1
 
   
    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 1994
    
                                                       REGISTRATION NO. 33-51391
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
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                                AMENDMENT NO. 3
    
                                       TO
 
                                    FORM S-3
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
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                          KAISER ALUMINUM CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                                                                        
        DELAWARE                                 3334                                94-3030279
(STATE OF INCORPORATION)             (PRIMARY STANDARD INDUSTRIAL                 (I.R.S. EMPLOYER
                                      CLASSIFICATION CODE NUMBER)                  IDENTIFICATION
                                                                                       NUMBER)
            5847 SAN FELIPE, SUITE 2600                             ANTHONY R. PIERNO
             HOUSTON, TEXAS 77057-3010                     VICE PRESIDENT AND GENERAL COUNSEL
                  (713) 267-3777                               KAISER ALUMINUM CORPORATION
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,             5847 SAN FELIPE, SUITE 2600
   INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL               HOUSTON, TEXAS 77057-3010
                EXECUTIVE OFFICES)                                   (713) 267-3777
                                                    (NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE
                                                   NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------ Copies of all communications to: HOWARD A. SOBEL, ESQ. BETH R. NECKMAN, ESQ. KRAMER, LEVIN, NAFTALIS, NESSEN, LATHAM & WATKINS KAMIN & FRANKEL 885 THIRD AVENUE 919 THIRD AVENUE NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022 (212) 906-1200 (212) 715-9100
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. / / ------------------------ CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS OFFERING AGGREGATE AMOUNT OF OF SECURITIES AMOUNT TO BE PRICE OFFERING REGISTRATION TO BE REGISTERED REGISTERED PER SHARE PRICE FEE - ------------------------------------------------------------------------------------------------------------ % PRIDES(SM), Convertible Preferred Stock, par value $.05 per share........... (1) (2) $96,600,000(3) $33,311(4) Common Stock, par value $.01 per share...... (5) N/A N/A N/A - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
(1) An indeterminate number of shares of % PRIDES, Convertible Preferred Stock, equal to the Proposed Maximum Aggregate Offering Price of the % PRIDES, Convertible Preferred Stock (which assumes exercise of the Underwriters' over-allotment option) divided by the actual initial offering price to the public per share of the % PRIDES, Convertible Preferred Stock. (2) The initial offering price per share of the % PRIDES, Convertible Preferred Stock will depend on the market price of the Registrant's Common Stock at the time the initial offering price to the public of the shares of % PRIDES, Convertible Preferred Stock is determined. (3) Assumes exercise of the Underwriters' over-allotment option. (4) Previously paid. (5) An indeterminate number of shares of Common Stock issuable upon, or in connection with, the conversion or redemption of the % PRIDES, Convertible Preferred Stock, including shares of Common Stock issuable in respect of accrued and unpaid dividends and additional shares of Common Stock that may become issuable as a consequence of adjustments to the Common Equivalent Rate and Optional Conversion Rate (the respective rates at which a share of % PRIDES, Convertible Preferred Stock is mandatorily or voluntarily converted into shares of Common Stock). ------------------------ (SM) Service mark of Merrill Lynch & Co., Inc. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 KAISER ALUMINUM CORPORATION ------------------------------ CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-3 PURSUANT TO ITEM 501(B) OF REGULATION S-K
ITEMS OF FORM S-3 CAPTION OR LOCATION --------------------------------------------------- ----------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus....................................... Inside Front and Outside Back Cover Pages; Available Information 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................ Summary; Risk Factors; Selected Historical and Pro Forma Consolidated Financial Data 4. Use of Proceeds.................................... Summary; Use of Proceeds 5. Determination of Offering Price.................... Outside Front Cover Page; Underwriting 6. Dilution........................................... Not Applicable 7. Selling Security Holders........................... Not Applicable 8. Plan of Distribution............................... Outside Front Cover Page; Underwriting 9. Description of Securities to be Registered......... Outside Front Cover Page; Summary; Description of the PRIDES; Federal Income Tax Considerations 10. Interests of Named Experts and Counsel............. Legal Matters; Experts 11. Material Changes................................... Incorporation of Certain Documents by Reference; Summary; The Company; Selected Historical and Pro Forma Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Description of Principal Indebtedness; Description of Senior Notes; Consolidated Financial Statements 12. Incorporation of Certain Information by Reference........................................ Incorporation of Certain Documents by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities... Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED FEBRUARY 9, 1994 PROSPECTUS 8,000,000 SHARES KAISER ALUMINUM CORPORATION % PRIDES(SM) CONVERTIBLE PREFERRED STOCK ------------------------ Kaiser Aluminum Corporation, a Delaware corporation (the "Company"), is hereby offering for sale 8,000,000 shares of Preferred Redeemable Increased Dividend Equity Securities(SM), % PRIDES(SM), Convertible Preferred Stock, par value $.05 per share (the "PRIDES"). The annual dividend payable with respect to each share of PRIDES is $ . Dividends will be cumulative from the date of issuance and will be payable quarterly in arrears on the last day of each March, June, September and December of each year, commencing March 31, 1994. The liquidation preference applicable to each share of PRIDES is equal to the sum of (i) the per share price to the public shown below, and (ii) the amount of accrued and unpaid dividends thereon. On December 31, 1997 (the "Mandatory Conversion Date"), 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, par value $.01 per share (the "Common Stock"), subject to adjustment in certain events and (ii) the right to receive an amount in cash equal to all accrued and unpaid dividends thereon. Shares of PRIDES are not redeemable prior to December 31, 1996. At any time and from time to time on or after December 31, 1996, until immediately prior to the Mandatory Conversion Date, 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) $ , declining after December 31, 1996, as set forth herein to $ until the Mandatory Conversion Date, plus, in the event the Company does not elect to pay cash dividends to the redemption date, (ii) all accrued and unpaid dividends thereon (the "Call Price") divided by (B) the Current Market Price (as defined herein) on the applicable date of determination, but in no event less than of a share of Common Stock, subject to adjustment in certain events. At any time prior to the Mandatory Conversion Date, unless previously redeemed, each share of PRIDES is convertible at the option of the holder thereof into of a share of Common Stock (equivalent to a conversion price of $ per share of Common Stock (the "Conversion Price")), 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, all as set forth herein. The opportunity for equity appreciation afforded by an investment in the shares of PRIDES is less than that afforded by an investment in the Common Stock because the Conversion Price is higher than the per share price to the public of the shares of PRIDES, and the Company may, at its option, redeem the shares of PRIDES at any time on or after December 31, 1996, and prior to the Mandatory Conversion Date, and may be expected to do so if, among other circumstances, the Current Market Price of the Common Stock exceeds the Call Price. In such event, a holder of a share of PRIDES will receive less than one share of Common Stock, but no less than of a share of Common Stock. The value per share of PRIDES of the Common Stock received by holders of PRIDES may be more or less than the per share amount paid for the PRIDES offered hereby, due to market fluctuations in the price of the Common Stock. For a detailed description of the terms of the PRIDES, see "Description of PRIDES." The Company does not currently pay dividends on its Common Stock. Annual dividends per share of Common Stock may be increased or decreased at the discretion of the Board of Directors of the Company (except that the New Credit Agreement (as defined) will prohibit the Company from paying dividends on its Common Stock). See "Dividend Policy." The shares of PRIDES and the Common Stock issuable in respect thereof have been approved for listing on the New York Stock Exchange (the "NYSE"), subject to official notice of issuance. The shares of PRIDES will be listed on the NYSE under the symbol "KLUPrD." The Company's Common Stock is listed on the NYSE under the symbol "KLU." The closing sale price of the Common Stock on the NYSE on February 8, 1994, was $11 7/8 per share. In connection with the offering of shares of PRIDES hereby, Kaiser Aluminum & Chemical Corporation, a Delaware corporation and a wholly owned subsidiary of the Company ("KACC"), is concurrently offering, pursuant to a separate prospectus, $225.0 million aggregate principal amount of its Senior Notes (as defined). For a detailed description of the terms of the Senior Notes, see "Description of Principal Indebtedness." KACC is also replacing its existing Credit Agreement (as defined) with a new five year, secured revolving line of credit in the amount of $250.0 million (the "New Credit Agreement"). The offering of the shares of PRIDES, the offering of the Senior Notes and the effectiveness of the New Credit Agreement will be conditioned upon the simultaneous closing of all such transactions. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE PRIDES OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC(1) DISCOUNT(2) COMPANY(1)(3) - --------------------------------------------------------------------------------------------------------- Per share of PRIDES................. $ $ $ - --------------------------------------------------------------------------------------------------------- Total(4)............................ $ $ $ - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
(1) Plus accrued dividends, if any, from the date of issue. (2) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) Before deducting expenses payable by the Company estimated at $600,000. (4) The Company has granted to the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase up to an additional 1,200,000 shares of PRIDES to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The PRIDES are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, and subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the PRIDES offered hereby will be made in New York, New York, on or about February , 1994. (SM) Service Mark of Merrill Lynch & Co., Inc. ------------------------ MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION PAINEWEBBER INCORPORATED SALOMON BROTHERS INC ------------------------ The date of this Prospectus is February , 1994. 4 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements, information statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements, information statements and other information filed by the Company can be inspected and copied at the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the Commission at 7 World Trade Center, New York, New York, 10048 and at Northwestern Atrium Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661-2511. The Company's $.65 Depositary Shares (the "$.65 Depositary Shares"), each representing ownership of one-tenth of a share of the Company's Series A Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares") and Common Stock are listed on the NYSE, and reports, proxy statements, information statements and other information concerning the Company may be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005. This Prospectus constitutes a part of a Registration Statement on Form S-3 filed by the Company with the Commission under the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits for further information with respect to the Company and this offering. Statements contained herein concerning the provisions of any document are not necessarily complete and, in each instance, reference is made to the copy of such documents filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. The Company will distribute to holders of the shares of PRIDES being offered hereby annual reports containing audited financial statements and an opinion thereon by the Company's independent public accountants, and quarterly reports containing unaudited summary financial information for each of the first three fiscal quarters of each fiscal year. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE This Prospectus incorporates documents by reference which are not presented herein or delivered herewith. Copies of any such documents are available upon request and without charge from Mr. Byron Wade, Vice President, Secretary and Deputy General Counsel, Kaiser Aluminum Corporation, 5847 San Felipe, Suite 2600, Houston, Texas 77057-3010, telephone (713) 267-3777. The following documents filed by the Company with the Commission are hereby incorporated by reference into this Prospectus: (1) The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (2) The Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, June 30 and September 30, 1993. (3) The Company's Proxy Statements, dated April 30 and August 19, 1993. (4) Form 8-A, filed on June 21, 1993, for registration of the Company's $.65 Depositary Shares, Series A Shares and Common Stock. (5) Form 8-A/A, filed on August 10, 1993, amending Form 8-A filed on June 21, 1993. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the shares of PRIDES hereunder shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or replaced for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or replaces such statement. Any such statement so modified or replaced shall not be deemed, except as so modified or replaced, to constitute a part of this Prospectus. --------------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OF PRIDES, THE $.65 DEPOSITARY SHARES AND THE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 5 SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements (including the Notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes that the over-allotment option granted to the Underwriters will not be exercised. All references to tons in this Prospectus refer to metric tons of 2,204.6 pounds. THE COMPANY Kaiser Aluminum Corporation, a Delaware corporation (the "Company"), is one of the world's leading producers of alumina, primary aluminum and fabricated (including semi-fabricated) aluminum products. The Company, through its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation, a Delaware corporation ("KACC"), operates in all principal aspects of the aluminum industry -- the mining of bauxite, the refining of bauxite into alumina, the production of primary aluminum and the manufacture of fabricated aluminum products. In 1993, the Company produced 2,826,600 tons of alumina, of which approximately 71% was sold to third parties, produced 436,200 tons of primary aluminum, of which approximately 56% was sold to third parties, and shipped approximately 373,200 tons of fabricated aluminum products to third parties, which accounted for approximately 6% of the total tonnage of United States domestic fabricated aluminum products shipments in 1993. The Company's share of total Western world alumina capacity and total Western world primary aluminum capacity was 8% and 3%, respectively, in 1993. The Company's strategy is to enhance its position as a leading producer of alumina, primary aluminum and fabricated aluminum products by: Increasing alumina production capacity. The Company has increased the capacity of its 65%-owned Alumina Partners of Jamaica ("Alpart") alumina refinery from 1,000,000 tons per year as of December 31, 1990, to 1,450,000 tons per year as of December 31, 1992. In addition, during the past several years the Company has increased production at its Gramercy, Louisiana alumina refinery and its 28.3%-owned Queensland Alumina Limited ("QAL") alumina refinery located in Australia. The percentage of the Company's alumina production sold to third parties increased to approximately 71% in 1993 from approximately 35% in 1987. Among alumina producers, the Company believes it is now the world's second largest seller of alumina to third parties. In light of the previously announced, and possible future, curtailments or permanent shutdowns of world-wide primary aluminum production, the Company anticipates that its alumina production and alumina sales to third parties will decline in 1994 from 1993 levels. See "-- Recent Trends and Developments." Improving the efficiency of its operations. From 1980 to 1993, on a per employee basis, alumina production increased by approximately 54% at the Company's Gramercy, Louisiana alumina refinery; fabricated products shipments increased by approximately 128% at the Company's Trentwood, Washington fabricating facility; and sales volume for aluminum operations as a whole increased by over 250%. Primary aluminum production at the Company's Mead and Tacoma smelters was curtailed in 1993 because of a power reduction imposed by the Bonneville Power Administration ("BPA") which reduced the operating rates for such smelters. From 1980 to 1992, prior to the BPA power reductions, on a per employee basis, primary aluminum production increased by approximately 72% and 39%, respectively, at the Mead and Tacoma smelters, and from 1980 to 1993, subsequent to the BPA power reductions, such primary aluminum production increased by approximately 36% and 15%, respectively, at such smelters. See "Risk Factors -- Recent Developments in Power Supply for Pacific Northwest Operations and Resultant Production Curtailments." The Company has also streamlined and decentralized its management structure to reduce corporate overhead and shift decision-making and accountability to its business units. KACC announced in October 1993 that it is restructuring its flat-rolled products operation at its Trentwood plant in the state of Washington, which is expected to result in annual cost savings of approximately $50.0 million after the restructuring has been fully implemented. See "-- Recent Trends and Developments." The Company has developed and installed proprietary retrofit technology in all of its smelters, which has contributed to increased and more efficient production of primary aluminum. The Company is actively 3 6 engaged in efforts to license this technology and sell technical and managerial assistance to other producers worldwide, and may participate in joint ventures or similar business partnerships which employ the Company's technical and managerial knowledge. Through continuing technological improvements, the Company's smelters have achieved improved energy efficiency and longer average life of reduction cells. From 1980 to 1993, the Company's average kilowatt hours of electricity utilized per ton of primary aluminum production was reduced by approximately 13% and the average life of reduction cells was increased by approximately 102%. Concentrating its fabricated aluminum products operations on the beverage container market and on high value-added transportation products. The Company operates a high-speed, wide-coil coating line which has reduced costs, improved quality and increased sales of aluminum to the beverage container industry. The Company believes that it is one of the highest quality producers of aluminum beverage can stock in the world. Over the past several years, the Company has also constructed four new fabrication facilities and modernized and expanded others to produce high value-added automotive (including air bag cannisters), truck (including truck wheels and hubs), trailer and aerospace products. Implementing a refinancing plan. The offering of PRIDES, the concurrent offering by KACC of $225.0 million aggregate principal amount of its % Senior Notes due 2002 (the "Senior Notes"), and the replacement of KACC's existing Credit Agreement (the "Credit Agreement") are the final steps of a comprehensive refinancing plan which the Company began in January 1993. The plan is intended to extend the maturities of the Company's outstanding indebtedness, to enhance its liquidity and to raise new equity capital. As of December 31, 1992, the Company's long-term indebtedness consisted principally of $321.7 million aggregate amount of KACC's 14 1/4% Senior Subordinated Notes due 1995 (the "14 1/4% Notes"), and the Credit Agreement, which matures in November 1994. KACC refinanced the 14 1/4% Notes through the issuance in February 1993 of $400.0 million aggregate principal amount of its 12 3/4% Senior Subordinated Notes due 2003 (the "12 3/4% Notes"). In addition, KACC has received a commitment (the "Commitment Letter") to replace the Credit Agreement ($262.2 million outstanding as of February 7, 1994, including $37.2 million in outstanding letters of credit) with a $250.0 million secured, revolving line of credit, scheduled to mature in 1999 (the "New Credit Agreement"). Bank of America National Trust and Savings Association ("Bank of America") and BankAmerica Business Credit, Inc. ("BA") have committed, subject to certain terms and conditions, to provide the full $250.0 million of the New Credit Agreement. As of December 31, 1993, the Company's total consolidated indebtedness was $729.4 million, and $113.6 million of borrowing capacity was unused under the revolving credit facility of the Credit Agreement. On a pro forma basis, after giving effect to the sale of the PRIDES, the sale of the Senior Notes and the effectiveness of the New Credit Agreement (collectively, the "Refinancing Transactions"), as of December 31, 1993, the Company's total consolidated indebtedness would have been $765.9 million, $182.5 million of borrowing capacity would have been available for use under the New Credit Agreement and the Company would have had additional cash available of $106.1 million. See "Capitalization." The foregoing does not give effect to $73.6 million of guaranteed unconsolidated joint venture indebtedness of the Company and $37.6 million of other guarantees and letters of credit outstanding as of December 31, 1993. To increase its equity capital, the Company consummated a public offering of its $.65 Depositary Shares in June 1993 pursuant to which the Company realized net proceeds of approximately $119.3 million. The Company will realize additional net proceeds of approximately $88.6 million as a result of the sale of the PRIDES. See "Use of Proceeds." After giving effect to the Refinancing Transactions, the scheduled amortization of the Company's long-term indebtedness through 1998 will be substantially reduced and the Company expects that it will be able to satisfy its debt service and capital expenditure requirements through at least December 31, 1995, from cash flows generated by operations and, to the extent necessary, from borrowings under the New Credit Agreement. See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition and Capital Spending." 4 7 RECENT TRENDS AND DEVELOPMENTS Exports from the Commonwealth of Independent States, additions to smelter capacities during the past several years, continued high operating rates and other factors have contributed to a significant increase in primary aluminum inventories in the Western world. If Western world production and exports from the Commonwealth of Independent States continue at current levels, primary aluminum inventory levels will increase further in 1994. The foregoing factors, among others, have contributed to a significant reduction in the market price of primary aluminum, and may continue to adversely affect the market price of primary aluminum in the future. Government officials from the European Union, the United States of America, Canada, Norway, Australia and the Russian Federation met in a multilateral conference in January 1994, to discuss the current excess global supply of primary aluminum. All six participating governments have ratified as a trade agreement the resulting Memorandum of Understanding (the "Memorandum") which provides, in part, for (i) a reduction in Russian Federation primary aluminum production by 300,000 tons per year within three months of the date of ratification of the Memorandum and an additional 200,000 tons within the following three months, (ii) improved availability of comprehensive data on Russian aluminum production and (iii) certain assistance to the Russian aluminum industry. A Russian Federation Trade Ministry official has publicly stated that the output reduction would remain in effect for 18 months to two years, provided that other worldwide production cutbacks occur, existing trade restrictions on aluminum are eliminated and no new trade restrictions on aluminum are imposed. The Memorandum does not require specific levels of production cutbacks by other producing nations. A further meeting of the participants is scheduled for the end of February 1994. There can be no assurance that the implementation of the Memorandum will adequately address the current oversupply of primary aluminum. See "-- Sensitivity to Prices and Hedging Programs -- Alumina and Primary Aluminum." The Company will continue to assess its production levels in light of market prices, industry inventory levels, production costs and user demand and, based on these and other factors, could determine to curtail production at certain of its facilities in the future. If the Company's average realized sales prices in 1994 for substantial quantities of its primary aluminum and alumina were based on the current market price of primary aluminum (the average Midwest U.S. transaction price ("AMT Price") was 61.14c per pound for the week ended February 4, 1994 -- See "Business -- Sensitivity to Prices"), the Company would continue to sustain net losses in 1994, which would be expected to approximate the loss in 1993 ($81.5 million) before (a) extraordinary loss and cumulative effect of changes in accounting principles, (b) the charges related to the restructuring of the Trentwood plant and certain other facilities (the "1993 Facilities Charges") and (c) certain other charges principally related to a reduction in the carrying value of the Company's inventories ($19.4 million, which is included in cost of goods sold) and the establishment of additional litigation and environmental reserves (the "Other 1993 Charges"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Industry Overview -- Recent Industry Trends" and "Business -- Sensitivity to Prices and Hedging Programs -- Alumina and Primary Aluminum." KACC announced in October 1993 that it is restructuring its flat-rolled products operation at its Trentwood plant in the state of Washington, to reduce that facility's annual operating costs. This effort is in response to over-capacity in the aluminum rolling industry, flat demand in can stock markets, and declining demand for aluminum products sold to customers in the commercial aerospace industry, all of which have resulted in declining prices in Trentwood's key markets. The Trentwood restructuring is expected to result in annual cost savings of approximately $50.0 million after it has been fully implemented (which is expected to occur during the next two years). See "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business -- Product Operations -- Fabricated Products." FOURTH QUARTER AND YEAR END RESULTS The Company's net sales totaled $415.9 million in the fourth quarter of 1993, compared with $496.0 million in the fourth quarter of 1992 and $1,719.1 million for the full year of 1993, compared with $1,909.1 million for the full year of 1992. Revenues decreased in the fourth quarter of 1993 as compared to the 5 8 fourth quarter of 1992 due principally to lower average realized prices and shipments of primary aluminum and alumina and lower average realized prices of most fabricated products, partially offset by increased shipments of fabricated products during the 1993 period compared with the 1992 period. Revenues decreased for the full year of 1993 as compared to the full year of 1992 due principally to lower shipments of primary aluminum and lower average realized prices of primary aluminum and alumina and, to a lesser extent, of fabricated products, partially offset by increased shipments of most fabricated products during 1993 as compared to 1992. The Company will report a net loss before extraordinary loss and cumulative effect of changes in accounting principles of $123.1 million (including the 1993 Facilities Charges and the Other 1993 Charges) for the full year of 1993, compared with net income of $26.9 million for the full year of 1992. The Company will report a net loss of $66.1 million (including the 1993 Facilities Charges and the Other 1993 Charges) for the fourth quarter of 1993, compared with net income of $2.6 million for the fourth quarter of 1992. The Company recognized an after-tax loss relating to the cumulative effect of changes in accounting principles of $507.3 million and an after-tax extraordinary loss on early extinguishment of debt of $21.8 million in the first quarter of 1993. See Note (1) of "Summary Historical and Pro Forma Consolidated Financial Data." The fourth quarter results include a pre-tax charge of $35.8 million ($22.6 million after-tax) related to the 1993 Facilities Charges and pre-tax charges of $30.2 million ($19.0 million after-tax) principally related to the Other 1993 Charges. The Company will also recognize an after-tax reduction of stockholders' equity of $14.9 million in the fourth quarter of 1993 to reflect the lowering of the discount rate used to calculate the Company's minimum pension liability. The Company recognized a pre-tax charge of $29.0 million ($24.2 million after-tax) related to a reduction in the carrying value of the Company's inventory, pre-tax income of $14.0 million ($11.7 million after-tax) for non-recurring adjustments to previously recorded liabilities and reserves and an after-tax reduction of stockholders' equity of $6.7 million in the fourth quarter of 1992. THE OFFERING SECURITIES OFFERED......... The PRIDES are shares of convertible preferred stock and rank (i) senior in right and priority of payment to the Common Stock as to dividends and upon liquidation and (ii) on a parity with the Series A Shares as to dividends and upon liquidation. The PRIDES mandatorily convert into shares of Common Stock on December 31, 1997 (the "Mandatory Conversion Date"), and the Company has the option to redeem the shares of PRIDES, in whole or in part, at any time and from time to time on or after December 31, 1996 and prior to the Mandatory Conversion Date at the Call Price (as defined), payable in shares of Common Stock. In addition, the PRIDES are convertible into shares of Common Stock at the option of the holder at any time prior to the Mandatory Conversion Date as set forth below. DIVIDENDS.................. Holders of shares of PRIDES will be entitled to receive annual cumulative dividends at a rate per annum of % of the per share price to the public shown on the cover page of this Prospectus (equivalent to a rate of $ 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, or, if any such date is not a business day, on the next succeeding business day, provided, however, that, with respect to any dividend period during which a redemption occurs, the Company may, at its option, declare accrued dividends on the shares of PRIDES to, and pay such accrued dividends on, the redemption date, in which case such dividends shall be payable to the holders of shares of PRIDES as of the record date for such dividend payment and shall not be included in the calculation of the Call Price (as defined). The first dividend payment will be for the period from the date of issue 6 9 (on or about February , 1994) to and including March 30, 1994, and will be paid on March 31, 1994. Dividends will cease to accrue in respect of the shares of PRIDES on the earlier of (i) the day immediately prior to the Mandatory Conversion Date or (ii) the day immediately prior to their earlier redemption. See "Description of PRIDES -- Dividends." The Company expects to make dividend payments on the shares of PRIDES until the Mandatory Conversion Date out of funds provided to it by KACC pursuant to the terms of the Intercompany Note (as defined in "Use of Proceeds"). The declaration and payment of dividends by the Company on the shares of PRIDES will be expressly permitted by the terms of the New Credit Agreement to the extent the Company receives payments on the Intercompany Note. Payments on the Intercompany Note will be expressly subordinated in right of payment to the extent set forth therein to the prior payment in full of all monetary obligations of KACC under the New Credit Agreement, including certain refundings, refinancings, replacements or restructurings of such monetary obligations, and to the Senior Notes. In the event of a KACC Merger (as defined below under "Voting Rights"), the Intercompany Note will be terminated by operation of law and the payment of dividends on the shares of PRIDES will be subject to the restrictions relating to the declaration and payment of dividends on the capital stock of the surviving entity set forth in the 12 3/4% Note Indenture (as defined) and any other agreements then in effect governing indebtedness of the surviving entity. See "Risk Factors -- Restrictions on Ability to Pay Dividends." MANDATORY CONVERSION On the Mandatory Conversion Date, unless previously redeemed or converted, each outstanding share of PRIDES will mandatorily convert into (i) one share of Common Stock, subject to adjustment in certain events, and (ii) the right to receive cash in an amount equal to all accrued and unpaid dividends thereon (other than previously declared dividends payable to a holder of record on a prior date). See "Description of PRIDES -- Mandatory Conversion of PRIDES." The value per share of PRIDES of the Common Stock that may be received by holders of PRIDES upon their mandatory conversion may be more or less than the amount paid for the PRIDES offered hereby due to market fluctuations in the price of the Common Stock. OPTIONAL REDEMPTION........ 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 until immediately prior to the Mandatory Conversion Date, 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, a number of shares of Common Stock equal to the sum of (i) $ , declining after December 31, 1996 as set forth herein to $ until the Mandatory Conversion Date, and (ii) all accrued and unpaid dividends thereon (other than previously declared dividends payable to a holder of record as of a prior date) (the "Call Price") divided by the Current Market Price (as defined) on the applicable date of determination, but in no event less than of a share of Common Stock, subject to adjustment as described herein. See "Description of PRIDES -- Optional Redemption." The number of shares of Common Stock to be delivered based on the applicable Call Price will be determined on the basis of the Current Market Price of the Common 7 10 Stock prior to the announcement of the redemption, and the market price of the Common Stock may vary between the date of such determination and the subsequent delivery of such shares. CONVERSION AT THE OPTION OF THE HOLDER............... At any time prior to the Mandatory Conversion Date, unless previously redeemed, each share of PRIDES is convertible at the option of the holder thereof into of a share of Common Stock, equivalent to a conversion price of $ per share of Common Stock (the "Conversion Price"), subject to adjustment as described herein. The value of the shares of Common Stock received upon conversion will vary depending on the market price of the Common Stock from time to time, all as set forth herein. The right of holders to convert shares of PRIDES called for redemption will terminate immediately prior to the close of business on the day prior to the redemption date. See "Description of PRIDES -- Conversion at the Option of the Holder." ENHANCED DIVIDEND YIELD; LESS EQUITY APPRECIATION THAN COMMON STOCK........ Dividends will accrue on the PRIDES at a higher rate than the rate at which dividends are currently paid on the Common Stock. No dividends are currently paid on the Common Stock. The owners of shares of PRIDES are entitled to receive (when, as and if the Board of Directors declares dividends) cumulative preferential cash dividends from the date of issue accruing at the rate of $. per annum or $. per quarter for each share of PRIDES. See "Description of the PRIDES -- Dividends." The opportunity for equity appreciation afforded by an investment in the PRIDES is less than that afforded by an investment in the Common Stock because the Conversion Price is higher than the per share price to the public of the shares of PRIDES and the Company may, at its option, redeem the shares of PRIDES at any time on or after December 31, 1996 and prior to the Mandatory Conversion Date, and may be expected to do so if, among other circumstances, the Current Market Price of the Common Stock exceeds the Call Price. In such event, a holder of a share of PRIDES will receive less than one share of Common Stock, but no less than of a share of Common Stock. A holder may also surrender for conversion any PRIDES called for redemption up to the close of business on the day prior to the redemption date, and a holder that so elects to convert will receive of a share of Common Stock per share of PRIDES. The value per share of PRIDES of the Common Stock received by holders of PRIDES may be more or less than the per share amount paid for the PRIDES offered hereby, due to market fluctuations in the price of Common Stock. See "Description of PRIDES -- Enhanced Dividend Yield; Less Equity Appreciation than Common Stock." VOTING RIGHTS.............. Holders of shares of PRIDES will have 4/5 vote for each share held of record and, except as required by law, will be 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. In addition, subject to certain exceptions, the affirmative vote of two-thirds of the shares of PRIDES actually voting (voting separately as a class) will be required to permit the Company to 8 11 (i) issue any class or series of stock, or any security convertible at the option of the holder thereof into shares of any class or series of stock, ranking senior to the PRIDES as to dividends or upon Liquidation, (ii) modify the terms of the Intercompany Note in a manner that materially adversely affects the Company as the holder of such Intercompany Note or the holders of the PRIDES, (iii) amend the Certificate of Incorporation in a manner that materially adversely affects the holders of the PRIDES, (iv) consummate a merger or consolidation of the Company with KACC (a "KACC Merger") if (a) each outstanding share of PRIDES, upon the effectiveness of the KACC Merger, neither remains outstanding nor is converted into one share of preferred stock of the surviving corporation ("KACC Preferred Stock"), (b) such shares of KACC Preferred Stock (if issued in the KACC Merger) are not to be deposited with a bank or trust company upon or prior to the effectiveness of the KACC Merger, or (c) the covenants in the debt instruments of the surviving corporation of the KACC Merger, at the time of the KACC Merger, prohibit the payment of any of the dividends on the PRIDES or the KACC Preferred Stock, as the case may be, in accordance with the terms thereof through and including the day immediately prior to the Mandatory Conversion Date, or (v) consummate a merger or consolidation of the Company with any other corporation, unless each holder of shares of PRIDES immediately preceding such merger or consolidation receives or continues to hold in the surviving corporation the same number of shares, with, subject to certain exceptions, substantially the same rights and preferences, as correspond to the shares of PRIDES so held. In the event that dividends payable on the PRIDES or any other series of preferred stock are in arrears in an aggregate amount equivalent to six full quarterly dividend periods, and in certain other circumstances, the holders of the outstanding PRIDES will be entitled to elect, together with the holders of all other series of outstanding preferred stock as to which voting rights are exercisable, voting separately as a class, two directors of the Company. See "Description of PRIDES -- Voting Rights." LIQUIDATION PREFERENCE..... The PRIDES are shares of convertible preferred stock and rank (i) senior in right and priority of payment to the Common Stock upon liquidation and (ii) on a parity with the Series A Shares upon liquidation. Subject to the terms of any stock ranking senior to, or on a parity with, the shares of PRIDES, the liquidation preference applicable to each share of PRIDES will be an amount equal to the sum of (i) the price to public for each share of PRIDES shown on the cover page of this Prospectus and (ii) an amount equal to all accrued and unpaid dividends payable with respect to such share of PRIDES. See "Description of PRIDES -- Liquidation Rights." LISTING.................... The shares of PRIDES and the Common Stock issuable in respect thereof have been approved for listing on the NYSE, subject to official notice of issuance. The shares of PRIDES will be listed on the NYSE under the symbol "KLUPrD." NEW YORK STOCK EXCHANGE SYMBOL OF COMMON STOCK... KLU USE OF PROCEEDS............ The Company intends to use a portion of the net proceeds from the offering to make a capital contribution to KACC and a portion of such net proceeds to make a loan or loans to KACC which will be evidenced 9 12 by the Intercompany Note. See "Risk Factors -- Restrictions on and Factors Affecting Ability to Pay Dividends" and "Use of Proceeds." KACC currently intends to use the funds it receives from the Company for working capital and general corporate purposes. In connection with this offering, KACC is concurrently offering $225.0 million of Senior Notes. The net proceeds of the offering of Senior Notes will be used to reduce outstanding borrowings under the revolving credit facility of the Credit Agreement immediately prior to the effectiveness of the New Credit Agreement and for working capital and general corporate purposes. As of February 7, 1994 there was $262.2 million in outstanding borrowings under the Credit Agreement, including $37.2 million in outstanding letters of credit. Borrowings and reborrowings under the New Credit Agreement will be used for working capital and general corporate purposes, including capital projects. See "Use of Proceeds." RISK FACTORS............... Prospective purchasers of the shares of PRIDES should consider carefully the factors set forth under the section entitled "Risk Factors," including the factors discussed under "Restrictions on and Factors Affecting Ability to Pay Dividends; Subordination of Intercompany Note; Termination of Intercompany Note," "Factors Affecting Liquidity; Failure of Earnings to Cover Fixed Charges; Anticipated 1994 Net Loss," "Sensitivity to Prices; Current Primary Aluminum Prices Adversely Affect Net Sales and Operating Income," "Recent Developments in Power Supply for Pacific Northwest Operations and Resultant Production Curtailments," "Increasing Worldwide Aluminum Inventories and Adverse Effects on Market Prices," "Environmental Litigation," "Controlling Stockholder and Possible Effects," "Absence of Public Market" and "Shares Eligible for Future Sale." 10 13 SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA The following summary historical and pro forma consolidated financial data are derived from the Selected Consolidated Financial Data appearing elsewhere in this Prospectus, and should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------------- --------------------------------------- 1993 1992 1992 1991 1990 ----------- ----------- ----------- ----------- ----------- (IN MILLIONS OF DOLLARS, EXCEPT RATIOS AND PER SHARE AMOUNTS) Operating Data: Net sales................... $ 1,303.2 $ 1,413.1 $ 1,909.1 $ 2,000.8 $ 2,095.0 Cost of products sold....... 1,181.0 1,178.1 1,619.3 1,594.2 1,525.2 Gross profit................ 122.2 235.0 289.8 406.6 569.8 Depreciation................ 72.9 60.4 80.3 73.2 70.5 Selling, administrative, research and development, and general............... 90.7 88.9 119.6 117.4 123.2 Operating income (loss)..... (41.4) 85.7 89.9 216.0 376.1 Interest expense............ 63.8 58.4 78.7 93.9 96.6 Income (loss) before income taxes, minority interests, extraordinary loss and cumulative effect of changes in accounting principles................ (95.2) 32.3 32.1 142.4 297.1 Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles................ (57.0) 24.3 26.9 108.4 213.7 Net income (loss)........... (586.1)(1) 24.3 26.9 108.4 213.7 Income (loss) per common and common equivalent share before extraordinary loss and cumulative effect of changes in accounting principles(2)............. $ (1.05)(3) $ .42 $ .47 $ 2.03 $ 4.27 Net income (loss) per common and common equivalent share..................... $ (10.28) $ .42 $ .47 $ 2.03 $ 4.27 Weighted average number of common and common equivalent shares outstanding (in thousands)(2)............... 57,330(3) 57,250 57,250 53,297 50,000 Dividends declared: Per common share............ -- $ .15 $ .20 $ 1.10 $ 3.00 Per Depositary Share........ $ .1625 Ratio of earnings to combined fixed charges and preferred stock dividends(4).......... --(5) 1.4x 1.3x 2.3x 3.5x Pro Forma(6): Interest expense............ $ 65.8 $ 82.4 Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles................ (58.3) 24.5 Net income (loss)(7)........ (602.6) 4.4 Income (loss) per common and common equivalent share before extraordinary loss and cumulative effect of changes in accounting principles................ $ (1.17) $ .38 Net income (loss) per common and common equivalent share..................... $ (10.67) $ .07
SEPTEMBER 30, 1993 ------------------- DECEMBER 31, PRO ------------------------------ FORMA(6) ACTUAL 1992 1991 1990 -------- -------- -------- -------- -------- (IN MILLIONS OF DOLLARS) Balance Sheet Data: Working capital.................................................... $ 459.1 $ 325.1 $ 320.3 $ 242.2 $ 264.4 Total assets....................................................... 2,601.2 2,483.3 2,098.8 2,134.1 2,118.5 Long-term liabilities.............................................. 1,141.4 1,141.4 217.9 212.9 310.8 Long-term debt, less current portion............................... 752.8 692.8 765.1 681.5 631.5 Notes payable to parent............................................ -- -- -- -- 150.0 Minority interests................................................. 103.7 103.7 104.9 108.9 123.2 Total stockholders' equity......................................... 191.1 110.2 565.2 555.8 356.0
- --------------- (1) Includes extraordinary loss on early extinguishment of debt of $21.8, net of tax benefit of $11.2, and cumulative effect of changes in accounting principles of $507.3, net of tax benefit of $237.7. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." (2) Based upon the weighted average number of common and common equivalent shares outstanding during each period. (3) For the nine months ended September 30, 1993, common stock equivalents of 19,382,950 attributable to the Series A Shares were excluded from the calculation of weighted average shares because they were antidilutive. Dividends on the Series A Shares of $3.2 are added to the net loss for the purpose of calculating earnings per share. (4) For the purpose of calculating the ratio of earnings to combined fixed charges and preferred stock dividends, "earnings" consist of the sum of (i) income (loss) before extraordinary loss and cumulative effect of changes in accounting principles of the Company and its consolidated subsidiaries, (ii) undistributed (earnings) losses of less-than-fifty-percent-owned companies, (iii) minority interest share of income (losses) of majority-owned subsidiaries that have fixed charges, (iv) consolidated provision for income taxes, (v) minority interest share of tax provision (credit) of majority-owned subsidiaries that have fixed charges, (vi) fixed charges, (vii) equity in losses of less-than-fifty-percent-owned companies where the Company has guaranteed the debt of such companies, and (viii) previously capitalized interest amortized during the period. Fixed charges consist of the sum of interest expense, amortization of deferred financing costs, the portion of rents representative of the interest factor, preferred stock dividend requirements and interest expense related to the guaranteed debt of less-than-fifty-percent-owned companies incurring a loss. (5) For the nine months ended September 30, 1993, earnings were inadequate to cover combined fixed charges and preferred stock dividends by $98.4. (6) The pro forma information assumes (a) the issuance and sale of 8,000,000 shares of PRIDES, (b) a capital contribution by the Company to KACC in the amount of $58.2, (c) a non-interest bearing loan from the Company to KACC in the principal amount of $30.4 evidenced by the Intercompany Note, (d) the sale by KACC of $225.0 aggregate principal amount of Senior Notes and (e) the effectiveness of the New Credit Agreement (collectively, the "Pro Forma Adjustments"), as if such Pro Forma Adjustments had occurred at the beginning of the respective periods for operating data and on September 30, 1993, for the balance sheet data. (7) Includes a pro forma extraordinary loss of $15.2 and $20.1 for the nine months ended September 30, 1993, and the year ended December 31, 1992, respectively, representing the deferred financing costs written off upon the refinancing of the Credit Agreement. 11 14 THE COMPANY The Company is one of the world's leading producers of alumina, primary aluminum and fabricated (including semi-fabricated) aluminum products, and is a major supplier of alumina and primary aluminum in the domestic and international markets. The Company operates in all principal aspects of the aluminum industry -- the mining of bauxite (the major aluminum-bearing ore), the refining of bauxite into alumina (the intermediate material), the production of primary aluminum, the manufacture of fabricated aluminum products, and the sale of bauxite, alumina, primary aluminum and fabricated aluminum products. In 1993, the Company produced 2,826,600 tons of alumina, of which approximately 71% was sold to third parties, produced 436,200 tons of primary aluminum, of which approximately 56% was sold to third parties, and shipped approximately 373,200 tons of fabricated aluminum products to third parties. The Company was organized in 1987 and maintains its principal executive offices at 5847 San Felipe, Suite 2600, Houston, Texas 77057-3010. Its telephone number is (713) 267-3777. RISK FACTORS Prospective investors should carefully consider the factors set forth below as well as the other information contained in this Prospectus. RESTRICTIONS ON AND FACTORS AFFECTING ABILITY TO PAY DIVIDENDS; SUBORDINATION OF INTERCOMPANY NOTE; TERMINATION OF INTERCOMPANY NOTE Source of Dividend Payments. The Company conducts all of its operations through KACC. The Company expects to make dividend payments on the shares of PRIDES until the Mandatory Conversion Date out of funds provided to it by KACC pursuant to the terms of the Intercompany Note. The declaration and payment of dividends by the Company on the shares of PRIDES will be expressly permitted by the terms of the New Credit Agreement to the extent the Company receives payments on the Intercompany Note. The Intercompany Note is designed to provide sufficient funds to the Company to enable it to make dividend payments on the shares of PRIDES until the Mandatory Conversion Date. The Intercompany Note will mature on December 31, 1997, and will be payable in quarterly installments. Subordination of Intercompany Note. Payments on the Intercompany Note will be expressly subordinated in right of payment to the extent set forth therein to the prior payment in full of all monetary obligations of KACC under (i) the New Credit Agreement, including certain refundings, refinancings, replacements or restructurings of such monetary obligations, and (ii) the Senior Note Indenture. As a result, in the event of a dissolution, liquidation or reorganization of KACC, the right of the Company to realize upon the assets of KACC, as a creditor of KACC pursuant to the Intercompany Note, will be subject to the prior claims of the financial institutions party to New Credit Agreement and the holders of the Senior Notes, and no payments will be made with respect to the Intercompany Note (or distributions made in respect of the shares of PRIDES under such circumstances), unless and until such prior claims have been satisfied in full in cash (KACC's obligations under the Intercompany Note, however, will not be subordinated to KACC's obligations in respect of the 12 3/4% Notes and will rank pari passu in right and priority of payment with KACC's obligations under the intercompany note issued in connection with the June 1993 offering of $.65 Depositary Shares). The Intercompany Note will provide that (i) in the event of a payment default by KACC under the terms of the New Credit Agreement or the Senior Note Indenture, no payments on the Intercompany Note to the Company will be permitted until such payment default shall have been cured or waived and (ii) during the continuance of other defaults under the New Credit Agreement, no payments on the Intercompany Note to the Company will be permitted for a period commencing on the date of receipt by the Company of notice of such default from the agent bank under the New Credit Agreement, and ending not more than 179 days thereafter; provided, however, that no payments or distributions will be prohibited by the provisions referred to in this sentence if (1) any of the 12 3/4% Notes are then outstanding and (2) payments and distributions on the 12 3/4% Notes are not then prohibited under certain provisions contained in the 12 3/4% Note Indenture relating to defaults on Senior Indebtedness (as defined). To the extent that the Company is dependent upon payments from KACC under the Intercompany Note to provide it with funds to make dividend payments on the shares 12 15 of PRIDES, the Company will not have sufficient funds available to make such dividend payments in the event KACC is prevented from making payments in respect of the Intercompany Note. Termination of Intercompany Note. In the event of a merger of the Company and KACC in accordance with the terms of the shares of PRIDES (see "Description of the PRIDES -- Voting Rights"), the Intercompany Note will be terminated by operation of law and the payment of dividends on the shares of PRIDES will be subject to the restrictions relating to the declaration and payment of dividends on the capital stock of the surviving entity set forth in the 12 3/4% Note Indenture and any other agreements then in effect governing indebtedness of the surviving entity (including the Senior Note Indenture). Recent Dividend Payment History. The Company paid a quarterly dividend of $.05 per share of Common Stock, commencing with its initial public offering during the third quarter of 1991 and continuing through the fourth quarter of 1992. The Company's Board of Directors determined not to declare any dividends on the Common Stock in 1993. KACC is currently paying dividends in the aggregate amount of approximately $1.5 million per year in respect of certain series of its outstanding preference stock. On September 30, 1993, and December 31, 1993, the Company paid a dividend in the amount of $.1625 per $.65 Depositary Share to all holders of its outstanding $.65 Depositary Shares. The New Credit Agreement will not permit the Company or KACC to pay any dividends on their common stock. The declaration and payment of dividends by KACC on its shares of common stock will be subject to certain covenants in the Senior Note Indenture and the 12 3/4% Note Indenture. See "Description of Principal Indebtedness." FACTORS AFFECTING LIQUIDITY; FAILURE OF EARNINGS TO COVER FIXED CHARGES; ANTICIPATED 1994 NET LOSS Borrowing Capacity and Refinancing Plans. The ability of the Company and its subsidiaries to satisfy their debt service and capital expenditure requirements will depend upon available cash resources and results of operations, and, in the case of dividend payments on the shares of PRIDES, the receipt of sufficient cash from KACC as described above. Cash used for operations (including $12.0 million of financing costs) was $2.4 million in the first nine months of 1993 compared with cash provided by operations (including $1.8 million of financing costs) of $21.9 million in the first nine months of 1992. At December 31, 1993, the Company's total consolidated indebtedness was $729.4 million. As of such date, $113.6 million of borrowing capacity was unused under the revolving credit facility of the Credit Agreement, and KACC had available to it, subject to certain restrictions, up to $15.0 million of uncommitted credit lines (of which $0.5 million was used). On a pro forma basis, after giving effect to the Refinancing Transactions, as of December 31, 1993, the Company's total consolidated indebtedness would have been $765.9 million, $182.5 million of borrowing capacity would have been unused under the New Credit Agreement and the Company would have had additional cash available of $106.1 million. The foregoing does not give effect to $73.6 million of guaranteed unconsolidated joint venture indebtedness of the Company and $37.6 million of other guarantees and letters of credit outstanding as of December 31, 1993. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition and Capital Spending" and "Capitalization." For a description of the Company's principal outstanding indebtedness, see "Description of Principal Indebtedness" and Note 4 of the Notes to the Consolidated Financial Statements. Failure of Earnings to Cover Fixed Charges; Anticipated Net Losses in 1994. The Company suffered a loss before extraordinary loss and cumulative effect of changes in accounting principles of $57.0 million in the first nine months of 1993, compared with income of $24.3 million in the first nine months of 1992. For the first nine months of 1993, the Company's earnings were inadequate to cover combined fixed charges and preferred stock dividends by $98.4 million. See Notes 4 and 5 of "Summary Historical and Pro Forma Consolidated Financial Data." If the Company's average realized sales prices in 1994 for substantial quantities of its primary aluminum and alumina were based on the current market price of primary aluminum (AMT Price of 61.14c per pound for the week ended February 4, 1994), the Company would continue to sustain net losses in 1994, which would be expected to approximate the loss in 1993 ($81.5 million) before (a) extraordinary loss and cumulative effect of changes in accounting principles, (b) the 1993 Facilities Charges and (c) the Other 1993 Charges. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent 13 16 Trends." The Company has attempted to lessen the adverse effect of declines in the price of primary aluminum. See "Sensitivity to Prices; Current Primary Aluminum Prices Adversely Affect Net Sales and Operating Income." SENSITIVITY TO PRICES; CURRENT PRIMARY ALUMINUM PRICES ADVERSELY AFFECT NET SALES AND OPERATING INCOME The Company's earnings are sensitive to changes in the prices of alumina, primary aluminum and fabricated aluminum products and also depend to a significant degree upon the volume and mix of all products sold. The Company's average realized prices from sales of alumina and primary aluminum declined substantially in 1993, 1992, 1991 and 1990 from their high levels of 1989 and 1988. Although the Company has attempted to lessen the effect of the decline of primary aluminum and alumina prices through a variety of forward sales transactions and hedging programs, earnings have been, and are expected to remain, significantly more sensitive to changes in primary aluminum prices and revenues derived from the sale of alumina to third parties. Revenues from alumina sales to third parties declined in 1993 as a result of lower average realized prices for alumina. Revenues from primary aluminum sales declined as a result of reduced shipments and lower average realized prices for primary aluminum in 1993 than in 1992. In 1993, the Company's average realized price from sales of primary aluminum was approximately $0.56 per pound compared to the average Midwest U.S. transaction price of approximately $0.54 per pound for such year. Increased revenues from sales of fabricated aluminum products (as a result of higher shipments, partially offset by lower unit prices for some fabricated products) partially offset these decreases in 1993. See "Management's Discussion and Analysis of Results of Operations -- Fourth Quarter and Preliminary Year End Results." The Company has sold forward substantially all of the alumina available to it in excess of its projected internal smelting requirements for 1994, and a substantial portion of such excess alumina for 1995. Approximately 95% of 1994 sales and virtually all of 1995 sales were made at prices indexed to future prices of primary aluminum. Approximately 75% of 1994 sales were made at prices indexed to future prices of primary aluminum, but with minimum prices that exceed the Company's estimated cash production costs. The remainder of 1994 sales were made either at fixed prices that exceed the Company's estimated cash production costs, or are subject to prices indexed to future prices of primary aluminum but without minimum prices. Approximately 85% of 1995 sales were made at prices indexed to future prices of primary aluminum, but with minimum prices that exceed the Company's estimated cash production costs. As of the date of this Prospectus, the Company has sold forward approximately 75% of its primary aluminum in excess of its projected internal fabrication requirements in 1994 and approximately 55% of such surplus in 1995 at fixed prices that approximate the current market price of primary aluminum. Hedging programs already in place would allow the Company to participate in certain higher market prices, should they materialize, for approximately 40% of the Company's excess primary aluminum sold forward in 1994, and 100% of the Company's excess primary aluminum sold forward in 1995. Fabricated aluminum prices, which vary considerably among products, are heavily influenced by changes in the price of primary aluminum and generally lag behind primary aluminum prices for periods of up to six months. A significant portion of the Company's fabricated product shipments consist of body, lid, and tab stock for the beverage container market. The Company may not be able to receive increases in primary aluminum prices from its can stock customers as promptly as in the recent past because of competition from other aluminum producers and because of excess supply in the industry. Changes in the market price of primary aluminum also affect the Company's production costs of fabricated products because they influence the price of aluminum scrap purchased by the Company and the Company's labor costs, to the extent such costs are indexed to primary aluminum prices. While the Company continues to attempt to lessen the adverse effect of declines in the price of primary aluminum through its variable cost structures, forward sales and hedging programs, possible future declines in the market price of primary aluminum would have an adverse effect on the Company's financial performance. If the Company's average realized sales prices in 1994 for substantial quantities of its primary aluminum and 14 17 alumina were based on the current market price of primary aluminum (AMT Price of 61.14c per pound for the week ended February 4, 1994), the Company would continue to sustain net losses in 1994, which would be expected to approximate the loss in 1993 ($81.5 million) before (a) extraordinary loss and cumulative effect of changes in accounting principles, (b) the 1993 Facilities Charges and (c) the Other 1993 Charges. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Industry Overview" and "Business -- Sensitivity to Prices and Hedging Programs." RECENT DEVELOPMENTS IN POWER SUPPLY FOR PACIFIC NORTHWEST OPERATIONS AND RESULTANT PRODUCTION CURTAILMENTS Electrical power represents an important production cost for the Company at its domestic smelters in Mead and Tacoma, Washington, and a much smaller portion of the Company's production costs at its fabricating plant in Trentwood, Washington (collectively, the "Facilities"). The electricity supply contracts between the BPA and its direct service industry customers (which consist of 15 energy intensive companies, principally aluminum producers, including the Company) permit the BPA to interrupt up to 25% of the amount of power which it normally supplies to such customers. As a result of drought conditions, in January 1993 the BPA reduced the amount of power it normally supplies to its direct service customers, including the Company, with respect to the Facilities. In response to such reduction, the Company removed three reduction potlines from production (two at the Mead smelter and one at the Tacoma smelter), and purchased substitute power in the first quarter of 1993 at increased costs. The BPA has notified its direct service industry customers that it intends to maintain the interruption of 25% of the amount of power it normally provides to such customers through February 28, 1994. As a result of the BPA power reductions, the Company has operated its Mead and Tacoma smelters at the reduced operating rates introduced in January 1993, and has operated its Trentwood fabrication facility without any curtailment of its production. The Company currently anticipates that in 1994 it will operate the Mead and Tacoma smelters at rates which do not exceed the current operating rates of 75% of full capacity for such smelters. The Company cannot predict whether full power will be provided by the BPA after February 28, 1994, or whether power will otherwise become available at a price acceptable to the Company. The Company will continue to assess its production levels at the Mead and Tacoma smelters in light of the availability and cost of such power and other production costs, the market price of primary aluminum, industry inventory levels and other industry-related and Company-related factors. Effective October 1, 1993, an increase in the base rate BPA charges to its direct service industry customers for electricity was adopted, which will increase the Company's production costs at the Mead and Tacoma smelters by approximately $15.0 million per year (approximately $11.3 million per year based on the Company's current operating rate of approximately 75% of full capacity). The rate increase generally is expected to remain in effect for two years. In the event that the BPA's revenues fall below certain levels prior to April 1994, the BPA may impose up to a 10% surcharge on the base rate it charges to its direct service industry customers, effective during the period from October 1994 through October 1995 (which would increase the Company's production costs at the Mead and Tacoma smelters by approximately $9.1 million per year based on the Company's current operating rate of approximately 75% of full capacity). In addition, in order to comply with certain federal laws and regulations applicable to endangered fish species, the BPA may be required in the future to reduce its power generation and to purchase substitute power (at greater expense) from other sources. The foregoing factors would increase the Company's operating expenses. INCREASING WORLDWIDE ALUMINUM INVENTORIES AND ADVERSE EFFECTS ON MARKET PRICES Exports from the Commonwealth of Independent States, additions to smelter capacities during the past several years, continued high operating rates and other factors have contributed to a significant increase in primary aluminum inventories in the Western world. If Western world production and exports from the Commonwealth of Independent States continue at current levels, primary aluminum inventory levels will increase further in 1994. The foregoing factors, among others, have contributed to a significant reduction in 15 18 the market price of primary aluminum, and may continue to adversely affect the market price of primary aluminum in the future. The average price of primary aluminum was at historic lows in real terms for the year ended 1993, which significantly and adversely affected the Company's net sales and operating income for such period. See "Sensitivity to Prices; Current Primary Aluminum Prices Adversely Affect Net Sales and Operating Income" and "Business -- Industry Overview -- Recent Industry Trends." ENVIRONMENTAL LITIGATION The Company is subject to a wide variety of international, state and local environmental laws and regulations (the "Environmental Laws"). From time to time, the Company is subject, with respect to its current and former operations, to fines or penalties assessed for alleged breaches of the Environmental Laws and to claims and litigation based upon such laws. The Company is currently subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). Under CERCLA and other related laws, past disposal of wastes, whether on-site or at other locations, may result in the imposition of clean-up obligations by federal or state regulatory authorities. The Company, 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. In certain instances, the Company may be exposed to joint and several liability for remedial action or damages to natural resources, which could effectively expose the Company to liability for all costs associated with any such remedial actions irrespective of its degree of culpability for the environmental damages related thereto. While the ultimate extent of the Company's liability for pending or potential fines, penalties, remedial costs, claims and litigation with respect to environmental and other related laws cannot be determined at this time, management currently believes that the resolution of the environmental and related litigation to which the Company is a party (even without giving effect to potential insurance recovery) should not have a material adverse effect on the Company's consolidated financial position or results of operations. For a discussion of the Company's environmental litigation, see "Business -- Environmental Matters" and "-- Legal Proceedings." CONTROLLING STOCKHOLDER AND POSSIBLE EFFECTS The Company became an indirect, wholly owned subsidiary of MAXXAM on October 28, 1988, through the merger of a subsidiary of MAXXAM with and into the Company (the "Merger"). As of the date of this Prospectus, MAXXAM directly owns approximately 67% of the Company's Common Stock, assuming the conversion of each outstanding $.65 Depositary Share into one share of Common Stock (and, after giving effect to this offering, MAXXAM will directly own approximately 61% of the Common Stock assuming the conversion of each share of PRIDES into one share of Common Stock, and approximately 60% if the Underwriters' over-allotment option is exercised in full), with public stockholders owning the balance. In the event that MAXXAM sells all of the 2,132,950 $.65 Depositary Shares which it owns to nonaffiliates, MAXXAM would own approximately 65% of the Company's Common Stock assuming the conversion of each outstanding $.65 Depositary Share into one share of Common Stock (and, after giving effect to this offering, MAXXAM would directly own approximately 58% of the Common Stock assuming the conversion of each share of PRIDES into one share of Common Stock, and approximately 58% if the Underwriters' overallotment option is exercised in full), with public stockholders owning the balance. Accordingly, MAXXAM is able to determine the outcome of all matters required to be submitted to the Company's stockholders for approval, including decisions relating to the election of the directors of the Company, the determination of day-to day corporate and management policies of the Company, the merger or acquisition of the Company, the sale of substantially all of the assets of the Company and other significant corporate transactions. MAXXAM's significant ownership interest in the Company may discourage third parties from seeking to acquire control of the Company which may adversely affect the market price of the Company's equity securities. Mr. Charles E. Hurwitz, Chairman of the Board, President and Chief Executive Officer of MAXXAM, together with Federated Development Company ("Federated"), a New York business trust that is wholly owned by Mr. Hurwitz, members of his immediate family and trusts for the benefit thereof, collectively own approximately 60.0% of the aggregate voting power of MAXXAM. 16 19 ABSENCE OF PUBLIC MARKET There is no existing market for the shares of PRIDES. The shares of PRIDES and the Common Stock issuable in respect thereof have been approved for listing on the NYSE, subject to official notice of issuance. Future trading prices of the shares of PRIDES will depend on many factors, including, among other things, the Company's operating results, the market for similar securities and the trading price of the Company's $.65 Depositary Shares and Common Stock. SHARES ELIGIBLE FOR FUTURE SALE As of the date of this Prospectus, MAXXAM owns 50,000,000 shares of the Company's Common Stock (the "MAXXAM Common Stock") and 2,132,950 $.65 Depositary Shares (the "MAXXAM Depositary Shares"). Sales of the MAXXAM Common Stock or MAXXAM Depositary Shares by MAXXAM may not be made in a public distribution unless registered under the Securities Act or sold pursuant to Rule 144 thereunder. On October 13, 1993, the Company filed a registration statement with the Commission (which has been declared "effective" by the Commission) relating to the public sale by MAXXAM of the MAXXAM Depositary Shares. Sales of substantial amounts of the MAXXAM Common Stock or MAXXAM Depositary Shares in the public market subsequent to the consummation of this offering, and the possibility that such sales may be made, could adversely affect the prevailing market price of the Company's equity securities. In connection with this offering, each of the Company and MAXXAM has agreed that it will not sell shares of PRIDES, Common Stock, $.65 Depositary Shares or Series A Shares for specified periods from the date of this Prospectus. See "Underwriting." 17 20 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the shares of PRIDES are estimated to be approximately $88.6 million. The Company intends to use such net proceeds to make a non-interest bearing loan to KACC in a principal amount equal to $30,360,000 (the aggregate dividends scheduled to accrue on the shares of PRIDES from the issuance date until the Mandatory Conversion Date) evidenced by an intercompany note (the "Initial Intercompany Note") and to use the balance of such net proceeds to make a capital contribution to KACC in the amount of approximately $58.2 million. The Initial Intercompany Note will mature on December 30, 1997, and will be payable in quarterly installments on March 30, June 29, September 29 and December 30 of each year, commencing March 30, 1994, and ending December 30, 1997, the first quarterly installment to be in the amount of $ and each remaining quarterly installment to be in the amount of $ . If the Underwriters' over-allotment option is exercised in full, the Company intends to use a portion of the additional net proceeds received from such exercise (estimated to be approximately $13.4 million) to make an additional non-interest bearing loan to KACC in a principal amount equal to $4,554,000 evidenced by an additional intercompany note (the "Additional Intercompany Note" and, together with the Initial Intercompany Note, the "Intercompany Note") and to use the balance of such net proceeds to make an additional capital contribution to KACC in the amount of approximately $8.8 million. The Additional Intercompany Note will be identical in all material respects to the Initial Intercompany Note. In a manner similar to the Initial Intercompany Note, the Additional Intercompany Note will have payment terms designed to provide sufficient funds to the Company to enable it to make dividend payments on the shares of PRIDES issued as a result of the exercise of the over-allotment option until the Mandatory Conversion Date. KACC currently intends to use the funds it receives from the Company for working capital and general corporate purposes. In connection with this offering, KACC is concurrently offering $225.0 million of Senior Notes. The net proceeds of the offering of Senior Notes will be used to reduce outstanding borrowings under the revolving credit facility of the Credit Agreement immediately prior to the effectiveness of the New Credit Agreement and for working capital and general corporate purposes. As of February 7, 1994 there was $262.2 million in outstanding borrowings under the Credit Agreement, including $37.2 million in outstanding letters of credit. The Credit Agreement currently bears interest at the rate of 6.2% per annum. Borrowings and reborrowings under the New Credit Agreement will be used for working capital and general corporate purposes, including capital projects. From time to time, the Company undertakes discussions with various parties relating to the creation of joint ventures or other business combinations, the acquisition of related businesses and other strategic matters which management believes may enhance the Company's competitive position. As of the date of this Prospectus, the Company has not entered into any material agreements relating to any of the foregoing. For information with respect to the New Credit Agreement and the Credit Agreement (including applicable interest rates and the maturity date thereof), see "Description of Principal Indebtedness." 18 21 COMMON STOCK AND $.65 DEPOSITARY SHARE PRICE RANGE AND DIVIDENDS The Common Stock has been listed and traded on the NYSE under the symbol "KLU" since July 1991. The $.65 Depositary Shares have been listed and traded on the NYSE under the symbol "KLU.pA" since June 1993. The following table sets forth the range of high and low sale prices of the Common Stock and $.65 Depositary Shares as reported on the NYSE, together with the per share cash dividends paid by the Company, during the periods indicated.
COMMON STOCK $.65 DEPOSITARY SHARES* ---------------------------------- -------------------------------- 1992 LOW HIGH DIVIDEND LOW HIGH DIVIDEND - ----------------------- ----- ----- ------ ---- ---- ------ First Quarter.......... $10 1/8 $14 3/4 $ .05 Second Quarter......... 10 1/4 14 1/4 .05 Third Quarter.......... 7 5/8 11 .05 Fourth Quarter......... 6 7/8 9 1/2 .05 1993 - ----------------------- First Quarter.......... $7 3/8 $9 7/8 0 Second Quarter......... 6 3/8 8 0 Third Quarter.......... 6 5/8 8 5/8 0 $7 1/2 $8 3/8 $.1625 Fourth Quarter......... 6 7/8 10 1/2 0 7 3/8 8 3/4 .1625 1994 - ----------------------- First Quarter (through February 8, 1994).... $8 7/8 $12 1/2 $7 3/8 $8 3/4
- --------------- * The $.65 Depositary Shares were issued by the Company on June 30, 1993. There were approximately 138 holders of record as of December 31, 1993, for the $.65 Depositary Shares, and 134 stockholders of record as of such date for the Common Stock, which does not, in either case, include beneficial owners holding shares through nominee or "street" names. The last sales prices of the Common Stock and the $.65 Depositary Shares as reported on the NYSE on February 8, 1994, were $11 7/8 and $8 3/4, respectively, per share. DIVIDEND POLICY The Company expects to make dividend payments on the shares of PRIDES until the Mandatory Conversion Date out of funds provided to it by KACC pursuant to the terms of the Intercompany Note. The Intercompany Note will mature on December 30, 1997, and will be payable in quarterly installments. The declaration and payment of dividends by the Company on the shares of PRIDES will be expressly permitted by the terms of the New Credit Agreement to the extent the Company receives payments on the Intercompany Note. The Company paid a quarterly dividend of $.05 per share of Common Stock, commencing with its initial public offering during the third quarter of 1991 and continuing through the fourth quarter of 1992. The Company's Board of Directors determined not to declare any dividends on the Common Stock in 1993. The declaration and payment of dividends on the Common Stock will depend upon the Company's results of operations, general financial condition, capital needs and future prospects. On September 30, 1993, and December 31, 1993, the Company paid a dividend in the amount of $.1625 per $.65 Depositary Share to all holders of its outstanding $.65 Depositary Shares. Holders of shares of PRIDES will receive shares of Common Stock upon conversion or redemption of their shares of PRIDES. The declaration and payment of dividends by KACC on its shares of common stock will be subject to certain covenants contained in the Senior Note Indenture and the 12 3/4% Note Indenture. See "Description of Principal Indebtedness -- Existing Indebtedness" for a discussion of such restrictions. The New Credit Agreement will not permit the Company or KACC to pay any dividends on their common stock. 19 22 CAPITALIZATION The following table summarizes the historical consolidated capitalization of the Company at September 30, 1993, and as adjusted to give effect to the Pro Forma Adjustments (as defined in Note (6) of "Summary -- Summary Historical and Pro Forma Consolidated Financial Data"). This table should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto appearing elsewhere in this Prospectus.
SEPTEMBER 30, 1993 ----------------------- ACTUAL AS ADJUSTED ------- ----------- (IN MILLIONS OF DOLLARS) Short-term debt (1).................................................... $ 27.0 $ 8.5 ------- ----------- Long-term debt (1): Revolving Credit Facility............................................ 165.0(2) -- New Credit Agreement................................................. -- 0.0(3) % Senior Notes....................................................... -- 225.0 Pollution Control and Solid Waste Disposal Obligations (less current portion of $1.1).................................... 38.1 38.1 Alpart CARIFA Loan................................................... 60.0 60.0 Alpart Term Loan (less current portion of $6.2)...................... 18.8 18.8 12 3/4% Senior Subordinated Notes.................................... 400.0 400.0 Other borrowings (less current portion of $1.2)...................... 10.9 10.9 ------- ----------- Total long-term debt.............................................. 692.8 752.8(4) ------- ----------- Minority interests..................................................... 103.7 103.7 ------- ----------- Stockholders' equity: Preferred stock, par value $.05, authorized 20,000,000 shares; 1,938,295 Series A Shares, stated value $.10, issued and outstanding....................................................... .2 .2 8,000,000 PRIDES, Series B Shares, par value $.05 issued and outstanding...................................................... -- .4 Common stock, par value $.01, authorized 100,000,000 shares; 57,331,507 shares issued and outstanding.......................... .6 .6 Additional capital................................................... 422.6 510.8 Accumulated deficit.................................................. (313.2) (320.9) ------- ----------- Total stockholders' equity........................................ 110.2 191.1 ------- ----------- Total capitalization............................................ $ 933.7 $ 1,056.1 ------- ----------- ------- -----------
- --------------- (1) Does not give effect to $72.7 million of guaranteed unconsolidated joint venture indebtedness of the Company and $36.5 million of other guarantees and letters of credit. For a description of the Company's long-term debt, see "Description of Principal Indebtedness" and Note 3 of the Notes to the Interim Financial Statements. (2) As of September 30, 1993, $148.9 million of borrowing capacity was unused under the revolving credit facility of the Credit Agreement. As of February 7, 1994, $262.2 million was outstanding under the Credit Agreement, including $37.2 million in outstanding letters of credit. (3) After giving effect to the Refinancing Transactions, $183.6 million of borrowing capacity would have been available for use under the New Credit Agreement ($66.4 million in letters of credit would have been outstanding), and the Company would have had additional cash available of $111.2 million ($58.9 million of additional cash would have been available as of February 7, 1994). (4) The scheduled maturity of the Company's long-term debt through 1998 is as follows: 1994 -- $8.5 million; 1995 -- $8.1 million; 1996 -- $8.8 million; 1997 -- $8.9 million; and 1998 -- $8.9 million. 20 23 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA The following selected historical and pro forma consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto, appearing elsewhere in this Prospectus, and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected historical consolidated financial data as of and for the years ended December 31, 1992, 1991, 1990 and 1989, as of and for the two months ended December 31, 1988, and for the ten months ended October 31, 1988 are derived from the Company's Consolidated Financial Statements which have been audited by independent public accountants. The selected historical consolidated financial data as of and for the nine months ended September 30, 1993, and for the nine months ended September 30, 1992, have not been audited, but in the opinion of management contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position and results of operations of the Company as of such date and for such periods. The financial statements of Predecessor and Successor are not directly comparable for the reasons set forth in footnote (1) to the table below.
SUCCESSOR(1) -------------------------------------------------------------------------------- PREDECESSOR(1) NINE MONTHS -------------- ENDED TWO MONTHS TEN MONTHS SEPTEMBER 30, YEAR ENDED DECEMBER 31, ENDED ENDED ---------------------- ----------------------------------------- DECEMBER 31, OCTOBER 31, 1993 1992 1992 1991 1990 1989 1988 1988 -------- -------- -------- -------- -------- -------- ------------ -------------- (IN MILLIONS OF DOLLARS, EXCEPT RATIOS AND PER SHARE AMOUNTS) Operating Data: Net sales..................... $1,303.2 $1,413.1 $1,909.1 $2,000.8 $2,095.0 $2,192.7 $298.1 $1,921.4 Cost of products sold......... 1,181.0 1,178.1 1,619.3 1,594.2 1,525.2 1,545.6 226.7 1,462.4 Gross profit.................. 122.2 235.0 289.8 406.6 569.8 647.1 71.4 459.0 Depreciation.................. 72.9 60.4 80.3 73.2 70.5 62.3 7.7 69.6 Selling, administrative, research and development, and general..................... 90.7 88.9 119.6 117.4 123.2 119.7 20.0 121.0 Operating income (loss)....... (41.4) 85.7 89.9 216.0 376.1 465.1 43.7 268.4 Interest expense.............. 63.8 58.4 78.7 93.9 96.6 207.0 39.2 69.6 Income (loss) before income taxes, minority interests, extraordinary loss and cumulative effect of changes in accounting principles.... (95.2) 32.3 32.1 142.4 297.1 311.5 19.9 243.7 Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles.... (57.0) 24.3 26.9 108.4 213.7 202.1 (1.2) 128.7 Net income(loss).............. (586.1)(2) 24.3 26.9 108.4 213.7 202.1 (1.2) 172.4(3) Income (loss) per common and common equivalent share before extraordinary loss and cumulative effect of changes in accounting principles(4)............... $ (1.05)(5) $ .42 $ .47 $ 2.03 $ 4.27 $ 4.04 Net income (loss) per common and common equivalent share....................... $ (10.28) $ .42 $ .47 $ 2.03 $ 4.27 $ 4.04 Weighted average number of common and common equivalent shares outstanding (in thousands)(4)................. 57,330(5) 57,250 57,250 53,297 50,000 50,000 Dividends declared: Per common share.............. -- $ .15 $ .20 $ 1.10 $ 3.00 Per Depositary Share.......... $ .1625 Ratio of earnings to combined fixed charges and preferred stock dividends(6)............ --(7) 1.4x 1.3x 2.3x 3.5x 2.4x 1.7x 3.4x Pro Forma(8) Interest expense.............. $ 65.8 $ 82.4 Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles.... (58.3) 24.5 Net Income (loss)(9).......... (602.6) 4.4 Income (loss) per common and common equivalent share before extraordinary loss and cumulative effect of changes in accounting principles.................. $ (1.17) $ .38 Net income (loss) per common and common equivalent share....................... $ (10.67) $ .07
DECEMBER 31, SEPTEMBER 30, 1993 --------------------------------------- --------------------------------- PRO FORMA(8) ACTUAL 1992 1991 ------------ ------------------ ------- ------- (IN MILLIONS OF DOLLARS) Balance Sheet Data: Working capital....................................... $ 459.1 $ 325.1 $ 320.3 $ 242.2 Total assets.......................................... 2,601.2 2,483.3 2,098.8 2,134.1 Long-term liabilities................................. 1,141.4 1,141.4 217.9 212.9 Long-term debt, less current portion.................. 752.8 692.8 765.1 681.5 Notes payable to parent............................... -- -- -- -- Minority interests.................................... 103.7 103.7 104.9 108.9 Total stockholders' equity............................ 191.1 110.2 565.2 555.8 1990 1989 1988 ------- ------- ------------------ Balance Sheet Data: Working capital....................................... $ 264.4 $ 200.2 $ 722.6 Total assets.......................................... 2,118.5 2,130.9 2,574.0 Long-term liabilities................................. 310.8 321.1 188.2 Long-term debt, less current portion.................. 631.5 655.8 1,414.2 Notes payable to parent............................... 150.0 -- -- Minority interests.................................... 123.2 135.1 81.9 Total stockholders' equity............................ 356.0 292.3 140.1
- --------------- (1) The acquisition of the Company in the Merger has been recorded as a purchase, with the Company's financial results reported through October 31, 1988 (Predecessor), and for periods subsequent thereto (Successor). In accounting for the acquisition, Successor recorded the assets and liabilities of Predecessor based upon estimated fair values. At the same time, Successor adopted the last-in, first-out (LIFO) method for financial reporting purposes for valuing substantially all product inventories. Operations of the Company's aluminum smelter and rolling mill at Ravenswood, West Virginia, its aluminum recycling facility at Bedford, Indiana, and its regional data center at Columbus, Ohio, are not included in the reported results of operations of Successor as they were accounted for as assets held for sale beginning November 1, 1988. (2) See Note (1) of "Summary -- Summary Historical Consolidated Financial Data." (3) Includes extraordinary tax benefits of $36.0 million from utilization of net operating loss carryforwards by domestic operations. (4) See Note (2) of "Summary -- Summary Historical and Pro Forma Consolidated Financial Data." (5) See Note (3) of "Summary -- Summary Historical and Pro Forma Consolidated Financial Data." (6) See Note (4) of "Summary -- Summary Historical and Pro Forma Consolidated Financial Data." (7) See Note (5) of "Summary -- Summary Historical and Pro Forma Consolidated Financial Data." (8) See Note (6) of "Summary -- Summary Historical and Pro Forma Consolidated Financial Data." (9) See Note (7) of "Summary -- Summary Historical and Pro Forma Consolidated Financial Data." 21 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company, through KACC, operates in two business segments: bauxite and alumina, and aluminum processing. The Company's operating results are sensitive to changes in prices of alumina, primary aluminum, and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold. The following table provides selected operational and financial information on a consolidated basis with respect to the Company for the years ended December 31, 1992, 1991, and 1990, and for the nine months ended September 30, 1993 and 1992. As an integrated aluminum producer, the Company uses a portion of its bauxite, alumina, and primary aluminum production for additional processing at certain of its other facilities. Intracompany shipments and sales are excluded from the information set forth below.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------- ------------------------------- 1993 1992 1992 1991 1990 ------- ------- ------- ------- ------- (IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES) Shipments: (000 tons) Alumina.............................. 1,508.5 1,436.2 2,001.3 1,945.9 1,758.2 Aluminum products: Primary aluminum.................. 183.4 261.0 355.4 340.6 344.2 Fabricated products............... 280.0 257.5 343.6 314.2 307.5 ------- ------- ------- ------- ------- Total aluminum products...... 463.4 518.5 699.0 654.8 651.7 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Average realized sales price: Alumina (per ton).................... $ 169 $ 195 $ 195 $ 240 $ 301 Primary aluminum (per pound)......... .57 .66 .66 .72 .72 Net sales: Bauxite and alumina: Alumina........................... $ 255.5 $ 280.7 $ 390.8 $ 466.5 $ 529.2 Other(1)(2)....................... 64.1 56.9 75.7 84.3 80.2 ------- ------- ------- ------- ------- Total bauxite and alumina.... 319.6 337.6 466.5 550.8 609.4 ------- ------- ------- ------- ------- Aluminum processing: Primary aluminum.................. 229.3 381.3 515.0 538.5 549.2 Fabricated products............... 744.6 683.9 913.7 898.9 917.0 Other(2).......................... 9.7 10.3 13.9 12.6 19.4 ------- ------- ------- ------- ------- Total aluminum processing.... 983.6 1,075.5 1,442.6 1,450.0 1,485.6 ------- ------- ------- ------- ------- Total net sales......... $1,303.2 $1,413.1 $1,909.1 $2,000.8 $2,095.0 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Operating income (loss): Bauxite and alumina.................. $ (1.8) $ 46.2 $ 62.6 $ 150.0 $ 241.4 Aluminum processing.................. 12.6 104.2 104.9 150.2 222.6 Corporate............................ (52.2) (64.7) (77.6) (84.2) (87.9) ------- ------- ------- ------- ------- Total operating income (loss)..................... $ (41.4) $ 85.7 $ 89.9 $ 216.0 $ 376.1 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes, minority interests, extraordinary loss and cumulative effect of changes in accounting principles............. $ (95.2) $ 32.3 $ 32.1 $ 142.4 $ 297.1 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles................ $ (57.0) $ 24.3 $ 26.9 $ 108.4 $ 213.7 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)...................... $(586.1) $ 24.3 $ 26.9 $ 108.4 $ 213.7 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Capital expenditures................... $ 36.4 $ 79.8 $ 114.4 $ 118.1 $ 115.1 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
- --------------- (1) Includes net sales of bauxite. (2) Includes the portion of net sales attributable to minority interests in consolidated subsidiaries. 22 25 RECENT TRENDS Exports from the Commonwealth of Independent States, additions to smelter capacities during the past several years, continued high operating rates and other factors have contributed to a significant increase in primary aluminum inventories in the Western world. If Western world production and exports from the Commonwealth of Independent States continue at current levels, primary aluminum inventory levels will increase further in 1994. The foregoing factors, among others, have contributed to a significant reduction in the market price of primary aluminum, and may continue to adversely affect the market price of primary aluminum in the future. Government officials from the European Union, the United States of America, Canada, Norway, Australia and the Russian Federation met in a multilateral conference in January 1994, to discuss the current excess global supply of primary aluminum. All six participating governments have ratified as a trade agreement the resulting Memorandum which provides, in part, for (i) a reduction in Russian Federation primary aluminum production by 300,000 tons per year within three months of the date of ratification of the Memorandum and an additional 200,000 tons within the following three months, (ii) improved availability of comprehensive data on Russian aluminum production and (iii) certain assistance to the Russian aluminum industry. A Russian Federation Trade Ministry official has publicly stated that the output reduction would remain in effect for 18 months to two years, provided that other worldwide production cutbacks occur, existing trade restrictions on aluminum are eliminated and no new trade restrictions on aluminum are imposed. The Memorandum does not require specific levels of production cutbacks by other producing nations. A further meeting of the participants is scheduled for the end of February 1994. There can be no assurance that the implementation of the Memorandum will adequately address the current oversupply of primary aluminum. The Company will continue to assess its production levels in light of market prices, industry inventory levels, production costs and user demand and, based on these and other factors, could determine to curtail production at certain of its facilities in the future. If the Company's average realized sales prices in 1994 for substantial quantities of its primary aluminum and alumina were based on the current market price of primary aluminum (AMT Price of 61.14c per pound for the week ended February 4, 1994) the Company would continue to sustain net losses in 1994, which would be expected to approximate the loss in 1993 ($81.5 million) before (a) extraordinary loss and cumulative effect of changes in accounting principles, (b) the 1993 Facilities Charges and (c) the Other 1993 Charges. KACC announced in October 1993 that it is restructuring its flat-rolled products operation at its Trentwood plant in the state of Washington, to reduce that facility's annual operating costs. This effort is in response to over-capacity in the aluminum rolling industry, flat demand in can stock markets, and declining demand for aluminum products sold to customers in the commercial aerospace industry, all of which have resulted in declining prices in Trentwood's key markets. The Trentwood restructuring is expected to result in annual cost savings of approximately $50.0 million after it has been fully implemented (which is expected to occur during the next two years). Effective October 1, 1993, an increase in the base rate BPA charges to its direct service industry customers for electricity was adopted, which will increase the Company's production costs at the Mead and Tacoma smelters by approximately $15.0 million per year (approximately $11.3 million per year, based on the current operating rate of approximately 75% of full capacity). The rate increase is generally expected to remain in effect for two years. FOURTH QUARTER AND YEAR END RESULTS The Company's net sales totaled $415.9 million in the fourth quarter of 1993, compared with $496.0 million in the fourth quarter of 1992, and $1,719.1 million for the full year 1993, compared with $1,909.1 million for the full year of 1992. Revenues decreased in the fourth quarter of 1993 as compared to the fourth quarter of 1992 due principally to lower average realized prices and shipments of primary aluminum and alumina and lower average realized prices of most fabricate products, partially offset by increased shipments of fabricated products during the 1993 period compared with the 1992 period. Revenues decreased for the full year of 1993 as compared to the full year of 1992 due principally to lower shipments of primary 23 26 aluminum and lower average realized prices of primary aluminum and alumina and, to a lesser extent, of fabricated products, partially offset by increased shipments of most fabricated products during 1993 as compared to 1992. The Company will report a net loss before extraordinary loss and cumulative effect of changes in accounting principles of $123.1 million (including the 1993 Facilities Charges and the Other 1993 Charges) for the full year of 1993, compared with net income of $26.9 million for the full year of 1992. The Company will report a net loss of $66.1 million (including the 1993 Facilities Charges and the Other 1993 Charges) for the fourth quarter of 1993, compared with net income of $2.6 million for the fourth quarter of 1992. The Company recognized an after-tax loss relating to the cumulative effect of changes in accounting principles of $507.3 million and an after-tax extraordinary loss on early extinguishment of debt of $21.8 million in the first quarter of 1993. See Note (1) of "Summary Historical and Pro Forma Consolidated Financial Data." The fourth quarter results include a pre-tax charge of $35.8 million ($22.6 million after-tax) related to the 1993 Facilities Charges and pre-tax charges of $30.2 million ($19.0 million after-tax) principally related to the Other 1993 Charges. The Company will also recognize an after-tax reduction of stockholders' equity of $14.9 million in the fourth quarter of 1993 to reflect the lowering of the discount rate used to calculate the Company's minimum pension liability. The Company recognized a pre-tax charge of $29.0 million ($24.2 million after-tax) related to a reduction in the carrying value of the Company's inventory, pre-tax income of $14.0 million ($11.7 million after-tax) for non-recurring adjustments to previously recorded liabilities and reserves, and an after-tax reduction of stockholders' equity of $6.7 million in the fourth quarter of 1992. NINE MONTHS ENDED SEPTEMBER 30, 1993 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1992 Net Sales Bauxite and Alumina -- Revenue from net sales of bauxite and alumina to third parties was $319.6 million in the first nine months of 1993, compared with $337.6 million in the first nine months of 1992. Revenue from alumina decreased 9% to $255.5 million in the first nine months of 1993 from $280.7 million in the first nine months of 1992 because lower average realized prices more than offset increased shipments. Aluminum Processing -- Revenue from net sales to third parties for the aluminum processing segment was $983.6 million in the first nine months of 1993, compared with $1,075.5 million in the first nine months of 1992. Revenue from primary aluminum decreased 40% to $229.3 million in the first nine months of 1993 from $381.3 million in the same period of 1992 because of lower shipments and lower average realized prices. Shipments of primary aluminum to third parties constituted approximately 40% of total aluminum products shipments in the first nine months of 1993, compared with approximately 50% in the first nine months of 1992. Revenue from fabricated aluminum products increased 9% to $744.6 million in the first nine months of 1993 from $683.9 million in the same period of 1992, principally due to an increase in shipments. Operating Income (Loss) The Company had an operating loss of $41.4 million in the first nine months of 1993, compared with operating income of $85.7 million in the first nine months of 1992. Bauxite and Alumina -- This segment's operating loss in the first nine months of 1993 was $1.8 million, compared with income of $46.2 million in the first nine months of 1992. The decline in earnings is principally due to a decrease in average realized prices for alumina, partially offset by increased shipments of alumina. In the 1992 period, the Company realized above-market prices for significant quantities of alumina sold forward at fixed prices in prior periods under long-term contracts. Aluminum Processing -- This segment's operating income was $12.6 million in the first nine months of 1993, compared with $104.2 million in the same period of 1992. This decrease was caused principally by reduced shipments and lower average realized prices of primary aluminum. Other contributing factors were lower production at the Company's smelters in the Pacific Northwest in the 1993 period, as a result of the removal of three reduction potlines from production at those smelters in January 1993 in response to the BPA's reduction in January 1993 of the amount of power it normally provides to the Company, and the 24 27 increased cost of substitute power in the first quarter of 1993. In the first nine months of 1993, the Company's average realized price from sales of primary aluminum was approximately $.57 per pound, compared to the average Midwest U.S. transaction price of approximately $.55 per pound during such period. In both the 1993 and 1992 periods, the Company realized above-market prices for significant quantities of primary aluminum sold forward in prior periods under long-term contracts. Corporate -- Corporate operating expenses of $52.2 million and $64.7 million in the first nine months of 1993 and 1992, respectively, represented corporate general and administrative expenses, which are not allocated to the Company's segments. Income (Loss) Before Extraordinary Loss and Cumulative Effect of Changes in Accounting Principles Loss before extraordinary loss and cumulative effect of changes in accounting principles was $57.0 million, or $1.05 per common share, in the first nine months of 1993, compared with income of $24.3 million, or $.42 per common share, in the first nine months of 1992. This decrease resulted from the lower operating income previously described, partially offset by a higher credit for income taxes. See Note 5 of the Notes to Interim Consolidated Financial Statements. Extraordinary Loss on Early Extinguishment of Debt On February 1, 1993, KACC issued $400.0 million aggregate principal amount of its 12 3/4% Notes. The net proceeds from the sale of the 12 3/4% Notes were used to retire $321.7 million aggregate principal amount of, and pay premiums on, the 14 1/4% Notes, to prepay $18.0 million of the term loan under the Credit Agreement, and to reduce outstanding borrowings under the revolving credit facility of the Credit Agreement. These transactions resulted in a pre-tax extraordinary loss of $33.0 million in the first quarter of 1993 ($21.8 million after taxes), 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. Cumulative Effect of Changes in Accounting Principles As of January 1, 1993, the Company adopted Statement of Financing Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106"), Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"), and Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits ("SFAS 112"). The cumulative effect of the change in accounting principle for the adoption of SFAS 106 reduced results of operations by $497.7 million, net of a related income tax benefit of $234.2 million. The cumulative effect of the change in accounting principle for the adoption of SFAS 112 reduced results of operations by $7.3 million, net of a related income tax benefit of $3.5 million. The new accounting methods have no effect on the Company's cash outlays for postretirement and postemployment benefits nor will the one-time charge affect the Company's compliance with its existing debt covenants. The Company reserves the right, subject to applicable collective bargaining agreements, to amend or terminate these benefits. The cumulative effect of the change in accounting principle for the adoption of SFAS 109 reduced results of operations by $2.3 million. The implementation of SFAS 109 required the Company to restate certain assets and liabilities to pre-tax amounts from net-of-tax amounts, originally recorded in connection with the acquisition of the Company by MAXXAM. See Notes 5, 6 and 7 to Interim Financial Statements. Net Income (Loss) The Company recorded a net loss of $586.1 million, or $10.28 per common share, for the first nine months of 1993 compared with net income of $24.3 million, or $.42 per common share, in the same period of 1992. The principal reasons for the earnings decline were the cumulative effect of changes in accounting principles of $507.3 million ($8.85 per common share), the extraordinary loss of $21.8 million ($.38 per common share) and the operating losses described above. 25 28 THREE YEARS ENDED DECEMBER 31, 1992 Net Sales Bauxite and Alumina -- This segment's revenue from net sales of bauxite and alumina to third parties was $466.5 million in 1992 compared with $550.8 million in 1991 and $609.4 million in 1990. Revenue from alumina decreased 16% to $390.8 million in 1992 from $466.5 million in 1991, as significantly lower average realized prices more than offset a 3% increase in alumina shipments. Revenue from alumina decreased 12% to $466.5 million in 1991 from $529.2 million in 1990 as significantly lower average realized prices more than offset an 11% increase in alumina shipments, which was principally attributable to increased production at all three of the Company's alumina refineries. The remainder of the segment's sales revenues were from sales of bauxite, which remained about the same throughout the three years, and the portion of sales of alumina attributable to the minority interest in Alpart. Aluminum Processing -- Revenue from net sales to third parties for the aluminum processing segment was $1,442.6 million in 1992 compared with $1,450.0 million in 1991 and $1,485.6 million in 1990. The bulk of the segment's sales represents the Company's primary aluminum and fabricated aluminum products, with the remainder attributable to the portion of sales of primary aluminum attributable to the minority interest in Valco. Revenue from primary aluminum decreased 4% to $515.0 million in 1992 from $538.5 million in 1991, as an 8% decrease in average realized prices more than offset a 4% increase in primary aluminum shipments. Shipments of primary aluminum to third parties were approximately 51% of total aluminum products shipments in 1992 compared with approximately 52% in 1991. Revenue from primary aluminum decreased 2% to $538.5 million in 1991 from $549.2 million in 1990, primarily because of a 1% decline in shipments. Shipments of primary aluminum to third parties were approximately 52% of total aluminum products shipments in 1991 compared with approximately 53% in 1990. Revenue from fabricated aluminum products increased 2% to $913.7 million in 1992 compared with $898.9 million in 1991, primarily because lower average realized prices were more than offset by a 9% increase in shipments of fabricated aluminum products. Revenue from fabricated aluminum products decreased by 2% to $898.9 million in 1991 from $917.0 million in 1990 because of lower average realized prices. Operating Income The Company's operating income in 1992 was $89.9 million, compared with $216.0 million in 1991 and $376.1 million in 1990. The Company recorded a pre-tax charge of approximately $29.0 million in the fourth quarter of 1992 because of a reduction in the carrying value of its inventories caused principally by prevailing lower prices for alumina, primary aluminum, and fabricated products of $18.8 million and a LIFO inventory liquidation of $10.2 million. Bauxite and Alumina -- This segment's operating income in 1992 was $62.6 million, a decrease of 58% from $150.0 million in 1991. Operating income in 1991 was $150.0 million, a decrease of 38% from $241.4 million in 1990. In both 1992 compared to 1991, and 1991 compared to 1990, operating income was adversely affected by a decrease in average realized prices for alumina which more than offset higher alumina shipments and above-market prices for significant quantities of alumina sold forward in prior periods under long-term contracts. Aluminum Processing -- Operating income for the aluminum processing segment was $104.9 million in 1992, a decrease of 30% from $150.2 million in 1991. Operating income in 1992 was adversely affected by a decrease in average realized prices for primary aluminum and most fabricated aluminum products, partially offset by increased shipments. In both 1992 and 1991, the Company realized above-market prices for significant quantities of primary aluminum sold forward in prior periods under long-term contracts. Operating income for the aluminum processing segment was $150.2 million in 1991, a decrease of 33% from $222.6 million in 1990. Operating income in 1991 was adversely affected by a decrease in average realized prices for fabricated aluminum products and, to a lesser extent, by higher unit production costs for labor and 26 29 raw materials. These decreases in operating income more than offset above-market prices for significant quantities of primary aluminum sold forward in prior periods under long-term contracts. Corporate -- Corporate operating expenses of $77.6 million, $84.2 million, and $87.9 million in 1992, 1991, and 1990, respectively, represented corporate general and administrative expenses which were not allocated to segments. Income Before Income Taxes and Minority Interests Income before income taxes and minority interests in 1992 was $32.1 million, a decrease of 77% from $142.4 million in 1991. This decrease resulted from the lower operating income previously described, partially offset by a decrease in interest expense. Other income remained about the same in 1992 and 1991 as approximately $14.0 million of income for non-recurring adjustments to previously recorded liabilities and reserves in the fourth quarter of 1992 approximately equaled the receipt of a $12.0 million fee in the first quarter of 1991 from the Company's minority partner in Alpart in consideration for the execution of an expansion agreement for the Alpart alumina refinery. Income before income taxes and minority interests in 1991 was $142.4 million, a decrease of 52% from $297.1 million in 1990. This decrease resulted from the lower operating income previously described, partially offset by an increase in other income principally due to the receipt of a $12.0 million fee in the first quarter of 1991 from the Company's minority partner in Alpart as explained above. Net Income The Company earned $26.9 million (or $.47 per common share) in 1992, compared with $108.4 million (or $2.03 per common share) in 1991 and $213.7 million (or $4.27 per common share) in 1990. The principal reason for the earnings decline in 1992 compared with 1991 was the decrease in average realized prices for alumina, primary aluminum, and most fabricated products, partially offset by an increase in shipments of such products. The principal reason for the earnings decline in 1991 compared with 1990 was the decrease in price realizations for alumina, primary aluminum, and fabricated products, partially offset by a significant increase in shipments of alumina and the Company's forward sales strategy for substantial quantities of alumina and primary aluminum which yielded better-than-market prices for these products. FINANCIAL CONDITION AND CAPITAL SPENDING Cash from Operations Cash used for operations was $2.4 million in the first nine months of 1993, compared with cash provided by operations of $21.9 million in the first nine months of 1992. Cash flow from operations was $26.3 million in 1992, compared with $135.0 million in 1991 and $192.6 million in 1990. The decrease in 1992 compared with 1991 was primarily because of the decline in net income and a $66.3 million decrease in previously withdrawn equity resulting from the excess of current market value over the premiums paid in certain option contracts. The decrease in 1991 compared with 1990 was mostly due to a lower level of net income in 1991, partially offset by the withdrawal of equity in certain option contracts. The equity withdrawal from these option contracts during 1991 increased by $52.9 million over 1990. Capital Expenditures The Company's capital expenditures of approximately $300.2 million (of which $42.6 million was funded by the Company's minority partners in certain joint ventures) during the three years ended December 31, 1993, were made primarily to improve production efficiency, reduce operating costs, expand capacity at existing facilities, and construct new facilities. Total consolidated capital expenditures were $67.7 million in 1993 compared with $114.4 million in 1992 and $118.1 million in 1991 (of which $9.4 million, $17.1 million and $16.1 million were funded by the minority partners in certain foreign joint ventures in 1993, 1992 and 1991, respectively). Total consolidated capital expenditures (of which approximately up to 5% is expected to 27 30 be funded by the minority partners in certain foreign joint ventures) are expected to be in the range of $50 million to $75 million per year in the years 1994-1996. Capital Structure The offering of the PRIDES, the concurrent offering by KACC of $225.0 million aggregate principal amount of Senior Notes and the replacement of the Credit Agreement are the final steps of a comprehensive refinancing plan which the Company began in January 1993. The plan is intended to extend the maturities of the Company's outstanding indebtedness, to enhance its liquidity and to raise new equity capital. As of December 31, 1992, the Company's long-term indebtedness consisted principally of $321.7 million aggregate amount of the 14 1/4% Notes and the Credit Agreement. KACC refinanced the 14 1/4% Notes through the issuance in February 1993 of $400.0 million aggregate principal amount of the 12 3/4% Notes. In addition, on January 24, 1994, KACC entered into the Commitment Letter to replace the Credit Agreement ($262.2 million outstanding as of February 7, 1994, including $37.2 million in outstanding letters of credit) with the New Credit Agreement. Bank of America and BA have committed, subject to certain terms and conditions, to provide the full $250.0 million of the New Credit Agreement. As of December 31, 1993, the Company's total consolidated indebtedness was $729.4 million, and $113.6 million of borrowing capacity was unused under the revolving credit facility of the Credit Agreement. On a pro forma basis, after giving effect to the sale of the PRIDES, the sale of the Senior Notes and the effectiveness of the New Credit Agreement, as of December 31, 1993, the Company's total consolidated indebtedness would have been $765.9 million, $182.5 million of borrowing capacity would have been unused under the New Credit Agreement and the Company would have had additional cash available of $106.1 million. See "Capitalization." To increase its equity capital, the Company consummated a public offering of its $.65 Depositary Shares in June 1993 pursuant to which the Company realized net proceeds of approximately $119.3 million. The Company will realize additional net proceeds of approximately $88.6 million as a result of the sale of the PRIDES. See "-- Debt Service and Capital Expenditure Requirements" below. After giving effect to the Refinancing Transactions, the scheduled maturity of the Company's long-term indebtedness through 1998 will be substantially reduced. Debt Service and Capital Expenditure Requirements. Under the terms of the Company's existing Credit Agreement ($262.2 million outstanding as of February 7, 1994, including $37.2 million in outstanding letters of credit), which is expected to be replaced by the New Credit Agreement, KACC expects to be able to satisfy its debt service and capital expenditures requirements through at least June 30, 1994, from cash flows generated by operations and, to the extent necessary, from borrowings under the revolving credit facility of the Credit Agreement. In the event the Credit Agreement is not replaced by the New Credit Agreement, there can be no assurance that KACC will be able to satisfy the covenants under the existing Credit Agreement on or after June 30, 1994. After giving effect to the Refinancing Transactions, KACC expects that it will be able to satisfy its debt service and capital expenditure requirements through at least December 31, 1995, from cash flows generated by operations and, to the extent necessary, from borrowings under the New Credit Agreement. See "Description of Principal Indebtedness -- The New Credit Agreement." The offering of the shares of PRIDES, the offering of the Senior Notes and the effectiveness of the New Credit Agreement will be conditioned upon the simultaneous closing of all such transactions. In connection with the offering of the $.65 Depositary Shares in June 1993, the Company made a non-interest bearing loan to KACC in the principal amount of $37,796,753 (an amount equal to the aggregate dividends scheduled to accrue on the Series A Shares issued in June 1993 from the issuance date until the date on which such Series A Shares mandatorily convert into shares of the Company's Common Stock). The loan is evidenced by an intercompany note which matures on June 29, 1996, and is payable in quarterly installments. As of December 31, 1993, the aggregate principal amount of such intercompany note was $31,497,294. 28 31 The Company expects to make dividend payments on the shares of PRIDES out of funds provided to it by KACC pursuant to the terms of the Intercompany Note. The declaration and payment of dividends by the Company on the shares of PRIDES will be expressly permitted by the terms of the New Credit Agreement to the extent the Company receives payments on the Intercompany Note. See "Risk Factors -- Restrictions on and Factors Affecting Ability to Pay Dividends; Subordination of Intercompany Note; Termination of Intercompany Note." Dividends and Distributions. The New Credit Agreement will not permit the Company or KACC to pay any dividends on their common stock. The declaration and payment of dividends by KACC on its shares of common stock will be subject to certain covenants contained in the Senior Note Indenture and the 12 3/4% Note Indenture. See "Description of Principal Indebtedness." Other Obligations. On February 1, 1993, KACC issued $400.0 million aggregate principal amount of its 12 3/4% Notes. The net proceeds from the sale of the 12 3/4% Notes were used to retire $321.7 million aggregate principal amount of, and pay premiums on, the 14 1/4% Notes, to prepay $18.0 million of the term loan under the Credit Agreement, and to reduce outstanding borrowings under the revolving credit facility of the Credit Agreement. These transactions resulted in a pre-tax extraordinary loss of approximately $33.0 million in the first quarter of 1993 ($21.8 million after taxes), 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 12 3/4% Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC. The 12 3/4% Note Indenture contains, among other things, restrictions on the ability of KACC and its subsidiaries to incur debt, undertake transactions with affiliates, and pay dividends. See "Description of Principal Indebtedness." In December 1992, KACC entered into an installment sale agreement (the "Sale Agreement") with the Parish of St. James, Louisiana (the "Louisiana Parish"), in connection with which the Louisiana Parish issued $20.0 million aggregate principal amount of its 7 3/4% Bonds due August 1, 2022 (the "Gramercy Bonds"), to finance the construction of certain solid waste disposal facilities at KACC's Gramercy plant. The proceeds from the sale of the Gramercy 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 indenture related thereto. At December 31, 1993, $10.8 million 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 Gramercy Bonds. The Company has historically participated in various raw material joint ventures outside the United States. At December 31, 1993, the Company was unconditionally obligated for $73.6 million of indebtedness of one such joint venture affiliate. ENVIRONMENTAL MATTERS For a discussion of certain environmental matters involving the Company, see "Business -- Environmental Matters" and "-- Legal Proceedings." TAX ATTRIBUTE CARRYFORWARDS AND CARRYBACKS At December 31, 1992, the Company had certain tax attribute carryforwards. See Note 5 of the Notes to the Consolidated Financial Statements. For a discussion of the Tax Allocation Agreements (as defined) and the effects upon the Company's tax attribute carryforwards and carrybacks resulting from the offering of $.65 Depositary Shares in June 1993, see "Certain Transactions." 29 32 BUSINESS INDUSTRY OVERVIEW Primary aluminum is produced by the refining of bauxite (the major aluminum-bearing ore) into alumina (the intermediate material) and the reduction of alumina into primary aluminum. Approximately two pounds of bauxite are required to produce one pound of alumina, and approximately two pounds of alumina are required to produce one pound of primary aluminum. Aluminum's valuable physical properties include its light weight, corrosion resistance, thermal and electrical conductivity and high tensile strength. Demand The packaging and transportation industries are the principal consumers of aluminum in the United States, Japan and Western Europe. In the packaging industry, which accounted for approximately 22% of consumption in 1992, aluminum's recyclability and weight advantages have enabled it to gain market share from steel and glass, primarily in the beverage container area. The aluminum packaging market in the United States, Japan and Western Europe grew at a rate of approximately 4.0% per year during the period 1982-1992, and total United States aluminum beverage can shipments increased at a rate of approximately 2.5% in 1993, 1.5% in 1992, 3.9% in 1991 and 6.0% in 1990. Nearly all beer cans and approximately 95% of the soft drink cans manufactured for the United States market are made of aluminum. Despite the flat demand currently being experienced in the can stock market, growth in the packaging area is generally expected to continue in the 1990s due to general population increase and to further penetration of the beverage can market in Western Europe and Japan, where aluminum cans are a substantially lower percentage of the total beverage container market than in the United States. In the transportation industry, which accounted for approximately 28% of aluminum consumption in the United States, Japan and Western Europe in 1992, automotive manufacturers use aluminum instead of steel or copper for an increasing number of components, including radiators, wheels and engines, in order to meet more stringent environmental and fuel efficiency requirements through vehicle weight reduction. Management believes that sales of aluminum to the transportation industry have considerable growth potential due to projected increases in the use of aluminum in automobiles. According to industry sources, aluminum content in United States automobiles nearly doubled in the last fifteen years to an average of 191 pounds per vehicle and the amount of aluminum consumed in the manufacture of Japanese automobiles more than doubled from 1983 to 1990. Management believes that the use of aluminum in automobiles in the United States and Japan will approximately double between 1991 and 2006. Supply As of year-end 1993, Western world aluminum capacity from 109 smelting facilities was approximately 16.4 million tons per year. Net exports of aluminum from the Commonwealth of Independent States to the West increased substantially from 1990 levels during the period from 1991 through 1993, and have contributed to a significant increase in London Metal Exchange stocks of primary aluminum. Based upon information currently available, the Company believes that only moderate additions will be made during 1994-1995 to Western world alumina and primary aluminum production capacity; however, due to the decline of primary aluminum prices from January 1, 1991, through the date of this Prospectus, and other factors, curtailments or permanent shutdowns have been announced, to management's knowledge, with respect to approximately 2.6 million tons of primary aluminum production capacity. New alumina and primary aluminum facilities generally require a four to five year design, engineering and construction period. 30 33 Historic Levels Certain data concerning the Western world aluminum industry are set forth in the following table:
PRIMARY PRIMARY AVERAGE ANNUAL ALUMINA ALUMINUM ALUMINUM MIDWEST INGOT PRODUCTION(1) PRODUCTION(1) INVENTORY(2) PRICES(3) -------------- -------------- -------------- -------------- (000 TONS) (000 TONS) (000 TONS) (C/LB) 1980............................... 29,315.6 12,771.7 2,078.0 76.1 1981............................... 27,893.3 12,456.3 3,275.0 59.8 1982............................... 23,515.6 10,759.8 3,655.7 46.8 1983............................... 24,600.7 11,097.5 2,583.7 68.3 1984............................... 27,860.8 12,765.6 3,138.5 61.1 1985............................... 27,240.1 12,308.1 2,827.9 49.0 1986............................... 27,808.9 12,234.5 2,171.5 56.5 1987............................... 29,390.3 12,919.3 1,728.9 73.3 1988............................... 31,342.2 13,909.5 1,858.7 112.3 1989............................... 33,202.5 14,462.8 1,860.1 88.9 1990............................... 34,529.2 14,623.9 2,067.4 75.0 1991............................... 35,417.7 15,180.4 3,091.6 60.0 1992............................... 34,455.1 14,923.5 3,551.3 58.0 1993............................... -- -- -- 53.8
- --------------- (1) Source: American Bureau of Metal Statistics. (2) Source: World Bureau of Metal Statistics, England. (3) Source: Metals Week. From 1980 through 1984, Midwest U.S. Market Price; from 1985 through 1993, Midwest U.S. Transaction Price. Recent Industry Trends The aluminum industry has been cyclical and the market prices of alumina and primary aluminum have been volatile from time to time. During 1989, tight supply conditions for alumina and strong demand for primary aluminum resulted in unusually high spot prices for alumina. During 1990, a moderate surplus of alumina supply developed due to new alumina production from two facilities that had been restarted in prior years (including the Company's Alpart refinery) and increased production at other refineries. Furthermore, recent curtailments of primary aluminum production in response to declining ingot prices have increased the surplus of alumina supply. Since 1990, spot prices of alumina have declined substantially due to these factors and slow economic growth in major aluminum consuming countries. Contract prices for deliveries of alumina in 1993 were in a lower range than the ranges applicable during the past several years. As a result of expansions of alumina refineries during 1992-1993, the current surplus of alumina is expected to continue. During 1989 and 1990, primary aluminum smelters throughout the world operated at near capacity levels. This factor, combined with increased production from smelter capacity additions during 1989 and 1990, resulted in a reduction of the market price of primary aluminum from 1988 peak prices. Additions to smelter capacity in 1991, 1992 and 1993, continued high operating rates in the Western world and slow economic growth in major aluminum consuming countries as well as exports from the Commonwealth of Independent States have contributed to an oversupply of primary aluminum and a significant increase in primary aluminum inventories in the Western world. If Western world production and exports from the Commonwealth of Independent States continue at current levels, primary aluminum inventory levels are expected to increase further in 1994. The foregoing factors have contributed to a significant reduction in the market price of primary aluminum, and may continue to adversely affect the market price of primary aluminum in the future. The average price of primary aluminum was at historic lows in real terms for the year ended 1993. See "-- Sensitivity to Prices and Hedging Programs -- Alumina and Primary Aluminum." Government officials from the European Union, the United States of America, Canada, Norway, Australia and the Russian Federation met in a multilateral conference in January 1994, to discuss the current excess global supply of primary aluminum. All six participating governments have ratified as a trade agreement the resulting Memorandum which provides, in part, for (i) a reduction in Russian Federation primary aluminum production by 300,000 tons per year within three months of the date of ratification of the 31 34 Memorandum and an additional 200,000 tons within the following three months, (ii) improved availability of comprehensive data on Russian aluminum production and (iii) certain assistance to the Russian aluminum industry. A Russian Federation Trade Ministry official has publicly stated that the output reduction would remain in effect for 18 months to two years, provided that other worldwide production cutbacks occur, existing trade restrictions on aluminum are eliminated and no new trade restrictions on aluminum are imposed. The Memorandum does not require specific levels of production cutbacks by other producing nations. A further meeting of the participants is scheduled for the end of February 1994. There can be no assurance that the implementation of the Memorandum will adequately address the current oversupply of primary aluminum. See "-- Sensitivity to Prices and Hedging Programs -- Alumina and Primary Aluminum." The Company will continue to assess its production levels in light of market prices, industry inventory levels, production costs and user demand and, based on these and other factors, could determine to curtail production at certain of its facilities in the future. BUSINESS STRATEGY The Company has made significant changes in the mix of products sold to customers by disposing of selected assets, restarting and increasing its percentage ownership interest in the Alpart alumina refinery, and increasing production of alumina at Gramercy, Louisiana, and QAL in Australia. The percentage of the Company's alumina production sold to third parties increased from approximately 35% in 1987 to approximately 71% in 1993, and the percentage of its primary aluminum production sold to third parties increased from approximately 20% in 1987 to approximately 56% in 1993. The Company has concentrated its fabricated products operations on the beverage container market (which historically has been recession-resistant); high value-added, heat-treated sheet and plate products for the aerospace industry; hubs, wheels and other products for the truck, trailer and shipping container industry; parts for air bag canisters and other automotive components; and distributor markets for a variety of semi-fabricated aluminum products. Since January 1, 1989, the Company has constructed four new fabrication facilities and has modernized and expanded others, with the objective of reducing manufacturing costs and expanding sales in selected product markets in which the Company has production expertise, high quality capability, and geographic and other competitive advantages. The Company has taken steps to control and reduce costs, improved the efficiency and increased the capacity of its alumina and primary aluminum production and fabricating operations, modernized its facilities, and streamlined and decentralized its management structure to reduce corporate overhead and shift decision-making and accountability to its business units. In October 1993, KACC announced that it is restructuring its flat-rolled products operation at its Trentwood plant in Spokane, Washington, to reduce that facility's annual operating costs. This effort is in response to over-capacity in the aluminum rolling industry, flat demand in can stock markets, and declining demand for aluminum products sold to customers in the commercial aerospace industry, all of which have resulted in declining prices in Trentwood's key markets. The Trentwood restructuring is expected to result in annual cost savings of approximately $50.0 million after it has been fully implemented (which is expected to occur during the next two years). From 1980 to 1993, on a per employee basis, alumina production increased by approximately 54% at the Company's Gramercy alumina refinery; fabricated product shipments increased by approximately 128% at the Trentwood fabricating facility; sales volume for aluminum operations as a whole increased by over 300% and the average life of reduction cells used to produce aluminum at the Company's smelters improved by approximately 102%. Primary aluminum production at the Company's Mead and Tacoma smelters was curtailed in 1993 because of a power reduction imposed by the BPA which reduced the operating rates for such smelters. From 1980 to 1992, prior to the BPA power reductions, on a per employee basis, primary aluminum production increased by approximately 72% and 39%, respectively, at the Mead and Tacoma smelters, and from 1980 to 1993, subsequent to the BPA power reductions, such primary aluminum production increased by approximately 36% and 15%, respectively, at such smelters. In addition, from 1985 to 1992, the Trentwood facility's recovery rate (the relative amount of fabricated product manufactured from a quantity of primary aluminum) improved by approximately 30% and its promise performance rate (a measure of ability to meet delivery dates) improved by approximately 23%. The Company's average kilowatt hours of 32 35 electricity utilized per ton of primary aluminum production was also reduced by approximately 13% from 1980 to 1993 through process improvements. The Company has also attempted to lessen its exposure to possible future declines in the market prices of alumina and primary aluminum by entering into fixed and variable rate power and fuel supply contracts, and a labor contract with the United Steelworkers of America which provides for semi-variable compensation with respect to approximately 73% of the Company's domestic hourly work force. See "-- Production Operations" and "-- Employees." SENSITIVITY TO PRICES AND HEDGING PROGRAMS The Company's earnings are sensitive to changes in the prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold. Consequently, the Company has developed strategies to mitigate its exposure to possible further declines in the market prices of alumina and primary aluminum while retaining the ability to participate in favorable pricing environments that may materialize. See "Risk Factors -- Sensitivity to Prices; Current Primary Aluminum Prices Adversely Affect Net Sales and Operating Income." Alumina and Primary Aluminum The Company's production capacity for alumina significantly exceeds the requirements of its aluminum smelters. As a result of the restart of, an increased percentage ownership interest in, and the increased capacity of, the Alpart refinery in Jamaica, increased production at the Company's other alumina refineries and the sale of its Ravenswood aluminum smelter, alumina production and sales to third parties increased further in 1992, 1991 and 1990 following a significant increase in 1989. These sales, combined with favorable contract sales prices during 1992, 1991 and 1990, and strong spot alumina prices during 1989, made a significant contribution to operating results during 1992, 1991, 1990 and 1989. The tight supply conditions and consequent high prices for alumina which existed in 1989 have been alleviated as a result of increased production and other factors, including reduced demand due to the economic recession. Average realized alumina prices for each of 1993, 1992, 1991 and 1990 declined significantly from the previous year and were significantly below their 1989 high levels. Although the Company has attempted to lessen the effect of such declines through forward sales transactions and hedging programs described below, earnings have been, and are expected to remain, significantly more sensitive to changes in primary aluminum prices and revenues derived from the sale of alumina to third parties. Revenues from alumina sales to third parties declined in 1993 as a result of lower average realized prices for alumina. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Trends." The Company has also sold forward substantially all of the alumina available to it in excess of its projected internal smelting requirements for 1994, and a substantial portion of such excess alumina for 1995. Approximately 95% of 1994 sales and virtually all of 1995 sales were made at prices indexed to future prices of primary aluminum. Approximately 75% of 1994 sales were made at prices indexed to future prices of primary aluminum, but with minimum prices that exceed the Company's estimated cash production costs. The remainder of 1994 sales were made either at fixed prices that exceed the Company's estimated cash production costs, or are subject to prices indexed to future prices of primary aluminum but without minimum prices. Approximately 85% of 1995 sales were made at prices indexed to future prices of primary aluminum, but with minimum prices that exceed the Company's estimated cash production costs. As of the date of this Prospectus, the Company has sold forward at fixed prices approximately 75% of its primary aluminum in excess of its projected internal fabrication requirements in 1994 and approximately 55% of such surplus in 1995 at fixed prices that approximate the current market price of primary aluminum. Hedging programs already in place would allow the Company to participate in certain higher market prices, should they materialize, for approximately 40% of the Company's excess primary aluminum sold forward in 1994, and 100% of the Company's excess primary aluminum sold forward in 1995. Primary aluminum prices have historically been cyclical and, from time to time, volatile. During 1991, average realized prices from sales of primary aluminum remained about the same as in 1990, even though market prices declined significantly, as a result of the Company's forward sales and hedging programs that 33 36 enabled the Company to sell significant quantities of primary aluminum at above market prices. In 1992, the Company realized an average price of $0.66 per pound while the average Midwest U.S. transaction price was approximately $0.58 per pound, as a result of the Company's forward sales and hedging programs that enabled the Company to sell significant quantities of primary aluminum at above market prices. In 1993, the Company's average realized price from sales of primary aluminum was approximately $0.56 per pound compared to the average Midwest U.S. transaction price of approximately $0.54 per pound during such period. In 1991 and 1990, the Company sold to third parties approximately two-thirds of the primary aluminum it produced, with the balance of the primary aluminum production used in the Company's fabrication operations. Approximately 70% of the Company's primary aluminum was sold to third parties in 1992, and approximately 56% in 1993 (primarily because of the curtailment of its production of primary aluminum in the Pacific Northwest caused by the BPA power reduction and increased use of the Company's primary aluminum in its fabrication operations). While the Company continues to attempt to lessen the adverse effect of declines in the price of primary aluminum through its variable cost structures, forward sales and hedging programs, possible future declines in the market price of primary aluminum would have an adverse effect on the Company's financial performance. If the Company's average realized sales prices in 1994 for substantial quantities of its primary aluminum and alumina were based on the current market price of primary aluminum (AMT Price of 61.14c per pound for the week ended February 4, 1994), the Company would continue to sustain net losses in 1994, which would be expected to approximate the loss in 1993 ($81.5 million) before (a) extraordinary loss and cumulative effect of changes in accounting principles, (b) the 1993 Facilities Charges and (c) the Other 1993 Charges. The following table indicates the monthly average Midwest U.S. transaction price for primary aluminum (the "AMT Price") for each of the months from January 1989 through January 1994 as reported by Metals Week. The AMT Price for the week ended February 4, 1994, as reported by Metals Week, was 61.14 cents per pound.
AVERAGE TRANSACTION PRICES (CENTS/POUND) -------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 ------ ------ ------ ------ ------ ------- January.................... 57.019 56.479 54.387 69.376 69.862 108.894 February................... 55.993 58.831 68.886 66.392 100.950 March...................... 53.794 60.041 68.983 72.111 97.534 April...................... 52.345 61.542 64.410 72.707 97.610 May........................ 52.694 60.398 59.562 73.288 99.175 June....................... 54.673 58.875 58.555 73.727 89.297 July....................... 56.829 60.423 59.682 73.709 81.448 August..................... 55.516 60.076 57.825 81.203 82.340 September.................. 52.905 58.383 56.020 89.621 79.051 October.................... 51.660 54.066 53.230 83.422 80.301 November................... 50.365 53.414 52.490 73.261 76.253 December................... 53.902 55.846 50.613 70.654 74.223 ------ ------ ------ ------ ------ ------- Average.......... 57.019 53.846 58.024 59.969 74.996 88.923 ------ ------ ------ ------ ------ ------- ------ ------ ------ ------ ------ -------
In response to the low price of primary aluminum caused by the current surplus, a number of companies have closed smelting facilities. In addition, in response to certain power reductions undertaken by the BPA in the Pacific Northwest, a number of companies (including the Company) have curtailed or shutdown production capacities at their smelter facilities in the Pacific Northwest. The Company will continue to assess its production levels in light of market prices, industry inventory levels, production costs and user demand and, based on these and other factors, could determine to curtail production at certain of its facilities in the future. See also "Business -- Industry Overview -- Recent Industry Trends." Fabricated Products Fabricated aluminum prices, which vary considerably among products, are heavily influenced by changes in the price of primary aluminum and generally lag behind primary aluminum prices for periods of up to six months. A significant portion of the Company's fabricated product shipments consist of body, lid and tab stock for the beverage container market. The Company may not be able to receive increases in primary aluminum 34 37 prices from its can stock customers as promptly as in the recent past because of competition from other aluminum producers and because of excess supply in the industry. The Company also ships fabricated products to customers in the aerospace market. Aluminum demand in the aerospace market is decreasing as a result of the structural contraction of the defense industry caused by the end of the cold war. In addition, the commercial aerospace market is experiencing a cyclical downturn in business due to the recent economic recessions in the United States, Canada, Australia and the United Kingdom, and slow economic growth in other countries. Changes in the market price of primary aluminum also affect the Company's production costs of fabricated products because they influence the price of aluminum scrap purchased by the Company and the Company's labor costs, to the extent such costs are indexed to primary aluminum prices. Following significant increases in the price of primary aluminum, the prices realized for fabricated aluminum products were at relatively high levels throughout 1990, 1989 and 1988. The average realized prices for fabricated aluminum products declined during 1991, reflecting the lower primary aluminum prices prevailing during such year, and continued to decline during 1992 and 1993. Revenue from fabricated aluminum products increased 7% to $981.4 million in 1993 compared with $913.7 million in 1992, primarily because of an 8% increase in shipments of fabricated aluminum products. PRODUCTION OPERATIONS The following table sets forth total shipments and intracompany transfers of the Company's alumina, primary aluminum and fabricated aluminum operations:
YEAR ENDED DECEMBER 31, ----------------------------- 1993 1992 1991 ------- ------- ------- (IN THOUSANDS OF TONS) ALUMINA: Shipments to Third Parties..................................... 1,997.5 2,001.3 1,945.9 Intracompany Transfers......................................... 807.5 878.2 884.2 PRIMARY ALUMINUM: Shipments to Third Parties..................................... 242.5 355.4 340.6 Intracompany Transfers......................................... 233.6 224.4 199.6 FABRICATED ALUMINUM PRODUCTS: Shipments to Third Parties..................................... 373.2 343.6 314.2
The Company's operations are conducted through decentralized business units which compete throughout the aluminum industry: - The Alumina Business Unit, which mines bauxite and obtains additional bauxite tonnage under long-term contracts, produced approximately 9% of Western world alumina in 1992. During 1993, the Company utilized approximately 82% of its bauxite production at its alumina refineries and the remainder was either sold to third parties or tolled into alumina by a third party. In addition, during 1993 the Company utilized approximately 29% of its alumina for internal purposes and sold the remainder to third parties. The Company's share of total Western world alumina capacity was 8% in 1993. - The Primary Aluminum Products Business Unit operates two domestic smelters wholly owned by the Company and two foreign smelters in which the Company holds significant ownership interests. In 1993, the Company utilized approximately 44% of its primary aluminum for internal purposes and sold the remainder to third parties. The Company's share of total Western world primary aluminum capacity was 3% in 1993. - Fabricated products are manufactured by three Business Units -- Flat-Rolled Products, Extruded Products (including rod and bar), and Forgings and Castings -- which manufacture a variety of fabricated products (including body, lid and tab stock for beverage containers, sheet and plate products, screw machine stock, redraw rod, forging stock, truck wheels and hubs, air bag canisters and other forgings and castings and extruded products) and which operate plants located in principal marketing areas of the United States and Canada. Substantially all of the primary aluminum utilized in the Company's fabricated products operations is obtained through the Company, with the balance of 35 38 the metal utilized in its fabricated products operations obtained from scrap metal purchases. In 1993, the Company shipped approximately 373,200 tons of fabricated aluminum products to third parties, which accounted for approximately 6% of the total tonnage of United States domestic fabricated shipments for such year. Alumina The following table lists the Company's bauxite mining and alumina refining facilities as of December 31, 1993:
ANNUAL PRODUCTION TOTAL CAPACITY ANNUAL COMPANY AVAILABLE TO PRODUCTION ACTIVITY FACILITY LOCATION OWNERSHIP THE COMPANY CAPACITY - ------------------------------- ------------- ---------- ---------- ------------ ------------ (TONS) (TONS) Bauxite Mining................. KJBC(1) Jamaica 49% 4,500,000 4,500,000 Alpart(2) Jamaica 65% 2,275,000 3,500,000 ------------ ------------ 6,775,000 8,000,000 ------------ ------------ ------------ ------------ Alumina Refining............... Gramercy Louisiana 100% 1,000,000 1,000,000 Alpart Jamaica 65% 943,000 1,450,000 QAL Australia 28.3% 934,000 3,300,000 ------------ ------------ 2,877,000 5,750,000 ------------ ------------ ------------ ------------
- --------------- (1) Although the Company owns 49% of Kaiser Jamaica Bauxite Company, it has the right to receive all of such entity's output. (2) Alpart bauxite is refined into alumina at the Alpart refinery. Bauxite mined in Jamaica by Kaiser Jamaica Bauxite Company ("KJBC") is refined into alumina at the Company's plant at Gramercy, Louisiana, or is sold to third parties. In 1979, the Government of Jamaica granted the Company a mining lease for the mining of bauxite sufficient to supply the Company's then- existing Louisiana alumina refineries at their annual capacities of 1,656,000 tons per year until January 31, 2020 (KJBC has announced that it intends to curtail production of bauxite by 500,000 tons per year). Alumina from the Gramercy plant is sold to third parties. The Company has entered into a series of medium-term contracts for the supply of natural gas to the Gramercy plant. The price of such gas varies based upon certain spot natural gas prices, with floor and ceiling prices applicable to approximately one-half of the delivered gas. The Company has, however, established a fixed price for a portion of the delivered gas through a hedging program. Alpart holds bauxite reserves and owns an alumina plant located in Jamaica. The Company has a 65% interest in Alpart and Hydro Aluminium a.s ("Hydro") owns the remaining 35% interest. The Company has management responsibility for the facility on a fee basis. The Company and Hydro have agreed to be responsible for their proportionate shares of Alpart's costs and expenses. Alpart is engaged in a program of modernization and expansion of its facilities. As a part of that program, the capacity of the Alpart alumina refinery has been increased to 1,450,000 tons per year as of December 31, 1992. In 1981, the Government of Jamaica granted Alpart a mining lease covering bauxite reserves sufficient to operate the Alpart plant until December 31, 2019. In connection with the expansion program, the Alpart partners have entered into an agreement with the Government of Jamaica designed to assure that sufficient reserves of bauxite will be available to Alpart to operate its refinery, as it has been expanded and as it may be expanded through the year 2024 (to a capacity of 2,000,000 tons per year). In mid-1990, Alpart entered into a five-year agreement for the supply of substantially all of its fuel oil, the refinery's primary energy source. In February 1992, this agreement was extended for one year and the quantity of fuel oil to be supplied was increased. The price for 80% of the initial quantity remains fixed at a price which prevailed in the fourth quarter of 1989; the price for 80% of the increased quantity is fixed at a negotiated price; and the price for the balance of the initial and increased quantities was based upon certain spot fuel oil prices plus transportation costs. Alpart has purchased all of the quantities of fuel oil which could be purchased based upon certain spot fuel oil prices under both the initial and extended agreements. 36 39 The Company holds a 28.3% interest in QAL, which owns the largest and one of the most efficient alumina refineries in the world, located in Queensland, Australia. QAL refines bauxite into alumina, essentially on a cost basis, for the account of its stockholders pursuant to long-term tolling contracts. The stockholders, including the Company, purchase bauxite from another QAL stockholder pursuant to long-term supply contracts. The Company has contracted to take approximately 751,000 tons per year of capacity or pay standby charges. The Company is unconditionally obligated to pay amounts calculated to service its share ($73.6 million at December 31, 1993) of certain debt of QAL, as well as other QAL costs and expenses, including bauxite shipping costs. An expansion project, completed at the end of 1990, increased QAL's annual production capacity to approximately 3,300,000 tons, of which approximately 934,000 tons are available to the Company. The Company's principal customers for bauxite and alumina consist of large and small domestic and international aluminum producers that purchase bauxite and reduction-grade alumina for use in their internal refining and smelting operations and trading intermediaries who resell raw materials to end-users. In 1993, the Company sold all of its bauxite to one customer and sold alumina to thirteen customers, the largest and top five of which accounted for approximately 22% and 79% of such sales, respectively. Among alumina producers, the Company believes it is now the world's second largest seller of alumina to third parties. The Company's strategy is to sell a substantial portion of the bauxite and alumina available to it in excess of its internal refining and smelting requirements pursuant to forward sales contracts. See "-- Sensitivity to Prices and Hedging Programs." Marketing and sales efforts are conducted by senior executives of the Alumina Business Unit and the Company. Primary Aluminum Products The following table lists the Company's primary aluminum smelting facilities as of December 31, 1993:
ANNUAL RATED TOTAL CAPACITY ANNUAL 1993 COMPANY AVAILABLE TO RATED OPERATING LOCATION FACILITY OWNERSHIP THE COMPANY CAPACITY RATE - ------------------------------------ ---------- ---------- ------------ --------- ---------- (TONS) (TONS) Domestic Washington........................ Mead 100% 200,000 200,000 80%(1) Washington........................ Tacoma 100% 73,000 73,000 77%(1) ------------ --------- Subtotal.................. 273,000 273,000 ------------ --------- International Ghana............................. Valco 90% 180,000 200,000 88% Wales, U.K........................ Anglesey 49% 55,000 112,000 112% ------------ --------- Subtotal.................. 235,000 312,000 ------------ --------- Total..................... 508,000 585,000 ------------ --------- ------------ ---------
- ------------ (1) See "Risk Factors -- Recent Developments in Power Supply for Pacific Northwest Operations and Resultant Production Curtailments." The Company owns two smelters located at Mead and Tacoma, Washington, where alumina is processed into primary aluminum. The Mead facility uses pre-bake technology; the Tacoma plant uses Soderberg technology. Both smelters have achieved significant production efficiencies in recent years through retrofit technology, cost controls and semi-variable wage and power contracts, leading to increases in production volume and enhancing their ability to compete with newer smelters. At the Mead plant, the Company has converted to welded anode assemblies to increase energy efficiency, has reduced the number of anodes used in the smelting process, has changed from pencil to liquid pitch to produce carbon anodes which achieved environmental and operating savings, and is engaged in efforts to increase production through the use of improved, higher-efficiency reduction cells. In 1992, improved performance was achieved at Mead and Tacoma in the areas of energy efficiency and hot metal production. Both the Mead and Tacoma plants operated at approximately full rated capacity during 1991-1992, but operated at less than rated capacity 37 40 throughout 1993, as a result of a power reduction imposed by the BPA, which is discussed below. The electricity supply contracts between the BPA and the Company expire in 2001. Through June 1996, the Company pays for power on a basis which varies, within certain limits, with the market price of primary aluminum, and thereafter the Company will pay for power at variable rates to be negotiated. During 1993, the Company paid for power under its power supply contract with the BPA at the floor rate. The Tacoma facility produces high grade, continuous cast, redraw rod, which currently commands a premium price in excess of primary aluminum prices. The Mead facility produces primary aluminum, almost all of which is used at the Company's Trentwood fabricating facility and the balance of which is sold to third parties. The Company manages, and holds a 90% interest in, the Valco aluminum smelter in Ghana. The Valco smelter uses pre-bake technology. The smelter processes alumina supplied by the Company and the other participant into primary aluminum under long-term tolling contracts which provide for proportionate payments by the participants in amounts intended to pay not less than all of Valco's operating and financing costs. The Company's share of the primary aluminum is sold to third parties. Power for the Valco smelter is supplied under an agreement which expires in 1997, subject to Valco's right to extend the agreement for 20 years. The agreement indexes the price of two-thirds of the contract quantity to the market price of primary aluminum and fixes the price for the remainder, and provides for a review and adjustment of the base power rate and the price index every five years. The Valco smelter restarted production early in 1985 after being closed for more than two years due to lack of rainfall and the resultant hydroelectricity shortage. The Company believes that there has been sufficient rainfall and water storage such that an adequate supply of electricity for the Valco plant at its current operating rate is probable for at least one year. The Company has a 49% interest in the Anglesey Aluminium Limited ("Anglesey") aluminum smelter and port facility at Holyhead, Wales. The Anglesey smelter uses pre-bake technology. The Company supplies 49% of Anglesey's alumina requirements and purchases 49% of Anglesey's aluminum output. The Company sells its share of Anglesey's output to third parties. Power for the Anglesey alumina smelter is supplied under an agreement which expires in 2001. Electrical power represents an important production cost for the Company at the Facilities. The electricity supply contracts between the BPA and its direct service industry customers (which consist of 15 energy intensive companies, principally aluminum producers, including the Company) permit the BPA to interrupt up to 25% of the amount of power which it normally supplies to such customers. As a result of drought conditions, in January 1993 the BPA reduced the amount of power it normally supplies to its direct service industry customers, including the Company with respect to the Facilities. In response to such reduction, the Company removed three reduction potlines from production (two at the Mead smelter and one at the Tacoma smelter), and purchased substitute power in the first quarter of 1993 at increased costs. The BPA has notified its direct service industry customers that it intends to maintain the interruption of 25% of the amount of power it normally provides to such customers through February 28, 1994. Despite the temporary availability of such power through July 1993, the Company has operated its Mead and Tacoma smelters at the reduced operating rates introduced in January 1993, and has operated its Trentwood fabrication facility without any curtailment of its production. The Company currently anticipates that in 1994 it will operate the Mead and Tacoma smelters at rates which do not exceed the current operating rates of 75% of full capacity for such smelters. The Company cannot predict whether full power will be provided by the BPA after February 28, 1994, or whether power will otherwise become available at a price acceptable to the Company. The Company will continue to assess its production levels at the Mead and Tacoma smelters in light of the availability and cost of such power and other production costs, the market price of primary aluminum, industry inventory levels and other industry-related and Company-related factors. Effective October 1, 1993, an increase in the base rate BPA charges to its direct service industry customers for electricity was adopted, which will increase the Company's production costs at the Mead and Tacoma smelters by approximately $15.0 million per year (approximately $11.3 million per year based on the Company's current operating rate of approximately 75% of full capacity). The rate increase generally is expected to remain in effect for two years. 38 41 In the event that the BPA's revenues fall below certain levels prior to April 1994, the BPA may impose up to a 10% surcharge on the base rate it charges to its direct service industry customers, effective during the period from October 1994 through October 1995 (which would increase the Company's production costs at the Mead and Tacoma smelters by approximately $9.1 million per year based on the Company's current operating rate of approximately 75% of full capacity). In addition, in order to comply with certain federal laws and regulations applicable to endangered fish species, the BPA may be required in the future to reduce its power generation and to purchase substitute power (at greater expense) from other sources. The foregoing factors would increase the Company's operating expenses. The Company has developed and installed proprietary retrofit technology in all of its smelters. This technology -- which includes the redesign of the cathodes and anodes that conduct electricity through reduction cells, improved "feed" systems that add alumina to the cells, and a computerized system that controls energy flow in the cells -- enhances the Company's ability to compete more effectively with the industry's newer smelters. The Company is actively engaged in efforts to license this technology and sell technical and managerial assistance to other producers worldwide, and may participate in joint ventures or similar business partnerships which employ the Company's technical and managerial knowledge. Pursuant to various arrangements, the Company's technology has been installed in aluminum smelters located in West Virginia, Ohio, Missouri, Kentucky, Sweden, Germany, India, Australia, New Zealand, Ghana, the Commonwealth of Independent States and the United Kingdom. See "-- Research and Development." The Company's principal primary aluminum customers consist of large trading intermediaries and metal brokers, who resell primary aluminum to fabricated product manufacturers, and large and small international aluminum fabricators. In 1993, the Company sold approximately 56% of its primary aluminum production not utilized for internal purposes to approximately 50 customers, the largest and top five of which accounted for approximately 44% and 64% of such sales, respectively. Marketing and sales efforts are conducted by a small staff located at the business unit's headquarters in Pleasanton, California, and by senior executives of the Company who often participate in the structuring of major sales transactions. A majority of the business unit's sales are based upon long-term relationships with metal merchants and end-users. Fabricated Products Flat-Rolled Products The Flat-Rolled Products Business Unit, the largest of the Company's fabricated products businesses, operates the Trentwood sheet and plate mill at Trentwood, Washington. The Trentwood facility is the Company's largest fabricating plant and accounted for substantially more than one-half of the Company's 1993 fabricated products shipments. The business unit supplies the beverage container market (producing body, lid and tab stock), the aerospace market, and the tooling plate, heat-treated alloy and common alloy coil markets, both directly and through distributors. KACC announced in October 1993 that it is restructuring its flat-rolled products operation at its Trentwood plant to reduce that facility's annual operating costs. This effort is in response to over-capacity in the aluminum rolling industry, flat demand in can stock markets, and declining demand for aluminum products sold to customers in the commercial aerospace industry, all of which have resulted in declining prices in Trentwood's key markets. The Trentwood restructuring is expected to result in annual cost savings of approximately $50.0 million after it has been fully implemented (which is expected to occur during the next two years). The Company's flat-rolled products are sold primarily to beverage container manufacturers located in the western United States where the Company has a transportation advantage. Quality of products for the beverage container industry, timeliness of delivery and price are the primary bases on which the Company competes. The Company believes that its capital improvements at Trentwood have enhanced the quality of its products for the beverage container industry and the capacity and efficiency of its manufacturing operations. The Company believes that it is one of the highest quality producers of aluminum beverage can stock in the world. In 1993, the Flat-Rolled Products Business Unit had twenty-two foreign and domestic can stock customers, the majority of which were beverage can manufacturers (including seven of the eight major 39 42 domestic beverage can manufacturers) and the balance of which were brewers. The largest and top five of such customers accounted for approximately 25% and 56%, respectively, of the business unit's sales revenue. In 1993, the business unit shipped products to over 200 customers in the aerospace, transportation and industrial ("ATI") markets, most of which were distributors who sell to a variety of industrial end-users. The top five customers in the ATI markets for flat-rolled products accounted for approximately 10% of the business unit's sales revenue. The marketing staff for the Flat-Rolled Products Business Unit is headquartered in Pleasanton, California, and is also located at the Trentwood facility, and sales are made directly to customers (including distributors) from ten sales offices located throughout the United States. International customers are served by a sales office in the Netherlands and by independent sales agents in Asia and Latin America. See also "-- Sensitivity to Prices and Hedging Programs -- Fabricated Products" for a discussion of demand for fabricated products in the aerospace market. Extruded Products The Extruded Products Business Unit is headquartered in Dallas, Texas, and operates soft alloy extrusion facilities in Los Angeles, California; Sherman, Texas; and London, Ontario, Canada; a cathodic protection business located in Tulsa, Oklahoma, that also extrudes both aluminum and magnesium; and rod and bar facilities in Newark, Ohio, and Jackson, Tennessee, which produces screw machine stock, redraw rod, forging stock and billet. Each of the soft alloy extrusion facilities has fabricating capabilities and provides finishing services. The Company began commercial operation of its London, Ontario, Canada facility in the second quarter of 1992, which is designed to produce more than 50 million pounds of extruded products annually. The Extruded Products Business Unit's major markets are in the transportation industry, to which it provides extruded shapes for automobiles, trucks, trailers, cabs and shipping containers, and distribution, durable goods, defense, building and construction, ordnance, and electrical markets. In 1993, the Extruded Products Business Unit had over 900 customers for its products, the largest and top five of which accounted for approximately 6% and 19%, respectively, of its sales revenue. Sales are made directly from plants as well as marketing locations across the United States. Forgings and Castings The Forgings and Castings Business Unit operates forging facilities at Erie, Pennsylvania, Oxnard, California, and Greenwood, South Carolina, and a machine shop at Greenwood, South Carolina. The Forgings and Castings Business Unit is one of the largest producers of aluminum forgings in the United States, and is a major supplier of high quality forged parts to customers in the automotive, commercial vehicle and ordnance markets. The high strength-to-weight properties of forged aluminum make it particularly well suited for automotive applications. During 1991, the Forgings and Castings Business Unit entered the castings business by purchasing the assets of Winters Industries, which supplies cast aluminum engine manifolds to the automobile, truck and marine markets. The casting production facilities include two foundries and a machining facility in Ohio. In 1993, the Forgings and Castings Business Unit had over 500 customers for its products, the largest and top five of which accounted for approximately 20% and 57%, respectively, of the Forgings and Casting Business Unit's sales revenue. The Forgings and Castings Business Unit's headquarters is located in Erie, Pennsylvania, and additional sales, marketing and engineering groups are located in the midwestern and western United States. COMPETITION Aluminum products compete in many markets with steel, copper, glass, plastic and numerous other materials. Within the aluminum business, the Company competes with both domestic and foreign producers of bauxite, alumina and primary aluminum, and with domestic and foreign fabricators. The Company's principal competitors in the sale of alumina include Alcoa of Australia, Ltd., Billiton International Metals B.V., Clarendon Ltd. and Pechiney S.A. In addition to the foregoing, the Company competes with most aluminum producers in the production of primary aluminum. Many of the Company's competitors have greater financial resources than the Company. In addition, the Commonwealth of Independent States has been supplying large quantities of primary aluminum to the Western world. 40 43 Primary aluminum and, to some degree, alumina are commodities with generally standard qualities, and competition in the sale of these commodities is based primarily upon price, quality and availability. The Company believes that, assuming the current relationship between worldwide supply and demand for alumina and primary aluminum does not change materially, the loss of any one of its customers, including intermediaries, would not have a material adverse effect on its business or operations. The Company also competes with a wide range of domestic and international fabricators in the sale of fabricated aluminum products. Competition in the sale of fabricated products is based upon quality, availability, price and service, including delivery performance. The Company concentrates its fabricating operations on selected products in which the Company has production expertise, high quality capability, and geographic and other competitive advantages. RESEARCH AND DEVELOPMENT The Company conducts research and development activities principally at three facilities dedicated to that purpose -- the Center for Technology ("CFT") in Pleasanton, California; the Primary Aluminum Products Division Technology Center ("DTC") adjacent to the Mead smelter in Spokane, Washington; and the Alumina Development Laboratory ("ADL") at the Gramercy, Louisiana refinery. Net expenditures for Company-sponsored research and development activities were $18.5 million in 1993, $13.5 million in 1992 and $11.4 million in 1991. The Company's research staff totaled 160 at December 31, 1993. The Company estimates that research and development net expenditures will be in the range of approximately $17-$19 million per year in the 1994 period. CFT concentrates its research and development efforts on flat-rolled products while providing specialized services to the Company's other business units. Its activities include development of can stock products and aircraft sheet and plate products, and process improvements directed at efficiency and quality. In can stock, CFT works to optimize the product's metallurgy, surface characteristics, coatings and lubrication. CFT also offers research and development, technical services and selected proprietary technology for license or sale to third parties. CFT is currently providing technology and technical assistance to Samyang Metal Co. Ltd. in building an aluminum rolling mill in Yongju, Korea. CFT also is engaged in cooperative research and development projects with Furukawa Electric Co., Ltd., Pechiney Rhenalu and Kawasaki Steel Corporation of Japan, with respect to the ground transportation market. DTC maintains specialized laboratories and a miniature carbon plant where experiments with new anode and cathode technology are performed. DTC supports the Company's primary aluminum smelters, concentrating on the development of cost-effective technical innovations and equipment and process improvements. Energy savings of approximately 10% have been achieved at smelters utilizing proprietary DTC-developed technologies (which are employed in both retrofit and new construction applications), such as improved cathode and anode design and insulation, modified electrolyte chemistry, distributive microprocessor control and modified cell magnetics. Other proprietary DTC retrofit technologies, such as redesigned reduction cells, have helped the Company's older smelters achieve competitiveness with more recently constructed facilities. The Company is actively engaged in efforts to license this technology and sell technical and managerial assistance to other producers worldwide. Pursuant to various arrangements, the Company's technology has been installed in aluminum smelters located in West Virginia, Ohio, Missouri, Kentucky, Sweden, Germany, India, Australia, New Zealand, Ghana and the United Kingdom. The Company has entered into agreements with respect to the Krasnoyarsk smelter located in the Commonwealth of Independent States pursuant to which the Company has licensed certain of its technology for use in such facility and has agreed to provide purchasing services in obtaining western-sourced technology and equipment to be used in such facility. These agreements were entered into in November 1990, and the services under them are expected to be completed in 1994. In addition, the Company has entered into agreements with respect to the Nadvoitsky smelter located in the Commonwealth of Independent States and the Korba smelter of the Bharat Aluminum Co. Ltd. located in India pursuant to which the Company has licensed certain of its technology for use in such facilities. The agreements relating to the Nadvoitsky and Korba smelters were entered into in 1993, and the services under such agreements are expected to be completed in 1995 and 1994, respectively. 41 44 ADL has developed technologies which have improved alumina refinery efficiency. These include a high-capacity thickener process used in the separation of alumina from bauxite slurry, plant conversion designs that enable alumina refineries to convert from the production of fine alumina to the preferred coarser "sandy" alumina, technology that enables refineries to process different qualities of bauxite, and computer-aided instrumentation systems to improve process efficiencies and energy use in alumina refineries. The Company is actively pursuing the licensing of alumina refinery technology worldwide. The Company's technology is in use in alumina refineries in the Americas, Australia, India and Europe. The Company's technology sales and revenue from technical assistance to third parties were $12.8 million in 1993, $14.1 million in 1992, and $10.9 million in 1991. EMPLOYEES During 1993, the Company employed an average of 10,223 persons, compared with an average of 10,129 employees in 1992, and 9,967 employees in 1991. At December 31, 1993, the Company's workforce was approximately 10,029, including a domestic workforce of 5,930, of whom 4,146 were paid at an hourly rate. Most hourly paid domestic employees are covered by collective bargaining agreements with various labor unions. Approximately 73% of such employees are covered by a master agreement with the United Steelworkers of America (the "Labor Contract") which expires on October 31, 1994. The Labor Contract covers the Company's plants in Spokane (Trentwood and Mead), Washington; Tacoma, Washington; Gramercy, Louisiana; and Newark, Ohio. The Labor Contract provides for floor level wages at all covered plants. In addition, for workers covered by the Labor Contract at the Mead and Newark plants, for any quarterly period when the average Midwest U.S. transaction price of primary aluminum is $.54 per pound or above, a bonus payment is made. The amount of the quarterly bonus payment changes incrementally with each full cent change in the price of primary aluminum between $.54 per pound and $.61 per pound, remains constant when the price is $.61 or more per pound but is below $.74 per pound, changes incrementally again with each full cent change in the price between $.74 per pound and $.81 per pound, and remains at the ceiling when the price is $.81 per pound or more. Workers covered by the Labor Contract at the Trentwood, Tacoma and Gramercy plants may receive quarterly bonus payments based on various indices of productivity, efficiency and other aspects of specific plant performance, as well as, in certain cases, the price of alumina or primary aluminum. The particular quarterly bonus variable compensation formulas currently applicable at each plant will remain applicable for the remainder of the contract term. Pursuant to the Labor Contract, base wage rates were raised $.50 per hour in 1990 and were raised an additional $.50 per hour effective November 1, 1993. Each of the employees covered by the Labor Contract has received $2,000 in lump-sum signing and special bonuses. In addition, the Company acquired in the first quarter of 1991 up to $4,000 of preference stock held for the benefit of approximately 80% of the employees covered by the Labor Contract, and agreed to acquire in 1994 an additional $2,000 of such preference stock held for the benefit of substantially the same employees. The Company also acquired in the first quarter of 1991 up to $4,000 of preference stock which had been held for the benefit of each of certain salaried employees. The Company considers its employee relations to be satisfactory. ENVIRONMENTAL MATTERS The Company is subject to a wide variety of Environmental Laws which continue to be adopted and amended. The Environmental Laws regulate, among other things, air and water emissions and discharges; the generation, storage, treatment, transportation and disposal of solid and hazardous waste; the release of hazardous or toxic substances, pollutants and contaminants into the environment; and, in certain instances, the environmental condition of industrial property prior to transfer or sale. In addition, the Company is subject to various federal, state and local workplace health and safety laws and regulations ("Health Laws"). From time to time, the Company is subject, with respect to its current and former operations, to fines or penalties assessed for alleged breaches of the Environmental and Health Laws and to claims and litigation brought by federal, state or local agencies and by private parties seeking remedial or other enforcement action 42 45 under the Environmental and Health Laws or damages related to alleged injuries to health or to the environment, including claims with respect to certain waste disposal sites and the remediation of sites presently or formerly operated by the Company. See "-- Legal Proceedings." The Company's Mead, Washington facility has been listed on the National Priorities List under CERCLA. In connection with certain of its asset sales, the Company has indemnified the purchasers of assets with respect to certain liabilities (and associated expenses) resulting from acts or omissions arising prior to such dispositions, including environmental liabilities. In certain instances, the Company may be exposed to joint and several liability for remedial action or damages to natural resources. The Company, along with several other entities, has been named as a Potentially Responsible Party ("PRP") for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. While the ultimate extent of the Company's liability for pending or potential fines, penalties, remedial costs, claims and litigation relating to environmental and health and safety matters cannot be determined at this time and, in light of evolving case law relating to insurance coverage for environmental claims, management is unable to determine definitively the extent of such coverage, management currently believes that the resolution of these matters (even without giving effect to potential insurance recovery) should not have a material adverse effect on the Company's consolidated financial position or results of operations. Environmental capital spending was $12.6 million in 1993, $13.1 million in 1992 and $11.2 million in 1991. Annual operating costs for pollution control, not including corporate overhead or depreciation, were approximately $22.4 million in 1993, $21.6 million in 1992 and $17.8 million in 1991. Legislative, regulatory and economic uncertainties make it difficult to project future spending for these purposes. However, the Company currently anticipates that in the 1994-1995 period, environmental capital spending will be within the range of approximately $7.0-$20.0 million per year, and operating costs for pollution control will be within the range of $20.0-$22.0 million per year. These expenditures will be made to assure compliance with applicable Environmental Laws and are expected to include, among other things, additional "red mud" disposal facilities and improved levees at the Gramercy, Louisiana refinery (which are being financed by the Gramercy Bonds), bath crushing improvements, baking furnace modernization, and improved calcining controls at the Mead, Washington facility; new and continuing environmental projects at the Trentwood, Washington facility; and environmental projects required under the Clean Air Act Amendments of 1990. In addition, $7.2 million in cash expenditures in 1993, $9.6 million in 1992 and $14.0 million in 1991 were charged to previously established reserves relating to environmental cost. Approximately $7.0 million is expected to be charged to such reserves in 1994. LEGAL PROCEEDINGS Aberdeen Pesticide Dumps Site Matter The Aberdeen Pesticide Dumps Site, listed on the Superfund National Priorities List, is composed of five separate sites around the town of Aberdeen, North Carolina. These sites (in the aggregate, the "Sites") include the Farm Chemicals Site, Twin Sites, Fairway Six Site, McIver Dump Site and the Route 211 Site. The Sites are of concern to the United States Environmental Protection Agency (the "EPA") because of their past use as either pesticide formulation facilities or pesticide disposal areas from approximately the mid-1930's through the late 1980's. The United States originally filed a cost recovery complaint (as amended, the "Complaint") in the United States District Court for the Middle District of North Carolina, Rockingham Division, No. C-89-231-R, against five defendants on March 31, 1989, and subsequently amended its complaint to add another ten defendants on February 6, 1991, and another four defendants on August 1, 1991. The Company and KACC were not defendants named in the Complaint. The Complaint seeks reimbursement for past and future response costs and a determination of liability of the defendants under Section 107 of CERCLA. On or about October 2, 1991, KACC, along with approximately seventeen other parties, was served with third party complaints from four of the defendants named in the Complaint (the "Third Party Plaintiffs") 43 46 alleging claims arising under various theories of contribution and indemnity. On October 22, 1992, the United States filed a motion for leave to file an amended complaint naming KACC as a first party defendant in its cost recovery action. On February 16, 1993, the court granted that motion. The EPA has performed a Remedial Investigation/Feasibility Study and issued a Record of Decision ("ROD") dated September 30, 1991, for the Sites. The major remedy selected for the five Sites in the ROD consisted of excavation of contaminated soil, treatment of the contaminated soil at a single location utilizing thermal treatment, and placement of the treated material back into the areas of excavation. The estimated cost of such remedy for the five Sites is approximately $32 million. Other possible remedies described in the ROD included on-site incineration and on-site ash disposal at an estimated cost of approximately $53 million, and off-site incineration and disposal at an estimated cost of approximately $222 million. The Company understands that the EPA is also investigating contamination of groundwater at the Sites. The EPA has stated that it has incurred past costs at the Sites in the range of $7.5-$8 million as of February 9, 1993, and alleges that response costs will continue to be incurred in the future. On May 20, 1993, the EPA issued three unilateral Administrative Orders under Section 106(a) of CERCLA ordering the Respondents, including KACC, to perform the remedial design and remedial action described in the ROD for the Farm Chemicals Site (EPA Docket No. 93-13-C), Twin Sites (EPA Docket No. 93-14-C) and Fairway Six Site (EPA Docket No. 93-15-C). The estimated cost as set forth in the ROD for the remedial action at the three sites is approximately $27 million. In additional to KACC, Respondents named in the Administrative Orders for all three sites include J. M. Taylor, Grower Service Corporation, E. I. DuPont de Nemours & Co., Olin Corporation, UCI Holdings, Inc., PPG Industries, Inc., and Union Carbide Corporation. Ciba-Geigy Corporation, Hercules, Inc., Mobil Oil Corporation, Shell Oil Company, The Boots Company (USA), Inc., Nor-Am Chemical Co., George D. Anderson, Farm Chemicals, Inc., Partners In The Pits, Ltd., Dan F. Maples, Pits Management Corp., Maples Golf Construction, Inc., Yadco of Pinehurst, Inc. and Robert Trent Jones are named as Respondents for one or two of the Sites. The Company has entered into an Agreement in Principle with certain of the respondents to participate jointly in responding to the Administrative Orders, to share costs incurred on an interim basis, and to seek to reach a final allocation of costs through agreement or to allow such final allocation and determination of liability to be made by the United States District Court. A definitive PRP Participation Agreement is awaiting execution by the group. By letter dated July 6, 1993, the Company notified the EPA of its ongoing participation with such group of respondents which, as a group, are intending to comply with the Administrative Orders to the extent consistent with applicable law. By letters dated December 30, 1993, the EPA notified KACC of its potential liability for, and requested that KACC, along with certain other companies, undertake or agree to finance, groundwater remediation at certain of the sites. With respect to the Farm Chemicals and Twin Sites, in addition to KACC, the EPA issued such letters to J.M. Taylor, Grower Services Corporation, Farm Chemicals, Inc., E.I. DuPont de Nemours and Company, Olin Corporation, UCI Holdings, Inc., Union Carbide Corporation, Miles, Inc., Mobil Oil Corporation, Shell Oil Company, Hercules, Inc., The Boots Company (USA), Inc., Nor-Am Chemical Company, and Ciba-Geigy Corporation. With respect to the Fairway Six Site, in addition to KACC, the EPA issued such letters to J.M. Taylor, G.D. Anderson, Grower Service Corporation, Partners in Pits, Dan Maples, Pits Management Corporation, Maples Golf Construction, Inc., Yadco of Pinehurst, Inc., Robert Trent Jones, E.I. DuPont de Nemours and Company, Olin Corporation, UCI Holdings, Inc., Union Carbide Corporation, Miles, Inc., Ciba-Geigy Corporation and Hercules, Inc. The ROD-selected remedy for the groundwater remediation selected by EPA includes extraction, on-site treatment by coagulation/flocculation/precipitation, air stripping, GAC absorption, and discharge on site for the Farm Chemicals/Twin Sites and extraction, on-site treatment by GAC absorption and discharge on-site for the Fairway Six Site. The EPA has estimated the total present worth cost, including thirty years of operation and maintenance, at $11,849,757. KACC, along with other notified parties, plans to meet with representatives of the EPA to discuss whether an agreement to perform this remediation is possible. 44 47 Based upon the information presently available to it, the Company is unable to determine whether KACC has any liability with respect to any of the Sites or, if there is any liability, the amount thereof. Two Government witnesses have testified that KACC acquired pesticide products from the operator of the formulation site over a two to three year period. The Company has been unable to confirm the accuracy of this testimony. United States of America v. Kaiser Aluminum & Chemical Corporation On February 8, 1989, a civil action was filed by the United States Department of Justice at the request of the EPA against the Company in the United States District Court for the Eastern District of Washington, Case Number C-89-106-CLQ. The complaint alleged that emissions from certain stacks at the Company's Trentwood facility in Spokane, Washington intermittently violated the opacity standard contained in the Washington State Implementation Plan ("SIP"), approved by the EPA under the federal Clean Air Act. The complaint sought injunctive relief, including an order that the Company take all necessary action to achieve compliance with the Washington SIP opacity limit and the assessment of civil penalties of not more than $25,000 per day. In the course of the litigation, questions arose as to whether the observers who recorded the alleged exceedances were qualified under the Washington SIP to read opacity. In July 1990, the Company and the Department of Justice agreed to a voluntary dismissal of the action. At that time, however, the EPA had arranged for increased surveillance of the Trentwood facility by consultants and the EPA's personnel. From May 1990 through May 1991, these observers recorded approximately 130 alleged exceedances of the SIP opacity rule. Justice Department representatives have stated their intent to file a second lawsuit against the Company based on the opacity observations recorded during that period. The second lawsuit has not yet been filed. Instead, the Company has entered into negotiations with the EPA to resolve the claims against the Company through a consent decree. Although the EPA and the Company have made substantial progress in negotiating the terms of the consent decree, key issues remain to be resolved. Anticipated elements of any settlement would include a commitment by the Company to improve the emission control equipment at the Trentwood facility and a civil penalty assessment against the Company, in an amount to be determined. As of the date of this Prospectus, the Company cannot predict the likelihood that the EPA and the Company will reach agreement upon the terms of a consent decree. In the event that the negotiations are not successful, the matter likely would be resolved in federal court. Catellus Development Corporation v. Kaiser Aluminum & Chemical Corporation and James L. Ferry & Son, Inc. On January 7, 1991, the City of Richmond, et al. (the "Plaintiffs") filed a Second Amended Complaint for Damages and Declaratory Relief against the United States of America, the United States Maritime Administration and Santa Fe Land Corporation (now known as Catellus Development Corporation ("Catellus")) (collectively, the "Defendants") alleging, among other things, that the Defendants caused or allowed hazardous substances, pollutants, contaminants, debris and other solid wastes to be discharged, deposited, disposed of or released on certain property located in Richmond, California (the "Property") formerly owned by Catellus and leased to (i) the Company for the purpose of shipbuilding activities conducted by the Company on behalf of the United States during World War II, and (ii) subsequent tenants thereafter. Plaintiffs allege, among other things, that (i) the Defendants are jointly and severally liable for response costs and natural resources damages under CERCLA, (ii) Defendant United States of America is liable on grounds of negligence for damages under the Federal Tort Claims Act, and (iii) Defendant Catellus is strictly liable and on grounds of negligence for such discharge, deposit, disposal or release. Certain of the Plaintiffs have alleged that they had incurred or expect to incur costs and damages in the amount of approximately $49 million, in the aggregate. On or about September 23, 1992, the Plaintiffs filed a Third Amended Complaint, alleging, among other things, that (i) the Defendants are jointly and severally liable for response costs, declaratory relief and natural 45 48 resources damages under CERCLA; (ii) Defendant United States of America is liable on grounds of negligence, continuing trespass and continuing nuisance for damages under the Federal Tort Claims Act; (iii) Defendant Catellus is strictly liable on grounds of continuing nuisance, continuing trespass and negligence for such discharge, deposit, disposal or release; (iv) Catellus is liable to indemnify Plaintiffs; and (v) Catellus is liable for fraudulent concealment of the alleged contamination. On February 20, 1991, Catellus filed a third party complaint (the "Third Party Complaint") against the Company and James L. Ferry & Son, Inc. ("Ferry") in the United States District Court for the Northern District of California, Case No. C-89-2935 DLJ. The Third Party Complaint was served on the Company as of April 12, 1991. The Third Party Complaint alleges that, if the allegations of the Plaintiffs are true, then the Company and Ferry (which is alleged to have performed certain excavation activities on the Property and, as a result thereof, to have released contaminants on the Property and to have arranged for the transportation, treatment and disposal of such contaminants) are liable for Catellus' response costs and damages under CERCLA and damages under other theories of negligence and nuisance and, in the case of the Company, waste. Catellus seeks (i) contribution from the Company and Ferry, jointly and severally, for its costs and damages pursuant to CERCLA, (ii) indemnity from the Company and Ferry for any liability or judgment imposed upon it, (iii) indemnity from the Company and Ferry for reasonable attorneys' fees and costs incurred by it, (iv) damages for the injury to its interest in the Property, and (v) treble damages from the Company pursuant to California Code of Civil Procedure Section 732. On June 4, 1991, Catellus served on the Company a first amended third party complaint which alleges, in addition to the allegations of the Third Party Complaint, that the Company and/or a predecessor in interest to the Company is also liable for Catellus' damages, if any, on the basis of alleged contractual indemnities contained in certain former leases of the Property. The Third Party Complaint was amended on or about October 26, 1992. The amended Third Party Complaint alleges that, if the allegations of the Plaintiffs are true, then the Company and Ferry (which is alleged to have performed certain excavation activities on the Property and, as a result thereof, to have released contaminants on the Property and to have arranged for the transportation, treatment and disposal of such contaminants) are liable for (i) Catellus' response costs and natural resources damage under CERCLA; (ii) damages under theories of negligence, trespass and nuisance; (iii) indemnity (equitable and contractual); and (iv) attorneys fees under California Code of Civil Procedure Section 1021.6. By letter dated October 26, 1992, counsel for certain underwriters at Lloyd's London and certain London Market insurance companies ("London Insurers") advised that the London Insurers agreed to reimburse the Company for defense expenses in the third party action filed by Catellus, subject to a full reservation of rights. The Plaintiffs filed a motion for leave to file a Third Amended Complaint which would have added the Company as a first party defendant. This motion was denied. On October 26, 1992, the Plaintiffs served a separate Complaint against the Company for damages and declaratory relief. The claims asserted by the Plaintiffs are for (i) recovery of costs, natural resources damages and declaratory relief under CERCLA; (ii) damages for injury to the Property arising from negligence; (iii) damages under a theory of strict liability; (iv) continuing nuisance and continuing trespass; (v) equitable indemnity; (vi) response costs incurred by the Richmond Redevelopment Agency under California Health & Safety Code Section 33459.4; and (vii) declaratory relief on the state claims. This matter has been tendered to the London Insurers. Picketville Road Landfill Matter On July 1, 1991, the EPA served on the Company and thirteen other PRPs a Unilateral Administrative Order For Remedial Design and Remedial Action (the "Order") at the Picketville Road Landfill site in Jacksonville, Florida. The EPA seeks remedial design and remedial action pursuant to CERCLA from some, but apparently not all, PRPs based upon a Record of Decision outlining remedial cleanup measures to be undertaken at the site adopted by the EPA on September 28, 1990. The site was operated as a municipal and industrial waste landfill from 1968 to 1977 by the City of Jacksonville. The Company was first notified by the EPA on January 17, 1991, that wastes from one of the Company's plants may have been transported to and deposited in the site. In its Record of Decision, the EPA estimated that the total capital, operations and 46 49 maintenance costs of its elected remedy for the site would be approximately $9.9 million. There can be no assurance that such costs will not exceed such estimated amount. In addition, the EPA has reserved the right to seek recovery of its costs incurred relating to the Order, including, but not limited to, reimbursement of the EPA's cost of response. Through negotiations with the EPA and other PRPs, the Company has reached an agreement with such PRPs under which the Company will fund $146,700 of the cost of the remedial action (unless remedial costs exceed $19 million, in which event the settlement agreement will be re-opened). The implementation of the foregoing agreement is subject to continuing discussion among the EPA, the other PRPs and the Company. Asbestos-related Litigation The Company 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 the Company or to products containing asbestos produced or sold by the Company. The number of such lawsuits instituted against the Company increased substantially in 1993 and management believes the number of such lawsuits will continue to increase at a greater annualized rate than in prior years. In connection with such litigation, the Company made cash payments (for settlement and other related costs) during 1993, 1992 and 1991, in the amounts of $7.0 million, $7.1 million and $6.1 million, respectively. Based upon prior experience, the Company estimates future cash payments in connection with such litigation of approximately $8.0 million to $12.0 million per year for the years 1994 through 1998, and an aggregate of approximately $85.0 million thereafter (through 2007). While the ultimate extent of the Company's liability for asbestos-related claims cannot be determined at this time, management currently believes that potential insurance recoveries should be adequate to pay substantially all of such claims, and that, as a result thereof, the resolution of these matters should not have a material adverse effect on the Company's consolidated financial position or results of operations. Various other lawsuits and claims are pending against the Company. Management believes that resolution of the lawsuits and claims made against the Company, including the matters discussed above, will not have a material adverse effect on the Company's consolidated financial position. PROPERTIES The Company owns in fee or leases all the real estate and facilities used in connection with its business. Plants and equipment and other facilities are generally in good condition and suitable for their intended uses, subject to changing environmental requirements. Although the Company's domestic aluminum smelters and alumina facility were initially designed early in the Company's history, they have been modified frequently over the years to incorporate technological advances in order to improve efficiency, increase capacity and achieve energy savings. The Company believes that its domestic plants are cost competitive on an international basis. Due to the Company's variable cost structure, the plants' operating costs are relatively lower in periods of low primary aluminum prices and relatively higher in periods of high primary aluminum prices. Obligations under the Credit Agreement are secured by, among other things, mortgages on the Company's plants located in Spokane (the Trentwood and Mead plants) and Tacoma, Washington; Gramercy, Louisiana; Erie, Pennsylvania; Newark, Ohio; and Sherman, Texas. The New Credit Agreement will not be secured by the Company's Gramercy, Louisiana plant. OTHER MATTERS On February 7, 1989, the Company sold aluminum production facilities at Ravenswood, West Virginia (the "Ravenswood Works") and Bedford, Indiana and a data center at Columbus, Ohio. The sales price for the three facilities was approximately $256 million, including approximately $168 million in cash and the assumption by the buyer of certain liabilities. Among the liabilities the buyer and its pension plan assumed were pension liabilities relating to former employees of the Company represented by the United Steelworkers of America ("USWA") who were employed by the buyer at the Ravenswood Works and the Bedford facility 47 50 at the sale date (the "Former Employees"). The projected benefit obligation relating to such assumed pension liabilities was calculated at such time to be approximately $77.6 million. The buyer agreed to certain restrictions on its activities designed to help assure that it would meet its assumed obligations. The Company retained liability for pension, retiree health and life insurance coverage with respect to Ravenswood Works employees who retired from the Company prior to the sale date. The Company agreed with the USWA that in the event of a permanent shutdown of the Ravenswood Works prior to February 7, 1994, the Former Employees would receive from the owner of the Ravenswood Works, the Pension Benefit Guaranty Corporation, the Company and/or a pension plan maintained by the Company, the pension benefits accrued as of the sale date subject to certain limited exceptions. The Company also agreed with the USWA that in the event of such a shutdown, such Former Employees, if otherwise eligible, would receive retiree health coverage, subject to a monthly premium, and a portion of their life insurance coverage. The Company has not calculated the costs which would be necessary to provide the retiree health and life insurance coverage, but such costs are believed to be smaller than the amount of the pension liabilities assumed by the buyer. The Department of Labor ("DOL"), which has enforcement powers under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), in October 1991, initiated a review of the transfer of the pension liabilities and the related assets from the Company plan to the buyer and its pension plan. The Company has assisted the DOL with its review and believes that its agreements and actions in connection with the sale and the actions of the Company plan fiduciaries were in full compliance with ERISA. 48 51 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The table below sets forth certain information, as of February 4, 1994, with respect to the executive officers and directors of the Company, and certain officers of KACC who perform services for the Company. All officers and directors hold office until their respective successors are elected and qualified or until their earlier resignation or removal.
NAMES POSITIONS AND OFFICES WITH THE COMPANY --------------------------------- ------------------------------------------------ George T. Haymaker, Jr........... Chairman of the Board, Chief Executive Officer and Director Joseph A. Bonn................... Vice President -- Planning and Administration John T. La Duc................... Vice President and Chief Financial Officer Anthony R. Pierno................ Vice President and General Counsel Byron L. Wade.................... Vice President, Secretary and Deputy General Counsel Charlie Alongi................... Controller Kris S. Vasan.................... Treasurer Robert E. Cole................... Vice President of KACC John E. Daniel................... Vice President of KACC Richard B. Evans................. Vice President of KACC Robert W. Irelan................. Vice President -- Public Relations of KACC Geoffrey W. Smith................ Vice President of KACC Lawrence L. Watts................ Vice President of KACC Robert J. Cruikshank............. Director Charles E. Hurwitz............... Director Ezra G. Levin.................... Director Robert Marcus.................... Director Paul D. Rusen.................... Director
George T. Haymaker, Jr. Mr. Haymaker, age 56, assumed the positions of Chairman of the Board and Chief Executive Officer of the Company and KACC effective January 1, 1994. From May 1993 to December 1993, Mr. Haymaker served as President and Chief Operating Officer of the Company and KACC. Mr. Haymaker was elected as a director of the Company at the Company's Annual Meeting of Stockholders on May 19, 1993, and was also elected as a director of KACC at KACC's Annual Meeting of Stockholders held on June 15, 1993. From 1987 to April 1993, Mr. Haymaker had been a partner in a partnership which acquires, redirects and operates small to medium sized companies in the metals industry. He served as President from February 1992 to March 30, 1993, and has been a director since July 1987 of Metalmark Corporation, which is in the business of semi-fabrication of aluminum specialty foils and extrusions. From May 1986 until February 1993, he also served as President of West Coast Sales Corp., which provides management and acquisition services. Mr. Haymaker also served as Chief Executive Officer and a director of Amarlite Architectural Products, Inc. ("Amarlite"), a producer of architectural curtain wall and entrance products, from August 1990 to April 1992 and from April 1989 to February 1993, respectively. He was a director of American Powdered Metals Company, engaged in the manufacture of powdered metal components, from August 1988 to March 1993, and Hayken Metals Asia Limited, which represents manufacturers of aluminum and metal products, from January 1988 to April 10, 1993. During 1984 to 1986, Mr. Haymaker served as Executive Vice President -- Aluminum Operations of Alumax Incorporated, responsible for all primary aluminum and semi-fabricating activities. Mr. Haymaker has extensive experience in the management of businesses engaged in the production and sale of aluminum and aluminum products, including 49 52 25 years of experience in a variety of executive and managerial positions with Aluminum Company of America and its subsidiaries. Joseph A. Bonn. Mr. Bonn, age 50, has been Vice President -- Planning and Administration of the Company and KACC since February 1992 and July 1989, respectively. Mr. Bonn has served as a Vice President of KACC since April 1987, and served as Senior Vice President -- Administration of MAXXAM from September 1991 through December 31, 1992. He was also KACC's Director of Strategic Planning from April 1987 until July 1989. John T. La Duc. Mr. La Duc, age 50, has been Vice President and Chief Financial Officer of the Company since June 1989 and May 1990, respectively. He has been Chief Financial Officer of KACC since January 1990 and a Vice President of KACC since June 1989. From January 1, 1993 until April 5, 1993, Mr. La Duc served as Treasurer of the Company and KACC, having previously served as Treasurer of the Company from September 1987 to May 1990 and Assistant Treasurer of the Company from February 1987 to September 1987. Mr. La Duc also previously served as Treasurer of KACC from September 1987 until January 1990. He was an Assistant Treasurer and Treasurer, International Operations of KACC from 1981 until 1987. In September 1990, Mr. La Duc was elected Senior Vice President and Chief Financial Officer of MAXXAM. Mr. La Duc also serves as a Vice President and Chief Financial Officer of MAXXAM Group Inc. ("MAXXAM Group"), a wholly owned subsidiary of MAXXAM engaged through its subsidiaries in forest products operations, The Pacific Lumber Company ("Pacific Lumber"), an indirect subsidiary of MAXXAM engaged in forest products operations, and Pacific Lumber's subsidiary, Scotia Pacific Holding Company ("Scotia Pacific"). He also serves as a director of Pacific Lumber and Scotia Pacific. Anthony R. Pierno. Mr. Pierno, age 61, has served as Vice President and General Counsel of the Company and KACC since January 1992. He also serves as Senior Vice President and General Counsel of MAXXAM, positions he has held since February 1989. Mr. Pierno also serves as Vice President and General Counsel of MAXXAM Group, Pacific Lumber and Scotia Pacific. Immediately prior to joining MAXXAM, Mr. Pierno served as partner in charge of the business practice group in the Los Angeles office of the law firm of Pillsbury, Madison & Sutro. He has served as the Commissioner of Corporations of the State of California and as Chair of several committees of the State Bar of California. Mr. Pierno is Vice Chairman of the Board of Trustees of Whittier College, and a member and past Chairman of the Board of Trustees of Marymount College. Byron L. Wade. Mr. Wade, age 46, has served as Vice President and Secretary of the Company and KACC since January 1992, and Deputy General Counsel of the Company and KACC since May 1992 and June 1992, respectively. Mr. Wade has also served as Vice President and Deputy General Counsel of MAXXAM since May 1990, and Secretary of MAXXAM since October 1988. He previously served as Assistant Secretary and Assistant General Counsel of MAXXAM from November 1987 to October 1988 and May 1990, respectively. Mr. Wade has served as Vice President, Secretary and Deputy General Counsel of Pacific Lumber and Scotia Pacific since June 1990 and November 1992, respectively, and as a Vice President of MAXXAM Group since July 1990. He had previously served since 1983 as Vice President, Secretary and General Counsel of MCO Resources, Inc., a publicly-traded oil and gas company, which was majority owned by MAXXAM. Since July 1993, Mr. Wade has served as a director, Vice President and Secretary of SHRP, Inc. ("SHRP"), the sole general partner of Sam Houston Race Park, Ltd., a Texas limited partnership, which has been granted a license to operate a horse racing facility in Houston, Texas. Charlie Alongi. Mr. Alongi, age 63, has been the Controller of the Company and KACC since July 1989, and was the Assistant Controller of KACC from February 1982 until July 1989. Kris S. Vasan. Mr. Vasan, age 44, became Treasurer of the Company and KACC on April 6, 1993. Mr. Vasan previously served the Company and KACC as Corporate Director of Financial Planning and Analysis from June 1990 until April 1993. From October 1987 until June 1990, he served as Associate Director of Financial Planning and Analysis. He was Associate Director of Energy Planning of KACC from 1980 until 1987, and prior thereto, Manager of Energy Planning from 1978. Mr. Vasan joined KACC in 1974 as Senior Operations Research Analyst, a position he held until 1978. 50 53 Robert E. Cole. Mr. Cole, age 47, has been a Vice President of KACC since March 1981. Mr. Cole also has served as Vice President -- Federal Government Affairs of MAXXAM, MAXXAM Group and Pacific Lumber since September 1990. John E. Daniel. Mr. Daniel, age 58, has been a Vice President of KACC since January 1992, and has been the General Manager of KACC's primary aluminum products business unit since November 1990. From November 1990 to January 1992, he was Divisional Vice President of KACC's primary aluminum products business unit. From December 1989 to November 1990, Mr. Daniel was Reduction Plant Manager of the Tacoma Smelter plant. From July 1986 to December 1989, he was Reduction Plant Manager of KACC's formerly owned Ravenswood, West Virginia plant. Richard B. Evans. Mr. Evans, age 46, has been a Vice President of KACC since January 1992, and has been the General Manager of KACC's flat-rolled products business unit since January 1989. From July 1986 to January 1992, he was Divisional Vice President of KACC's flat-rolled products business unit. From March 1985 to June 1986, Mr. Evans was Divisional Vice President and manager of KACC's formerly-owned Ravenswood, West Virginia plant. From July 1982 to February 1985, he was General Manager for Die Formed Products. Robert W. Irelan. Mr. Irelan, age 56, has been Vice President -- Public Relations of KACC since February 1988. From June 1985 to February 1988, Mr. Irelan served as Divisional Vice President -- Corporate Public Relations of KACC, and from 1968 to June 1985, he served KACC and certain affiliated companies in a variety of positions. Mr. Irelan also has served as Vice President -- Public Relations of MAXXAM, MAXXAM Group and Pacific Lumber since September 1990. Geoffrey W. Smith. Mr. Smith, age 47, has been a Vice President of KACC since January 1992, and has been Co-General Manager of KACC's alumina business unit since September 1991. From September 1990 to January 1992, Mr. Smith was Divisional Vice President of KACC's alumina business unit. From August 1988 to August 1990, Mr. Smith was Director of Business Development for the alumina business unit, and from 1982 to August 1988 was Operations/Technical Manager for the Gramercy refinery. Lawrence J. Watts. Mr. Watts, age 47, has been a Vice President of KACC since January 1992, and has been Co-General Manager of KACC's alumina business unit since September 1991. From June 1989 to January 1992, Mr. Watts was Divisional Vice President, Governmental Affairs and Human Resources for the alumina business unit, and from July 1988 to June 1989, he was Divisional Vice President, Public Relations and Governmental Relations for the same business unit. From September 1984 to July 1988, Mr. Watts was Manager, Human Resources for the alumina business unit. Robert J. Cruikshank. Mr. Cruikshank, age 63, was appointed as a director of the Company and KACC on January 26, 1994. In addition, he has been a director of MAXXAM since May 1993. Mr. Cruikshank was a Senior Partner in the international public accounting firm of Deloitte & Touche from December 1989 until his retirement in March 1993. Prior to its merger with Touche Ross & Co. in December 1989, Mr. Cruikshank served as Managing Partner of Deloitte Haskins & Sells from June 1974 until the merger, and served on such firm's board of directors from 1981 to 1985. Mr. Cruikshank also serves as a director of Houston Industries Incorporated, a public utility holding company with interests in electric utilities, cable television, coal and transportation businesses. Charles E. Hurwitz. Mr. Hurwitz, age 53, has served as a director of the Company since October 1988 and of KACC since November 1988. Mr. Hurwitz has also served as a member of the Board of Directors and the Executive Committee of MAXXAM since August 1978 and was elected as Chairman of the Board and Chief Executive Officer of MAXXAM in March 1980. Since May 1982, Mr. Hurwitz has been Chairman of the Board and Chief Executive Officer of MAXXAM Group. Since January 1, 1993, Mr. Hurwitz has also served MAXXAM and MAXXAM Group as President. Mr. Hurwitz has also served as a director and Chairman of the Board of SHRP since July 1993. From May 1986 until February 1993, Mr. Hurwitz served as a director of Pacific Lumber, and from December 31, 1992 until February 1993, he served as Chairman of the Board of Pacific Lumber. Mr. Hurwitz has been, since January 1974, Chairman of the Board and Chief 51 54 Executive Officer of Federated Development Company ("Federated"), a New York business trust primarily engaged in the management of real estate investments. Ezra G. Levin. Mr. Levin, age 59, has been a director of the Company since July 1991. He has been a director of KACC since November 1988, and a director of MAXXAM since May 1978. Mr. Levin also served as a director of the Company from April 1988 to May 1990. Mr. Levin is a partner in the law firm of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel. He serves as a trustee of Federated and as a director of MAXXAM Group, Pacific Lumber, Scotia Pacific and UMB Bank and Trust Company. Robert Marcus. Mr. Marcus, age 68, has been a director of the Company and KACC since September 1991. From 1987 to January 1992, Mr. Marcus was a partner in American Industrial Partners, a San Francisco and New York based firm specializing in private equity investments in industrial companies. From 1983 to 1991, Mr. Marcus was a director of Domtar Inc., a Canadian resource-based multi-business corporation. From 1982 to 1987, Mr. Marcus served as President and Chief Executive Officer of Alumax Inc., an integrated aluminum company. Paul D. Rusen. Mr. Rusen, age 58, has been a director of the Company since July 1991. Mr. Rusen previously served as a director of the Company from May 1987 to May 1990. Mr. Rusen has served as a director of KACC since April 1986. He is President of Employee Ownership, Inc., an investment banking firm, Chairman of Bliss/Salem Corporation, a rolling mill manufacturing company, former Chairman and Chief Executive Officer of Pittsburgh Forgings Company, a former director of Wheeling-Pittsburgh Steel Corporation and a former principal of Working Equity, Inc., an investment banking firm. In February 1992, Pittsburgh Forgings Company filed a voluntary corporate petition under Chapter 11, Title 11, of the United States Code in the United States Bankruptcy Court for the Western District of Pennsylvania. Mr. Rusen was the Chairman, President and Chief Executive Officer of Pittsburgh Forgings Company at such time. In October 1990, Amarlite filed a voluntary corporate petition under Chapter 11, Title 11, of the United States Code in the United States Bankruptcy Court for the Northern District of Georgia. In December 1991, Amarlite obtained approval of its reorganization plan, which was funded and substantially consummated on January 14, 1992. Mr. Haymaker was Chief Executive Officer and a director of Amarlite during such period. THE BOARD OF DIRECTORS AND ITS COMMITTEES The Board of Directors of the Company has several standing committees, including Executive, Audit and Compensation Committees. The Executive Committee, which currently consists of two members, meets on call and has authority to act on most matters during the intervals between meetings of the entire Board of Directors. Its current members are Messrs. Hurwitz (Chairman) and Haymaker. The Audit Committee presently consists of Messrs. Levin, Marcus (Chairman) and Rusen. The Audit Committee meets with appropriate Company financial and legal personnel, internal auditors and independent public accountants and reviews the internal controls of the Company and the objectivity of its financial reporting. This Committee recommends to the Board the appointment of the independent public accountants to serve as auditors in examining the corporate accounts of the Company. The independent public accountants periodically meet privately with the Audit Committee and have access to the Committee at any time. The Compensation Committee reviews and advises management, makes recommendations to the Board, and reviews and approves proposals regarding the establishment or change of benefit plans, salaries or compensation afforded the executive officers and other employees of the Company. Messrs. Levin (Chairman) and Marcus currently serve as members of this Committee. The Board of Directors of the Company does not have a standing nominating committee nor does it have any committee performing a similar function. 52 55 DIRECTOR COMPENSATION Directors who were not employees of the Company received a retainer of $30,000 for the 1992 calendar year. During 1992, directors of the Company who were also directors of MAXXAM did not receive any additional director or committee fees for serving as a director of the Company. Directors could also be paid additional ad hoc fees for extraordinary services. Mr. Marcus was paid an additional fee of $10,000 for extraordinary services performed in 1992. Directors were reimbursed for travel and other disbursements relating to Board and Committee meetings. Fees to directors who were also employees of the Company were deemed to be included in their salary. In addition to the compensation payable as a director for 1992, the Chairman of each of the Executive, Audit and Compensation Committees was paid a fee of $1,500 per committee meeting held on a date other than a Board of Directors meeting date. Other members of such Committees received no additional compensation for attending such Committee meetings. In November 1988, MAXXAM Group entered into a one-year consulting agreement with one of the Company's former directors, John B. Connally, under which Mr. Connally received $250,000. The agreement was subsequently renewed each year on the same terms and was effective until June 1993. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Ownership of the Company's Common Stock The following table sets forth, as of December 31, 1993, the beneficial ownership of the Company's Common Stock by (i) those persons known by the Company to own beneficially more than 5% of the shares of the Common Stock then outstanding, (ii) named executive officers and directors and (iii) all directors and officers of the Company as a group.
AMOUNT AND NATURE OF BENEFICIAL PERCENT BENEFICIAL OWNER OWNERSHIP(1) OF CLASS ------------------------------------------- ----------------- -------- MAXXAM Inc.(2)............................. 50,000,000 shares 67% A. Stephens Hutchcraft(3).................. 1,000 shares * George T. Haymaker, Jr..................... 0 shares * John T. La Duc............................. 181,763 shares * Joseph A. Bonn............................. 181,763 shares * Anthony R. Pierno.......................... 500 shares * Charles E. Hurwitz......................... 0 shares (4) * Ezra G. Levin.............................. 0 shares * Robert Marcus.............................. 3,500 shares * Paul D. Rusen.............................. 0 shares * All directors and officers of the Company as a group (18 persons).................. 585,045 shares *
- --------------- * Less than 1%. (1) Except as may otherwise be indicated, the beneficial owners have sole voting and investment power with respect to the shares listed in the table. (2) The address of MAXXAM is 5847 San Felipe, Suite 2600, Houston, Texas 77057. See "Risk Factors -- Controlling Stockholder and Possible Effects." (3) Mr. Hutchcraft served as Chief Executive Officer of the Company and KACC during 1993. (4) Mr. Hurwitz, however, may be deemed to hold beneficial ownership in the Company as a result of his beneficial ownership in MAXXAM. Ownership of Parent of the Company MAXXAM owns approximately 67% of the Company's Common Stock. The following table sets forth, as of December 31, 1993, the beneficial ownership of the common stock and Class A $.05 Non-Cumulative 53 56 Participating Convertible Preferred Stock ("Class A Preferred Stock") of MAXXAM by the directors of the Company, and by the Company's directors and officers as a group:
PERCENT OF PERCENT COMBINED AMOUNT AND NATURE OF OF VOTING BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS POWER(2) - ----------------------------------- ------------------------------------ ------- ---------- Charles E. Hurwitz................. Common Stock -- 2,746,642(3)(4) 31.2% Class A Preferred Stock -- 59.9% (3)(4) 97.0% Ezra G. Levin...................... Common Stock -- 1,000(3)(5) * * All directors and officers of the Company as a group (18 persons)......................... Common Stock -- 2,771,792 31.6% Class A Preferred Stock -- 60.0% 657,917 96.6%
- --------------- * Less than 1%. (1) Except as may otherwise be indicated, beneficial owners have sole voting and investment power with respect to the shares listed in the table. (2) MAXXAM's Class A Preferred Stock is generally entitled to ten votes per share on matters presented to a vote of MAXXAM's stockholders. (3) Messrs. Hurwitz and Levin serve as trustees of Federated, and Mr. Hurwitz, together with members of his immediate family and trusts for the benefit thereof, owns all of the shares of beneficial interest in Federated. In addition, Federated, Messrs. Hurwitz and Levin, and Mr. James H. Paulin, Jr., Secretary and Treasurer of Federated, are a "group" (the "Stockholder Group") within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended. As of December 31, 1993, in the aggregate, the Stockholder Group beneficially owned 2,762,994 shares of MAXXAM's common stock and 658,050 shares of MAXXAM's Class A Preferred Stock, aggregating approximately 59.9% of the total voting power of MAXXAM. By reason of the foregoing and their relationship with the members of the Stockholder Group, Messrs. Hurwitz and Levin may be deemed to possess shared voting and investment power with respect to the shares held by the Stockholder Group. (4) Includes as of December 31, 1993 (a) 1,669,451 shares of MAXXAM's common stock and 656,853 shares of MAXXAM's Class A Preferred Stock, respectively, owned by Federated as to which Mr. Hurwitz possesses voting and investment power, (b) 1,526 shares of MAXXAM's common stock owned by Mr. Hurwitz's spouse as separate property, (c) 46,500 shares of MAXXAM's common stock owned by a limited partnership controlled by Mr. Hurwitz and his spouse, 23,250 of which shares were separately owned by Mr. Hurwitz's spouse prior to their transfer to such limited partnership and as to which Mr. Hurwitz disclaims beneficial ownership, (d) 158,564 shares of MAXXAM's common stock owned by 1992 Hurwitz Investment Partnership, L.P., of which 79,282 shares are owned by Mr. Hurwitz's spouse as separate property, and (e) 71,175 shares of MAXXAM's common stock which could be acquired upon exchange of 7% Cumulative Exchangeable Preferred Stock of MCO Properties, Inc. owned by Federated. Does not include shares owned by other members of the Stockholder Group. (5) Does not include shares owned by other members of the Stockholder Group. At December 31, 1993, 28,000,000 shares of the Company's Common Stock owned by MAXXAM were pledged as security for two MAXXAM Group debt issues consisting of $100.0 million aggregate principal amount of 11 1/4% Senior Secured Notes due 2003 and $126.7 million aggregate principal amount of 12 1/4% Senior Discount Notes due 2003. EXECUTIVE COMPENSATION The Kaiser 1993 Omnibus Stock Incentive Plan On April 2, 1993, the Compensation Committee recommended to the Board of Directors the adoption of the Kaiser 1993 Omnibus Stock Incentive Plan (the "Plan"). On April 6, 1993, the Board of Directors 54 57 adopted the Plan, subject to approval by the stockholders of the Company and KACC. The stockholders of both the Company and KACC approved the Plan at their 1993 Annual Meetings. The Company and KACC currently have identical Boards of Directors and identical Compensation Committee memberships. Accordingly, their respective Compensation Committees are referred to jointly in this section as the "Committee." The Plan is the Company's first stock-based incentive plan since KACC's 1979 Stock Option Plan, which expired on December 31, 1988. The Plan is jointly sponsored by the Company and KACC. The description of the Plan herein is qualified in its entirety by the provisions of the Plan, a copy of which has been filed with the Commission. Long-Term Incentive Compensation Background Effective as of January 1, 1989, the Company and KACC adopted an unfunded long-term incentive plan (as amended, the "LTIP"). Effective as of January 1, 1990, KACC adopted an unfunded middle management long-term incentive plan (the "Mid-Management Plan"). No employee participates in both plans. Both plans are linked to certain measurements of corporate net income. During 1992, the senior managements of the Company and KACC and the Committee determined that the continued utilization of the LTIP and Mid-Management Plan might not be in the best interest of the corporations. They observed that virtually all benefits under the LTIP had been earned and that the Mid-Management Plan was being viewed as an annual, rather than longer term, incentive. Moreover, they observed that the Company's stock had become publicly traded since those plans were adopted. For these and other reasons the Committee determined that it would be appropriate to design a new stock-based long-term incentive plan. Compensation Committee Initiation of the Plan and Initial Grants At its meeting held on December 2, 1992, the Committee directed the preparation of a flexible but stock-based incentive plan for joint sponsorship by the Company and KACC. The Committee determined not to make year-end 1992 grants to participants under either the LTIP or the Mid-Management Plan and indicated that, although such plans were not being terminated, they expected to make future long-term incentive grants to certain employees under a stock-based plan. In addition, the Committee determined to provide a one-time opportunity for participants in the LTIP to elect to receive payment of their LTIP account balances, as of December 31, 1992, as follows: (i) Amounts earned and vested would be paid half in cash and half in restricted shares of Common Stock. Ninety-five percent of the earned and vested amounts would be paid on or prior to December 31, 1992, with the remainder to be paid on or about April 10, 1993. The portion payable in restricted shares of Common Stock would be divided by the average closing price for the stock for December 1992 through the latest practical date to determine the number of shares granted. As implemented, the average December price of $8.539 per share (through December 28, 1992) was utilized. The portion payable in cash would be reduced by 1992 bonuses paid to recipients and by appropriate tax withholdings. (ii) Amounts earned and unvested as of December 31, 1992 under the LTIP would be paid in options or shares of restricted stock under the Plan following its implementation. Restrictions would be removed or options would vest at the rate of 25% each December for four (4) years. (iii) Amounts unearned and unvested as of December 31, 1992 under the LTIP would be paid in options or shares of restricted stock under the Plan following its implementation. Restrictions would be removed or options would vest as to 50% thereof in each of December 1995 and December 1996. The payments made in accordance with item (i) above were separate and apart from the Plan and are reflected in column (h) of the Summary Compensation Table set forth hereafter. The grants made in accordance with items (ii) and (iii) above are referred to in the Plan as the Initial Grants and are reflected in column (f) of the Summary Compensation Table. 55 58 Six participants in the LTIP, constituting all of the participants in the LTIP then employed by KACC other than Messrs. John M. Seidl (former Chairman of the Board and Chief Executive Officer of the Company until December 31, 1992) and Hutchcraft (former Chairman of the Board and Chief Executive Officer of the Company until December 31, 1993), timely made elections to receive the December 1992 restricted stock and cash distribution and the Initial Grants under the Plan in lieu of the LTIP benefits attributable to their accounts at year end 1992. As a result of their elections, Messrs. La Duc and Bonn each received as to their 95% payment described in item (i) above, 13,145 shares of restricted Common Stock. Mr. La Duc received cash in the amount of $13,159, and Mr. Bonn's cash account was a negative $1,489 which he paid to the Company. The remaining in lieu distributions were made to these individuals on or about April 10, 1993 and amounted to $1,384 and 772 shares to Mr. La Duc and $690 and 772 shares to Mr. Bonn. The Initial Grants relating to items (ii) and (iii) above are an integral part of the Plan. The information shown below in the New Plan Benefits Table, except with respect to Mr. Haymaker, represents the Initial Grants. An aggregate of 764,096 shares of restricted Common Stock were awarded as the Initial Grants, including 167,346 shares each to Messrs. La Duc and Bonn. New Plan Benefits Table The following table sets forth the determinable number of shares of Common Stock that were issued or allocated during 1993 to each of the named executive officers and the following groups under the Plan:
1993 KAISER OMNIBUS STOCK INCENTIVE PLAN ------------------------ NUMBER DOLLAR OF NAME AND POSITION VALUE($)(1) SHARES ----------------------------------------------------------- ---------- -------- John M. Seidl, former Chairman of the Board and Chief Executive Officer.................................................. $ -0- -0- A. Stephens Hutchcraft, Jr., former Chairman of the Board and Chief Executive Officer.................................................. -0- -0- George T. Haymaker, Jr., Chairman of the Board and Chief Executive Officer........ 712,500 100,000 Anthony R. Pierno, Vice President and General Counsel....................... -0- -0- John T. La Duc, Vice President and Chief Financial Officer............... 1,428,967 167,346 Joseph A. Bonn, Vice President, Planning and Administration.............. 1,428,967 167,346 Executive Group............................................ 6,127,333 749,195 Non-Executive Director Group............................... -0- -0- Non-Executive Officer Employee Group....................... 5,345,957 699,201
- --------------- (1) Valuation based on the average price per share during the month such awards were granted. General Provisions The Plan is administered by the Committee. It is the intention of the Board of Directors that the Plan be formulated, adopted and administered in a manner which allows for transactions under it to be exempt employee benefit transactions under Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly, no person shall serve on the Committee who has received any grant or award under the Plan within one year prior to his or her appointment nor shall any person receive a grant or award under the Plan while a member of the Committee. The Committee may select participants for awards, in addition to the Initial Grants under the Plan, from among those employees of the Company recommended by the Chief Executive Officer of the Company who are, in the opinion of the Committee, key employees in a position to contribute materially to the Company's continued growth and development and to its long-term success. It is expected that approximately 80 employees will participate in the Plan within the first two (2) 56 59 years of its duration, but such participation has not been determined and is subject to the discretion of the Committee. The Committee has discretion to make awards under the Plan. In making awards, the Committee has flexibility in choosing from a variety of stock-based incentive alternatives. The Plan allows for the grant of incentive stock options ("ISOs"), nonstatutory stock options, stock appreciation rights ("SARs"), performance units, performance shares, restricted stock and unrestricted stock; however, it is not contemplated that any participant will receive awards from all categories available under the Plan. Up to 2,500,000 shares of the Common Stock are reserved for awards or for payment of rights granted under the Plan (subject to adjustment in the event of certain changes in the capitalization of the Company). Of that amount, the Initial Grants comprise 764,096 shares of Common Stock. Payments under the Plan for other than direct awards of stock may be made in cash, in stock or partly in each, at the discretion of the Committee. If any award terminates or lapses prior to the expiration or earlier termination of the Plan, the shares of Common Stock subject to the award will be available again for award under the Plan (except in the case of a stock option as to which a related SAR has been exercised). The Plan became effective as of December 1992 upon stockholder approval and will expire on December 31, 2002. Awards made under the Plan prior to its termination shall remain in effect until they shall have been exercised, satisfied or terminated as set forth in the Plan. The Board of Directors may suspend or terminate the Plan at any time prior to its expiration. Any amendment increasing the aggregate number of shares of Common Stock which may be issued pursuant to ISOs or making certain other material changes shall require stockholder approval. However, no plan amendment may adversely impact a previously granted award made under the Plan without consent of the grantee. Awards under the Plan (other than direct grants of stock or stock obtained as payment through exercise of a Plan award) may not be transferred except by will or the laws of descent and distribution. Stock obtained under the Plan may be subject to restrictions and recipients will be subject to reporting and disposition restrictions under Section 16 of the Exchange Act and related insider trading laws. Stock Options The Committee may grant options to purchase shares of Common Stock. Such options may be nonstatutory or nonqualified stock options and ISOs pursuant to Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The option price for any option may not be less than the par value of the Common Stock and ISOs granted under the Plan may not utilize an exercise price which is less than the fair market value of the Common Stock on the date of the grant. The option price may be paid in cash, in previously acquired Common Stock held for at least six (6) months and with a fair market value on the date of exercise equal to the option price, or by combination of cash and Common Stock. The Committee may also approve other forms of payment. Options may not be exercised sooner than one year or more than ten years from the date of grant. Stock Appreciation Rights The Committee may grant stock appreciation rights in conjunction with, or apart from, stock options. An SAR entitles the grantee to receive a payment from the Company equal to the excess of the fair market value of a share of Common Stock at the date of exercise over a specified price fixed by the Committee. The Committee may establish a maximum appreciation value when granting SARs. Payment for SARs may be made in cash, Common Stock, or a combination of both, at the discretion of the Committee. SARs may not be exercised sooner than one year or more than ten years from the date of grant. Restricted Stock The Committee may grant shares of restricted Common Stock under the Plan. The Committee may make the grant of restricted Common Stock subject to various conditions including the participant remaining 57 60 employed by the Company for a number of years. Participants holding shares of restricted stock may exercise full voting rights with respect to those shares but shall not be entitled to receive dividends and other distributions paid, if any, with respect to those shares during the period of restriction. A holder of restricted stock may not sell or otherwise transfer the Common Stock until the restrictions have lapsed or have been removed. Performance Units and Performance Shares The Committee may grant performance units and performance shares under the Plan. In such event, the Committee will establish a performance period over which corporate, business unit, or individual performance goals set by the Committee will be measured. At the end of the performance period, the performance units or performance shares will be paid out at their initial established values, increased or decreased, as the case may be, based upon performance above or below target levels. Payment may be made in cash, Common Stock or a combination thereof as determined by the Committee. Payment may be made in a lump sum or in installments at the Committee's discretion. In the event payment is deferred, interest or dividend equivalents may be paid to participants. Unrestricted Stock Unrestricted shares of Common Stock also may be awarded under the Plan as well as upon the exercise of stock options, in connection with distributions due on the exercise of stock appreciation rights or as payment on performance units or performance shares. Rights to Grants Upon Termination of Employment In the event a participant's employment is terminated by reason of death, disability, or retirement, vested options or other vested rights under the Plan may be exercised within twelve months of termination (three years in the event of retirement), or the remaining term of the option or right, whichever is shorter. If employment is terminated for any other reason, options or rights may be exercised for three months, or the remaining term of the option or right, whichever is shorter, except that participants who are terminated for cause immediately forfeit all exercise rights. In the event a participant dies, becomes disabled or retires after having reached normal retirement age for pension purposes, a portion of such person's granted shares of restricted stock will become free of restrictions, and a portion of such person's granted stock options, SARs, performance units or performance shares shall vest. Such portion shall be equal to the number of shares subject to such grants multiplied by the number of full months elapsed between the date of grant and the date of death, disability or retirement, divided by the number of full months of the period for which such grants were to have been restricted or to have remained unvested. The remaining portion of such grants shall be forfeited. In the event of retirement before normal retirement age, all such grants shall continue to be subject to their respective conditions, vesting schedules and restrictions, including any requiring continued employment. In the event a participant's employment is terminated involuntarily, other than for cause, the Committee may, in its discretion, waive any applicable forfeiture, vesting requirements or restrictions as it deems appropriate. 58 61 Summary Compensation Table The following table sets forth compensation information, cash and non-cash, for each of the Company's last three completed fiscal years with respect to the Chief Executive Officer and the four most highly compensated executive officers of the Company (collectively referred to as the "named executive officers") for the fiscal year ended December 31, 1992:
LONG-TERM COMPENSATION ----------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ------------------------------------ --------------------------- ---------- (A) (B) (C) (D) (E) (F) (G) (H) (I) OTHER RESTRICTED ANNUAL STOCK OPTIONS/ LTIP ALL OTHER NAME AND SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION PRINCIPAL POSITION YEAR ($) ($) ($)(1)(2) ($) (#) ($) ($)(1) - ---------------------- ---- -------- -------- ------------ ---------- -------- ---------- ------------ John M. Seidl, former 1992 $533,077(3) $ 99,000 $ -0- $ -0- -0- $1,653,385 $ 35,822(4)(5) Chairman and Chief 1991 450,000 90,000 -- -0- -0- 4,877,648(6) -- Executive Officer 1990 450,000 90,000 -- -0- -0- -0- -- A. Stephens Hutchcraft, 1992 400,000 -0- -0- -0- -0- 1,376,874 11,423(5) Jr., former President 1991 365,000 73,000 -- -0- -0- 3,832,437(6) -- and Chief Operating Officer 1990 365,000 133,000 -- -0- -0- -0- -- Anthony R. Pierno, Vice 1992 302,275 265,000(8) -0- -0- -0- -0- 50,123(9) President and General 1991 -- -- -- -- -- -- -- Counsel(7) 1990 -- -- -- -- -- -- -- John T. La Duc, Vice 1992 225,000 45,000 -0- 1,428,967(10)(11) 10,000(12) 192,698(13) 8,469(4)(5) President and Chief 1991 195,000 53,500 -- -0- -0- 1,000,000(6) -- Financial Officer 1990 186,250 38,000 -- -0- -0- -0- -- Joseph A. Bonn, Vice 1992 210,000 42,000 -0- 1,428,967(10)(11) -0- 195,697(13) 96,248(4)(5) President, Planning 1991 197,500 47,000 -- -0- -0- 1,000,000(6) -- and Administration 1990 185,000 37,000 -- -0- -0- -0- --
- --------------- (1) Pursuant to the transitional rules effective October 21, 1992, these amounts are excluded for the Company's 1991 and 1990 fiscal years. (2) Excludes perquisites and other personal benefits because the aggregate amount of such compensation is the lesser of either $50,000 or 10% of the total of annual salary and bonus reported for the named executive officer. (3) Includes payment of $38,077 representing accrued vacation not taken upon his resignation on December 31, 1992, in addition to his base salary of $495,000. (4) Includes moving related items of $30,111, $3,969 and $76,684 for Messrs. Seidl, La Duc and Bonn, respectively. (5) Includes $5,711, $8,000, $4,500 and $4,200 under the Kaiser Savings Plan (as defined below) to Messrs. Seidl, Hutchcraft, La Duc and Bonn, respectively. Also includes $3,423 credited to Mr. Hutchcraft under the Kaiser Supplemental Benefits Plan described below. Includes $15,364 loan forgiveness granted to Mr. Bonn in March 1992. (6) Pursuant to 1991 amendments, LTIP participants were permitted to elect an accelerated payment option pursuant to which they could receive in December 1991 and April 1992 amounts approximating 95% and 5% respectively of the vested portion of their LTIP account balances (excluding bonuses previously paid), subject to certain maximum dollar limitations. Without such accelerated payment option and subject to certain reductions and limitations, participants were generally entitled to receive the vested portion of their LTIP account balances on the earlier to occur of (a) termination of their employment, (b) termination of the LTIP if prior to December 31, 1993, or (c) April 10, 1994. (Notes continued on following page) 59 62 (7) Mr. Pierno receives his compensation from MAXXAM; however the Company reimburses MAXXAM for certain allocable costs associated with the performance of services for the Company by such executive officer. The table reflects such officer's total compensation rather than an allocated part of such compensation. Mr. Pierno's compensation for 1991 and 1990 is not included since he was not an executive officer of the Company at any time during such years. (8) Pursuant to Mr. Pierno's employment agreement, his personal loans from MAXXAM outstanding on the date of such agreement are forgiven at the rate of $15,000 per year. This amount is included as part of his bonus compensation. See "Certain Transactions" for a discussion of such personal loans. (9) Represent matching contributions by MAXXAM under the MAXXAM 401-K savings plan of $4,782, and $45,341 accrued in respect of MAXXAM's revised capital accumulation plan pursuant to which, in general, benefits vesting 10% annually are payable upon termination of employment with MAXXAM. (10) Represents restricted stock granted under the Plan effective December 1992. The Plan was approved by the stockholders of the Company and KACC in May and June 1993, respectively. See "-- New Plan Benefits Table." (11) At the end of fiscal year 1992, Messrs. Bonn and La Duc each owned 13,145 shares of restricted common stock of the Company valued at approximately $112,245. (12) Represents SARs Mr. La Duc received from MAXXAM with respect to MAXXAM's common stock. (13) See "-- The Kaiser 1993 Omnibus Stock Incentive Plan" regarding the election by LTIP participants to receive payment of their LTIP account balances. Without such election opportunity and subject to certain reductions and limitations, participants were generally entitled to receive the vested portion of their LTIP account balances on the earlier to occur of (a) termination of their employment, (b) termination of the LTIP if prior to December 31, 1996, or (c) April 10, 1997. Pursuant to such election, these amounts were paid half in cash and half in restricted shares of Common Stock of the Company. Option/SAR Grants Table The following table sets forth certain information concerning options to purchase Common Stock granted in fiscal year 1992 to any of the named executive officers:
POTENTIAL REALIZABLE VALUE AT ASSUMED INDIVIDUAL GRANTS ANNUAL RATES OF - -------------------------------------------------------------------------------------- STOCK PRICE (C) APPRECIATION FOR % OF TOTAL OPTION TERM OPTIONS/SARS (D) -------------------- (B) GRANTED TO EXERCISE OR (E) (A) OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION (F) (G) NAME GRANTS (#) 1992(1) ($/SHARE) DATE 5% ($) 10% ($) - -------------------------- ------------ ------------ ----------- ---------- -------- -------- John T. La Duc............ 10,000 12.5% $28.00 12/02/02 $176,090 $446,248
The SARs set forth in the above table were granted on December 2, 1992 to Mr. La Duc under MAXXAM's 1984 Phantom Share Plan. The SARs are exercisable for cash only and vest with respect to 20% on the anniversary date of the grant and an additional 20% on each anniversary date thereafter until fully vested. 60 63 Option/SAR Exercises and Fiscal Year End Value Table The table below provides information on an aggregated basis concerning each exercise of stock options (or tandem SARs) and freestanding SARs, if any, during the fiscal year ended December 31, 1992 by each of the named executive officers, of which there was only one, and the 1992 fiscal year-end value of unexercised options and SARs.
(A) (B) (C) (D) (E) VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS SHARES AT YEAR-END (#) AT FISCAL YEAR-END ($) ACQUIRED ON VALUE ---------------------------- ---------------------------- NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------- ------------ ------------ ----------- ------------- ----------- ------------- John T. La Duc........... -- -- -- 10,000 -0- -0- Anthony R. Pierno........ -- -- 14,000 19,000 -0- -0-
- --------------- Pension Plan Table KACC maintains a qualified, defined-benefit Retirement Plan (the Kaiser Retirement Plan ) for salaried employees of KACC and co-sponsoring subsidiaries who meet certain eligibility requirements.
YEARS OF SERVICE ANNUAL -------------------------------------------------------- REMUNERATION 15 20 25 30 35 - ------------ -------- -------- -------- -------- -------- $125,000........................ $ 28,125 $ 37,500 $ 46,875 $ 56,250 $ 65,625 150,000........................ 33,750 45,000 56,250 67,500 78,750 175,000........................ 39,375 52,500 65,625 78,750 91,875 200,000........................ 45,000 60,000 75,000 90,000 105,000 225,000........................ 50,625 67,500 84,375 101,250 118,125 250,000........................ 56,250 75,000 93,750 112,500 131,250 300,000........................ 67,500 90,000 112,500 135,000 157,500 400,000........................ 90,000 120,000 150,000 180,000 210,000 450,000........................ 101,250 135,000 168,750 202,500 236,250 500,000........................ 112,500 150,000 187,500 225,000 262,500 600,000........................ 135,000 180,000 225,000 270,000 315,000 720,000........................ 162,000 216,000 270,000 324,000 378,000
The foregoing table shows estimated annual retirement benefits payable under the terms of the Kaiser Retirement Plan to participants with the indicated years of credited service without reduction for the limitations imposed by the Code on qualified plans and before adjustment for the social security offset. KACC has adopted a Supplemental Benefits Plan under which certain participants in the Kaiser Retirement Plan will receive the benefits described in the summary of the Supplemental Benefits Plan set forth below. The estimated annual retirement benefits shown are based upon the assumptions that current Kaiser Retirement Plan provisions remain in effect, that the participant retires at age 65, and that the retiree receives payments based on a straight life annuity for his lifetime. Messrs. Seidl, Hutchcraft, La Duc and Bonn had 3.9, 36.8, 23.3 and 25.5 years of credited service, respectively, on December 31, 1992. Monthly retirement benefits, except for certain minimum benefits, are determined by multiplying years of credited service (not in excess of 40) by the difference between 1.50% of average monthly compensation for the highest base period (of 36, 48 or 60 consecutive months, depending upon compensation level) in the last 10 years of employment and 1.25% of monthly primary social security benefits. 61 64 The compensation covered by the Kaiser Retirement Plan includes base salary and bonus payments. No named executive officer had compensation covered by the Kaiser Retirement Plan which differed by more than 10% from that set forth in the Summary Compensation Table (column (c) plus column (d) thereof). Participants are entitled to retire and receive pension benefits, unreduced for age, upon reaching age 62 or after 30 years of credited service. Full early pension benefits (without adjustment for social security offset prior to age 62) are payable to participants who are at least 55 years of age and have completed 10 or more years of pension service (or whose age and years of pension service total 70) and who have been terminated by KACC or an affiliate for reasons of job elimination or partial disability. Participants electing to retire prior to age 62 who are at least 55 years of age and have completed 10 or more years of pension service (or whose age and years of pension service total at least 70) may receive pension benefits, unreduced for age, payable at age 62 or reduced benefits payable earlier. Participants who terminate their employment after five years or more of pension service, or after age 55 but prior to age 62, are entitled to pension benefits, unreduced for age, commencing at age 62 or actuarially reduced benefits payable earlier. For participants with five or more years of pension service or who have reached age 55 and who die, the Kaiser Retirement Plan provides a pension to their eligible surviving spouses. Upon retirement, participants may elect among several payment alternatives including, for most types of retirement, a lump-sum payment. Kaiser Supplemental Benefits Plan KACC maintains an unfunded, non-qualified Supplemental Benefits Plan (the "Kaiser Supplemental Benefits Plan"), the purpose of which is to restore benefits which would otherwise be paid from the Kaiser Retirement Plan or the Supplemental Savings and Retirement Plan, a qualified Section 401(k) plan (the "Kaiser Savings Plan"), were it not for the limitations imposed by the Code. Participation in the Kaiser Supplemental Benefits Plan includes all employees of KACC and its subsidiaries whose benefits under the Kaiser Retirement Plan and Kaiser Savings Plan are likely to exceed the maximum dollar limitations imposed by the Code. Eligible participants are entitled to receive the equivalent of the Kaiser Retirement Plan and Kaiser Savings Plan benefits which they may be prevented from receiving under those plans because of Code limitations. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Until his resignation on December 31, 1992, Mr. Seidl held the positions of Chairman and Chief Executive Officer of the Company and KACC. He was employed pursuant to an employment agreement which commenced February 1, 1989 and provided for an annual salary of $450,000, or such higher rate as might be mutually agreed to by Mr. Seidl, the Company and KACC. Mr. Seidl was eligible to participate in the employee benefit plans and fringe benefit programs maintained by the Company and KACC as from time to time in effect applicable to senior executives of the Company and KACC; provided that Mr. Seidl was eligible to participate in any bonus program maintained by the Company or KACC only to the extent participants in the LTIP were also eligible for such bonus program participation. In general, Mr. Seidl was entitled to participate in the LTIP in accordance with the terms of the LTIP. In light of his resignation, Mr. Seidl and KACC entered into an agreement on December 23, 1992, pursuant to which Mr. Seidl received $1,000,000 on or before December 31, 1992 (the "December Payment") in payment of benefits otherwise due him on or before April 10, 1993. In consideration thereof, Mr. Seidl agreed that the payment of benefits otherwise due him on or before April 10, 1993 would be reduced by $1,000,000 plus an amount equal to interest on $1,000,000 from the date of the December Payment to April 10, 1993 at the greater of (i) 6.125% or (ii) the rate of interest applicable on April 1, 1992 to borrowings under the Credit Agreement (as defined below under "Certain Transactions"). In June 1990, Mr. Seidl also entered into an agreement with MAXXAM related to his move to Houston, Texas, which was amended as of February 1991 and May 1991, and subsequently assigned to KACC. The agreement provided for reimbursement to Mr. Seidl for certain expenses incurred in connection with such move. This reimbursement amount for 1992 is reflected in the Summary Compensation Table. 62 65 Mr. Hutchcraft retired from the Company effective December 31, 1993. Mr. Hutchcraft's prior employment agreement provided for a 1993 base salary of $450,000 and for termination of his participation in the LTIP as of December 31, 1992, with payment of his estimated account balance thereunder as of December 31, 1992, with any adjustment from estimated to actual balance determined after preparation of audited financial statements for 1992, to be made on or about April 10, 1993. Pursuant to this agreement, Mr. Hutchcraft was paid $1,358,000 on December 31, 1992, and $18,874 on April 8, 1993, on account of his LTIP account balance. In light of other compensation provisions in his agreement, Mr. Hutchcraft received no bonus in 1992. Prior to the time of his election as Chairman of the Board and Chief Executive Officer of the Company, Mr. Hutchcraft served as Chief Operating Officer in addition to President of the Company and his compensation was established pursuant to the base salary program and bonus plan for executives and managers of the Company generally and based on those same performance factors. The compensation set forth in Mr. Hutchcraft's agreement was also established in recognition of his previous compensation history, in anticipation of his additional responsibilities as Chairman of the Board, and his potential leadership qualities and industry expertise widely recognized in the Company and in the aluminum industry and also as an incentive to Mr. Hutchcraft to continue in the employ of the Company. On April 1, 1993 the Company and KACC entered into an employment agreement with Mr. George T. Haymaker, Jr. pursuant to which Mr. Haymaker joined the Company and KACC in May 1993 as President and Chief Operating Officer. Mr. Haymaker's agreement has a term of five (5) years. Pursuant to the agreement, Mr. Haymaker was named Chairman of the Board and Chief Executive Officer of the Company and KACC upon Mr. Hutchcraft's retirement on December 31, 1993. Mr. Haymaker's employment agreement provides for a base salary of $450,000 per annum commencing upon his joining the Company and KACC, and a bonus target of 50% of his salary beginning fiscal year 1994. The agreement further provides that Mr. Haymaker will not be paid a bonus for calendar year 1993. Any bonus actually awarded for 1994 or thereafter could be less or greater than the target level, depending upon corporate performance as compared to corporate plan objectives usually established in January of each year, as well as individual performance. Under the agreement, Mr. Haymaker received an initial award under the Plan of options to purchase up to 100,000 shares of Common Stock at its fair market value on the date of the award. Such options are to vest 20% per year for a period of five (5) years. See "-- New Plan Benefits Table" above. In the event of a change of control of the Company or KACC which within one year thereafter adversely affects Mr. Haymaker's title, position, duties, responsibilities or compensation, Mr. Haymaker's employment agreement provides that he may elect to be deemed terminated without cause, and therefore, entitled to a severance payment equal to two times his base annual salary. Additionally, in the event of such termination, Mr. Haymaker's options for 100,000 shares of Common Stock shall fully vest. Mr. Pierno and MAXXAM entered into a five-year employment agreement effective as of March 8, 1990. Pursuant to the terms of the agreement, Mr. Pierno was entitled during the first six months of 1993 to a base salary of $321,232 per year, which amount is increased each July by an amount not less than the increase in the Consumer Price Index for that year. The agreement provided for a bonus for the year 1992 in an amount not less than 75% and not more than 125% of Mr. Pierno's then base salary. Although the agreement specifies no bonus percentage for the years 1993 and 1994, in the agreement MAXXAM expresses an intent to pay a bonus in the same percentage range. The agreement also entitles Mr. Pierno to participate in employee benefit plans and programs applicable to senior executives of MAXXAM. Mr. La Duc held the positions of Vice President and Chief Financial Officer of KACC and the Company and Senior Vice President and Chief Financial Officer of MAXXAM pursuant to an employment agreement among MAXXAM, the Company and Mr. La Duc, which commenced September 26, 1990, and expired December 31, 1993. The employment agreement provides for a base salary of $225,000 with any increases at the discretion of the Company and MAXXAM. Currently, Mr. La Duc continues in his employment in such positions with MAXXAM, KACC and the Company. Subject to limitations pursuant to the LTIP, an annual bonus may be paid under the terms of KACC's bonus plan. Mr. La Duc is eligible to participate in the employee benefit plans and programs maintained by the Company and KACC, as from time to time in effect, applicable to senior executives of KACC and the Company, including, but not limited to, the LTIP and, if approved by the stockholders, the Plan. 63 66 Mr. La Duc is entitled to reimbursement by the Company of certain moving expenses incurred in connection with his relocation to Houston, Texas, and to other benefits under the Company's executive relocation policy. The amount reimbursed during 1992 pursuant to this arrangement is related in the Summary Compensation Table. The Company and MAXXAM entered into an employment agreement with Mr. Joseph A. Bonn, Vice President, Planning and Administration of the Company and a Vice President of KACC. The employment agreement has a term of three years ending June 30, 1994, and provides for a base salary of $210,000, which may increase at the discretion of the Company and MAXXAM. Subject to limitations pursuant to the LTIP, an annual bonus may be paid under the terms of the KACC bonus plan. Any annual bonus amounts payable under the employment agreement will be reduced by the amount of any directorship fees (during the year for which the annual bonus is paid) received by Mr. Bonn in respect of board memberships held at the request of the Company or MAXXAM. Mr. Bonn is eligible to participate in the employee benefit plans and programs maintained by the Company, as from time to time in effect, applicable to senior executives of the Company, including, but not limited to, the LTIP and, if approved by stockholders, the Plan. Mr. Bonn subsequently relocated to Oakland, California. Pursuant to an agreement dated December 20, 1991, KACC agreed to reimburse Mr. Bonn for reasonable and necessary moving expenses from Texas to California (including the expense of moving property, travel costs, and temporary living expenses) in accordance with KACC's relocation policy; to reimburse Mr. Bonn for the reasonable amount of net out-of-pocket loss, if any, incurred in the termination of construction work in process in connection with Mr. Bonn's Texas residence and incurred in the resale of the land upon which the residence was being constructed (including reasonable transaction costs and expenses in connection with the purchase and sale of the land and improvements, construction termination fees, architectural, engineering and drafting fees and expenses, lot clearing costs, and the like); and to reimburse Mr. Bonn for the reasonable amount of the net out-of-pocket loss, if any, incurred on the sale, cancellation or forfeiture of a country club membership acquired in Texas. This reimbursement amount for 1992 is reflected in the Summary Compensation Table. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of the Compensation Committee of the Board of Directors of the Company was, during the 1992 fiscal year, an officer or employee of the Company or any of its subsidiaries, or was formerly an officer of the Company or any of its subsidiaries or, other than Mr. Levin, had any relationships requiring disclosure by the Company under Item 404 of Regulation S-K. Mr. Levin served on the Compensation Committee and Board of both the Company and KACC during 1992. Mr. Levin is also a partner in the law firm of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, which provided legal services for the Company and its subsidiaries during 1992. During the Company's 1992 fiscal year, no executive officer of the Company served as (i) a member of the Committee (or other board committee performing equivalent functions) of another entity, one of whose executive officers served on the Company's Compensation Committee, (ii) a director of another entity, one of whose executive officers served on the Company's Compensation Committee, or (iii) a member of the compensation committee (or other board committee performing equivalent functions) of another entity, one of whose executive officers served as a director of the Company. 64 67 CERTAIN TRANSACTIONS For periods through June 30, 1993, the Company and its subsidiaries (including KACC) were members of an affiliated group of corporations (an "Affiliated Group") within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"), of which MAXXAM is the common parent corporation (the "MAXXAM Tax Group"). Effective July 1, 1993, the Company and its subsidiaries are no longer members of the MAXXAM Tax Group (the "Deconsolidation") but are members of a new Affiliated Group of which the Company is the common parent corporation (the "New Kaiser Tax Group"). 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 Tax Group consolidated Federal income tax return (the "MAXXAM 1993 Tax Return"). For periods beginning on and after July 1, 1993 (the "Post Deconsolidation Periods"), the taxable income and loss and tax credits for the Company and its subsidiaries will be included in the consolidated Federal income tax returns to be filed for the New Kaiser Tax Group. The Company obtained the approval of the Secretary of the Treasury in order to file a consolidated Federal income tax return for the New Kaiser Tax Group for the period ended December 31, 1993. As a consequence of the Deconsolidation, the KACC Tax Allocation Agreement (as defined) and the Company Tax Allocation Agreement (as defined) (collectively, the "Tax Allocation Agreements") terminated pursuant to their terms, effective with respect to Post Deconsolidation Periods. The provisions of the Tax Allocation Agreements will continue to govern periods ending before the date of the Deconsolidation (the "Pre Deconsolidation Periods"). Therefore, payments or refunds may still be required by or payable to the Company or KACC under the Tax Allocation Agreements for Pre Deconsolidation Periods due to the final resolution of audits, amended returns and related matters with respect to such Pre Deconsolidation Periods. To the extent the New Kaiser Tax Group generates unused tax losses or tax credits in Post Deconsolidation Periods, such amounts will not be available to obtain refunds of amounts paid by the Company or KACC to MAXXAM for Pre Deconsolidation Periods pursuant to the Tax Allocation Agreements. It is anticipated that such losses and credits will be carried forward to offset future Federal income taxes payable by the Company. Any unused tax attribute carryforwards existing as of the date of the Deconsolidation under the terms of the Tax Allocation Agreements will be eliminated and will not be available to offset Federal income tax liabilities of the New Kaiser Tax Group for Post Deconsolidation Periods. Upon the filing of the MAXXAM 1993 Tax Return, the tax attribute carryforwards of the MAXXAM Tax 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 anticipated that the amounts of such tax attribute carryforwards apportioned to the New Kaiser Tax Group will approximate or exceed the amounts of tax attribute carryforwards eliminated under the Tax Allocation Agreements. Although the amounts of tax attribute carryforwards apportioned to the New Kaiser Tax Group will be determined as of December 31, 1993, they will be available as of the date of the Deconsolidation, subject to certain limitations, to reduce Federal income taxes payable by the New Kaiser Tax Group for Post Deconsolidation Periods. In 1989, KACC and MAXXAM entered into a tax allocation agreement (the "KACC Tax Allocation Agreement"). Pursuant to the terms of the KACC Tax Allocation Agreement, MAXXAM pays any consolidated Federal income tax liability for the MAXXAM Tax Group. KACC is liable to MAXXAM for the Federal income tax liability of KACC and its subsidiaries (collectively, the "KACC Subgroup") computed as if the KACC Subgroup were a separate Affiliated Group which was never affiliated with the MAXXAM Tax Group (taking into account all limitations under the Code and regulations applicable to the KACC Subgroup), except that the KACC Subgroup excludes interest income received or accrued on an intercompany note issued by the Company in connection with a financing consummated in December 1989 (the "KACC Subgroup's Separate Income Tax Liability"). To the extent such calculation resulted in a net operating loss or a net capital loss or credit which the KACC Subgroup could have carried back to a prior taxable period under the principles of Sections 172 and 1502 of the Code, MAXXAM pays to KACC an amount equal to the tax refund to which KACC would have been entitled (but not in excess of the aggregate net amount previously paid by KACC to MAXXAM for the current year and the three prior years). If such separately calculated net operating loss or net capital loss or credit of the KACC Subgroup can not be carried back to a prior taxable year of the KACC Subgroup for which the KACC Subgroup paid its separate tax 65 68 liability to MAXXAM, the net operating loss or net capital loss or credit becomes a loss or credit carryover of the KACC Subgroup to be used in computing the KACC Subgroup's Separate Income Tax Liability for future taxable years. The same principles were applied to any consolidated or combined state or local income tax returns filed by the MAXXAM Tax Group with respect to KACC and its subsidiaries. Although, under Treasury regulations, all members of the MAXXAM Tax Group, including the members of the KACC Subgroup, are severally liable for the MAXXAM Tax Group's Federal income tax liability for all of 1993 and applicable prior periods, under the KACC Tax Allocation Agreement, MAXXAM indemnifies each KACC Subgroup member for all Federal income tax liabilities relating to taxable years during which such KACC Subgroup member was a member of the MAXXAM Tax Group, except for payments required under the KACC Tax Allocation Agreement. During 1992, under the KACC Tax Allocation Agreement, KACC made a payment to MAXXAM of $28.0 million in respect of the year ended December 31, 1991. The eighth amendment to the Credit Agreement, dated as of January 7, 1993 (the "Eighth Amendment"), prohibits the payment by KACC to MAXXAM of any additional amounts due under the KACC Tax Allocation Agreement until December 15, 1994. KACC estimates that it owes MAXXAM approximately $8.7 million in respect of the year ended December 31, 1992. Inasmuch as KACC will record tax losses in the period January 1, 1993 through June 30, 1993, and that such losses will be carried back to prior taxable periods under the terms of the KACC Tax Allocation Agreement, it is estimated that MAXXAM owes KACC approximately $20.0 million with respect to such losses. In 1991, MAXXAM and the Company entered into a tax allocation agreement (the "Company Tax Allocation Agreement"). Pursuant to the terms of the Company Tax Allocation Agreement, the Federal income tax liability of the Company and its subsidiaries (collectively, the "Company Subgroup") is computed using the same principles used in the KACC Tax Allocation Agreement to determine the KACC Subgroup's income tax liability. To the extent such tax liability (the "Company's Separate Income Tax Liability") for any applicable period exceeds the KACC Subgroup's Separate Income Tax Liability for such period, the Company is obligated to pay the amount of such difference to MAXXAM. To the extent that the Company's Separate Income Tax Liability for any applicable period is less than the KACC Subgroup's Separate Income Tax Liability for such period, MAXXAM is obligated to pay the amount of such difference to the Company (but not in excess of the aggregate net amount previously paid by the Company and KACC to MAXXAM for the current year and the three prior years). The foregoing principles are also applied to any consolidated or combined state or local income tax returns filed by the MAXXAM Tax Group with respect to the Company. While the Company is severally liable for the MAXXAM Tax Group's Federal income tax liability for all of 1993 and applicable prior periods, pursuant to the Company Tax Allocation Agreement, MAXXAM indemnifies the Company according to the same principles as those applied to KACC Subgroup members under the KACC Tax Allocation Agreement. During 1992, under the Company Tax Allocation Agreement, MAXXAM made a payment to the Company of $45,000 in respect of the year ended December 31, 1991. The Company estimates the amounts due from MAXXAM in respect of the year ended December 31, 1992 and for the period January 1, 1993, through the date of the Deconsolidation to be approximately $84,000 and $42,000, respectively. Under the current consolidated return regulations, the Deconsolidation caused certain tax basis adjustments and the recognition of certain types of taxable income (including amounts that were previously deferred), none of which the Company believes to be material. On June 30, 1993, the Company and KACC entered into a tax allocation agreement (the "New Tax Allocation Agreement") effective for Post Deconsolidation Periods. The terms of the New Tax Allocation Agreement are similar, in all material respects, to those of the KACC Tax Allocation Agreement except that KACC is liable to the Company. The Company and MAXXAM have an arrangement pursuant to which they reimburse each other for certain allocable costs associated with the performance of services by their respective employees, and KACC also pays to MAXXAM amounts in respect of directors' fees for directors of KACC who are not employees of KACC and who are directors of MAXXAM. During 1992 and during the first nine months of 1993, KACC 66 69 paid a total of approximately $2.0 million and $1.5 million, respectively, to MAXXAM pursuant to such arrangements, and MAXXAM paid approximately $1.4 million and $0.6 million, respectively, to KACC pursuant to such arrangements. As a condition to the effectiveness of the Eighth Amendment, KACC issued the MAXXAM Note in the principal amount of $15.0 million, which evidenced a cash loan in the amount of $15.0 million made to KACC. On June 30, 1993, the MAXXAM Note was exchanged for 2,132,950 $.65 Depositary Shares. The Company made a capital contribution of the MAXXAM Note to KACC, which resulted in the extinguishment of the MAXXAM Note. The Company paid cash dividends on its Common Stock in the amount of $2.9 million in each quarter of 1992. In the event the Company pays any distributions to its holders of Common Stock (including the payment of regular quarterly cash dividends), the Eighth Amendment requires MAXXAM and any subsidiary of MAXXAM to use the entire proceeds of any such distributions received by MAXXAM or any subsidiary of MAXXAM to purchase a PIK Note from KACC. On December 15, 1992, KACC issued a PIK Note to a subsidiary of MAXXAM in the principal amount of $2.5 million, representing the entire amount of the dividend received by such subsidiary in respect of the shares of the Company's Common Stock which it owns. 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. KACC is not required to make any payment of principal of or interest on the PIK Note prior to June 30, 1995. However, to the extent not prohibited by the Credit Agreement, KACC may be required to prepay the PIK Note upon demand. The Credit Agreement currently prohibits the payment of principal and interest on the PIK Note. Additional PIK Notes issued by KACC, if any, will have terms substantially similar to the terms of the PIK Note described herein. In February 1993, MAXXAM entered into a commercial guaranty of payment (the "Guaranty") of a promissory note dated January 28, 1993, in the original principal amount of $150,000 issued by Mr. Anthony R. Pierno, Vice President and General Counsel of the Company, to Charter National Bank -- Houston. The Guaranty is subject to an agreement between MAXXAM and Mr. Pierno that any payment by MAXXAM under the Guaranty shall be offset in like amount plus interest at 12% per annum from the date of payment on the Guaranty to the date of payment to MAXXAM by Mr. Pierno. Such offset may be made from any payments due Mr. Pierno from MAXXAM which lawfully may be the subject of such offset, including any payment under any compensation arrangement or employee benefit plan. The Guaranty was entered into by MAXXAM for the convenience of Mr. Pierno. Pursuant to the terms of Mr. Pierno's employment agreement, personal loans of Mr. Pierno outstanding on the date of the agreement are forgiven at the rate of $15,000 per year beginning March 8, 1991, with any remaining balance being due and payable upon Mr. Pierno's termination of employment. At the time of the agreement, MAXXAM had loaned an aggregate of $150,000 at 6% interest to Mr. Pierno. The principal balance on such loans as of November 30, 1993 was $105,000. Such loans are payable on demand, require monthly interest payments and are secured by real estate owned by Mr. Pierno. The agreement also provided for up to an additional $200,000 in loans to Mr. Pierno bearing interest at 6% per annum, with interest being payable monthly and principal being due December 15, 1994 (with prepayments due upon the exercise by Mr. Pierno of any stock appreciation rights granted pursuant to the employment agreement). All of such amount has been borrowed by Mr. Pierno. Mr. Levin, a director of the Company, is a partner of the law firm of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, which provides legal services for the Company and its subsidiaries. See "Legal Matters." 67 70 DESCRIPTION OF PRINCIPAL INDEBTEDNESS The New Credit Agreement. On January 24, 1994, KACC entered into the Commitment Letter with Bank of America and BA which contains the principal terms and conditions with respect to the New Credit Agreement. The expected terms and conditions of the New Credit Agreement are summarized below. A form of the New Credit Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. Bank of America and BA have committed, subject to the terms and conditions of the Commitment Letter, to provide the full $250.0 million of the New Credit Agreement. - Facility. The New Credit Agreement will consist of a $250.0 million five-year secured, revolving line of credit. KACC will be able to borrow under the facility by means of revolving credit advances, swingline advances (up to $25.0 million) and letters of credit in an aggregate amount equal to the lesser of $250.0 million or a borrowing base consisting of 85% of eligible accounts receivable (as defined) plus 65% of eligible inventory (as defined) (with availability against such eligible inventory not to exceed $175.0 million at any one time). - Interest Rates. Loans under the New Credit Agreement will bear interest at a rate per annum, at KACC's election, equal to (i) a Reference Rate (as defined) plus 1.50% or (ii) LIBOR (as defined) plus 3.25%. After June 30, 1995, the interest rate margins applicable to borrowings under the New Credit Agreement may be reduced (non-cumulatively), based upon KACC's Interest Coverage Ratio (as defined) ("ICR"), as follows: ICR 1.25, reduction of 0%; 1.25 ICR 1.50, reduction of 0.50%; 1.50 ICR 2.00, reduction of 1.00%; and ICR 2.00, reduction of 1.50%. ICR will be defined as the ratio of (i) EBITDA (as defined), less Adjusted Capital Expenditures (as defined), to (ii) adjusted interest expense. - Guaranties. The New Credit Agreement will be unconditionally guaranteed by the Company and by all significant subsidiaries of KACC which are subsidiary guarantors under the Credit Agreement. - Security. The New Credit Agreement will be secured by substantially the same assets securing the Credit Agreement, and will include a pledge of the stock of KACC and its material subsidiaries and the grant of a lien on all now existing and hereafter acquired receivables, inventory, intangibles and certain other assets of the Company, KACC and its subsidiaries. However, the New Credit Agreement will not be secured by the Company's Gramercy alumina refinery. - Payments and Fees. The New Credit Agreement will permit repayments of base rate advances in minimum amounts of $1.0 million and prepayments of LIBOR advances in minimum amounts of $5.0 million. Lenders will be entitled to receive a risk participation fee equal to 3% per annum on their respective share of the total amount of letters of credit outstanding, subject to reduction under certain circumstances. A commitment fee equal to 0.50% per annum will be payable, quarterly in arrears, on the unutilized portion of the New Credit Agreement. - Covenants. The New Credit Agreement will contain certain affirmative and negative covenants including, but not limited to, covenants relating to (i) the incurrence of liens and additional indebtedness, (ii) the making of restricted payments and the payment of fees to MAXXAM, (iii) Asset Dispositions (as defined), (iv) the sale of accounts receivable, (v) the maximum permitted amount of capital expenditures each year, (vi) mergers, acquisitions and investments, (vii) leases and sale-leasebacks, (viii) transactions with affiliates, and (ix) the maintenance of a minimum net worth and ICR. The covenant relating to the maintenance of the ICR will not become applicable under the New Credit Agreement until March 31, 1996. In addition, the New Credit Agreement will not permit the Company or KACC to pay any dividends on their common stock. The New Credit Agreement will (i) prohibit redemptions or repurchases of the Senior Notes, including, without limitation, purchases of Senior Notes that might otherwise be required pursuant to the provisions of the Senior Note Indenture, (ii) prohibit, without the written consent of the Required Lenders (as defined in the New Credit Agreement), amendments or supplements to the Senior Note Indenture and (iii) prohibit, with certain exceptions, the taking of action, or permitting to exist any condition, which would require (a) any subsidiary of the Company (other than the initial Subsidiary Guarantors under the Senior Note Indenture) to 68 71 guarantee the Senior Notes or (b) the Company or any of its Subsidiaries to provide collateral in respect of the Senior Notes. - Events of Default. The New Credit Agreement will contain certain events of default substantially similar to the events of default contained in the Credit Agreement, including, but not limited to, payment defaults, cross defaults to other indebtedness, covenant defaults, breach of representation, bankruptcy and similar events, ERISA violations, any requirements to repurchase the Senior Notes and breaches of collateral documents. - Conditions to Initial Funding. The obligations of Bank of America and BA under the New Credit Agreement will be subject to certain conditions, including, but not limited to the requirement that the Company and KACC shall have raised not less than $250.0 million aggregate gross proceeds of new capital pursuant to the offering of shares of PRIDES and the Senior Notes. Issuance of Senior Notes. In connection with the offering of the PRIDES hereby, KACC is concurrently offering $225.0 million aggregate principal amount of Senior Notes pursuant to a separate registration statement filed with the Commission. The following is a summary of certain material terms of the Senior Notes expected to be contained in the Indenture governing the Senior Notes (the "Senior Note Indenture"). A form of the Senior Note Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. - Ranking. The Senior Notes will represent senior, unsecured obligations of KACC, ranking senior in right and priority of payment to all indebtedness of KACC that by its terms is expressly subordinated to the Senior Notes. The Senior Notes will rank pari passu in right and priority of payment with all senior indebtedness, including indebtedness under the New Credit Agreement. - Guarantee. The obligations of KACC with respect to the Senior Notes will be unconditionally guaranteed, jointly and severally, on a senior, unsecured basis by certain subsidiaries of KACC. - Optional Redemption. The Senior Notes will be redeemable at the option of KACC, in whole or in part, at any time after February 15, 1998, at the redemption prices set forth in the Senior Notes, plus accrued and unpaid interest to the redemption date. -Offer to Purchase the Senior Notes. Upon a Change of Control (as defined in the Senior Note Indenture), KACC will be required to make an offer to purchase the Senior Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. In addition, KACC will be required to make an offer to purchase the Senior Notes under certain circumstances if the Company has available Net Cash Proceeds (as defined in the Senior Note Indenture) as a result of Asset Sales (as defined in the Senior Note Indenture). Any Change of Control, and any repurchase of the Notes upon a Change of Control or Asset Sale, would constitute an event of default under the New Credit Agreement. - Covenants. The Senior Note Indenture will contain certain affirmative and negative covenants, including, but not limited to, covenants imposing limitations on: (i) Asset Sales, (ii) transactions with affiliates, (iii) restricted payments and restricted investments, (iv) the incurrence of indebtedness and preferred stock, (v) the granting of liens to secure indebtedness on U.S. Fixed Assets (as defined), (vi) the transfer of assets to entities that are not guarantors of the Senior Notes, (vii) mergers and consolidations and (viii) dividend and other payment restrictions affecting subsidiaries of KACC. - Events of Default. The Senior Note Indenture will contain certain events at default, including, but not limited to, (i) payment defaults, (ii) covenant defaults, (iii) cross payment defaults and cross accelerations to other indebtedness, (iv) certain final judgments against KACC and its significant subsidiaries, (v) bankruptcy and similar events and (vi) any guarantee of the Senior Notes being held invalid or unenforceable or ceasing to be in full force and effect, except in accordance with the Senior Note Indenture. Existing Indebtedness. In December 1989, the Company and KACC entered into the Credit Agreement, and KACC issued $350.0 million of the 14 1/4% Notes (collectively, the "Financing"). The net proceeds of the Financing, together with the $180.0 million initial payment received by the Company in respect of a forward alumina sales transaction ("FAST") and other available funds, were used to retire $925.0 million 69 72 principal amount of Increasing Rate Notes of the Company, to prepay certain indebtedness of KACC, to pay related fees and expenses, and to pay a $50.0 million dividend to a subsidiary of MAXXAM. The Credit Agreement consisted of a $350.0 million five-year revolving credit facility, a $125 million five-year term loan, a $75.0 million two-year bridge loan, and a $172.0 million three and one-half year standby letter of credit which secured the advance payment on the FAST. As of September 30, 1993, the bridge loan and the term loan under the Credit Agreement were fully repaid, the letter of credit issued in connection with the FAST had been fully amortized, $165.0 million of borrowings and $36.1 million of letters of credit were outstanding under the revolving credit facility and $148.9 million of borrowing capacity was unused under the revolving credit facility. The Credit Agreement contains a number of affirmative and negative covenants, which among other things (a) prohibit KACC from engaging in business significantly different from that currently conducted by it, (b) limit the incurrence of additional indebtedness and liens, (c) limit Investments (as defined), (d) limit capital expenditures, (e) limit mergers and consolidations, (f) restrict Asset Dispositions (as defined), (g) limit transactions with Affiliates (as defined), (h) restrict KACC's ability to pay dividends and make other distributions to its stockholders and (i) require the maintenance of a (1) minimum Current Ratio (as defined) (2) minimum Net Worth (as defined), (3) maximum Leverage Ratio (as defined) and (4) minimum Interest Coverage Ratio (as defined). KACC's obligations under the Credit Agreement are guaranteed by the Company and certain of KACC's subsidiaries. In addition, the Credit Agreement is secured by, among other things, (i) mortgages on KACC's facilities in Trentwood, Mead and Tacoma, Washington; Gramercy, Louisiana (which will not constitute part of the security under the New Credit Agreement); Erie, Pennsylvania; Newark, Ohio; and Sherman, Texas, (ii) subject to certain exceptions, liens on accounts receivable, inventory, equipment, domestic patents and trademarks and substantially all other personal property of KACC and certain of its subsidiaries, (iii) a pledge of all of the stock of KACC owned by the Company and (iv) pledges of all of the stock of certain 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. Loans under the Credit Agreement bear interest at a base rate per annum, at KACC's election from time to time, equal to (i) the Reference Rate (as defined) plus 1 1/2%, (ii) the CD Rate (Reserve Adjusted) (as defined) plus 2 5/8%, or (iii) the LIBO Rate (Reserve Adjusted) (as defined) plus 2 1/2%. KACC is currently required to pay fees equal to 2 1/2% per annum on the average aggregate amount outstanding of letters of credit under the Credit Agreement. The Credit Agreement contains provisions for the reduction or increase of the base interest rates and letter of credit fees, based upon the Interest Coverage Ratio, determined quarterly, under which the base interest rates could be reduced or increased by 1/2 of 1% per annum, on a non-cumulative basis (based upon the Interest Coverage Ratio, the Company's base interest rates and letter of credit fees have been increased by 1/2 of 1% per annum). In addition to the above fees, there is a commitment fee equal to 1/2% per annum on any unused portion of the revolving credit facility. On February 1, 1993, KACC extended a portion of its debt maturities by refinancing the 14 1/4% Notes with $400.0 million aggregate principal amount of the 12 3/4% Notes. Subject to certain exceptions, the 12 3/4% Note Indenture requires KACC to satisfy certain financial tests and other conditions (including the satisfaction of a consolidated fixed charge coverage ratio) in order to pay dividends and limits the amount of cash dividends payable by KACC to (i) the sum of (A) 50% of the Consolidated Net Income (as defined; such definition, among other things, excludes the one time charge of $497.7 million incurred as a result of the cumulative effect of the adoption of SFAS 106) of KACC accrued (or, if the aggregate Consolidated Net Income of KACC for such period shall be a deficit, minus 100% of such deficit) for the period (taken as one accounting period) from January 1, 1993 to the end of KACC's most recently ended fiscal quarter for which financial statements are available at the time such dividends are declared or paid, plus (B) the aggregate net proceeds received by KACC after December 31, 1992, as capital contributions or from the issuance or sale (other than to a Non-Affiliate Joint Venture (as defined) or to a Subsidiary (as defined) of KACC) of Capital Stock (as defined) other than Redeemable Stock (as defined) or from the issuance or sale of any debt or other security of KACC convertible or exercisable into such Capital Stock that has been so converted or 70 73 exercised minus (ii) the aggregate amount of Restricted Investments (as defined) then outstanding, subject to certain adjustments. The declaration and payment of dividends by the Company and KACC on their shares of common stock are currently subject to certain covenants contained in the Credit Agreement and, in the case of KACC, the 12 3/4% Note Indenture. Under the most restrictive of these covenants, neither the Company nor KACC is currently permitted to pay dividends on its common stock. The 12 3/4% Note Indenture contains a number of affirmative and negative covenants applicable to KACC which, among other things, (a) limit the incurrence of additional indebtedness and liens, (b) limit Restricted Payments (as defined), (c) limit Restricted Investments (as defined), (d) limit mergers, consolidations and sales of all or substantially all of KACC's assets, (e) impose certain requirements with respect to Asset Sales (as defined), (f) limit transactions with Affiliates (as defined), (g) prohibit, with certain exceptions, restrictions on the ability of any Subsidiary to pay dividends, make certain other distributions, pay indebtedness owed to KACC or another Subsidiary, make loans or advances to KACC or another Subsidiary or transfer any of its assets to KACC, (h) require KACC to repurchase 12 3/4% Notes at a premium upon the occurrence of a Change of Control (as defined) if so requested by the holder thereof, and (i) prohibit, with certain exceptions, the incurrence of indebtedness that is both subordinated to Senior Indebtedness (as defined) and senior to the 12 3/4% Notes. In December 1991, Alpart entered into a $60 million loan agreement with CARIFA under which CARIFA loaned Alpart the proceeds from the issuance of CARIFA's Industrial Revenue bonds. Proceeds from the sale of the bonds were used by Alpart to refinance the interim loans from the partners in Alpart, to pay eligible project costs for expansion and modernization of its refinery and to pay certain costs of issuance. Alpart's obligations under the loan agreement are secured by a $64.2 million letter of credit severally guaranteed by the partners in Alpart (of which $22.5 million is guaranteed by the minority partner in Alpart). See Note 7 of the Notes to the Consolidated Financial Statements and Note 3 of the Notes to the Interim Financial Statements. In December 1992, KACC entered into the Sale Agreement with the Louisiana Parish. To fund the acquisition of the facilities, the Louisiana Parish issued $20.0 million aggregate principal amount of the Gramercy Bonds, the proceeds of which were deposited into a construction fund established under the related indenture and which may be withdrawn from the construction fund, from time to time, pursuant to the terms of such indenture and the related Sale Agreement. The Sale Agreement requires KACC to pay the purchase price of the facilities 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 related indenture. In connection with the offering of the $.65 Depositary Shares in June 1993, the Company made a non-interest bearing loan to KACC in the principal amount of $37,796,753 (an amount equal to the aggregate dividends scheduled to accrue on the Series A Shares issued in June 1993 from the issuance date until the date on which the Series A Shares mandatorily convert into shares of the Company's Common Stock). The loan is evidenced by an intercompany note which matures on June 29, 1996, and is payable in quarterly installments. As of December 31, 1993, the aggregate principal amount of such intercompany note was $31,497,294. The Company expects to make dividend payments on the shares of PRIDES out of funds provided to it by KACC pursuant to the terms of the Intercompany Note. The Intercompany Note is designed to provide sufficient funds to the Company to enable it to make dividend payments on the shares of PRIDES until the Mandatory Conversion Date. The Intercompany Note will mature on December 31, 1997, and will be payable in quarterly installments. 71 74 DESCRIPTION OF THE PRIDES The following is a summary of the material provisions of the shares of PRIDES. The summary is qualified by reference to the full text of the Company's Certificate of Incorporation (as defined below) and the form of Certificate of Designations, both of which are filed as exhibits to the Registration Statement, which exhibits may be obtained from the Company by writing to the Secretary of the Company, 5847 San Felipe, Suite 2600, Houston, Texas 77057. The Board of Directors has adopted resolutions authorizing the issuance of up to 9,200,000 shares of PRIDES out of the Company's authorized and unissued Preferred Stock. The PRIDES will rank on a parity with the Series A Shares and any other classes or series of stock ranking on a parity with the PRIDES that may from time to time be issued by the Company in respect of the payment of dividends and the distribution of assets upon liquidation. Dividends. Subject to the rights of holders of Series A Shares and holders of other classes or series of stock ranking on a parity with or senior to the PRIDES that may from time to time be issued by the Company, the holders of PRIDES are entitled to receive, when, as and if the Board of Directors declares dividends on the PRIDES, out of funds legally available for dividends, cumulative preferential cash dividends from the issue date of the PRIDES, accruing at the rate per share of PRIDES of $ per annum or $ per quarter, payable quarterly in arrears on the last day of each March, June, September and December, or, if any such date is not a business day, on the next succeeding day that is a business day; provided, however, that, with respect to any dividend period during which a redemption occurs, the Company may, at its option, declare accrued dividends on the shares of PRIDES to, and pay such accrued dividends on, the redemption date, in which case such dividends shall be payable to the holders of shares of PRIDES as of the record date for such dividend payment and shall not be included in the calculation of the Call Price (as defined below). The first dividend payment will be for the period from the issue date of the PRIDES to and including March 30, 1994 and will be paid on March 31, 1994. Dividends on the PRIDES will be payable to holders of record as they appear on the books of the Company or any transfer agent for the PRIDES on such record dates, not less than 10 nor more than 50 days preceding the payment dates thereof, as shall be fixed by the Board of Directors. Dividends in arrears for any past quarterly dividend periods may be declared and paid at any time without reference to any regular dividend payment date to holders of record on such date, not exceeding 50 days preceding the payment date thereof, as shall be fixed by the Board of Directors. Dividends will cease to accrue in respect of the shares of PRIDES on the earlier of (i) the day immediately prior to the Mandatory Conversion Date or, subject to the provisions described in the last sentence of the first paragraph under "Optional Redemption," (ii) the day immediately prior to their earlier redemption. Dividends (or amounts equal to accrued and unpaid dividends) payable on the shares of PRIDES for any period shorter than a quarterly dividend period will be computed on the basis of a 360 day year of twelve 30-day months. Dividends on the PRIDES will accrue whether or not the Company has earnings, whether or not there are funds legally available for the payment of such dividends and whether or not such dividends are declared and will accumulate to the extent they are not paid on the dividend payment date for the quarter for which they accrue. Except as described below, accumulated unpaid dividends will not bear interest. So long as any shares of PRIDES or a Deposit Deficit (as defined below) are outstanding, except as set forth in the next succeeding sentence (unless a Deposit Deficit is outstanding), no dividends shall be declared or paid or set apart for payment on, and no other distribution shall be ordered or made on (other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, stock ranking junior to the PRIDES in respect of dividends and the distribution of assets upon Liquidation), nor (except for redemptions or conversions of Series A Shares or shares of PRIDES pursuant to the applicable certificate of designations for such shares) shall any sum or sums be set aside for, in a sinking fund or otherwise, or applied to the purchase, redemption or other acquisition for value of, shares of PRIDES, Series A Shares or any other class or series of stock ranking on a parity with or junior to the PRIDES in respect of dividends or the distribution of assets upon Liquidation (or, if any Deposit Deficit is outstanding, any class or series of stock of the Company), unless all cumulative dividends accumulated on the PRIDES shall have been or shall contemporaneously be declared and paid in full or shall be declared and a sum sufficient for the 72 75 payment in full thereof set apart for such payment on the PRIDES (or, if any Deposit Deficit is outstanding, unless such Deposit Deficit and all accrued interest thereon shall have been paid in full). When dividends are not paid in full, as aforesaid, all dividends declared upon the shares of PRIDES and any other class or series of outstanding stock ranking on a parity with the PRIDES in respect of dividends shall be declared pro rata so that the amount of dividends declared per share on the PRIDES and such other stock shall in all cases bear to each other the same ratio that accrued and unpaid dividends per share on the PRIDES and such other stock bear to each other. Holders of PRIDES shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends as described herein. Mandatory Conversion of PRIDES. Unless previously either redeemed or converted at the option of the holder into Common Stock, as described below, on the Mandatory Conversion Date each outstanding share of PRIDES will convert automatically into shares of Common Stock at the Common Equivalent Rate (as described below) in effect on the Mandatory Conversion Date and the right to receive an amount in cash equal to all accrued and unpaid dividends on such shares of PRIDES (other than previously declared dividends payable to a holder of record as of a prior date) to and including the day immediately prior to the Mandatory Conversion Date. If an amount equal to the accrued and unpaid dividends referred to in the preceding sentence (the "Required Dividend Amount") is not deposited with a bank or trust company on or prior to the Mandatory Conversion Date (the amount, if any, by which the Required Dividend Amount exceeds the amount so deposited in respect of the Required Dividend Amount being referred to as the "Deposit Deficit"), the Company shall, out of funds legally available therefor, as promptly as practicable following the Mandatory Conversion Date, deposit cash with a bank or trust company in an amount equal to the Deposit Deficit plus an amount equal to interest at the rate of 11.0% per annum on the Deposit Deficit from time to time outstanding from and including the Mandatory Conversion Date to but not including the date the Deposit Deficit is reduced to zero; provided, that so long as a Deposit Deficit is outstanding, no class or series of stock thereafter issued by the Company shall rank senior to the claims of the holders of the shares of PRIDES on the Mandatory Conversion Date with regard to the Required Dividend Amount and interest thereon as and to the extent provided in the Certificate of Designations. The Common Equivalent Rate is initially one share of Common Stock for each share of PRIDES. The Common Equivalent Rate is subject to adjustment as described below. Optional Redemption. Shares of PRIDES are not redeemable by the Company before December 31, 1996 (the "Initial Redemption Date"). At any time or from time to time on or after the Initial Redemption Date until immediately before the Mandatory Conversion Date, the Company has the right to call, in whole or in part, the outstanding shares of PRIDES for redemption. On the redemption date, the Company shall deliver to the holders thereof in exchange for each such share of PRIDES called for redemption a number of shares of Common Stock equal to the greater of (i) the Call Price (as defined below) in effect on the redemption date divided by the Current Market Price per share of Common Stock determined as of the second trading day immediately preceding the Notice Date (as defined below) or (ii) of a share of Common Stock (subject to adjustment in the same manner as the Optional Conversion Rate is adjusted, as described below). If all shares of Common Stock described in the immediately preceding sentence are not deposited with a bank or trust company on or prior to the redemption date, such redemption shall not be effective. The Call Price of each share of PRIDES is the sum of (i) $ on and after the Initial Redemption Date, to and including March 30, 1997; $ on and after March 31, 1997, to and including June 29, 1997; $ on and after June 30, 1997, to and including September 29, 1997; $ on and after September 30, 1997, to and including November 29, 1997; and $ on and after November 30, 1997, to and including December 30, 1997; and (ii) all accrued and unpaid dividends thereon to but not including the date fixed for redemption (other than previously declared dividends payable to a holder of record as of a prior date). The "Current Market Price" per share of Common Stock on any date of determination means the lesser of (i) the average of the daily Closing Prices (as defined below) for the fifteen consecutive trading days ending on and including such date of determination, or (ii) the Closing Price for such date of determination; provided, however, that, for purposes of calculating the Current Market Price in connection with any 73 76 redemption of PRIDES, if any adjustment of the Common Equivalent Rate becomes effective as of any date during the period beginning on the first day of such fifteen-day period and ending on the date on which shares of PRIDES are to be redeemed, then the Current Market Price as determined pursuant to the foregoing will be adjusted to the extent appropriate to reflect such adjustment. The "Notice Date" with respect to any notice given by the Company in connection with a redemption of shares of PRIDES means the date on which first occurs either the public announcement of such redemption or the commencement of the mailing of such notice to the holders of shares of PRIDES. The term "Closing Price" on any day means the closing sales price regular way on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked quotations regular way, in each case on the New York Stock Exchange, or, if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if not listed or admitted to trading on any national securities exchange, the average of the high bid and low asked quotations of the Common Stock in the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similarly generally accepted reporting service, or, if no such quotations are available, the fair market value of the Common Stock as determined by any New York Stock Exchange member firm selected from time to time by the Board of Directors of the Company for that purpose. If fewer than all the outstanding shares of PRIDES are to be called, the shares of PRIDES to be called shall be selected by the Company from outstanding shares of PRIDES by lot or on a pro rata basis or by any other method determined by the Board of Directors of the Company in its sole discretion to be equitable. The Company will provide notice of any redemption of shares of PRIDES to holders of record of shares of PRIDES to be called not less than 15 nor more than 60 days prior to the date fixed for redemption. Accordingly, the earliest Notice Date for any call for redemption of shares of PRIDES will be November 1, 1996. Any such notice shall be provided by mailing notice of redemption to the holders of record of shares of PRIDES to be redeemed at each such holder's address as it appears on the stock register of the Company; provided, however, that no failure to give such notice nor any defect therein shall affect the validity of the proceeding for redemption except as to the holders of shares of PRIDES to which the Company has failed to give said notice of redemption or as to the holders of shares of PRIDES whose notice of redemption was defective. Conversion at the Option of the Holder. The shares of PRIDES are convertible at the option of the holders thereof, at any time before the Mandatory Conversion Date, unless previously redeemed, into shares of Common Stock, at a rate of of a share of Common Stock for each share of PRIDES (the "Optional Conversion Rate"), equivalent to a conversion price of $ per share of Common Stock (the "Conversion Price"), subject to adjustment as described below. The right to convert shares of PRIDES called for redemption will terminate immediately before the close of business on the day prior to any redemption date with respect to such shares. Conversion of shares of PRIDES at the option of the holder may be effected by delivering certificates evidencing such shares of PRIDES, together with written notice of conversion and, if required by the Company, a proper assignment of such certificates to the Company or in blank (and, if applicable, as provided in the following paragraph, cash payment of an amount equal to the dividends attributable to the current quarterly dividend period payable on such shares), to the office of the transfer agent for PRIDES or to any other office or agency maintained by the Company for that purpose and otherwise in accordance with conversion procedures established by the Company. Each optional conversion will be deemed to have been effected immediately before the close of business on the date on which the foregoing requirements have been satisfied. The conversion will be at the Optional Conversion Rate in effect at such time and on such date. Holders of shares of PRIDES at the close of business on a record date for any payment of declared dividends will be entitled to receive the dividend payable on such shares of PRIDES on the corresponding dividend payment notwithstanding the optional conversion of such shares of PRIDES following such record date and on or before such dividend payment date. However, shares of PRIDES surrendered for conversion 74 77 after the close of business on a record date for any payment of declared dividends and before the opening of business on the next succeeding dividend payment date must be accompanied by payment in cash of an amount equal to the dividends attributable to the current quarterly dividend period payable on such shares on such dividend payment date (unless such shares of PRIDES are subject to redemption on a redemption date between such record date and such dividend payment date). A holder of shares of PRIDES called for redemption on the Initial Redemption Date or any other dividend payment date will receive the dividend on such shares of PRIDES payable on that date and will be able to convert such shares of PRIDES after the record date for such dividend without paying an amount equal to such dividend to the Company upon conversion. Except as provided above, upon any optional conversion of shares of PRIDES, the Company will make no payment of or allowance for unpaid dividends, whether or not in arrears, on such shares of PRIDES, or for previously declared dividends or distributions on the shares of Common Stock issued upon such conversion. Enhanced Dividend Yield; Less Equity Appreciation than Common Stock. Dividends will accrue on the shares of PRIDES at the rate per annum of $ ( % of the price per share to the public as set forth on the cover page of this Prospectus). No dividends are currently paid on the Common Stock. The opportunity for equity appreciation afforded by an investment in shares of PRIDES is less than that afforded by an investment in Common Stock because the Conversion Price is higher than the per share price to the public of the shares of PRIDES and the Company may, at its option, redeem the shares of PRIDES at any time on or after December 31, 1996, and before the Mandatory Conversion Date, and may be expected to do so if, among other circumstances, the Current Market Price of the Common Stock exceeds the Call Price for a share of PRIDES. In such event, a holder of a share of PRIDES will receive less than one share of Common Stock but no less than of a share of Common Stock. A holder may also surrender for conversion any shares of PRIDES called for redemption up to the close of business on the day prior to the redemption date, and a holder that so elects to convert will receive of a share of Common Stock per share of PRIDES, subject to adjustment as described herein. The value per share of PRIDES of the Common Stock received by holders of shares of PRIDES may be more or less than the per share amount paid for the shares of PRIDES offered hereby, due to market fluctuations in the price of the Common Stock. As a result of these provisions, holders of shares of PRIDES would be expected to realize no equity appreciation if the Current Market Price of the Common Stock is below the Conversion Price, and less than all of such appreciation if the Current Market Price of the Common Stock is above the Conversion Price. Holders of shares of PRIDES will realize the entire decline in equity value if the Current Market Price of the Common Stock is less than the price paid for a share of PRIDES. Conversion Adjustments. The Common Equivalent Rate and the Optional Conversion Rate are each subject to adjustment if the Company shall (i) pay a dividend or make a distribution with respect to Common Stock in shares of such stock, (ii) subdivide or split its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares, (iv) issue by reclassification of its shares of Common Stock any shares of common stock of the Company, (v) issue certain rights or warrants to all holders of its Common Stock, or (vi) pay a dividend or make a distribution to all holders of its Common Stock of evidences of its indebtedness or other assets (including capital stock of the Company, but excluding any cash dividends or distributions (other than Extraordinary Cash Distributions (as defined below)) and excluding any distributions and dividends referred to in clauses (i) through (iv) above). In addition, the Company will also be entitled to make upward adjustments in the Common Equivalent Rate, the Optional Conversion Rate or the Call Price, as it shall in its discretion determine to be advisable, in order that any stock dividends, subdivision or split of shares, distribution of rights to purchase stock or securities, or distribution of securities convertible into or exchangeable for stock (or any transaction which could be treated as any of the foregoing transactions pursuant to Section 305 of the Code) hereafter made by the Company to its stockholders will not be taxable. "Extraordinary Cash Distributions" means, with respect to any cash dividend or distribution paid on any date, the amount, if any, by which all cash dividends and cash distributions on the Common Stock paid during the consecutive 12-month period ending on and including such date (other than cash dividends and cash distributions for which an adjustment to the Common Equivalent Rate and the Optional Conversion Rate was previously made) exceeds, on a per share of Common Stock basis, 10% of the 75 78 average of the daily Closing Prices of the Common Stock over such consecutive 12-month period. All adjustments to the Common Equivalent Rate and the Optional Conversion Rate will be calculated to the nearest 1/100th of a share of Common Stock (with 5/1000th of a share being rounded to the next lower 1/100th of a share). No adjustment in the Common Equivalent Rate or the Optional Conversion Rate will be required unless such adjustment would require an increase or decrease of at least 1% in such rate; provided, however, that any adjustments which by reason of this provision are not required to be (and are not) made shall be carried forward and taken into account in any subsequent adjustment. Whenever the Common Equivalent Rate and the Optional Conversion Rate are adjusted as provided in the preceding paragraph, the Company will file with the transfer agent for the shares of PRIDES a certificate with respect to such adjustment, make a prompt public announcement thereof and mail a notice to holders of the shares of PRIDES providing specified information with respect to such adjustment. At least 10 days (or such shorter period as may be practicable in the circumstances) before taking any action that could result in certain adjustments in the Common Equivalent Rate and the Optional Conversion Rate, the Company will mail a notice to holders of shares of PRIDES concerning such proposed action. Adjustment for Certain Consolidations or Mergers. In case of (i) any consolidation or merger to which the Company is a party (other than a merger or consolidation in which the Company is the surviving or continuing corporation and in which the shares of Common Stock outstanding immediately before the merger or consolidation remain unchanged and other than a merger or consolidation with KACC (a "KACC Merger"), (ii) any sale or transfer to another corporation of the property of the Company as an entirety or substantially as an entirety, or (iii) any statutory exchange of securities with another corporation (other than in connection with a merger or acquisition), each share of PRIDES will, after consummation of such transaction, be subject to (A) conversion at the option of the holder into the kind and amount of securities, cash, or other property receivable upon consummation of such transaction by a holder of the number of shares of Common Stock into which such share of PRIDES might have been converted immediately before consummation of such transaction, (B) conversion on the Mandatory Conversion Date into the kind and amount of securities, cash, or other property receivable upon consummation of such transaction by a holder of the number of shares of Common Stock into which such share of PRIDES would have been converted if the conversion on the Mandatory Conversion Date had occurred immediately before the date of consummation of such transaction, plus the right to receive cash in an amount equal to all accrued and unpaid dividends on such share of PRIDES (other than previously declared dividends payable to a holder of record as of a prior date), and (C) redemption on any redemption date in exchange for the kind and amount of securities, cash, or other property receivable upon consummation of such transaction by a holder of the number of shares of Common Stock that would have been issuable at the Call Price in effect on such redemption date upon a redemption of such shares of PRIDES immediately before consummation of such transaction, assuming that, if the Notice Date for such redemption is not before such transaction, the Notice Date had been the date of such transaction; and assuming in each case that such holder of shares of Common Stock failed to exercise rights of election, if any, as to the kind or amount of securities, cash, or other property receivable upon consummation of such transaction (provided that, if the kind or amount of securities, cash, or other property receivable upon consummation of such transaction is not the same for each non-electing share, then the kind and amount of securities, cash or other property receivable upon consummation of such transaction for each non-electing share will be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). The kind and amount of securities into or for which the shares of PRIDES will be convertible or redeemable after consummation of such transaction will be subject to adjustment as described above under the caption "Conversion Adjustments" following the date of consummation of such transaction. The Company may not become a party to any such transaction unless the terms thereof are consistent with the foregoing. Fractional Shares. No fractional shares of Common Stock will be issued upon redemption or conversion of the shares of PRIDES but, in lieu of any fraction of a share of Common Stock which would otherwise be issuable in respect of all shares of PRIDES surrendered by the same holder for redemption or conversion on any date, the holder shall be entitled to receive an amount in cash, out of funds of the Company legally available therefor, equal to the same fraction of the (i) Current Market Price of the Common Stock determined as of the second trading day immediately preceding the Notice Date, in the case of a redemption, 76 79 or (ii) Closing Price of the Common Stock determined (A) as of the fifth trading day immediately preceding the Mandatory Conversion Date, in the case of a mandatory conversion, or (B) as of the second trading day immediately preceding the effective date of conversion, in the case of an optional conversion by a holder. Liquidation Rights. Subject to the rights of holders of Series A Shares and holders of any class or series of stock which the Company may in the future issue which ranks senior to, or on a parity with, the PRIDES in respect of a distribution of assets upon the liquidation, dissolution or winding-up of the affairs of the Company, whether voluntary or involuntary (such event, a "Liquidation"), the holders of the shares of PRIDES shall be entitled to receive out of the assets of the Company available for distribution to stockholders, whether from capital, surplus or earnings, before any distribution or payment is made to holders of Common Stock of the Company or on any other class or series of stock of the Company ranking junior as to assets distributable upon Liquidation to the shares of PRIDES, for each share of PRIDES, an amount equal to the sum of (i) the price to public for each share of PRIDES shown on the cover page of this Prospectus and (ii) an amount equal to all accrued and unpaid dividends thereon whether or not earned or declared (including dividends accumulated and unpaid), to the date of Liquidation, but no more. If, upon any Liquidation, there are insufficient assets to permit full payment to holders of shares of PRIDES and to holders of any other class or series of stock ranking on a parity with the PRIDES in respect of a distribution of assets upon Liquidation, then such assets or proceeds thereof will be distributed among the holders of PRIDES and any such other stock ratably in accordance with the respective amounts which would be payable on such shares of PRIDES and any such other stock if all amounts payable thereon were paid in full. Neither the consolidation or merger of the Company with one or more corporations nor the sale, lease or transfer by the Company of all or any part of its assets shall be deemed a Liquidation. Voting Rights. Holders of shares of PRIDES will have 4/5 vote for each share held of record and, except as required by law, will be 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 which are entitled to 10 votes per Series A Share) who are entitled to vote in such manner on all matters submitted to a vote of common stockholders. In addition, subject to certain exceptions, the affirmative vote of two-thirds of the shares of PRIDES actually voting (voting separately as a class) will be required to permit the Company to (i) issue any class or series of stock, or any security convertible at the option of the holder thereof into shares of any class or series of stock, ranking senior to the PRIDES as to dividends or upon Liquidation, (ii) modify the terms of the Intercompany Note in a manner that materially adversely affects the Company as the holder of such Intercompany Note or the holders of the PRIDES, (iii) amend the Certificate of Incorporation in a manner that materially adversely affects the holders of the PRIDES, (iv) consummate a KACC Merger if (a) each outstanding share of PRIDES, upon the effectiveness of the KACC Merger, neither remains outstanding nor is converted into one share of KACC Preferred Stock, (b) such shares of KACC Preferred Stock (if issued in the KACC Merger) are not to be deposited with a bank or trust company upon or prior to the effectiveness of the KACC Merger or (c) the covenants in the debt instruments of the surviving corporation of the KACC Merger, at the time of the KACC Merger, prohibit the payment of any of the dividends on the PRIDES or the KACC Preferred Stock, as the case may be, in accordance with the terms thereof through and including the day immediately prior to the Mandatory Conversion Date or (v) consummate a merger or consolidation of the Company with any other corporation, unless each holder of shares of PRIDES immediately preceding such merger or consolidation receives or continues to hold in the surviving corporation the same number of shares, with substantially the same rights and preferences, (except as contemplated by the provisions described under "Adjustments for Certain Consolidations or Mergers"), as correspond to the shares of PRIDES so held. In the event of a KACC Merger for which the consent of the holders of the PRIDES voting as a class is not obtained, so long as any shares of PRIDES or KACC Preferred Stock, as the case may be, remain outstanding, the surviving corporation of the KACC Merger shall not thereafter amend its debt instruments so as to prohibit the payment of any of the dividends on the PRIDES or KACC Preferred Stock, as the case may be, in accordance with the terms thereof, without the consent of the holders of at least two-thirds of the shares of shares of PRIDES or the KACC Preferred Stock, as the case may be, voting thereon (voting separately as a class). The voting provisions described above in this paragraph shall not apply if, at or prior to the time of the act with respect to which a class vote of the PRIDES would otherwise be required, (x) all outstanding shares of PRIDES are scheduled to be redeemed or converted 77 80 within two months, (y) sufficient shares of the Common Stock and cash, if any, necessary for such redemption or conversion have been deposited with a bank or trust company and (z) a KACC Merger is not consummated prior to such redemption or conversion. In the event that dividends on the shares of PRIDES or any other series of Preferred Stock are in arrears and unpaid for six quarterly dividend periods, or if any series of Preferred Stock (other than the PRIDES) shall be entitled for any other reason to exercise voting rights, separate from the Common Stock, to elect any directors of the Company ("Preferred Stock Directors"), the holders of the shares of PRIDES (voting separately as a class with holders of all other series of Preferred Stock upon which like voting rights have been conferred and are exercisable), with each share of PRIDES entitled to one vote on this and other matters in which Preferred Stock votes as a group, will be entitled to vote for the election of two directors of the Company. Such right to elect two directors will continue until all dividends in arrears and payable on the shares of PRIDES and such other series of Preferred Stock have been paid in full and the right of any other series of Preferred Stock to exercise voting rights, separate from the Common Stock, to elect Preferred Stock Directors terminates. The term of office of any director elected by the holders of the share of PRIDES and such other series will terminate on the earlier of (i) the next annual meeting of stockholders at which a successor shall have been elected and qualified or (ii) the termination of the right of holders of the shares of PRIDES and such other series to vote for such directors. Certain Procedures in connection with Redemption and Mandatory Conversion. Each holder of shares of PRIDES to be redeemed or to be converted on the Mandatory Conversion Date must surrender the certificates evidencing such shares to the Company at the place designated in the notice of such redemption (or, in the case of a mandatory conversion, the principal executive offices of the Company or at such other place as may be designated by the Company in a written notice mailed to the holders of record of the PRIDES) and shall thereupon be entitled to receive certificates evidencing shares of Common Stock and cash, if any, payable on such redemption or conversion following such surrender and following the date of such redemption or conversion. If (A) shares of PRIDES are called for redemption and, on the date fixed for redemption, shares of Common Stock necessary for the redemption shall have been deposited with a bank or trust company as provided in the Certificate of Designations or (B) shares of PRIDES have been converted on the Mandatory Conversion Date, then, notwithstanding that the certificates evidencing any shares of PRIDES so called for redemption or converted shall not have been surrendered, the shares represented thereby so called for redemption or converted shall be deemed no longer outstanding and all rights with respect to the shares so called for redemption or converted shall forthwith cease and terminate, except for the right of the holders to receive the shares of Common Stock and cash, if any, payable on such redemption or conversion upon surrender of their certificates therefor, provided, that holders of shares of PRIDES at the close of business on a record date for any payment of dividends on shares of PRIDES shall be entitled to receive the dividends payable on such shares on the corresponding dividend payment date notwithstanding the redemption or conversion of such shares following such record date and on or before such corresponding dividend payment date. Holders of shares of PRIDES that are redeemed or that are converted on the Mandatory Conversion Date shall not be entitled to receive dividends declared and paid on shares of Common Stock issuable on such redemption or conversion, and such shares of Common Stock shall not be entitled to vote, until such shares of Common Stock are issued upon the surrender of the certificates representing such shares of PRIDES and upon such surrender such holders shall be entitled to receive such dividends declared and paid on such shares of Common Stock subsequent to the redemption date or Mandatory Conversion Date, as applicable. Reissuance. Shares of PRIDES redeemed for or converted into Common Stock or otherwise acquired and retired by the Company will assume the status of authorized but unissued Preferred Stock and may thereafter be reissued in the same manner as other authorized but unissued Preferred Stock, but not as PRIDES. Miscellaneous. Upon issuance, the shares of PRIDES will be fully paid and nonassessable. The holders of PRIDES will have no preemptive rights. The transfer agent and registrar for the PRIDES shares will be The First National Bank of Boston. 78 81 FEDERAL INCOME TAX CONSIDERATIONS In the opinion of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, the following sets forth the material United States federal income tax consequences of the ownership and disposition of shares of PRIDES. Changes to existing law, which could have retroactive effect, may alter the consequences described below. This discussion relates only to shares of PRIDES or shares of Common Stock received upon conversion thereof or in exchange therefor that are held as capital assets within the meaning of Section 1221 of the Code and does not deal with all tax consequences that may be relevant in the particular circumstances of each holder (some of which, such as dealers in securities, insurance companies, tax-exempt organizations and foreign persons, may be subject to special rules). In addition, stock having terms closely resembling those of shares of PRIDES have not been the subject of any regulation, ruling or judicial decision currently in effect, and there can be no assurance that the Internal Revenue Service will take the positions set forth below. The Company has not and will not seek a ruling as to any tax matters relating to shares of PRIDES. Persons considering the purchase of shares of PRIDES should consult their tax advisors with respect to the application of the United States federal income tax laws to their particular situations as well as any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction. DIVIDENDS Dividends paid on shares of PRIDES out of the Company's current or accumulated earnings and profits will be taxable as ordinary income and will qualify for the 70% intercorporate dividends-received deduction subject to the minimum holding period (generally at least 46 days, or 91 days in the case of dividends attributable to periods aggregating more than 366 days) and other applicable requirements. Under certain circumstances, a corporate holder may be subject to the alternative minimum tax with respect to the amount of its dividends-received deduction. Under certain circumstances, a corporation that receives an "extraordinary dividend," as defined in Section 1059 of the Code, is required to reduce its stock basis by the non-taxed portion of such dividend (generally, the portion claimed as a dividend received deduction). Quarterly dividends not in arrears paid to an original holder of shares of PRIDES will generally not constitute extraordinary dividends under Section 1059(c). Under a special rule in Section 1059(f), any dividend with respect to "disqualified preferred stock" is treated as an extraordinary dividend; however, while the issue is not free from doubt due to the lack of authority directly on point, shares of PRIDES should not constitute "disqualified preferred stock." REDEMPTION PREMIUM Under certain circumstances, Section 305 of the Code requires that any excess of the redemption price of preferred stock over its issue price be includable in income, prior to receipt, as a constructive dividend. However, while the issue is not free from doubt due to a lack of authority directly on point, a holder of shares of PRIDES should not be required to include any redemption premium in income under Section 305 of the Code. REDEMPTION OR CONVERSION INTO COMMON STOCK Gain or loss generally will not be recognized by a holder upon the redemption of shares of PRIDES for shares of Common Stock or the conversion of shares of PRIDES into shares of Common Stock if no cash is received. Dividend income may be recognized, however, to the extent cash or Common Stock is received in payment of accrued dividends. In addition, a holder who receives cash in lieu of a fractional share will be treated as having received such fractional share and having exchanged it for cash in a transaction subject to Section 302 of the Code and related provisions. A holder who receives both Common Stock and cash (other than any cash in lieu of a fractional share and cash treated as dividend income as a result of payment of accrued dividends) upon a conversion or redemption of shares of PRIDES into shares of Common Stock will not recognize any loss and will recognize gain (if any) upon such conversion or redemption, but not in excess of the amount of such cash. The measure of such a holder's gain will be the excess (if any) of the sum of such cash plus the value of the shares of Common Stock received (other than shares of Common Stock taxed as a 79 82 dividend upon receipt) over such holder's adjusted tax basis in the converted shares of PRIDES. Depending on the facts and circumstances, such gain might be treated in whole or part as a dividend. Any such dividend to a corporate holder might constitute an "extraordinary dividend" under Section 1059 of the Code, with the result that certain regular dividends received by such holder might be treated as "extraordinary." See "Federal Income Tax Considerations -- Dividends." Generally, a holder's basis in the Common Stock received upon the redemption or conversion of shares of PRIDES (other than shares of Common Stock taxed as a dividend upon receipt) will equal the adjusted tax basis of the redeemed or converted shares of PRIDES on the date of such redemption or conversion plus the amount of gain recognized, minus the amount of cash received, and the holding period of such Common Stock will include the holding period of the redeemed or converted shares of PRIDES. If any shares of Common Stock are taxed as a dividend on receipt, the holder's basis in such shares will be their fair market value at the time of receipt, and the holding period for such shares will begin on the date of their receipt. SALE OF SHARES A holder who sells shares of PRIDES or Common Stock will recognize gain or loss measured by the difference between the amount received in exchange for such shares and such holder's tax basis in the shares (as determined under the rules discussed above). In general, any gain or loss so recognized will be capital gain or loss if the shares were held as a capital asset, and will be long-term capital gain or loss if the holding period for such shares (determined under the rules discussed above) exceeds one year. ADJUSTMENT OF CONVERSION RATE Certain adjustments to the Common Equivalent Rate to reflect the Company's issuance of certain rights, warrants, evidences of indebtedness, securities or other assets to holders of Common Stock may result in constructive distributions taxable as dividends to the holders of the shares of PRIDES, which may constitute (and cause other dividends to constitute) "extraordinary dividends" to corporate holders. See "Federal Income Tax Considerations -- Dividends." BACKUP WITHHOLDING Certain noncorporate holders may be subject to backup withholding at a rate of 31% on dividends and certain consideration received upon the redemption or conversion of the shares of PRIDES. Generally, backup withholding applies only when the taxpayer fails to furnish or certify a proper Taxpayer Identification Number or when the taxpayer is notified by the Internal Revenue Service that the taxpayer has failed to report payments of interest and dividends properly. Holders should consult their tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining any applicable exemption. DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock, and 20,000,000 shares of preferred stock, par value $.05 per share (the "Preferred Shares"). The following is a summary of the material terms of the capital stock of the Company, but does not purport to be complete or to give full effect to the provisions of statutory or common law, and is subject in all respects to the applicable provisions of the Certificate of Incorporation. COMMON STOCK The Company is authorized by its Certificate of Incorporation to issue 100,000,000 shares of Common Stock, of which 58,095,599 shares were issued and outstanding as of December 31, 1993. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. The Common Stock does not have cumulative voting rights. Subject to the rights of holders of any Preferred Shares, the holders of Common Stock are entitled to receive ratably such 80 83 dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding Preferred Shares. Holders of Common Stock have no preemptive, conversion or redemption rights. All outstanding shares of Common Stock are duly and validly issued, fully paid and nonassessable. PREFERRED STOCK General. The Board of Directors has the authority (without action by the stockholders) to issue the authorized and unissued Preferred Shares in one or more classes or one or more series within any class thereof and to determine the voting rights (including the right to vote as a class of series on particular matters and elect directors in certain circumstances), preferences, conversion, liquidation, dividend, and other rights of each such series. A total of 1,938,295 Preferred Shares were designated as Series A Shares in connection with the June 1993 offering of $.65 Depositary Shares. The $.65 Depositary Shares and Series A Shares. Each $.65 Depositary Share represents ownership of one-tenth of a Series A Share deposited with The First National Bank of Boston, as depositary, and entitles the owner to all of the powers, preferences and rights of the Series A Shares represented thereby (including the dividend, voting, liquidation and other rights thereof). The Series A Shares are Preferred Shares and rank senior as to dividends and in liquidation to the Company's Common Stock. The $.65 Depositary Shares convert automatically into shares of Common Stock (upon the automatic conversion of the Series A Shares) on June 30, 1996 (the "Mandatory Series A Conversion Date") or earlier in the event of certain mergers, consolidations or similar extraordinary transactions involving the Company. In addition, the Company has the option to call the $.65 Depositary Shares (by calling the Series A Shares) for redemption, in whole or in part, at any time or from time to time prior to the Mandatory Series A Conversion Date, at the prescribed call price payable in shares of Common Stock, plus an amount in cash equal to all accrued and unpaid dividends payable with respect to such $.65 Depositary Shares. If the $.65 Depositary Shares are not redeemed or converted prior to the Mandatory Series A Conversion Date, the owners of $.65 Depositary Shares will receive one share of Common Stock for each $.65 Depositary Share (subject to adjustment for stock splits and certain other events) on the Mandatory Series A Conversion Date. Although not obligated to do so, the Company may be expected to call the $.65 Depositary Shares (by calling the Series A Shares) prior to the Mandatory Series A Conversion Date if the market price for the Common Stock exceeds the call price for the $.65 Depositary Shares, in which event owners of $.65 Depositary Shares will receive less than one share of Common Stock for each $.65 Depositary Share. The $.65 Depositary Shares are not convertible into Common Stock at the option of holders thereof. Dividends. The owners of $.65 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 at the rate of $.65 per annum or $.1625 per quarter for each of the $.65 Depositary Shares, payable quarterly in arrears on the last day of each March, June, September and December, or, if any such date is not a business day, on the next succeeding day that is a business day. Dividends cease to accrue in respect of the $.65 Depositary Shares on the earliest of (i) the day immediately prior to the Mandatory Series A Conversion Date, (ii) the day immediately prior to the effective date of a merger, consolidation or similar extraordinary transaction that results in an automatic conversion (as described below) and (iii) the day immediately prior to the date of redemption of any such shares. Except as otherwise set forth in the Certificate of Designations governing the Series A Shares, accumulated unpaid dividends do not bear interest. Mandatory Conversion. On the Mandatory Series A Conversion Date, each outstanding $.65 Depositary Share will convert automatically (upon the automatic conversion of the Series A Shares) into one share of Common Stock (subject to adjustment in the event of certain stock dividends or distributions, subdivisions, splits, combinations, reclassifications, issuances of certain rights or warrants or distributions of certain assets with respect to the Common Stock), and the right to receive an amount in cash equal to all accrued and unpaid dividends payable with respect to such $.65 Depositary Share to and including the day immediately prior to the Mandatory Series A Conversion Date. The Company has the right to call a portion or all of the 81 84 outstanding $.65 Depositary Shares (by calling the Series A Shares) prior to the Mandatory Series A Conversion Date as described below. In addition, immediately prior to the effectiveness of a merger, consolidation or similar extraordinary transaction involving the Company (other than a KACC Merger Event (as defined below)) that results in the conversion or exchange of the Common Stock into, or results in the holders of Common Stock having the right to receive, other securities or other property (whether of the Company or any other entity) (any such merger, consolidation or similar extraordinary transaction, a "Merger or Consolidation Event"), each outstanding $.65 Depositary Share will automatically convert (upon the automatic conversion of the Series A Shares) into (i) one share of Common Stock, subject to adjustment in certain events, plus (ii) the right to receive an amount in cash equal to the accrued and unpaid dividends payable with respect to such $.65 Depositary Share to and including the day immediately prior to the effective date of such Merger or Consolidation Event, plus (iii) the right to receive an amount in cash equal to $1.95 as of June 30, 1993, declining by $.0018 on each day thereafter (computed on the basis of a 360-day year of twelve 30-day months) to $.114 on April 30, 1996, and equal to zero thereafter. The Company may, at its option, deliver, in lieu of some or all of the cash consideration described in clauses (ii) and (iii) of the immediately preceding sentence, shares of Common Stock. The number of shares of Common Stock to be delivered in lieu of any cash consideration described in such clauses (ii) and (iii) will be determined by dividing the amount of cash consideration that the Company has elected to deliver in Common Stock by the Current Market Price (as defined) per share of the Common Stock determined as of the second trading day immediately preceding the Notice Date (as defined). Right to Call for Redemption. At any time or from time to time prior to the Mandatory Series A Conversion Date, the Company may call, in whole or in part, the outstanding $.65 Depositary Shares (by calling the Series A Shares) for redemption at a call price per $.65 Depositary Share initially equal to $12.46 as of June 30, 1993, declining by $.0018 on each day thereafter (computed on the basis of a 360-day year of twelve 30-day months) 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 equal to such call price, plus an amount in cash equal to accrued and unpaid dividends payable with respect to such $.65 Depositary Shares, to and including the day immediately prior to the date of redemption. Liquidation Rights. The Series A Shares rank senior in right and priority of payment to the Common Stock upon liquidation. Subject to the terms of any stock ranking senior to, or on a parity with, the Series A Shares, the liquidation preference applicable to each $.65 Depositary Shares (based on the liquidation preference of the Series A Shares) is an amount equal to the sum of (i) $7.25 and (ii) an amount equal to all accrued and unpaid dividends payable with respect to such $.65 Depositary Shares. Voting Rights. Holders of $.65 Depositary Shares (based on the voting rights of the Series A Shares) have one vote for each $.65 Depositary Share held of record and, except as required by law, are entitled to vote with the holders of Common Stock on all matters submitted to a vote of common stockholders. In addition, subject to certain exceptions, the affirmative vote of two-thirds of the Series A Shares actually voting (voting separately as a class) is required to permit the Company to (i) issue any class or series of stock ranking senior to the Series A Shares as to dividends or upon liquidation, (ii) modify the terms of a certain intercompany note (which provides funds to the Company to enable the Company to make dividend payments on the Series A Shares) in a manner that materially adversely affects the Company as the holder of such intercompany note or the holders of the Series A Shares, (iii) amend its Certificate of Incorporation in a manner that materially adversely affects the holders of the Series A Shares, or (iv) consummate a merger or consolidation of the Company with KACC (a "KACC Merger Event") if (a) each outstanding Series A Share, upon the effectiveness of the KACC Merger Event, neither remains outstanding nor is converted into one share of preferred stock of the surviving corporation ("KACC Preferred Stock") identical as near as practicable to a Series A Share, (b) such shares of KACC Preferred Stock (if issued in the KACC Merger Event) are not to be deposited with a bank or trust company upon or prior to the effectiveness of the KACC Merger Event, or (c) the covenants in the debt instruments of the surviving corporation of the KACC Merger Event, at the time of the KACC Merger, prohibit the payment of any of the dividends on the Series A Shares or the KACC Preferred Stock, as the case may be, in accordance with the terms thereof through and including 82 85 the day immediately prior to the Mandatory Series A Conversion Date. In the event that dividends payable on the Series A Shares are in arrears in an aggregate amount equivalent six full quarterly dividends, the holders of the outstanding Series A Shares are entitled to elect, together with the holders of all classes or series of stock ranking on a parity with the Series A Shares in respect of dividends and upon which like voting rights in the event of a dividend default with respect thereto have been conferred and are exercisable, voting separately as a class, two directors of the Company. 83 86 UNDERWRITING The Underwriters named below, acting through Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), have severally agreed, subject to the terms and conditions of the Purchase Agreement with the Company, to purchase from the Company the number of shares of PRIDES set forth below opposite their respective names. Under certain circumstances, the commitments of non-defaulting Underwriters may be increased as set forth in the Purchase Agreement. The Underwriters are committed to purchase all of such shares of PRIDES if any are purchased. The shares of PRIDES are offered subject to receipt and acceptance by the Underwriters and certain other conditions, including the right to reject orders in whole or in part.
NUMBER OF UNDERWRITERS SHARES ---------- Merrill Lynch, Pierce, Fenner & Smith............................ Incorporated Bear, Stearns & Co. Inc.......................................... Donaldson, Lufkin & Jenrette Securities Corporation.............. PaineWebber Incorporated......................................... Salomon Brothers Inc............................................. ---------- Total............................................... 8,000,000 ---------- ----------
The Company has granted the Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an additional 1,200,000 shares of PRIDES to cover over-allotments, if any, at the public offering price set forth on the cover page of this Prospectus, less the underwriting discount. If the Underwriters exercise this option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage thereof which the number of shares of PRIDES to be purchased by it shown in the foregoing table is of the 8,000,000 shares of PRIDES initially offered hereby. The Underwriters have advised the Company that they propose to offer the shares of PRIDES to the public at the offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share on sales to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The Company has agreed that during a period of 90 days from the date of the Prospectus, the Company will not, without the prior written consent of Merrill Lynch, directly or indirectly, offer to sell, sell, grant any option for the sale of, or otherwise issue or dispose of any shares of PRIDES, $.65 Depositary Shares, Series A Shares or Common Stock, or any securities similar thereto, or any security convertible into or exchangeable or exercisable for any such securities or any such similar securities, except (i) offers to sell and sales to the Underwriters pursuant to the offering, (ii) the issuance of a certain number of shares of Common Stock pursuant to employee benefit arrangements of the Company and (iii) the issuance of Common Stock upon the conversion or redemption of Series A Shares or shares of PRIDES. In addition, MAXXAM has agreed that it will not, and it will not permit any of its subsidiaries (other than the Company and its subsidiaries) (each, a "MAXXAM Subsidiary") to, without the prior written consent of Merrill Lynch, directly or indirectly, offer to sell, sell, grant any option for the sale of or otherwise dispose of any (a) shares of PRIDES or Common Stock, or any security (other than $.65 Depository Shares and Series A Shares) convertible into or exchangeable or exercisable for such securities, during a period of 180 days from the date of this Prospectus, and (b) $.65 Depositary Shares or Series A Shares during a period of 90 days from the date of the Prospectus except that, in each case, MAXXAM or any MAXXAM Subsidiary may pledge or otherwise encumber, shares of PRIDES, $.65 Depositary Shares, Series A Shares or Common Stock, as the case may be, to unaffiliated persons or entities solely in connection with financing activities of MAXXAM or its subsidiaries and MAXXAM or any MAXXAM Subsidiary may transfer, shares of PRIDES, $.65 Depositary Shares, Series A Shares or Common Stock, as the case may be, to MAXXAM or any MAXXAM Subsidiary. The Underwriters for this offering of shares of PRIDES are also acting as underwriters for the offering of Senior Notes and will receive underwriting discounts and commissions in connection therewith. The 84 87 Underwriters for the PRIDES Offering also acted as underwriters in connection with the public offering of the $.65 Depositary Shares and received underwriting discounts and commissions in connection therewith. Donaldson, Lufkin & Jenrette Securities Corporation and Bear, Stearns & Co. Inc. acted as underwriters in connection with the public offering by MAXXAM Group, a subsidiary of MAXXAM, of $100,000,000 aggregate principal amount of MAXXAM Group's 11 1/4% Senior Secured Notes due 2003 and $126,720,000 aggregate principal amount of MAXXAM Group's 12 1/4% Senior Secured Discount Notes due 2003 for which they received underwriting discounts and commissions. Donaldson, Lufkin & Jenrette Securities Corporation and Salomon Brothers Inc acted as underwriters in connection with the public offering by (i) The Pacific Lumber Company ("Pacific Lumber"), an indirect subsidiary of MAXXAM, of $235.0 million aggregate principal amount of Pacific Lumber's 10 1/2% Senior Notes due 2003 for which they received underwriting discounts and commissions and (ii) Scotia Pacific Holding Company ("Scotia Pacific"), a wholly owned subsidiary of Pacific Lumber, of $385.0 million aggregate principal amount of Scotia Pacific's 7.95% Timber Collateralized Notes due 2015 for which they also received underwriting discounts and commissions. There is no existing market for the shares of PRIDES. Application will be made to list the shares of PRIDES and the Common Stock issuable in respect thereof on the NYSE. Future trading prices for the shares of PRIDES will depend on many factors, including, among other things, the Company's operating results, the market for similar securities and the trading price of the Company's $.65 Depositary Shares and Common Stock. The Company has agreed to indemnify the Underwriters against certain civil liabilities, including certain liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. LEGAL MATTERS The legality of the shares of PRIDES and the Common Stock issuable in respect thereof will be passed upon for the Company by Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, New York, New York. Certain legal matters will be passed upon for the Underwriters by Latham & Watkins, New York, New York. Kramer, Levin, Naftalis, Nessen, Kamin & Frankel performs legal services for MAXXAM and its subsidiaries. Ezra G. Levin is a partner of that firm and is a director of the Company, KACC, MAXXAM and certain of MAXXAM's other subsidiaries as well as a trustee of Federated. EXPERTS The consolidated financial statements and schedules for the years ended December 31, 1992, 1991 and 1990 included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen & Co., independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. 85 88 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- AUDITED FINANCIAL STATEMENTS KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES Report of Independent Public Accountants............................................ F-2 Consolidated Balance Sheets at December 31, 1992 and 1991........................... F-3 Statements of Consolidated Income for the Years Ended December 31, 1992, 1991 and 1990............................................................................. F-4 Statements of Consolidated Cash Flows for the Years Ended December 31, 1992, 1991 and 1990......................................................................... F-5 Notes to Consolidated Financial Statements.......................................... F-6 UNAUDITED FINANCIAL STATEMENTS KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES Consolidated Balance Sheets at September 30, 1993 and December 31, 1992............. F-24 Statements of Consolidated Income (Loss) for the Nine Months Ended September 30, 1993 and 1992.................................................................... F-25 Statements of Consolidated Cash Flows for the Nine Months Ended September 30, 1993 and 1992......................................................................... F-26 Notes to Interim Consolidated Financial Statements.................................. F-27
F-1 89 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and the Board of Directors of Kaiser Aluminum Corporation: We have audited the accompanying consolidated balance sheets of Kaiser Aluminum Corporation (a Delaware corporation) and subsidiaries as of December 31, 1992 and 1991, and the related statements of consolidated income and cash flows for each of the three years in the period ended December 31, 1992. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements. 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, 1992 and 1991, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1992, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN & CO. Houston, Texas February 8, 1993 F-2 90 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) ASSETS
DECEMBER 31, -------------------- 1992 1991 -------- -------- Current assets: Cash and cash equivalents............................................. $ 19.1 $ 15.8 Receivables: Trade, less allowance for doubtful receivables of $3.0 in 1992 and $4.8 in 1991................................................. 174.0 163.9 Other.............................................................. 96.0 54.9 Inventories........................................................... 439.9 498.6 Prepaid expenses and other current assets............................. 37.0 84.0 -------- -------- Total current assets............................................... 766.0 817.2 Investments in and advances to unconsolidated affiliates................ 150.1 161.9 Property, plant, and equipment -- net................................... 1,066.8 1,014.5 Other assets............................................................ 115.9 140.5 -------- -------- Total.............................................................. $2,098.8 $2,134.1 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................................... $ 136.6 $ 141.8 Accrued interest...................................................... 4.6 4.9 Accrued salaries, wages, and related expenses......................... 84.4 76.2 Other accrued liabilities............................................. 111.0 232.4 Payable to affiliates................................................. 78.4 87.1 Short-term borrowings................................................. 4.8 6.3 Long-term debt -- current portion..................................... 25.9 26.3 -------- -------- Total current liabilities.......................................... 445.7 575.0 Long-term liabilities................................................... 217.9 212.9 Long-term debt.......................................................... 765.1 681.5 Minority interests...................................................... 104.9 108.9 Stockholders' equity: Preferred stock, par value $.05, authorized 20,000,000 shares; no shares issued or outstanding Common stock, par value $.01, authorized 100,000,000 shares; issued 57,327,279 and 57,250,000 shares in 1992 and 1991........... .6 .6 Additional capital.................................................... 288.5 287.9 Retained earnings..................................................... 276.1 267.3 -------- -------- Total stockholders' equity......................................... 565.2 555.8 -------- -------- Total.............................................................. $2,098.8 $2,134.1 -------- -------- -------- --------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-3 91 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED INCOME (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, -------------------------------- 1992 1991 1990 -------- -------- -------- Net sales..................................................... $1,909.1 $2,000.8 $2,095.0 -------- -------- -------- Costs and expenses: Cost of products sold.................................... 1,619.3 1,594.2 1,525.2 Depreciation............................................. 80.3 73.2 70.5 Selling, administrative, research and development, and general................................................ 119.6 117.4 123.2 -------- -------- -------- Total costs and expenses............................... 1,819.2 1,784.8 1,718.9 -------- -------- -------- Operating income.............................................. 89.9 216.0 376.1 Other income (expense): Interest and other income................................... 20.9 20.3 17.6 Interest expense............................................ (78.7) (93.9) (96.6) -------- -------- -------- Income before income taxes and minority interests............. 32.1 142.4 297.1 Provision for income taxes.................................... (5.3) (32.4) (75.6) Minority interests............................................ .1 (1.6) (7.8) -------- -------- -------- Net income.................................................... $ 26.9 $ 108.4 $ 213.7 -------- -------- -------- -------- -------- -------- Net income per common share................................... $ .47 $ 2.03 $ 4.27 -------- -------- -------- -------- -------- --------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 92 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------- 1992 1991 1990 ------ ------ ------ (IN MILLIONS OF DOLLARS) Cash flows from operating activities: Net income....................................................... $ 26.9 $108.4 $213.7 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................................ 80.3 73.2 70.5 Amortization of deferred financing costs and discount on long-term debt........................................ 11.5 10.7 10.4 Minority interests.......................................... (.1) 1.6 7.9 Increase in accrued income taxes............................ 3.5 10.1 32.9 Equity in losses of unconsolidated affiliates............... 1.9 19.5 14.6 Recognition of previously deferred income from a forward alumina sale............................................. (25.7) (42.0) (95.1) (Increase) decrease in receivables.......................... (57.8) (2.5) 43.2 Decrease (increase) in inventories, prepaid expenses, and other current assets....................................... 66.3 (13.0) (48.0) Decrease in accounts payable, payable to affiliates, and accrued liabilities...................................... (93.9) (29.6) (30.2) Other....................................................... 13.4 (1.4) (27.3) ------ ------ ------ Net cash provided by operating activities................ 26.3 135.0 192.6 Cash flows from investing activities: Net proceeds from disposition of property and investments........ 26.1 8.8 16.2 Capital expenditures............................................. (114.4) (118.1) (115.1) ------ ------ ------ Net cash used for investing activities................... (88.3) (109.3) (98.9) Cash flows from financing activities: Repayments of long-term debt, including revolving credit......... (221.4) (533.3) (516.3) Borrowings of long-term debt, including revolving credit......... 303.8 575.9 386.8 Net short-term (payments) borrowings............................. (1.5) 6.7 Borrowing (prepayment) of notes to parent........................ 2.5 (100.2) Dividends paid................................................... (11.4) (55.7) Capital stock issued............................................. .6 93.2 Redemption of minority interests preference stock................ (7.3) (20.4) (35.4) ------ ------ ------ Net cash provided by (used for) financing activities..... 65.3 (33.8) (164.9) Net increase (decrease) in cash and cash equivalents during the year............................................................. 3.3 (8.1) (71.2) Cash and cash equivalents at beginning of year..................... 15.8 23.9 95.1 ------ ------ ------ Cash and cash equivalents at end of year........................... $ 19.1 $ 15.8 $ 23.9 ------ ------ ------ ------ ------ ------ Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest....................... $ 68.1 $ 81.7 $ 86.0 Income taxes paid................................................ 1.8 20.9 39.2 Tax allocation payments to MAXXAM................................ 28.0 39.1 5.7 Supplemental disclosure of non-cash financing activities: Contribution to capital of notes payable to parent together with accrued interest.............................................. $ 53.9
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 93 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 an indirect 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. 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:
DECEMBER 31, ----------------- 1992 1991 ------ ------ Finished fabricated products.............................. $ 91.2 $ 95.6 Primary aluminum and work in process...................... 128.7 184.4 Bauxite and alumina....................................... 107.4 111.5 Operating supplies and repair and maintenance parts....... 112.6 107.1 ------ ------ $439.9 $498.6 ------ ------ ------ ------
The Company recorded a pre-tax charge of approximately $29.0 in the fourth quarter of 1992 because of a reduction in the carrying value of its inventories caused principally by prevailing lower prices for alumina, primary aluminum, and fabricated products of $18.8, and 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
Recognition of Certain Sales In 1989, KACC entered into a forward alumina sales transaction to sell forward alumina at fixed prices through 1992. A portion of the selling price was received in the form of an initial payment of approximately $179.9, which approximately equaled the expected cash profit margin for the sale, discounted to present value. The initial payment has been recognized as revenue as the alumina was delivered. At December 31, 1992, substantially all of the initial payment has been recognized as revenue. F-6 94 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Other Income Included in other income in 1992 are 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 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, 1992, the Company has contracts to purchase $18.3 of pounds sterling and $8.4 of Australian dollars at various fixed rates expiring on various dates through December 31, 1993. The Company is entitled to withdraw the excess of current market value over the premiums paid on certain commodity option contracts. These withdrawals were $3.7 and $70.0 at December 31, 1992 and 1991, respectively, and are included in other accrued liabilities. Deferred Financing Costs Costs incurred to obtain 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. 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 Share Net income per share calculations for 1992 and 1991 were based on the 57,250,423 and 53,297,260 weighted average number of common shares, respectively. During the year ended December 31, 1990, the Company's common stock was not publicly traded, and there were no common stock equivalents outstanding. Earnings per share calculation for that year was based on 50,000,000 shares issued. 2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES Summary combined financial information is provided below for unconsolidated aluminum investments, most of which supply and process raw materials. The investees are Queensland Alumina Limited ("QAL") (28.3% owned), Anglesey 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, 1992 and 1991, KACC's net receivables from these affiliates were not material. F-7 95 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, ------------------ 1992 1991 ------ ------ Current assets............................................ $295.0 $286.9 Property, plant, and equipment -- net..................... 389.4 411.0 Other assets.............................................. 49.9 53.4 ------ ------ Total assets....................................... $734.3 $751.3 ------ ------ ------ ------ Current liabilities....................................... $132.8 $156.7 Long-term debt............................................ 275.0 264.2 Other liabilities......................................... 20.0 30.7 Stockholders' equity...................................... 306.5 299.7 ------ ------ Total liabilities and stockholders' equity......... $734.3 $751.3 ------ ------ ------ ------
Summary of Combined Operations
DECEMBER 31, ------------------------------ 1992 1991 1990 ------ ------ ------ Net sales...................................... $586.6 $589.0 $569.0 Costs and expenses............................. (586.7) (630.7) (565.4) Provision for income taxes..................... 6.9 9.5 4.0 ------ ------ ------ Net income (loss).............................. $ 6.8 $(32.2) $ 7.6 ------ ------ ------ ------ ------ ------ Company equity in losses....................... $ (1.9) $(19.5) $(12.8) ------ ------ ------ ------ ------ ------
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, 1992, KACC's investment in its unconsolidated affiliates exceeded its equity in their net assets by approximately $49.8. The Company is amortizing this amount over a 12-year period, which results in an annual amortization charge of approximately $7.6. The Company and its affiliates have interrelated operations. The Company 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 $219.4, $238.7, and $228.2 in the years ended December 31, 1992, 1991, and 1990, respectively. No dividends were received from investees in the three years ended December 31, 1992. F-8 96 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 3. PROPERTY, PLANT, AND EQUIPMENT The major classes of property, plant, and equipment are as follows:
DECEMBER 31, --------------------- 1992 1991 -------- -------- Land and improvements.................................. $ 123.8 $ 83.2 Buildings.............................................. 164.1 141.1 Machinery and equipment................................ 1,010.7 925.7 Construction in progress............................... 70.3 87.5 -------- -------- 1,368.9 1,237.5 Accumulated depreciation............................... 302.1 223.0 -------- -------- Property, plant, and equipment -- net.................. $1,066.8 $1,014.5 -------- -------- -------- --------
4. LONG-TERM DEBT Long-term debt and its maturity schedule are as follows:
DECEMBER 31, 1998 ---------------- AND 1992 1991 1993 1994 1995 1996 1997 AFTER TOTAL TOTAL ----- ------ ---- ---- ---- ------- ------ ------ 1989 Credit Agreement (6.07% at December 31, 1992) Revolving Credit Facility........................... $290.0 $290.0 $205.0 Term Loan........................................... $18.3 18.3 36.6 55.0 Pollution Control and Economic Development Facilities Obligations (fixed and variable rates)............................................ .9 1.1 $1.2 $1.2 $1.2 $ 34.4 40.0 20.8 14 1/4% Senior Subordinated Notes................... 320.5 320.5 319.8 Alpart CARIFA Loan.................................. 60.0 60.0 60.0 Alpart Term Loan (8.95%)............................ 6.2 6.3 6.2 6.3 6.3 31.3 37.5 Other Borrowings (fixed and variable rates)......... .5 .7 .7 1.3 1.4 8.0 12.6 9.7 ----- ------ ---- ---- ---- ------- ------ ------ Total....................................... $25.9 $316.4 $8.1 $8.8 $8.9 $ 422.9 791.0 707.8 ----- ------ ---- ---- ---- ------- ----- ------ ---- ---- ---- ------- Less current portion................................ 25.9 26.3 ------ ------ Long-term debt...................................... $765.1 $681.5 ------ ------ ------ ------
The 1989 Credit Agreement The Company and KACC entered into a credit agreement with a syndicate of commercial banks and other financial institutions (the "Banks") pursuant to the terms of which the Banks agreed to extend to KACC credit facilities in an aggregate principal amount of approximately $722.0 (as amended, "the 1989 Credit Agreement"). The obligations of KACC in respect of the credit facilities are guaranteed by Kaiser, and by a number of wholly owned subsidiaries of KACC, which, among other things, together directly own the Company's interest in Alpart and QAL. Loans under the 1989 Credit Agreement bear an annual interest rate, at KACC's election from time to time, equal to (i) the Reference Rate (prime) plus 1 1/2%, (ii) the CD Rate plus 2 5/8%, or (iii) the LIBO Rate plus 2 1/2%. All interest rates and fees are subject to a reduction or increase of 1/2% per annum, on a non-cumulative basis, depending upon KACC's interest coverage ratio, determined quarterly. As of December 31, 1992, the interest coverage ratio permitted no reduction or increase in interest rates and fees. The 1989 Credit Agreement requires KACC to maintain certain financial covenants and places restrictions on KACC's ability to, among other things, incur debt and liens, make investments, pay dividends, F-9 97 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) undertake transactions with affiliates, make capital expenditures, and enter into unrelated lines of business. Payment of dividends by KACC to Kaiser is subject to meeting certain conditions. As of December 31, 1992, $20.6 was available for payment of dividends, although under the terms of the 1989 Credit Agreement, no more than $3.0 may be paid in any quarter. The 1989 Credit Agreement requires KACC to prepay certain outstanding amounts from proceeds from Asset Dispositions, as defined, and to prepay certain amounts outstanding in an amount equal to 50% of Excess Cash Flow, as defined, for each fiscal year ending on or after December 31, 1990. The 1989 Credit Agreement is secured by, among other things, (i) mortgages on KACC's major domestic plants; (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 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 comprises the following: Revolving Credit Facility -- The five-year Revolving Credit Facility provides 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 may be used for letters of credit. During each year the Revolving Credit Facility is outstanding, KACC is required to maintain $50.0 in unutilized capacity for a minimum of thirty consecutive days. As of December 31, 1992, $24.0 (of which $14.0 may be used for letters of credit) was available to KACC under the Revolving Credit Facility. Term Loan -- The five-year Term Loan was originally to be repaid in ten equal semi-annual installments, commencing May 31, 1990. Following an amendment, the 1989 Credit Agreement requires, among other things, the mandatory prepayment, no later than July 29, 1993, of all amounts outstanding under the Term Loan. The Company expects that it will be able to satisfy its debt service and capital expenditures requirements through at least March 31, 1994, from cash flows generated by operations and, to the extent necessary, from borrowings under the revolving credit facility of the 1989 Credit Agreement. The Company believes that it will be able to renegotiate and/or refinance the 1989 Credit Agreement as necessary prior to its expiration. 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, 1992, $17.4 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. 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 Facility. These transactions will result in a pre-tax F-10 98 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 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 tender premium on the 14 1/4% Notes. The obligations of KACC with respect to the 12 3/4% Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC. The indenture governing the 12 3/4% Notes contains, among other things, restrictions on the ability of KACC and its subsidiaries to incur debt, undertake transactions with affiliates, and pay dividends. 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 (3.4% at December 31, 1992) 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 1992, 1991, and 1990 was $4.4, $4.2, and $8.9, respectively. Restricted Net Assets of Subsidiary At December 31, 1992, certain debt instruments restricted the ability of KACC to transfer assets, make loans and advances, and pay dividends to the Company. The restricted net assets of KACC totaled $547.8 at December 31, 1992. Fair Value Disclosure The fair value of the Company's long-term debt at December 31, 1992, is as follows: -- The estimated fair value of the 14 1/4% Notes is 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 estimated to be $459.0 based upon discounting the future cash flows using the current rate for debt of similar maturities and terms. F-11 99 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 5. INCOME TAXES Income (loss) before income taxes and minority interests is as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1992 1991 1990 ------ ------ ------ Domestic................................................. $(77.6) $ 16.2 $ 54.2 Foreign.................................................. 109.7 126.2 242.9 ------ ------ ------ Total.......................................... $ 32.1 $142.4 $297.1 ------ ------ ------ ------ ------ ------
The provision (credit) for income taxes consists of:
FEDERAL FOREIGN STATE TOTAL ------ ------ ------ ------ 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 ------ ------ ------ ------ ------ ------ ------ ------ 1990 Current................................... $ 18.7 $ 39.4 $ 3.0 $ 61.1 Deferred................................. (4.6) 17.1 2.0 14.5 ------ ------ ------ ------ Total................................ $ 14.1 $ 56.5 $ 5.0 $ 75.6 ------ ------ ------ ------ ------ ------ ------ ------
The deferred (credit) provision for income taxes results from the following timing differences:
YEAR ENDED DECEMBER 31, ---------------------------- 1992 1991 1990 ------ ----- ----- Depreciation............................................. $ 5.4 $ 7.8 $ 8.4 Undistributed earnings or losses of foreign and unconsolidated affiliates.............................. (12.3) (12.4) (3.3) Inventory costing differences............................ (5.5) 5.9 .6 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 9.4 Other.................................................... (.6) 3.6 (.6) ------ ----- ----- Total.......................................... $(15.9) $(2.9) $14.5 ------ ----- ----- ------ ----- -----
F-12 100 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) A reconciliation between the provision for income taxes and the amount computed by applying the federal statutory income tax rate to income before income taxes and minority interests is as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1992 1991 1990 ----- ----- ------ Amount of federal income tax based upon the statutory rate................................................... $10.9 $48.4 $101.0 Financial reporting/tax basis differences................ 3.0 (6.4) (10.9) Foreign taxes, net of federal tax benefit................ .4 (.2) (3.2) Percentage depletion..................................... (6.3) (6.0) (5.6) Revision of prior years' tax estimates................... (2.9) (8.7) Losses and expenses for which no federal benefit was recognized............................................. 3.8 Other.................................................... .2 1.5 (5.7) ----- ----- ------ Provision for income taxes............................... $ 5.3 $32.4 $ 75.6 ----- ----- ------ ----- ----- ------
In the years ended December 31, 1992 and 1991, the Company has reversed $2.9 and $8.7 of previously established income tax reserves. The Company and its subsidiaries are included in the consolidated federal income tax return of MAXXAM. KACC and MAXXAM entered into a tax allocation agreement (the "KACC Tax Allocation Agreement") which became effective as of October 28, 1988. Under the terms of the KACC Tax Allocation Agreement, MAXXAM will compute 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 a tax allocation agreement (the "Company Tax Allocation Agreement") which became effective as of January 1, 1991. Under the terms of the Company Tax Allocation Agreement, MAXXAM will compute 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 will be the difference between the tentative federal income tax liability and the liability computed under the KACC Tax Allocation Agreement. The 1989 Credit Agreement prohibits the payment by KACC to MAXXAM of any amount due under the KACC Tax Allocation Agreement until December 15, 1994. 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. At December 31, 1992, the Company has approximately $1.8 of regular tax foreign tax credit carryforwards and approximately $31.5 of alternative minimum tax foreign tax credit carryforwards which expire through 1994. These tax attributes are available to reduce future federal tax provisions for financial F-13 101 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) reporting purposes. The following table presents the Company's tax attributes for federal income tax purposes under the terms of the tax allocation agreements at December 31, 1992:
EXPIRING THROUGH ----------- Regular tax attribute carryforwards: Pre-acquisition net operating losses................... $58.1 2003 Pre-acquisition general business tax credits........... 55.9 2002 Foreign tax credits.................................... 4.5 1994 Alternative minimum tax credits........................ 3.1 Indefinite Alternative minimum tax attribute carryforwards: Pre-acquisition net operating losses................... 25.9 2003 Foreign tax credits.................................... 5.5 1994
The above tax attributes are subject to various limitations. In February 1992, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The Company elected to adopt SFAS 109 as of January 1, 1993. The cumulative effect of the change in accounting principle for the adoption of SFAS 109 will be recorded as a charge to operations and will reduce results of operations by approximately $2.0. The implementation of SFAS 109 will require the Company to restate certain assets and liabilities to their pre-tax amounts from their net-of-tax amounts originally recorded. The adoption of SFAS 109, including the restatement of certain assets and liabilities, will primarily result in an increase in the net carrying value of property, plant, and equipment, an increase in long-term liabilities, and an increase in deferred income tax liabilities. Concurrent with the adoption of SFAS 109, the Company will implement the change in accounting method for postretirement benefits as discussed in Note 6. This accounting method change will result in the recognition of a deferred tax asset of approximately $234.0. The Company believes that its ability to generate future taxable income will allow for the realization of this deferred tax asset. F-14 102 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 6. EMPLOYEE BENEFIT AND INCENTIVE PLANS Retirement Plans Retirement plans are non-contributory for salaried and hourly employees. Employee pension benefit plans status was:
DECEMBER 31, -------------------------------------------- 1992 1991 ------------------ -------------------- PLANS PLANS PLANS PLANS WITH WITH WITH WITH ASSETS ACCUMULATED ASSETS ACCUMULATED EXCEEDING BENEFITS EXCEEDING BENEFITS ACCUMULATED EXCEEDING ACCUMULATED EXCEEDING BENEFITS ASSETS BENEFITS ASSETS ----- ------- ------- ------- Accumulated benefit obligation: Vested employees........................... $(1.8) $(661.7) $(200.8) $(457.4) Nonvested employees........................ (.5) (49.1) (14.0) (31.4) ----- ------- ------- ------- Accumulated benefit obligation............. (2.3) (710.8) (214.8) (488.8) Additional amounts related to projected salary increases........................... (.1) (33.6) (27.5) (9.4) ----- ------- ------- ------- Projected benefit obligation................. (2.4) (744.4) (242.3) (498.2) Plan assets (principally fixed income obligations and common stocks) at fair value........... 2.5 570.0 217.9 386.9 ----- ------- ------- ------- Plan assets in excess of (less than) projected benefit obligation......................... .1 (174.4) (24.4) (111.3) ----- ------- ------- ------- Unrecognized gains and obligations and prior-service cost: Net losses (gains)......................... .1 34.6 .1 (2.2) Net obligations............................ 2.6 3.8 Prior-service cost......................... .2 15.7 .2 16.5 ----- ------- ------- ------- Net unrecognized losses and obligations...... .3 52.9 .3 18.1 ------- ------- Adjustment required to recognize minimum liability.................................. (25.3) (9.1) ----- ------- ------- ------- Net pension assets (liabilities) included in the Consolidated Balance Sheet (principally in long-term liabilities).................. $ .4 $(146.8) $ (24.1) $(102.3) ----- ------- ------- ------- ----- ------- ------- -------
Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions, requires recognition of a minimum pension liability for unfunded plans. At December 31, 1992, the Company recorded an after-tax charge to equity of $6.7 because the additional liability required to be recognized exceeded unrecognized prior service cost (see Note 7). F-15 103 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) The components of net periodic pension cost are:
YEAR ENDED DECEMBER 31, ----------------------------- 1992 1991 1990 ------ ------- ------ Service cost -- benefits earned during the period........................................... $ 11.0 $ 9.8 $ 10.3 Interest cost on projected benefit obligation...... 58.8 59.3 56.3 Return on assets: Actual (gain) loss............................... (26.3) (100.1) 4.9 Deferred (loss) gain............................. (31.2) 49.9 (59.2) Net amortization and deferral...................... 2.1 .3 .8 ------ ------- ------ Net periodic pension cost.......................... $ 14.4 $ 19.2 $ 13.1 ------ ------- ------ ------ ------- ------
Assumptions to value obligations at year-end, and to determine the net periodic pension cost in the subsequent year, are:
1992 1991 1990 ----- ----- ----- Discount rate.......................................... 8.25% 8.25% 9.00% Expected long-term rate of return on assets............ 10.00% 10.00% 10.00% Rate of increase in compensation levels................ 5.00% 5.00% 6.00%
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. Substantially all compensation vested 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, 1992. Under the LTIP, as amended, amounts earned and unvested of approximately $6.1 will vest at the rate of 25% per year for the four-year period ending December 31, 1996. All future payments from the LTIP are expected to be in common stock of the Company. 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 $6.6, $6.5, and $15.0 for the years ended December 31, 1992, 1991, and 1990, respectively. Postretirement Benefits 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. Those benefits are provided through administrative service contracts with various insurance carriers. The Company or its subsidiaries pay and expense the cost of providing these benefits as incurred. The cost of these benefits was $47.2, $40.2, and $40.0 for the years ended December 31, 1992, 1991, and 1990, respectively. In December 1990, the FASB issued Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106"), which requires that the expected cost of providing postretirement health care and life insurance benefits be charged to expense during the years that the employees render service. This is a significant change from the Company's current policy of F-16 104 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) recognizing these costs on a cash basis. The Company has elected to adopt SFAS 106 as of January 1, 1993. The cumulative effect of the change in accounting principle for the adoption of SFAS 106 will be recorded as a charge to results of operations and will reduce pre-tax results of operations by $732.0. The tax benefit for the adoption of SFAS 106 which will be recorded under SFAS 109, based upon the current statutory rate, is approximately $234.0. In addition, the Company estimates that annual 1993 postretirement benefit pre-tax expense will be approximately $18.4 higher than would have been reported under the current policy. The new accounting method has no effect on the Company's cash outlays for retiree benefits nor will the one-time charge affect the Company's compliance with its existing debt covenants. The Company reserves the right, subject to applicable collective bargaining agreements, to amend or terminate these benefits. Postemployment Benefits In November 1992, the FASB issued Statement of Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits ("SFAS 112"). SFAS 112 requires employers to recognize the obligation to provide postemployment benefits to former or inactive employees. The Company provides certain benefits to former or inactive employees after employment but before retirement. The Company has elected to adopt SFAS 112 as of January 1, 1993. The cumulative effect of the change in accounting principle for the adoption of SFAS 112 will reduce pre-tax results of operations by approximately $10.0 to $15.0. In addition, the Company believes that annual 1993 postemployment benefit expenses will not be materially different than would have been reported under the current policy. The new accounting method has no effect on the Company's cash outlays for postemployment benefits nor will it 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. F-17 105 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 7. STOCKHOLDERS' EQUITY AND MINORITY INTERESTS Changes in stockholders' equity and minority interests were:
MINORITY INTERESTS --------------- STOCKHOLDERS' EQUITY REDEEMABLE --------------------------- PREFERENCE COMMON ADDITIONAL RETAINED STOCKS OTHER STOCK CAPITAL EARNINGS ----- ----- ----- ------ ------ BALANCE, JANUARY 1, 1990......................... $60.8 $74.3 $141.4 $150.9 Net income..................................... 213.7 Redeemable preference stock: Accretion................................... 11.8 Stock repurchase............................ 10.2 Stock redemption............................ (35.0) Dividends on common stock...................... (150.0) Conversions (6,844 preference shares into cash)....................................... (.5) Stock split.................................... $ .5 (.5) Minority interest in majority-owned subsidiaries................................ 1.6 ----- ----- ----- ------ ------ BALANCE, DECEMBER 31, 1990....................... 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 pension liability (see Note 6)...... (6.7) ----- ----- ----- ------ ------ BALANCE, DECEMBER 31, 1992....................... $32.8 $72.1 $ .6 $288.5 $276.1 ----- ----- ----- ------ ------ ----- ----- ----- ------ ------
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 F-18 106 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 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.
1992 1991 1990 -------- -------- -------- Shares: Beginning of year........................ 1,305,550 1,718,051 2,407,086 Issued................................... 1,868 129 Redeemed................................. (142,329) (414,369) (689,164) -------- -------- -------- End of year.............................. 1,163,221 1,305,550 1,718,051 -------- -------- -------- -------- -------- --------
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 April 1988, KACC entered into a two-and-one-half-year agreement with the USWA whereby KACC was obligated to make additional contributions to the Series A redemption fund of (i) $2.0 each in March 1989 and 1990; and (ii) an additional amount equal to 8.5% of the redemption value of all shares of Series A Stock distributed from the trust occasioned by the sale of any plant covered by the agreement to the extent there was not enough money in the redemption fund to redeem the shares presented for payment. As a result of this agreement, KACC also agreed with the USWA to contribute $22.5 to the Series A redemption fund in conjunction with the sale of Ravenswood. In March 1991 and 1992, KACC contributed $7.1 and $7.0 for the years 1990 and 1991, respectively, and will contribute $4.3 in March 1993 for 1992. 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. In 1991, KACC purchased $11.1 of Series A stock and $2.1 of Series B stock. If the remaining shares of Series A stock are purchased by the Company, the purchases will total $4.1 in 1994. 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 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 F-19 107 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 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 The outstanding shares of KACC preference stocks, in descending order of seniority, were:
DECEMBER ------------------ 1992 1991 ------ ------ Preference, Cumulative Convertible, $100 par: 4 1/8%................................................ 4,110 4,440 4 3/4% (1957 Series).................................. 3,054 3,721 4 3/4% (1959 Series).................................. 14,607 15,180 4 3/4% (1966 Series).................................. 4,235 5,070
KACC Cumulative Convertible Preference Stocks, $100 par value ("$100 Preference Stocks"), restrict acquisition of junior stock and payment of dividends. At December 31, 1992, 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 Stocks can be exchanged for per share cash amounts of $69.30, $77.84, $78.38, and $76.46, respectively. KACC records the $100 Preference Stocks at their exchange amounts for financial statement presentation. Common Stock On July 18, 1991, the Company issued 7,250,000 shares, or approximately 12.7% of its common stock, for net proceeds of approximately $93.2. Approximately 87.2% of Kaiser's common stock continues to be held indirectly by MAXXAM and the remaining .1% of common stock is owned by management (see Note 6). 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" 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. At December 31, 1992, 25,945,946 shares of Kaiser's common stock held indirectly by MAXXAM are pledged as security for $150.0 of notes issued in November 1991 by a MAXXAM subsidiary. Dividends In December 1990, the Company declared a dividend on common stock of $150.0 in the form of promissory notes (see "Common Stock" above). On January 31, September 16, and December 16, 1991, the F-20 108 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 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. In the event that the Company pays any distributions to its shareholders, the 1989 Credit Agreement requires MAXXAM and any subsidiary of MAXXAM to use the entire proceeds of any such distributions received by MAXXAM or any subsidiary of MAXXAM to purchase a Pay-in-Kind Note (the "PIK Note") from KACC. On December 15, 1992, KACC issued a PIK Note to a subsidiary of MAXXAM in the principal amount of $2.5, representing the entire amount of the dividend received by such subsidiary in respect of the shares of the Company's common stock which it owns. 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. 8. COMMITMENTS AND CONTINGENCIES 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, 1992, is $70.7, due in 1997. The KACC share of payments, including operating costs and certain other expenses under the agreement, was $99.2, $107.6, and $88.9 for the years ended December 31, 1992, 1991, and 1990, respectively. Minimum rental commitments under operating leases at December 31, 1992, are as follows: years ending December 31, 1993 -- $20.4; 1994 -- $19.3; 1995 -- $18.4; 1996 -- $18.0; 1997 -- $17.4; thereafter -- $261.7. The future minimum rentals receivable under noncancelable subleases were $94.5 at December 31, 1992. Rental expenses were $26.2, $23.3, and $23.1 for the years ended December 31, 1992, 1991, and 1990, respectively. Primarily included in other long-term liabilities are environmental accruals related to potential solid waste disposal and soil and groundwater remediation matters. The following table presents the changes in such accruals for the years ended December 31, 1992, 1991, and 1990:
1992 1991 1990 ----- ----- ----- Balance at beginning of period................ $51.5 $57.7 $72.9 Additional amounts............................ 4.5 7.8 3.6 Less expenditures............................. (9.6) (14.0) (18.8) ----- ----- ----- Balance at end of period...................... $46.4 $51.5 $57.7 ----- ----- ----- ----- ----- -----
The Company is involved in various claims, lawsuits, and other proceedings relating to product liability, environmental protection, and a wide variety of other matters. While uncertainties are inherent in the ultimate outcome of such matters and it is impossible to determine the costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs, some of which may be substantial, should not have a material adverse effect upon the Company's consolidated financial position or results of operations. F-21 109 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 9. 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 $12.0, $1.2, and $7.2 for the years ended December 31, 1992, 1991, and 1990, respectively. Sales to a single customer were $135.3, $155.9, and $204.3 of bauxite and alumina and $144.9, $160.9, and $205.9 of aluminum processing for the years ended December 31, 1992, 1991, and 1990, respectively. Export sales were less than 10% of total revenue during the years ended December 31, 1992, 1991, and 1990. Financial information by industry segment at December 31, 1992 and 1991, and for the years ended December 31, 1992, 1991, and 1990, is as follows:
YEAR ENDED BAUXITE DECEMBER & ALUMINUM 31, ALUMINA PROCESSING CORPORATE TOTAL ---- ------ -------- ------ -------- Net sales to unaffiliated customers 1992 $466.5 $1,442.6 $1,909.1 1991 550.8 1,450.0 2,000.8 1990 609.4 1,485.6 2,095.0 Intersegment sales 1992 $179.9 $ 179.9 1991 194.6 194.6 1990 254.7 254.7 Equity in earnings (losses) of 1992 $ 1.8 $ (3.7) $ (1.9) consolidated affiliates 1991 (4.4) (15.1) (19.5) 1990 (5.0) (7.8) (12.8) Operating income (loss) 1992 $ 62.6 $ 104.9 $(77.6) $ 89.9 1991 150.0 150.2 (84.2) 216.0 1990 241.4 222.6 (87.9) 376.1 Depreciation 1992 $ 29.8 $ 49.0 $ 1.5 $ 80.3 1991 26.4 46.0 .8 73.2 1990 25.8 43.5 1.2 70.5 Capital expenditures 1992 $ 50.8 $ 39.4 $ 24.2 $ 114.4 1991 51.1 64.8 2.2 118.1 1990 46.9 67.4 .8 115.1 Investment in and advances to 1992 $136.2 $ 12.5 $ 1.4 $ 150.1 unconsolidated affiliates 1991 140.9 16.1 4.9 161.9 Identifiable assets 1992 $715.7 $1,165.9 $217.2 $2,098.8 1991 693.3 1,256.2 184.6 2,134.1
F-22 110 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) Geographical area information relative to operations is summarized as follows:
YEAR ENDED OTHER DECEMBER 31, DOMESTIC CARIBBEAN AFRICA FOREIGN ELIMINATIONS TOTAL ------------ -------- --------- ------- ------- ------------ ------------ Net sales to unaffiliated 1992 $1,359.6 $ 92.9 $ 263.5 $ 193.1 $ 1,909.1 customers 1991 1,383.8 149.6 269.2 198.2 2,000.8 1990 1,384.9 186.0 286.8 237.3 2,095.0 Sales and transfers among 1992 $ 111.8 $ 93.5 $ (205.3) geographic areas 1991 116.4 112.3 (228.7) 1990 137.6 155.7 (293.3) Equity in losses of 1992 $ (1.9) $ (1.9) unconsolidated affiliates 1991 (19.5) (19.5) 1990 (12.8) (12.8) Operating income (loss) 1992 $ (25.3) $ 18.4 $ 78.8 $ 18.0 $ 89.9 1991 59.7 47.8 72.1 36.4 216.0 1990 163.6 95.1 60.2 57.2 376.1 Investment in and advances 1992 $ 1.4 $ 29.5 $ 119.2 $ 150.1 to unconsolidated affiliates 1991 4.9 30.7 126.3 161.9 Identifiable assets 1992 $1,301.1 $ 358.3 $ 227.5 $ 211.9 $ 2,098.8 1991 1,396.2 332.1 211.6 194.2 2,134.1
F-23 111 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (IN MILLIONS OF DOLLARS) ASSETS
SEPTEMBER 30, DECEMBER 31, 1993 1992 ------------- ------------ (UNAUDITED) Current assets: Cash and cash equivalents..................................... $ 13.9 $ 19.1 Receivables................................................... 241.2 270.0 Inventories................................................... 431.1 439.9 Prepaid expenses and other current assets..................... 74.1 37.0 ------------- ------------ Total current assets....................................... 760.3 766.0 Investments in and advances to unconsolidated affiliates........ 177.6 150.1 Property, plant, and equipment -- net........................... 1,167.6 1,066.8 Deferred income taxes........................................... 209.7 Other assets.................................................... 168.1 115.9 ------------- ------------ Total...................................................... $ 2,483.3 $2,098.8 ------------- ------------ ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.............................................. $ 105.3 $ 136.6 Accrued interest.............................................. 10.2 4.6 Accrued salaries, wages, and related expenses................. 101.8 84.4 Other accrued liabilities..................................... 118.5 111.0 Payable to affiliates......................................... 72.4 78.4 Short-term borrowings......................................... 18.5 4.8 Long-term debt -- current portion............................. 8.5 25.9 ------------- ------------ Total current liabilities.................................. 435.2 445.7 Long-term liabilities........................................... 1,141.4 217.9 Long-term debt.................................................. 692.8 765.1 Minority interests.............................................. 103.7 104.9 Stockholders' equity: Preferred stock............................................... .2 Common stock.................................................. .6 .6 Additional capital............................................ 422.6 288.5 Retained earnings (accumulated deficit)....................... (313.2) 276.1 ------------- ------------ Total stockholders' equity................................. 110.2 565.2 ------------- ------------ Total...................................................... $ 2,483.3 $2,098.8 ------------- ------------ ------------- ------------
The accompanying notes to interim consolidated financial statements are an integral part of these statements. F-24 112 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED INCOME (LOSS) (UNAUDITED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 1993 1992 -------- -------- Net sales............................................................ $1,303.2 $1,413.1 -------- -------- Costs and expenses: Cost of products sold.............................................. 1,181.0 1,178.1 Depreciation....................................................... 72.9 60.4 Selling, administrative, research and development, and general..... 90.7 88.9 -------- -------- Total costs and expenses........................................... 1,344.6 1,327.4 -------- -------- Operating income (loss).............................................. (41.4) 85.7 Other income (expense): Interest and other income.......................................... 10.0 5.0 Interest expense................................................... (63.8) (58.4) -------- -------- Income (loss) before income taxes, minority interests, extraordinary loss, and cumulative effect of changes in accounting principles.... (95.2) 32.3 Credit (provision) for income taxes.................................. 39.5 (7.9) Minority interests................................................... (1.3) (.1) -------- -------- Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles................................... (57.0) 24.3 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).................................................... $ (586.1) $ 24.3 -------- -------- -------- -------- Per common and common equivalent share: Income (loss) before extraordinary loss and cumulative effect of changes in accounting principles................................ $ (1.05) $ .42 Extraordinary loss................................................. (.38) Cumulative effect of changes in accounting principles.............. (8.85) -------- -------- Net income (loss).................................................... $ (10.28) $ .42 -------- -------- -------- -------- Weighted average common and common equivalent shares outstanding (000).............................................................. 57,330 57,250 -------- -------- -------- --------
The accompanying notes to interim consolidated financial statements are an integral part of these statements. F-25 113 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) (IN MILLIONS OF DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 1993 1992 --------- ------- Cash flows from operating activities: Net income (loss).................................................... $ (586.1) $ 24.3 Adjustments to reconcile net income (loss) to net cash (used for) provided by operating activities: Depreciation...................................................... 72.9 60.4 Non-cash postretirement benefit expenses other than pensions...... 14.6 Amortization of deferred financing costs and discount on long-term debt............................................................. 8.5 8.7 Extraordinary loss on early extinguishment of debt................ 33.0 Cumulative effect of changes in accounting principles............. 507.3 Minority interests................................................ 1.3 .1 Equity in losses of unconsolidated affiliates..................... 11.8 9.1 Recognition of previously deferred income from a forward alumina sale............................................................. (.6) (18.7) Increase in accrued interest...................................... 5.7 10.6 Incurrence of financing costs..................................... (12.0) (1.8) Decrease (increase) in receivables................................ 25.2 (10.8) Decrease in inventories, prepaid expenses, and other current assets........................................................... 21.6 14.7 Decrease in accounts payable, payable to affiliates, and accrued liabilities...................................................... (90.2) (83.7) Other............................................................. (15.4) 9.0 --------- ------- Net cash (used for) provided by operating activities............ (2.4) 21.9 --------- ------- Cash flows from investing activities: Net proceeds from disposition of property and investments............ 11.4 43.4 Capital expenditures................................................. (36.4) (79.8) --------- ------- Net cash used for investing activities.......................... (25.0) (36.4) --------- ------- Cash flows from financing activities: Repayments of long-term debt, including revolving credit............. (1,011.3) (97.1) Borrowings of long-term debt, including revolving credit............. 920.0 123.5 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 borrowings............................................ 13.7 4.6 Dividends paid....................................................... (3.2) (8.6) Redemption of minority interest in preference stock of a subsidiary........................................................ (4.2) (7.2) Capital stock issued................................................. 119.3 --------- ------- Net cash provided by financing activities....................... 22.2 15.2 --------- ------- Net (decrease) increase in cash and cash equivalents during the period............................................................... (5.2) .7 Cash and cash equivalents at beginning of period....................... 19.1 15.8 --------- ------- Cash and cash equivalents at end of period............................. $ 13.9 $ 16.5 --------- ------- --------- ------- Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest........................... $ 49.6 $ 39.6 Income taxes paid.................................................... 9.3 2.0 Tax allocation payments to MAXXAM Inc................................ 28.0 Supplemental disclosure of non-cash financing activities: Exchange of the borrowings from MAXXAM Group Inc. for capital stock............................................................. $ 15.0
The accompanying notes to interim consolidated financial statements are an integral part of these statements. F-26 114 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 1. GENERAL The foregoing unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, said financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair statement of the results for the interim periods presented have been included. Operating results for the first nine months of 1993 are not necessarily indicative of the results that may be expected for the year ending December 31, 1993. Certain reclassifications of prior period information were made to conform to the current presentation. Kaiser Aluminum Corporation ("Kaiser" or the "Company") is a 68%-owned subsidiary of MAXXAM Inc. ("MAXXAM"). The remaining 32% of Kaiser's equity interest is publicly held. On February 1, 1993, Kaiser Aluminum & Chemical Corporation ("KACC"), the operating subsidiary of the Company, 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 refinance KACC's 14 1/4% Senior Subordinated Notes due 1995 (the "14 1/4% Notes"), to prepay $18.0 of the term loan under KACC's 1989 Credit Agreement (the "Credit Agreement"), and to reduce outstanding borrowings under the revolving credit facility of the Credit Agreement. These transactions resulted in a pre-tax extraordinary loss of $33.0 in the first quarter of 1993 ($21.8 after taxes), 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 12 3/4% Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC. The Credit Agreement and the indenture in respect of the 12 3/4% Notes (see Note 3 below) restrict, among other things, the Company's and KACC's ability to pay dividends. Under the most restrictive of these covenants, neither the Company nor KACC is currently permitted to pay dividends on its common stock. On June 30, 1993, Kaiser consummated the public offering (the "Public Offering") of 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 Public Offering, MAXXAM Group Inc. ("MGI"), a wholly owned subsidiary of MAXXAM, exchanged a promissory note of KACC (the "MAXXAM Note") in the principal amount of $15.0 (which evidenced a cash loan in the amount of $15.0 made by MGI to KACC) for 2,132,950 Depositary Shares. The net cash proceeds from the Public Offering were approximately $119.3. Kaiser used approximately $37.8 of such net proceeds to make a non-interest bearing loan to KACC evidenced by a note, which note is designated to provide sufficient funds to Kaiser to enable it to make dividend payments on the Series A Shares until the Mandatory Conversion Date with respect to the Series A Shares; and 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 the Credit Agreement and $105.6 of such funds to reduce outstanding borrowings under the revolving credit facility of the Credit Agreement. At September 30, 1993, 28,000,000 shares of the Company's common stock owned by MAXXAM were pledged as security of two new MGI debt issues, consisting of $100.0 of 11 1/4% Senior Secured Notes due 2003, initially priced at 100%, and $126.7 of 12 1/4% Senior Secured Discount Notes due 2003, initially priced at 55.24%, of their principal amount. KACC announced in October that it is restructuring its flat-rolled products operation at its Trentwood plant in Spokane, Washington, to reduce that facility's annual operating costs. This effort is in response to over-capacity in the aluminum rolling industry, flat demand in can stock markets, and declining demand for F-27 115 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) aluminum products sold to customers in the commercial aerospace industry, all of which have resulted in declining prices in Trentwood's key markets. The Company expects that the Trentwood restructuring, and the restructuring of operations at some other facilities which is under consideration, are likely to result in a fourth quarter pre-tax charge of approximately $30.0 to $40.0. 2. INVENTORIES The classification of inventories is as follows:
SEPTEMBER 30, DECEMBER 31, 1993 1992 ------------- ------------ Finished fabricated products........................ $ 89.1 $ 91.2 Primary aluminum and work in process................ 141.8 128.7 Bauxite and alumina................................. 98.0 107.4 Operating supplies and repair and maintenance parts............................................. 102.2 112.6 ------------- ------------ Total..................................... $ 431.1 $439.9 ------------- ------------ ------------- ------------
Substantially all product inventories are stated at last-in, first-out (LIFO) cost, not in excess of market. Replacement cost is not in excess of LIFO cost. 3. LONG-TERM DEBT Long-term debt is as follows:
SEPTEMBER 30, DECEMBER 31, 1993 1992 ------------- ------------ 1989 Credit Agreement: Revolving Credit Facility......................... $ 165.0 $290.0 Term Loan......................................... 36.6 Pollution Control and Solid Waste Disposal Obligations (6%-7.75%)............................ 39.2 40.0 Alpart CARIFA Loan (fixed and variable rates)....... 60.0 60.0 Alpart Term Loan (8.95%)............................ 25.0 31.3 12 3/4% Senior Subordinated Notes due 2003.......... 400.0 14 1/4% Senior Subordinated Notes due 1995, net of discount of $1.2........................... 320.5 Other borrowings (fixed and variable rates)......... 12.1 12.6 ------------- ------------ Total..................................... 701.3 791.0 Less current portion................................ 8.5 25.9 ------------- ------------ Long-term debt...................................... $ 692.8 $765.1 ------------- ------------ ------------- ------------
Loans under the Credit Agreement bear an annual interest rate, at KACC's election from time to time, equal to (i) the Reference Rate plus a margin of 1 1/2%, (ii) the CD Rate (Reserve Adjusted) plus a margin of 2 5/8%, or (iii) the LIBO Rate (Reserve Adjusted) plus a margin of 2 1/2%. All margins and fees are subject to a reduction or increase of 1/2% per annum on a non-cumulative basis, depending upon a financial test, determined quarterly. This financial test required an increase in margins and fees commencing with the second quarter of 1993, and the increase will continue at least through the fourth quarter of 1993. As of September 30, 1993, $148.9 of borrowing capacity was unused under the revolving credit facility of the Credit Agreement (of which $13.9 could also have been used for letters of credit). F-28 116 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 4. EARNINGS PER COMMON SHARE Earnings per share are computed based on the weighted average number of common and common equivalent shares outstanding during each period. For the nine months ended September 30, 1993, common stock equivalents of 19,382,950 attributable to the Series A Shares were excluded from the calculation of weighted average shares because they were antidilutive. Dividends on the Series A Shares ($3.2 for the nine months ended September 30, 1993) are deducted from net income (added to net loss) for the purpose of calculating earnings per share. 5. INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The adoption of SFAS 109 changes the Company's method of accounting for income taxes to an asset and liability approach from the deferral method prescribed by Accounting Principles Board Opinion No. 11, Accounting for Income Taxes. The asset and liability approach requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred income tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. The cumulative effect of the change in accounting principle, as of January 1, 1993, reduced the Company's results of operations by $2.3. 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 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 $56.0 in long-term liabilities, (iv) a decrease of $2.5 in other assets and an increase of $10.1 in other liabilities, and (v) an increase of $126.1 in deferred income tax liabilities. Concurrent with the adoption of SFAS 109, the Company implemented changes in its accounting methods for postretirement benefits pursuant to Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106") (see Note 6) and Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits ("SFAS 112") (see Note 7). The cumulative effect of changes in accounting principles relating to SFAS 106 and SFAS 112 totaled approximately $742.7 and resulted in the recognition of deferred income tax assets of $237.7, net of valuation allowances. The Company believes that its ability to generate future taxable income will allow for the realization of these deferred income tax assets. F-29 117 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) As of January 1, 1993, after giving effect to the adoption of SFAS 109, SFAS 106, and SFAS 112, the components of the Company's net deferred income tax assets (liabilities) were as follows:
JANUARY 1, 1993 ------- Deferred income tax assets: Postretirement benefits other than pensions...................... $ 270.8 Other liabilities................................................ 98.8 Loss and credit carryforwards.................................... 83.3 Pensions......................................................... 45.8 Foreign and state deferred income tax liabilities................ 44.4 Property, plant, and equipment................................... 22.6 Other............................................................ 18.6 Valuation allowances............................................. (103.7) ------- Total deferred income tax assets, net.................... 480.6 ------- Deferred income tax liabilities: Property, plant, and equipment................................... (218.3) Investments in and advances to unconsolidated affiliates......... (60.9) Inventories...................................................... (18.6) Other............................................................ (28.7) ------- Total deferred income tax liabilities.................... (326.5) ------- Net deferred income tax assets..................................... $ 154.1 ------- -------
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 Omnibus Budget Reconciliation Act of 1993 ("the Act"), enacted on August 10, 1993, retroactively increased the federal statutory income tax rate from 34% to 35% for periods beginning on or after January 1, 1993. As a result of the Act, the Company increased its net deferred income tax assets by $3.4 and recorded a deferred tax benefit of $3.4 as of the date of the enactment. The Company has recorded the cumulative effect of the change in the federal statutory income tax rate as an adjustment to its credit for income taxes in the third quarter of 1993. Current tax benefits comprise approximately $17.0 of the credit for income taxes for the nine months ended September 30, 1993. The reconciliation of the Company's credit (provision) for income taxes on income (loss) before income taxes, minority interests, extraordinary loss and cumulative effect of changes in accounting principles to the statutory rate does not differ materially from the reconciliation disclosed in Note 5 to the audited Consolidated Financial Statements contained in the Company's 1992 Annual Report to Stockholders. As shown in the unaudited Statement of Consolidated Income (Loss) for the nine months ended September 30, 1993, the Company reported an extraordinary loss related to the early extinguishment of debt. The Company reported the loss net of related income taxes of $11.2 which approximated the statutory rate in effect on the date the transaction occurred.. The related income tax benefits recorded by the Company in respect of SFAS 106 and SFAS 112 differed from the statutory rate in effect when adopted due to valuation allowances. As a consequence of the consummation of the Public Offering on June 30, 1993, as discussed in Note 1, 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 F-30 118 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS) 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 Company has obtained the approval of the Secretary of the Treasury to file a consolidated federal income tax return for the period ending on December 31, 1993. The tax allocation agreement between the Company and MAXXAM (the "Company Tax Allocation Agreement") terminated pursuant to its terms, effective for taxable periods beginning after June 30, 1993. Any unused federal income tax attribute carryforwards under the terms of the Company Tax Allocation Agreement were eliminated and are not available 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 anticipated that the amounts of such tax attribute carryforwards apportioned to the New Kaiser Tax Group will approximate or exceed the amounts of tax attribute carryforwards eliminated under the Company Tax Allocation Agreement. 6. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company adopted SFAS 106 as of January 1, 1993. The costs of postretirement benefits other than pensions 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 change in accounting principle for the adoption of SFAS 106 was recorded as a charge to results of operations of $497.7, net of related income taxes of $234.2. The Company's accumulated postretirement benefits obligation at the date of adoption was: Retirees.................................................... $581.5 Actives eligible for benefits............................... 32.7 Actives not eligible for benefits........................... 117.7 ------ $731.9 ------ ------
The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 9.5% for 1993 and is assumed to decrease gradually to 6% for 2005 and remain at that level thereafter. Each one percentage point change in the assumed health care cost trend rate would change the accumulated postretirement benefit obligation as of January 1, 1993, by approximately $85.0 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1993 by approximately $10.0. 7. POSTEMPLOYMENT BENEFITS The Company adopted SFAS 112 as of January 1, 1993. The costs of postemployment benefits are now accrued over the period the employee provides services to the date of their full eligibility for such benefits. Previously, such costs were expensed as actual claims were incurred. The cumulative effect of the change in accounting principle for the adoption of SFAS 112 was recorded as a charge to results of operations of $7.3, net of related income taxes of $3.5. F-31 119 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES TO WHICH IT RELATES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Available Information.................. 2 Incorporation of Certain Documents by Reference............................ 2 Summary................................ 3 The Company............................ 12 Risk Factors........................... 12 Use of Proceeds........................ 18 Common Stock and $.65 Depositary Share Price Range and Dividends............ 19 Dividend Policy........................ 19 Capitalization......................... 20 Selected Historical and Pro Forma Consolidated Financial Data.......... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 22 Business............................... 30 Management............................. 49 Certain Transactions................... 65 Description of Principal Indebtedness......................... 68 Description of the PRIDES.............. 72 Federal Income Tax Considerations...... 79 Description of Capital Stock........... 80 Underwriting........................... 84 Legal Matters.......................... 85 Experts................................ 85 Consolidated Financial Statements...... F-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 8,000,000 SHARES KAISER ALUMINUM CORPORATION % PRIDES SM CONVERTIBLE PREFERRED STOCK, ------------------------ PROSPECTUS ------------------------ MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION PAINEWEBBER INCORPORATED SALOMON BROTHERS INC FEBRUARY , 1994 SM Service mark of Merrill Lynch & Co., Inc. - ------------------------------------------------------ - ------------------------------------------------------ 120 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses of this offering will be paid by Kaiser Aluminum Corporation (the "Registrant") and, exclusive of underwriting discounts and commissions, are as follows: SEC registration fee.............................................. $ 33,311 NASD fee.......................................................... 10,160 Printing and engraving............................................ 225,000* Legal............................................................. 150,000* Accounting........................................................ 100,000* NYSE listing fee.................................................. 25,000 Blue Sky filing fees and expenses (including counsel fees)........ 10,000* Rating Agency fees................................................ 15,000 Transfer Agent and Registrar fees................................. 9,000 Miscellaneous..................................................... 22,529* -------- Total................................................... $600,000* -------- --------
- --------------- * Estimated ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Reference is made to Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL"), which enables a corporation in its original certificate of incorporation or an amendment thereto to eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of the director's fiduciary duty, except (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL (providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions), or (iv) for any transaction from which the director derived an improper personal benefit. The Registrant's Restated Certificate of Incorporation contains provisions permitted by Section 102(b)(7) of the DGCL. Reference also is made to Section 145 of the DGCL which provides that a corporation may indemnify any person, including officers and directors, who is, or is threatened to be made, a party to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person is or was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, with respect to any criminal proceeding, had no reasonable cause to believe that his conduct was unlawful. A Delaware corporation may indemnify its officers, directors, employees and agents in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer, director, employee or agent is adjudged to be liable to the corporation. Where an officer, director, employee or agent is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer, director, employee or agent actually and reasonably incurred in connection therewith. The restated certificate of incorporation and by-laws of the Registrant provide for indemnification of directors, officers and employees of the Registrant to the fullest extent authorized by law. II-1 121 The Registrant has entered into, or will enter into, indemnification agreements with each of its directors and officers which provide that the Registrant will indemnify such individuals if and whenever they were or are a party or are threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that they are or were a director, officer or employee of the Registrant or any of its subsidiaries, or are or were serving at the request of the Registrant or any of its subsidiaries as a director, officer, employee, agent or other official of another corporation, partnership, joint venture, trust, or other enterprise, against judgments, fines and amounts paid in settlement and reasonable expenses (including attorneys' fees) actually incurred by them in connection with such action, suit or proceeding except to the extent that (a) any judgments, fines, amounts paid in settlement and expenses are finally determined by a court of competent jurisdiction to have resulted from their gross negligence or bad faith in the performance of their duties (or, alternatively in the case of certain of the indemnification agreements, result from conduct which is finally determined by a court of competent jurisdiction to be knowingly fraudulent or deliberately dishonest, or to constitute willful misconduct), (b) any amount is paid without the prior approval of the Registrant in settlement of a proceeding brought in the name and on behalf of the Registrant or another corporation, partnership, joint venture, trust or other enterprise for which they are or were serving at the request of the Registrant as a director, officer, employee, agent or other official, (c) such indemnification is otherwise prohibited by law, whether by statute, court decision or otherwise, or (d) reimbursement of such expenses has actually been made pursuant to insurance policies maintained by the Registrant for their benefit. For these purposes, service at the request of the Registrant with respect to an "other enterprise" includes service with respect to any employee benefit plan. The agreements further provide for the advancement of expenses incurred in defending any such action, suit or proceeding upon receipt of a repayment undertaking if it is ultimately determined that such individuals are not entitled to be indemnified or to the extent they recover such expenses from others pursuant to insurance or otherwise. The Registrant may terminate the agreements on 90 days' prior written notice to such individuals, but the indemnification provided by the agreements continues to apply to all actions taken or failed to be taken by such individuals prior to the expiration of the 90-day notice period notwithstanding such termination. The Registrant provides liability insurance for each of its directors and officers for certain losses arising from claims or charges made against them while acting in their capacities as directors or officers of the Registrant. The Purchase Agreement pursuant to which securities may be purchased by Underwriters, if any, will be expected to provide that such Underwriters will indemnify the Company, its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company against certain losses related to written information furnished by such Underwriters to the Company for inclusion in the Registration Statement or Prospectus. The foregoing discussion is qualified in its entirety by reference to the DGCL, the Registrant's restated certificate of incorporation and by-laws, and the referenced indemnification agreements. ITEM 16. EXHIBITS (a) Exhibits.
EXHIBIT NO. EXHIBIT - --------------------------------------------------------------------------------------------- 1.1 Form of Purchase Agreement 4.1 Indenture (the "12 3/4% Note Indenture"), dated February 1, 1993, among Kaiser Aluminum & Chemical Corporation, as Issuer ("KACC"), Kaiser Alumina Australia Corporation ("KAAC"), Alpart Jamaica Inc. ("AJI") and Kaiser Jamaica Corporation ("KJC"), as Subsidiary Guarantors, and The First National Bank of Boston, as Trustee, regarding KACC's 12 3/4% Senior Subordinated Notes Due 2003 (incorporated by reference to Exhibit 4.1 to Amendment No. 5 to the Registration Statement on Form S-2 dated January 22, 1993, filed by KACC, Registration No. 33-48260; "KACC's 1993 Registration Statement")
II-2 122
EXHIBIT NO. EXHIBIT - --------------------------------------------------------------------------------------------- 4.2 First Supplemental Indenture, dated as of May 1, 1993 (incorporated by reference to Exhibit 4.2 to the Report on Form 10-Q for the quarterly period ended June 30, 1993 of KACC, filed August 10, 1993, File No. 1-3605; "KACC June 1993 Form 10-Q") *4.3 Form of Indenture, to be entered into by KACC, as Issuer, KAAC, AJI and KJC, as Subsidiary Guarantors, and First Trust National Association, as Trustee, regarding KACC's Senior Notes due 2002 4.4 Credit Agreement, dated December 13, 1989 (the "Credit Agreement"), among the Registrant, KACC, the financial institutions a party thereto, Bank of America National Trust and Savings Association, as Agent, and Mellon Bank, N.A., as Collateral Agent (incorporated by reference to Exhibit 4.3 to Amendment No. 5 to the Registration Statement on Form S-1, dated December 13, 1989, filed by KACC, Registration No. 33-30645; "KACC's 1989 Registration Statement") 4.5 First Amendment to the Credit Agreement, dated April 17, 1990 (incorporated by reference to Exhibit 4.2 to the Report on Form 10-Q for the quarterly period ended September 30, 1990, of MAXXAM, filed November 6, 1990, File No. 1-3924; the "September 1990 MAXXAM Form 10-Q") 4.6 Second Amendment to the Credit Agreement, dated September 17, 1990 (incorporated by reference to Exhibit 4.3 to the September 1990 MAXXAM Form 10-Q) 4.7 Third Amendment to the Credit Agreement, dated December 7, 1990 (incorporated by reference to Exhibit 4.6 to Amendment No. 1 to the Registration Statement on Form S-1, dated February 13, 1991, filed by the Registrant, Registration No. 33-37895) 4.8 Fourth Amendment to the Credit Agreement, dated April 19, 1991 (incorporated by reference to Exhibit 4.1 to the Report on Form 10-Q for the quarterly period ended March 31, 1991, filed by KACC, File No. 1-3605) 4.9 Fifth Amendment to the Credit Agreement, dated March 13, 1992 (incorporated by reference to Exhibit 4.8 to Form 10-K for the period ended December 31, 1991, filed by the Registrant, File No. 1-9447) 4.10 Seventh Amendment to the Credit Agreement, dated November 6, 1992 (incorporated by reference to Exhibit 4.10 to Amendment No. 5 to KACC's 1993 Registration Statement) 4.11 Eighth Amendment to the Credit Agreement, dated January 7, 1993 (incorporated by reference to Exhibit 4.12 to Amendment No. 5 to KACC's 1993 Registration Statement) 4.12 Ninth Amendment to Credit Agreement, dated as of May 19, 1993 (including the form of Intercompany Note annexed as an Exhibit thereto) (incorporated by reference to Exhibit 4.10 to Amendment No. 2 to the Registration Statement on Form S-1, dated June 22, 1993, filed by the Registrant, Registration No. 33-49555; the "The Registrant's 1993 Registration Statement") 4.13 Tenth Amendment to Credit Agreement, dated as of July 23, 1993, (incorporated by reference to Exhibit 4.13 to the Registration Statement on Form S-3, dated August 26, 1993, filed by KACC, Registration No. 33-50097) 4.14 Eleventh Amendment to Credit Agreement, dated as of August 27, 1993, (incorporated by reference to Exhibit 4.13 to the Registration Statement on Form S-3, dated October 13, 1993, filed by the Registrant, Registration No. 33-50581) 4.15 Twelfth Amendment to Credit Agreement
II-3 123
EXHIBIT NO. EXHIBIT - --------------------------------------------------------------------------------------------- 4.16 Form of Intercompany Note between the Registrant and KACC (incorporated by reference to Exhibit 4.2 to Amendment No. 5 to KACC's 1989 Registration Statement) 4.17 Certificate of Designations of Series A Mandatory Conversion Premium Dividend Preferred Stock of the Registrant, dated June 28, 1993 (incorporated by reference to Exhibit 4.3 of the KACC's June 1993 Form 10-Q) 4.18 Deposit Agreement between the Registrant and The First National Bank of Boston, dated as of June 30, 1993 (incorporated by reference to Exhibit 4.4 of the KACC's June 1993 Form 10-Q) 4.19 Form of Certificate of Designations of PRIDES *4.20 Form of Credit Agreement to be entered into by the Registrant, KACC, certain financial institutions and BankAmerica Business Credit, Inc., as Agent *4.21 Form of Intercompany Note between the Company and KACC Note: The Registrant has not filed certain long-term debt instruments not being registered with the Securities and Exchange Commission where the total amount of indebtedness authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees and undertakes to furnish a copy of any such instrument to the Securities and Exchange Commission upon its request. 5.1 Opinion of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel as to the validity of the securities being registered hereunder 8.1 Opinion of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel as to Tax Matters 12 Ratio of earnings to combined fixed charges and preferred stock dividends 21 Subsidiaries of the Company (incorporated by reference to Exhibit 22 to Form 10-K for the period ended December 31, 1992, filed by the Registrant File No. 1-9447) *23.1 Consent of Arthur Andersen & Co. 23.2 Consent of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel (included in Exhibit 5) 24 Power of Attorney (included on signature page of this Registration Statement)
- --------------- * Filed herewith. (b) Financial Statement Schedules. The following appear after the signature page of this Registration Statement: Report of Independent Public Accountants on Financial Statement Schedules Schedule II -- Kaiser Aluminum Corporation and Subsidiary Companies -- Amounts Receivable from Related Parties and Underwriters, Promoters and Employees Other Than Related Parties Schedule III -- Kaiser Aluminum Corporation (Parent Company) -- Condensed Balance Sheets -- Condensed Statements of Income -- Condensed Statement of Cash Flows -- Notes to Condensed Financial Statements Schedule V -- Kaiser Aluminum Corporation and Subsidiary Companies -- Consolidated Property, Plant, and Equipment Schedule VI -- Kaiser Aluminum Corporation and Subsidiary Companies -- Accumulated Depreciation, Depletion and Amortization of Consolidated Property, Plant and Equipment
II-4 124 Schedule IX -- Kaiser Aluminum Corporation and Subsidiary Companies -- Consolidated Short-Term Borrowings Schedule X -- Kaiser Aluminum Corporation and Subsidiary Companies -- Supplementary Consolidated Income Statement Information
All other schedules are omitted because the required information is included in the Consolidated Financial Statements or the Notes thereto or is otherwise inapplicable. ITEM 17. UNDERTAKINGS 1. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 15 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 2. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. 3. The registrant hereby undertakes: (1) That for purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) That for the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 125 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF HOUSTON, STATE OF TEXAS, ON THE 9TH DAY OF FEBRUARY, 1994. KAISER ALUMINUM CORPORATION By: /s/ GEORGE T. HAYMAKER, JR. George T. Haymaker, Jr. Chairman of the Board and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE - --------------------------------------------- ------------------------------ ----------------- /s/ GEORGE T. HAYMAKER, JR. Chairman, Chief Executive February 9, 1994 George T. Haymaker, JR. Officer and Director (Principal Executive Officer) /s/ JOHN T. LA DUC Vice President and Chief February 9, 1994 John T. La Duc Financial Officer (Principal Financial Officer) /s/ CHARLIE ALONGI Controller (Principal February 9, 1994 Charlie Alongi Accounting Officer) /s/ CHARLES E. HURWITZ Director February 9, 1994 Charles E. Hurwitz /s/ EZRA G. LEVIN Director February 9, 1994 Ezra G. Levin /s/ ROBERT MARCUS Director February 9, 1994 Robert Marcus /s/ PAUL D. RUSEN Director February 9, 1994 Paul D. Rusen
II-6 126 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited, in accordance with generally accepted auditing standards, the financial statements included in the registration statement and have issued our report thereon dated February 8, 1993. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index above are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN & CO. Houston, Texas February 8, 1993 II-7 127 SCHEDULE II KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES (IN MILLIONS OF DOLLARS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
BALANCE AT DEDUCTIONS END OF YEAR BALANCE AT ------------------------- ------------------- BEGINNING AMOUNTS AMOUNTS NOT NAME OF DEBTOR OF YEAR ADDITIONS COLLECTED WRITTEN OFF CURRENT CURRENT - ------------------------------ ----------- --------- --------- ----------- ------- ------- 1992 J.A. Bonn(1)................ $.1 $ .1 1991 J.M. Seidl(2)............... $ 1.3 1.3 J.A. Bonn(1)................ .1 $.1 1990 None........................
- --------------- (1) This note bears interest at 7.09% per annum and is due on the earlier of demand, the termination of Mr. Bonn's employment, or on June 30, 1994. The interest is payable quarterly. The note is secured by real estate owned by Mr. Bonn. The full amount of the note was paid in March 1992. (2) The note of $1.0, together with its accrued interest (at 8.9% per annum), was transferred to the Company by MAXXAM in September 1991 and was subsequently paid off in cash. S-1 128 SCHEDULE III KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES CONDENSED BALANCE SHEETS -- PARENT COMPANY (IN MILLIONS OF DOLLARS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
DECEMBER 31, -------------------- 1992 1991 -------- -------- ASSETS CURRENT ASSETS -- CASH AND CASH EQUIVALENTS............................. $ .7 $ .4 INVESTMENTS -- KACC..................................................... 1,752.2 1,610.0 -------- -------- TOTAL......................................................... $1,752.9 $1,610.4 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES..................................................... $ 1.1 $ .6 OTHER LONG-TERM LIABILITIES............................................. .8 4.7 INTERCOMPANY NOTE PAYABLE TO KACC....................................... 1,185.8 1,049.3 STOCKHOLDERS' EQUITY: Preferred stock, par value $.05, authorized 20,000,000 shares; no shares issued or outstanding Common stock, par value $.01, authorized 100,000,000 shares; issued 57,327,279 and 57,250,000 shares in 1992 and 1991 respectively....................................................... .6 .6 Additional capital.................................................... 288.5 287.9 Retained earnings..................................................... 276.1 267.3 -------- -------- Total stockholders' equity....................................... 565.2 555.8 -------- -------- TOTAL......................................................... $1,752.9 $1,610.4 -------- -------- -------- --------
The accompanying notes to condensed financial statements are an integral part of these statements. S-2 129 SCHEDULE III (CONTINUED) KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES CONDENSED STATEMENTS OF INCOME -- PARENT COMPANY (IN MILLIONS OF DOLLARS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, -------------------------- 1992 1991 1990 ------ ------ ------ EQUITY IN INCOME FROM CONTINUING OPERATIONS OF KACC............................................... $159.7 $235.9 $317.7 ADMINISTRATIVE AND GENERAL EXPENSES................................ .2 .3 ------ ------ ------ OPERATING INCOME................................................... 159.5 235.9 317.4 OTHER INCOME (EXPENSE): Other income..................................................... 3.9 4.1 6.7 Interest expense................................................. (136.5) (131.6) (110.4) ------ ------ ------ NET INCOME......................................................... $ 26.9 $108.4 $213.7 ------ ------ ------ ------ ------ ------
The accompanying notes to condensed financial statements are an integral part of these statements. S-3 130 SCHEDULE III (CONTINUED) KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES CONDENSED STATEMENTS OF CASH FLOWS -- PARENT COMPANY (IN MILLIONS OF DOLLARS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ------------------------------- 1992 1991 1990 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................. $ 26.9 $ 108.4 $ 213.7 Adjustments to reconcile net income to net cash used for operating activities: Equity income............................................ (159.7) (235.9) (314.4) Accrued interest on Intercompany note payable to KACC.... 136.5 120.3 107.2 (Decrease) increase in other liabilities................. (3.4) .5 (6.4) ------- ------- ------- Net cash provided by (used for) operating activities... .3 (6.7) .1 CASH FLOWS FROM INVESTING ACTIVITIES: Dividends received from subsidiary.......................... 11.4 93.0 Investment in subsidiary.................................... (.6) (23.3) ------- ------- ------- Net cash provided by investing activities.............. 10.8 69.7 CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid.............................................. (11.4) (55.7) Capital stock issued........................................ .6 93.2 Prepayment of notes payable to parent....................... (100.2) ------- ------- ------- Net cash used for financing activities................. (10.8) (62.7) Net increase in cash and cash equivalents during the year..... .3 .3 .1 Cash and cash equivalents at beginning of year................ .4 .1 nil ------- ------- ------- Cash and cash equivalents at end of year...................... $ .7 $ .4 $ .1 ------- ------- ------- ------- ------- ------- SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES: Contribution to capital of notes payable to parent with accrued interest............................................ $ 53.9
The accompanying notes to condensed financial statements are an integral part of these statements. S-4 131 SCHEDULE III (CONTINUED) KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONDENSED FINANCIAL STATEMENTS -- PARENT COMPANY (IN MILLIONS OF DOLLARS) 1. BASIS OF PRESENTATION The accompanying parent company financial statements of Kaiser Aluminum Corporation ("Kaiser") should be read in conjunction with the 1992 consolidated financial statements of Kaiser and Subsidiary Companies. Kaiser is a holding company and conducts its operations through subsidiary companies which are reported herein using the equity method of accounting. The principal subsidiary is Kaiser Aluminum & Chemical Corporation ("KACC"). 2. INTERCOMPANY NOTE PAYABLE The Intercompany Note to KACC bears interest at a fixed rate of 13%. No interest or principal payments are due until December 31, 2000, after which interest and principal will be payable over a 15-year term pursuant to a predetermined schedule. 3. RESTRICTED NET ASSETS The investment in KACC is substantially unavailable to Kaiser pursuant to the terms of KACC's 1989 Credit Agreement. The obligations of KACC in respect of the credit facilities under the 1989 Credit Agreement are guaranteed by Kaiser and by a number of wholly owned subsidiaries of KACC. See Note 4 to the consolidated financial statements. 4. DIVIDENDS Kaiser received $11.4, $93.0, and nil in cash dividends on common stock of KACC in 1992, 1991, and 1990, respectively. S-5 132 SCHEDULE V KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED PROPERTY, PLANT AND EQUIPMENT (IN MILLIONS OF DOLLARS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
BALANCE OTHER AT CHANGE BALANCE BEGINNING ADD AT END DESCRIPTION OF YEAR ADDITIONS RETIREMENTS (DEDUCT) OF YEAR - ------------------------------------- -------- --------- ----------- -------- -------- Year ended December 31, 1992: Land............................... $ 49.5 $ 11.0 $24.3 $ 84.8 Land improvements.................. 33.7 5.5 (0.2) 39.0 Buildings.......................... 135.3 16.6 $ (.2) 3.3 155.0 Machinery and equipment............ 925.7 94.6 (4.8) (4.8) 1,010.7 Leasehold improvements............. 5.8 3.3 9.1 Construction in progress........... 87.5 (16.6) (.1) (.5) 70.3 -------- ------ ----- ----- -------- Total...................... $1,237.5 $114.4 $(5.1) $22.1(1) $1,368.9 -------- ------ ----- ----- -------- -------- ------ ----- ----- -------- Year ended December 31, 1991: Land............................... $ 43.3 $ 1.4 $ (.2) $ 5.0 $ 49.5 Land improvements.................. 27.7 1.8 4.2 33.7 Buildings.......................... 123.5 5.9 (.7) 6.6 135.3 Machinery and equipment............ 866.7 71.6 (6.0) (6.6) 925.7 Leasehold improvements............. 5.0 .7 .1 5.8 Construction in progress........... 52.4 36.7 (.1) (1.5) 87.5 -------- ------ ----- ----- -------- Total...................... $1,118.6 $118.1 $(7.0) $ 7.8 $1,237.5 -------- ------ ----- ----- -------- -------- ------ ----- ----- -------- Year ended December 31, 1990: Land............................... $ 21.1 $ .3 $21.9(3) $ 43.3 Land improvements.................. 37.3 2.5 (12.1)(3) 27.7 Buildings.......................... 109.5 9.6 $ (.6) 5.0(3) 123.5 Machinery and equipment............ 771.8 115.5 (2.4) (18.2)(3) 866.7 Leasehold improvements............. 2.7 .2 2.1(3) 5.0 Construction in progress........... 71.6 (17.8)(2) (1.4)(3) 52.4 -------- ------ ----- ----- -------- Total...................... $1,014.0 $110.3 $(3.0) $(2.7) $1,118.6 -------- ------ ----- ----- -------- -------- ------ ----- ----- --------
- --------------- (1) Consists principally of reclassifications from other current and long-term assets to property, plant and equipment. (2) Represents $128.1 transfer to other fixed asset categories net of $110.3 additions to construction in progress in 1990. (3) Consists principally of reclassifications between asset categories of the 1989 consolidation of Alpart and purchase accounting valuation adjustments of domestic assets. S-6 133 SCHEDULE VI KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION OF CONSOLIDATED PROPERTY, PLANT, AND EQUIPMENT (IN MILLIONS OF DOLLARS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
BALANCE AT OTHER BALANCE AT BEGINNING CHANGE END OF DESCRIPTION OF YEAR ADDITIONS RETIREMENTS ADD (DEDUCT) YEAR - ------------------------------------- ---------- ---------- ----------- ------------ ---------- Year ended December 31, 1992: Depletable land.................... $ 1.2 $ .3 $ 1.5 Land improvements.................. 4.8 1.6 $ (.1) 6.3 Buildings.......................... 21.9 7.3 $ (.1) 1.6 30.7 Machinery and equipment............ 193.2 70.5 (1.1) (1.4) 261.2 Leasehold improvements............. 1.9 .6 (.1) 2.4 ---------- ---------- ----------- ------ ---------- Total...................... $223.0 $ 80.3 $(1.2) nil $302.1 ---------- ---------- ----------- ------ ---------- ---------- ---------- ----------- ------ ---------- Year ended December 31, 1991: Depletable land.................... $ .7 $ .5 $ 1.2 Land improvements.................. 3.5 1.1 $ .2 4.8 Buildings.......................... 14.6 6.5 $ (.1) .9 21.9 Machinery and equipment............ 128.3 64.5 (1.6) 2.0 193.2 Leasehold improvements............. 1.2 .6 .1 1.9 ---------- ---------- ----------- ------ ---------- Total...................... $148.3 $ 73.2 $(1.7) $ 3.2 $223.0 ---------- ---------- ----------- ------ ---------- ---------- ---------- ----------- ------ ---------- Year ended December 31, 1990: Depletable land.................... $ .5 $ .3 $ (.1) $ .7 Land improvements.................. 2.4 1.3 (.2) 3.5 Buildings.......................... 10.6 6.6 (2.6) 14.6 Machinery and equipment............ 63.9 61.7 $ (.7) 3.4 128.3 Leasehold improvements............. .6 .6 1.2 ---------- ---------- ----------- ------ ---------- Total...................... $ 78.0 $ 70.5 $ (.7) $ .5 $148.3 ---------- ---------- ----------- ------ ---------- ---------- ---------- ----------- ------ ----------
S-7 134 SCHEDULE IX KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED SHORT-TERM BORROWINGS (IN MILLIONS OF DOLLARS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
MAXIMUM AVERAGE WEIGHTED WEIGHTED AMOUNTS AMOUNT AVERAGE CATEGORY OF BALANCE AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE AGGREGATE SHORT- AT END OF INTEREST DURING DURING THE DURING THE TERM BORROWINGS YEAR RATE THE YEAR YEAR(1) YEAR(2) - --------------------------------- ---------- ----------- ----------- ----------- ------------- Bank borrowings(3) 1992........................... $4.8 4.8% $52.8 $29.6 4.7% 1991........................... 6.3 4.9 50.6 29.2 7.0 1990........................... 8.7 35.9 8.8 9.3
- --------------- (1) Based on outstanding borrowings at the end of each month. (2) Based on outstanding borrowings and weighted average interest rates at the end of each month. (3) Short-term bank borrowings are made available on an uncommitted basis and no fee is charged. Maturities generally range from one to ten days with no formal provisions for the extension of maturities. Interest rates are based upon short-term prevailing rates. S-8 135 SCHEDULE X KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES SUPPLEMENTARY CONSOLIDATED INCOME STATEMENT INFORMATION(1) (IN MILLIONS OF DOLLARS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
CHARGED TO COSTS AND EXPENSES YEAR ENDED DECEMBER 31, -------------------------------- 1992 1991 1990 ------ ------ ------ Maintenance and repairs...................................... $147.0 $161.4 $157.7 ------ ------ ------ ------ ------ ------ Taxes, other than payroll and income taxes -- production levy on bauxite........................ $ 31.5 $ 34.0 $ 33.8 ------ ------ ------ ------ ------ ------
- --------------- (1) The amounts for amortization of intangible assets and preoperating costs and similar deferrals, royalties, and advertising costs are not reported as these items did not exceed 1% of sales and revenues. NOTE: ALL OTHER SCHEDULES ARE INAPPLICABLE OR THE REQUIRED INFORMATION IS INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS OR THE NOTES THERETO. S-9 136 EXHIBIT INDEX
EXHIBIT NO. EXHIBIT - --------------------- ----------- 1.1 Form of Purchase Agreement 4.1 Indenture (the "12 3/4% Note Indenture"), dated February 1, 1993, among Kaiser Aluminum & Chemical Corporation, as Issuer ("KACC"), Kaiser Alumina Australia Corporation ("KAAC"), Alpart Jamaica Inc. ("AJI") and Kaiser Jamaica Corporation ("KJC"), as Subsidiary Guarantors, and The First National Bank of Boston, as Trustee, regarding KACC's 12 3/4% Senior Subordinated Notes Due 2003 (incorporated by reference to Exhibit 4.1 to Amendment No. 5 to the Registration Statement on Form S-2 dated January 22, 1993, filed by KACC, Registration No. 33-48260; "KACC's 1993 Registration Statement") 4.2 First Supplemental Indenture, dated as of May 1, 1993 (incorporated by reference to Exhibit 4.2 to the Report on Form 10-Q for the quarterly period ended June 30, 1993 of KACC, filed August 10, 1993, File No. 1-3605; "KACC June 1993 Form 10-Q") *4.3 Form of Indenture, to be entered into by KACC, as Issuer, KAAC, AJI and KJC, as Subsidiary Guarantors, and First Trust National Association, as Trustee, regarding KACC's Senior Notes due 2002 4.4 Credit Agreement, dated December 13, 1989 (the "Credit Agreement"), among the Registrant, KACC, the financial institutions a party thereto, Bank of America National Trust and Savings Association, as Agent, and Mellon Bank, N.A., as Collateral Agent (incorporated by reference to Exhibit 4.3 to Amendment No. 5 to the Registration State- ment on Form S-1, dated December 13, 1989, filed by KACC, Registration No. 33-30645; "KACC's 1989 Registration Statement") 4.5 First Amendment to the Credit Agreement, dated April 17, 1990 (incorporated by reference to Exhibit 4.2 to the Report on Form 10-Q for the quarterly period ended September 30, 1990, of MAXXAM, filed November 6, 1990, File No. 1-3924; the "September 1990 MAXXAM Form 10-Q") 4.6 Second Amendment to the Credit Agreement, dated September 17, 1990 (incorporated by reference to Exhibit 4.3 to the September 1990 MAXXAM Form 10-Q) 4.7 Third Amendment to the Credit Agreement, dated December 7, 1990 (incorporated by reference to Exhibit 4.6 to Amendment No. 1 to the Registration Statement on Form S-1, dated February 13, 1991, filed by the Registrant, Registration No. 33-37895) 4.8 Fourth Amendment to the Credit Agreement, dated April 19, 1991 (incorporated by reference to Exhibit 4.1 to the Report on Form 10-Q for the quarterly period ended March 31, 1991, filed by KACC, File No. 1-3605) 4.9 Fifth Amendment to the Credit Agreement, dated March 13, 1992 (incorporated by reference to Exhibit 4.8 to Form 10-K for the period ended December 31, 1991, filed by the Registrant, File No. 1-9447) 4.10 Seventh Amendment to the Credit Agreement, dated November 6, 1992 (incorporated by reference to Exhibit 4.10 to Amendment No. 5 to KACC's 1993 Registration Statement) 4.11 Eighth Amendment to the Credit Agreement, dated January 7, 1993 (incorporated by reference to Exhibit 4.12 to Amendment No. 5 to KACC's 1993 Registration Statement)
[/R] 137
EXHIBIT NO. EXHIBIT - --------------------- ----------- 4.12 Ninth Amendment to Credit Agreement, dated as of May 19, 1993 (including the form of Intercompany Note annexed as an Exhibit thereto) (incorporated by reference to Exhibit 4.10 to Amendment No. 2 to the Registration Statement on Form S-1, dated June 22, 1993, filed by the Registrant, Registration No. 33-49555; the "The Registrant's 1993 Registration Statement") 4.13 Tenth Amendment to Credit Agreement, dated as of July 23, 1993, (incorporated by reference to Exhibit 4.13 to the Registration Statement on Form S-3, dated August 26, 1993, filed by KACC, Registration No. 33-50097) 4.14 Eleventh Amendment to Credit Agreement, dated as of August 27, 1993, (incorporated by reference to Exhibit 4.13 to the Registration Statement on Form S-3, dated October 13, 1993, filed by the Registrant, Registration No. 33-50581) 4.15 Twelfth Amendment to Credit Agreement 4.16 Form of Intercompany Note between the Registrant and KACC (incorporated by reference to Exhibit 4.2 to Amendment No. 5 to KACC's 1989 Registration Statement) 4.17 Certificate of Designations of Series A Mandatory Conversion Premium Dividend Preferred Stock of the Registrant, dated June 28, 1993 (incorporated by reference to Exhibit 4.3 of the KACC's June 1993 Form 10-Q) 4.18 Deposit Agreement between the Registrant and The First National Bank of Boston, dated as of June 30, 1993 (incorporated by reference to Exhibit 4.4 of the KACC's June 1993 Form 10-Q) 4.19 Form of Certificate of Designations of PRIDES *4.20 Form of Credit Agreement to be entered into by the Registrant, KACC, certain financial institutions and BankAmerica Business Credit, Inc., as Agent *4.21 Form of Intercompany Note between the Company and KACC Note: The Registrant has not filed certain long-term debt instruments not being registered with the Securities and Exchange Commission where the total amount of indebtedness authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees and undertakes to furnish a copy of any such instrument to the Securities and Exchange Commission upon its request. 5.1 Opinion of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel as to the validity of the securities being registered hereunder 8.1 Opinion of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel as to Tax Matters. 12 Ratio of earnings to combined fixed charges and preferred stock dividends 21 Subsidiaries of the Company (incorporated by reference to Exhibit 22 to Form 10-K for the period ended December 31, 1992, filed by the Registrant File No. 1-9447) *23.1 Consent of Arthur Andersen & Co.
[/R] 138
EXHIBIT NO. EXHIBIT - --------------------- ----------- 23.2 Consent of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel (included in Exhibit 5) 24 Power of Attorney (included on signature page of this Registration Statement)
- --------------- * Filed herewith.
   1
   
                                                                       L&W Draft
                                                                    Dated 2/7/94
    




                    KAISER ALUMINUM & CHEMICAL CORPORATION,
                                   as Issuer,
   
                     KAISER ALUMINA AUSTRALIA CORPORATION,
                              ALPART JAMAICA INC.,
                         KAISER FINANCE CORPORATION and
                         KAISER JAMAICA CORPORATION,
                          as Subsidiary Guarantors,
    
                                      AND
   
                       FIRST TRUST NATIONAL ASSOCIATION
    
                                          as Trustee



                                   INDENTURE
   
                         Dated as of February --, 1994
    

   
                                  $225,000,000
    
   
                          ----% Senior Notes due 2002
    
   2
                         RECONCILIATION AND TIE SHEET*

                                    between

                 PROVISIONS OF THE TRUST INDENTURE ACT OF 1939

                                      and
   
                    INDENTURE DATED AS OF FEBRUARY --, 1994
    
                                    between
   
                     KAISER ALUMINUM & CHEMICAL CORPORATION
                     KAISER ALUMINA AUSTRALIA CORPORATION,
                              ALPART JAMAICA INC.,
                         KAISER FINANCE CORPORATION and
                           KAISER JAMAICA CORPORATION
    
                                      and
   
                   FIRST TRUST NATIONAL ASSOCIATION, TRUSTEE
    

Sections Sections of of Act Indenture - ------ --------- 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.09 310(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.09 310(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 310(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 310(a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.09 310(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.08, 7.10 310(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.13(a), 7.13(c) 311(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.13(b), 7.13(c) 311(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.01, 5.02(a) 312(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.02(b) 312(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.02(c) 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.04(a) 313(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 313(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.04(b) 313(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.04(c) 313(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.04(d) 314(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.03(a) 314(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.03(b) 314(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.03(c) 314(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.03(d) 314(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.05
i 3
Sections Sections of of Act Indenture - ------ --------- 314(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.05 314(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 314(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.05 314(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Omitted 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 315(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07 315(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 315(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 315(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.08 316(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.06, 8.04 316(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Omitted 316(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.04 316(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.05 317(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.02 317(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.04(a) 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.07 318(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.07
- ------------------------- *This Reconciliation and Tie Sheet is not a part of the Indenture. ii 4 TABLE OF CONTENTS
Page ARTICLE ONE DEFINITIONS SECTION 1.01. Certain terms defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 1.02. References are to Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 1.03. Other definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE TWO ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES SECTION 2.01. Designation, amount, authentication and delivery of Notes . . . . . . . . . . . . . . . . . . . . 31 SECTION 2.02. Form of Notes and Trustee's certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 2.03. Date of Notes and denominations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 2.04. Execution of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 2.05. Exchange and transfer of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 2.06. Temporary Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 2.07. Mutilated, destroyed, lost or stolen Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 2.08. Cancellation of surrendered Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE THREE REDEMPTION AND PURCHASES OF NOTES SECTION 3.01. Redemption prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 3.02. Notice of redemption; selection of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 3.03. When Notes called for redemption become due and payable . . . . . . . . . . . . . . . . . . . . . 35 SECTION 3.04. Cancellation of redeemed Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 3.05. Purchase of Notes at option of the holder upon Change of Control . . . . . . . . . . . . . . . . 36 SECTION 3.06. Effect of Change of Control Purchase Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 3.07. Deposit of Change of Control Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 3.08. Covenant to comply with securities laws upon purchase of Notes . . . . . . . . . . . . . . . . . 39 SECTION 3.09. Repayment to the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE FOUR PARTICULAR COVENANTS OF THE COMPANY SECTION 4.01. Payments on the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 4.02. Maintenance of office or agency for registration of transfer, exchange and payment of Notes . . . 39 SECTION 4.03. Appointment to fill a vacancy in the office of Trustee . . . . . . . . . . . . . . . . . . . . . 40 SECTION 4.04. Provision as to paying agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 4.05. Maintenance of corporate existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 4.06. Officers' Certificate as to default and statement as to compliance . . . . . . . . . . . . . . . 41 SECTION 4.07. Usury laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 4.08. Restrictions on transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 42
iii 5
Page SECTION 4.09. Limitations on Restricted Payments and Restricted Investments . . . . . . . . . . . . . . . . . 43 SECTION 4.10. Limitation on Indebtedness and Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 4.11. Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 SECTION 4.12. Subsidiary guarantees, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 4.13. Limitation on dividends and other payment restrictions affecting Subsidiaries . . . . . . . . . 54 SECTION 4.14. Limitation on Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 ARTICLE FIVE NOTEHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 5.01. Company to furnish Trustee information as to names and addresses of noteholders . . . . . . . . 57 SECTION 5.02. Preservation and disclosure of lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 5.03. Reports by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 5.04. Reports by the Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 ARTICLE SIX REMEDIES OF THE TRUSTEE AND NOTEHOLDERS ON EVENT OF DEFAULT SECTION 6.01. Events of Default defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 6.02. Payment of Notes on default; suit therefor . . . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 6.03. Application of moneys collected by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 6.04. Limitation on suits by holders of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 6.05. Proceedings by Trustee; remedies cumulative and continuing; delay or omission not waiver of default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 SECTION 6.06. Rights of holders of majority in principal amount of Notes to direct Trustee and to waive defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 SECTION 6.07. Trustee to give notice of defaults known to it, but may withhold in certain circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 6.08. Requirement of an undertaking to pay costs in certain suits under the Indenture or against the Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 6.09. Waiver of stay or extension laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 ARTICLE SEVEN CONCERNING THE TRUSTEE SECTION 7.01. Duties and responsibilities of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 7.02. Reliance on documents, opinions, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 7.03. No responsibility for recitals, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 7.04. Trustee, paying agent or Note registrar may own Notes . . . . . . . . . . . . . . . . . . . . . 68 SECTION 7.05. Moneys received by Trustee to be held in trust without interest . . . . . . . . . . . . . . . . 68 SECTION 7.06. Compensation and expenses of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 7.07. Right of Trustee to rely on Officers' Certificate where no other evidence specifically prescribed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
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Page SECTION 7.08. Conflicting interest of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 7.09. Requirements for eligibility of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 7.10. Resignation or removal of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 7.11. Acceptance by successor to Trustee; notice of succession of a Trustee . . . . . . . . . . . . . . 74 SECTION 7.12. Successor to Trustee by merger, consolidation or succession to business; notice by Trustee of change in its location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 SECTION 7.13. Limitations on rights of Trustee as a creditor . . . . . . . . . . . . . . . . . . . . . . . . . 75 ARTICLE EIGHT CONCERNING THE NOTEHOLDERS SECTION 8.01. Evidence of action by noteholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 SECTION 8.02. Proof of execution of instruments and of holding of Notes . . . . . . . . . . . . . . . . . . . . 78 SECTION 8.03. Who may be deemed owners of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 SECTION 8.04. Notes owned by Company or controlled by controlling persons disregarded for certain purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 SECTION 8.05. Record date for action by noteholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 SECTION 8.06. Instruments executed by noteholders bind future holders . . . . . . . . . . . . . . . . . . . . . 80 ARTICLE NINE NOTEHOLDERS' MEETINGS SECTION 9.01. Purposes for which meetings may be called . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 SECTION 9.02. Manner of calling meetings; record date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 SECTION 9.03. Call of meeting by Company or noteholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 SECTION 9.04. Who may attend and vote at meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 SECTION 9.05. Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 SECTION 9.06. Manner of voting at meetings and record to be kept . . . . . . . . . . . . . . . . . . . . . . . 82 SECTION 9.07. Exercise of rights of Trustee and noteholders not to be hindered or delayed . . . . . . . . . . . 82 ARTICLE TEN SUPPLEMENTAL INDENTURES SECTION 10.01. Purposes for which supplemental indentures may be entered into without consent of noteholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 SECTION 10.02. Modification of Indenture with consent of holders of a majority in principal amount of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 SECTION 10.03. Effect of supplemental indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 SECTION 10.04. Notes may bear notation of changes by supplemental indentures . . . . . . . . . . . . . . . . . . 84 SECTION 10.05. Officers' Certificate and Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . 84 ARTICLE ELEVEN CONSOLIDATION, MERGER AND SALE SECTION 11.01. Company may consolidate, etc., on certain terms . . . . . . . . . . . . . . . . . . . . . . . . . 85 SECTION 11.02. Successor corporation to be substituted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 SECTION 11.03. Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
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Page ARTICLE TWELVE SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS SECTION 12.01. Satisfaction and discharge of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 SECTION 12.02. Application by Trustee of funds deposited for payment of Notes . . . . . . . . . . . . . . . . . . 87 SECTION 12.03. Repayment of moneys held by paying agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 SECTION 12.04. Repayment of moneys held by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 SECTION 12.05. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 ARTICLE THIRTEEN IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 13.01. Incorporators, stockholders, officers and directors of Company exempt from individual liability . . 88 ARTICLE FOURTEEN MISCELLANEOUS PROVISIONS SECTION 14.01. Successors and assigns of Company bound by Indenture . . . . . . . . . . . . . . . . . . . . . . . 89 SECTION 14.02. Acts of board, committee or officer of successor corporation valid . . . . . . . . . . . . . . . . 89 SECTION 14.03. Required notices or demands may be served by mail; waiver . . . . . . . . . . . . . . . . . . . . . 89 SECTION 14.04. Indenture and Notes to be construed in accordance with the laws of the State of New York . . . . . 89 SECTION 14.05. Evidence of compliance with conditions precedent . . . . . . . . . . . . . . . . . . . . . . . . . 89 SECTION 14.06. Payments due on Saturdays, Sundays and holidays . . . . . . . . . . . . . . . . . . . . . . . . . . 90 SECTION 14.07. Provisions required by Trust Indenture Act of 1939 to control . . . . . . . . . . . . . . . . . . . 90 SECTION 14.08. Provisions of the Indenture and Notes for the sole benefit of the parties and the noteholders . . . 91 SECTION 14.09. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 SECTION 14.10. Indenture may be executed in counterparts; acceptance by Trustee . . . . . . . . . . . . . . . . . 91 SECTION 14.11. Article and Section headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 SECTION 14.12. No Adverse Interpretation of Other Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . 91 ARTICLE FIFTEEN GUARANTEE OF NOTES SECTION 15.01. Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 SECTION 15.02. Guarantee senior in respect of Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . 92 SECTION 15.03. Subsidiary Guarantors may consolidate, etc., on certain terms . . . . . . . . . . . . . . . . . . . 92 SECTION 15.04. Application of certain terms and provisions to the Subsidiary Guarantors. . . . . . . . . . . . . . 93 SECTION 15.05. Release of Guarantee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SCHEDULE A - SCHEDULE OF LIENS SECURING INDEBTEDNESS IN EXCESS OF $5,000,000 SCHEDULE B - REAL PROPERTY CONSTITUTING PERMITTED COLLATERAL vi 8 THIS INDENTURE, dated as of the --- day of February, 1994, between KAISER ALUMINUM & CHEMICAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (hereinafter referred to as the "Company"), as Issuer, KAISER ALUMINA AUSTRALIA CORPORATION, KAISER FINANCE CORPORATION, ALPART JAMAICA INC. and KAISER JAMAICA CORPORATION, as Subsidiary Guarantors, and FIRST TRUST NATIONAL ASSOCIATION, a national banking association (hereinafter referred to as the "Trustee"), as Trustee. W I T N E S S E T H: WHEREAS, the Company has duly authorized an issue of its ----% Senior Notes due February --, 2002 (hereinafter referred to as the "Notes"), for an aggregate principal amount of up to two hundred twenty five million dollars ($225,000,000), to be issued as registered Notes without coupons, to be authenticated by the certificate of the Trustee, to be payable on February --, 2002, and to be redeemable and purchasable as hereinafter provided; and, to provide the terms and conditions upon which the Notes are to be authenticated, issued and delivered, the Company has duly authorized the execution and delivery of this Indenture; WHEREAS, the payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest on, the Notes is hereby expressly designated, and the monetary obligations of the Company under the Notes shall hereafter constitute for all purposes, Senior Indebtedness of the Company under the terms of the Subordinated Note Indenture (as hereinafter defined); WHEREAS, the Guarantee (as hereinafter defined) of each Subsidiary Guarantor in respect of the Notes is hereby expressly designated, and the monetary obligations of such Subsidiary Guarantor under the Notes shall hereafter constitute for all purposes Senior Indebtedness of such Subsidiary Guarantor under the terms of the Subordinated Note Indenture, to the extent that such Subsidiary Guarantor is a guarantor under the Subordinated Note Indenture; WHEREAS, the Company has duly delivered written notice to the trustee under the Subordinated Note Indenture designating the Notes and the Guarantee as Senior Indebtedness thereunder; WHEREAS, the Notes and the Trustee's certificate of authentication to be borne by the Notes are to be substantially in the following forms, respectively: [FORM OF FACE OF NOTE] No. [Principal Amount] Issue Date: CUSIP 483008 AE 8
KAISER ALUMINUM & CHEMICAL CORPORATION ----% SENIOR NOTE DUE 2002 KAISER ALUMINUM & CHEMICAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein referred to as the "Company"), for value received, hereby promises to pay to --------------------, or registered assigns, the principal sum of -------------------- DOLLARS on February --, 2002, at the office or agency of the Company in the Borough of Manhattan, the City of New York, State of New York, in such coin or currency of The 9 United States of America as at the time of payment is legal tender for the payment of public and private debts, and to pay to the registered holder hereof, as hereinafter provided, interest on said principal sum at the rate per annum specified in the title of this Note, in like coin or currency, semiannually on February 15 and August 15 in each year. Interest shall accrue from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from February --, 1994. The interest so payable on any February 15 or August 15 will, subject to certain exceptions provided in the Indenture hereinafter referred to, be paid to the person in whose name this Note is registered at the close of business on the February 1 or August 1, as the case may be, next preceding such February 15 or August 15 whether or not such February 1 or August 1 is Business Day. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. Payment of interest shall be made at the office or agency of the Company maintained for such purpose within the City and State of New York or, at the option of the Company, by check mailed by first-class mail to the address of the person entitled thereto at such address as shall appear on the registry books of the Company. As provided in the Indenture, this Note shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be governed by and construed in accordance with the laws of such State. Reference is made to the further provisions of this Note set forth on the reverse hereof. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by the Trustee under the Indenture referred to on the reverse hereof. IN WITNESS WHEREOF, KAISER ALUMINUM & CHEMICAL CORPORATION has caused this instrument to be duly executed under its corporate seal. Dated KAISER ALUMINUM & CHEMICAL CORPORATION By: --------------------------- Name: Title: [Corporate Seal] Attest: - ----------------------------------- Secretary 2 10 [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the Notes described in the within-mentioned Indenture. FIRST TRUST NATIONAL ASSOCIATION as Trustee By: ------------------------------ Authorized Signatory [FORM OF REVERSE OF NOTE] KAISER ALUMINUM & CHEMICAL CORPORATION ---% SENIOR NOTE DUE 2002 This Note is one of a duly authorized issue of Notes of the Company known as its ---% Senior Notes due 2002 (herein referred to as the "Notes"), limited to an aggregate principal amount of two hundred twenty five million dollars ($225,000,000), all issued or to be issued under and pursuant to an indenture, dated as of February --, 1994 (herein referred to as the "Indenture"), duly executed and delivered between the Company, the Subsidiary Guarantors (as defined in the Indenture) and First Trust National Association, as trustee (herein referred to as the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the respective rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company, the Subsidiary Guarantors and the holders of the Notes. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal amount of this Note plus any accrued interest to the date of acceleration may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture provides that in certain events such declaration and its consequences may be waived by the holders of a majority of the aggregate principal amount of the Notes then outstanding or outstanding on the record date, if any, fixed therefor in accordance with the provisions of the Indenture. It is also provided in the Indenture that the holders of a majority of the aggregate principal amount of the Notes at the time or on any such record date outstanding may on behalf of the holders of all of the Notes waive, prior to such declaration, any past default under the Indenture and its consequences, except a default in the payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest on any of the Notes or a default in respect of a covenant or provision in the Indenture which under Article Ten of the Indenture cannot be modified or amended without the consent of the holder of each outstanding Note. Payment of the Notes is guaranteed on a senior basis by Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser Finance Corporation and Kaiser Jamaica Corporation and, under certain circumstances set forth in the Indenture, may be guaranteed by certain other Subsidiaries and Non-Affiliate Joint Ventures of the Company. Under certain circumstances set forth in the Indenture, each 3 11 of the Subsidiary Guarantors may be released from their respective obligations under the Indenture and the Notes. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority of the aggregate principal amount of the Notes then outstanding or outstanding on the record date, if any, fixed therefor in accordance with the provisions of the Indenture, evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the holders of the Notes; provided, however, that, as provided in Section 10.02 of the Indenture, without the consent of each holder of an outstanding Note affected, no such supplemental indenture shall, inter alia, (i) extend the stated maturity of any Note, reduce the interest rate, extend the time or alter the manner of payment of interest thereon, or reduce the principal amount thereof, or alter the timing of or reduce any premium payable upon the redemption thereof, or reduce the amount payable thereon in the event of acceleration or the amount thereof payable in bankruptcy, or (ii) reduce the aforesaid percentage of aggregate principal amount of Notes, the consent of the holders of which is required for any such supplemental indenture. Any such consent or waiver by the registered holder of this Note (unless effectively revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders of this Note and of any Note issued in exchange or substitution herefor, irrespective of whether or not any notation of such consent or waiver is made upon this Note or such other Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest on this Note at the place, at the respective times, at the rate and in the currency herein prescribed. The Notes are issuable as fully registered Notes without coupons in denominations of $1,000 and any integral multiple of $1,000. At the office or agency to be maintained by the Company referred to on the face hereof, and in the manner and subject to the limitations provided in the Indenture, Notes may be exchanged for a like aggregate principal amount of Notes in other authorized denominations, without payment of any charge other than a sum sufficient to reimburse the Company for any tax or other governmental charge incident thereto. Principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest on this Note are payable at the office or agency of the Company referred to on the face hereof, except that, at the option of the Company, payment of interest hereon may be made by check mailed by first-class mail to the address of the person entitled thereto at such address as shall appear on the registry books of the Company. The Notes are subject to redemption on or after February 15, 1998, at the option of the Company, in whole or in part on any date prior to maturity, upon mailing by first-class mail a notice of such redemption not less than 15 nor more than 60 days prior to the date fixed for redemption to the holders of Notes to be redeemed in whole or in part at their addresses as they shall appear upon the registry books of the Company, all as provided in the Indenture. Any such notice which is mailed in the manner hereinabove provided shall be conclusively presumed to have been duly given, whether or not the holder receives the notice. The table below shows the redemption prices (expressed as a percentage of principal amount) on the dates shown below. If redeemed during the 12-month period beginning February 15, the redemption price shall be: 4 12
Redemption Year Price ---- ----------- 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % 2001 and thereafter . . . . . . . . . . . . . . . . . . . . . . . 100.000%
in each case together with accrued and unpaid interest to (but not including) the date fixed for redemption. Subject to the terms and conditions of the Indenture, if any Change of Control (as defined in the Indenture) occurs on or prior to maturity, the Company shall offer to purchase from each holder all or any part of the holder's Notes for which a Change of Control Purchase Notice shall have been delivered as provided in the Indenture and not withdrawn, on the date that is 30 Business Days after the occurrence of such Change of Control (the "Change of Control Purchase Date"), for a Change of Control Purchase Price equal to 101% of the principal amount thereof plus accrued interest to (but not including) the Change of Control Purchase Date, which Change of Control Purchase Price shall be paid in cash. Holders have the right to withdraw any Change of Control Purchase Notice by delivering to the Trustee a written notice of withdrawal in accordance with the provisions of the Indenture. If cash sufficient to pay the Change of Control Purchase Price of all Notes or portions thereof to be purchased on the Change of Control Purchase Date is deposited with the Trustee as of the Change of Control Purchase Date, interest shall cease to accrue (whether or not this Note is delivered to the Trustee or any other office or agency maintained for such purpose) on such Notes (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, upon surrender of such Notes). Subject to the terms and conditions of the Indenture, the Company shall apply the Net Cash Proceeds (as defined in the Indenture) of Asset Sales (as defined in the Indenture), under certain circumstances described in the Indenture, to (x) the prepayment of Indebtedness (as defined in the Indenture) in respect of or under the Credit Agreement (as defined in the Indenture) and the Specified Pari Passu Indebtedness (as defined in the Indenture) unless the holders thereof elect not to receive such prepayment and (y) an offer to purchase (an "Asset Sale Offer") the then outstanding Notes, on any Business Day occurring no later than 175 days after the receipt by the Company (or any of its Subsidiaries, if applicable) of such Net Cash Proceeds, at a price equal to 100% of the principal amount thereof together with accrued interest, if any, to but not including the Asset Sale Purchase Date (as defined in the Indenture). Such Asset Sale Offer with respect to the Notes shall be in an aggregate principal amount (the "Asset Sale Offer Amount") equal to the Net Cash Proceeds (rounded down to the nearest $1,000) from the Asset Sales to which the Asset Sale Offer relates multiplied by a fraction, the numerator of which is the principal amount of the Notes outstanding (determined as of the close of business on the day immediately preceding the date notice of such Asset Sale Offer is mailed) and the denominator of which is the principal amount of the Notes outstanding plus the aggregate principal amount of Indebtedness under the Credit Agreement and the Specified Pari Passu Indebtedness outstanding (determined as of the close of business on the day immediately preceding the date notice of such Asset Sale Offer is mailed). If (x) no Indebtedness is outstanding in respect of or under the Credit Agreement or the Specified Pari Passu Indebtedness or (y) the holders of such Indebtedness entitled to 5 13 receive payment elect not to receive the payments provided for in the previous sentence, or (z) the application of such Net Cash Proceeds results in the complete prepayment of such Indebtedness, then in each case any remaining portion of such Net Cash Proceeds will be required to be applied to an Asset Sale Offer to purchase the Notes. Upon surrender of this Note, the transfer of this Note is registrable by the registered holder hereof in person or by his attorney duly authorized in writing on the registry books of the Company at the office or agency to be maintained by the Company referred to on the face hereof, subject to the terms of the Indenture but without payment of any charge other than a sum sufficient to reimburse the Company for any tax or other governmental charge incident thereto. Upon any such registration of transfer, a new Note or Notes of authorized denomination or denominations, for the same aggregate principal amount, will be issued to the transferee in exchange herefor. Prior to due presentation for registration of transfer, the Company, the Trustee, any paying agent and any Note registrar may deem and treat the person in whose name this Note shall be registered upon the registry books of the Company as the absolute owner of this Note (whether or not this Note shall be overdue and notwithstanding any notation of ownership or other writing hereon), for the purpose of receiving payment of or on account of the principal hereof, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any Note registrar shall be affected by any notice to the contrary. All such payments shall be valid and effectual to satisfy and discharge the liability on this Note to the extent of the sum or sums so paid. No recourse shall be had for the payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or the interest on this Note, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture or any indenture supplemental thereto, against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. 6 14 ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to: (Insert assignee's soc. sec. or tax I.D. no.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------- agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: ------------------- Your Signature: ---------------------------- ---------------------------- (Sign exactly as your name(s) appear(s) on the Note) Signature Guarantee: ------------------------------------- (bank, trust company or member firm of the New York Stock Exchange) 7 15 OPTION OF HOLDER TO ELECT PURCHASE Upon an offer by the Company to purchase all or any part of this Note pursuant to Section 3.05 or 4.14 of the Indenture, please check the appropriate box below if you wish to elect to have all or any part of this Note so purchased. Section 3.05--- Section 4.14--- If you wish to have only part of this Note purchased by the Company pursuant to Section 3.05 or Section 4.14 of the Indenture, state the principal amount you elect to have purchased: $------------------- Date: ------------- Signature: ----------------------------- ----------------------------- (Sign exactly as your name(s) appear(s) on the face of this Note) Signature Guarantee: ------------------------------------------ (bank, trust company or member firm of the New York Stock Exchange) 8 16 AND WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee as in this Indenture provided, the valid, binding and legal obligations of the Company, and to constitute these presents a valid indenture and agreement according to its terms, have been done and performed, and the execution and delivery of this Indenture and the issuance hereunder of the Notes have in all respects been duly authorized, and the Company, in the exercise of the legal right and power vested in it, executes and delivers this Indenture and proposes to make, execute, issue and deliver the Notes; THEREFORE, in consideration of the premises and of the purchase and acceptance of the Notes by the holders thereof, the Company, each Subsidiary Guarantor and the Trustee each covenants and agrees, for the equal and proportionate benefit of the respective holders from time to time of the Notes, as follows: ARTICLE ONE DEFINITIONS SECTION 1.01. Certain terms defined. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires), for all purposes of this Indenture and of any indenture supplemental hereto, shall have the respective meanings specified in this Section 1.01. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939 (as defined herein) or which are by reference therein defined in the Securities Act of 1933 (as defined herein) (except as herein otherwise expressly provided or unless the context otherwise requires) shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as they were in force at the date of the execution and delivery of this Indenture. 14 1/4% Senior Subordinated Notes: The term "14 1/4% Senior Subordinated Notes" shall mean the Company's 14 1/4% Senior Subordinated Notes Due 1995, as amended, which were retired in 1993 and are no longer outstanding as of the date of this Indenture. 14 1/4% Senior Subordinated Note Indenture: The term "14 1/4% Senior Subordinated Note Indenture" shall mean the 14 1/4% Senior Subordinated Note Indenture, dated as of December 21, 1989, among the Company, as issuer, the parties named therein as and, if applicable, thereafter becoming, subsidiary guarantors, and The Bank of New York, a New York banking corporation, as trustee, as amended or supplemented from time to time in accordance with the terms thereof. Affiliate: The term "Affiliate" shall mean any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with a specified Person; provided, however, that the term Affiliate shall not (other than for purposes of Section 3.07) include the Company, any Subsidiary of the Company or any Non-Affiliate Joint Venture of the Company so long as no Affiliate of the Company has any direct or indirect interest therein, except through the Company and/or its Subsidiaries and/or its Non-Affiliate Joint Ventures. For the purpose of this definition, control when used with respect to any specified Person means the possession of the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, 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 (other than for purposes of Section 3.07) mean that the law firm is an Affiliate of such Person. 9 17 AJI: The term "AJI" shall mean Alpart Jamaica Inc., a Delaware corporation, and its successors. Alpart: The term "Alpart" shall mean Alumina Partners of Jamaica, a Delaware general partnership, and its successors. Asset Sale: The term "Asset Sale" shall mean any sale, transfer or other disposition (including, without limitation, dispositions pursuant to a merger, consolidation or sale and leaseback transaction) of any assets (other than cash or Cash Equivalents) on or after the date of the initial issuance of the Notes by the Company or any of its Subsidiaries to any Person other than the Company or any of its Subsidiaries or any Non-Affiliate Joint Venture; provided, however, that solely for the purposes of the definition of Consolidated Cash Flow Available for Fixed Charges, the term Asset Sale shall exclude dispositions pursuant to a sale and leaseback transaction if the lease under such sale and leaseback transaction is required to be classified and accounted for as a Capitalized Lease Obligation; and provided, further, that the term Asset Sale shall not include a Refinancing Sale and Leaseback Transaction; and provided, further, that the following sales, transfers or other dispositions of assets shall not be an "Asset Sale" hereunder: (A) in the ordinary course of business of the Company and its Subsidiaries, (B) in a single transaction or group of related transactions, the gross proceeds of which (exclusive of indemnities) do not exceed $10,000,000 (such proceeds, to the extent non-cash, to be determined in good faith by the Board of Directors of the Company), (C) resulting from the creation, incurrence or assumption of (but not any foreclosure with respect to) any Lien not prohibited by Section 4.11, (D) in connection with any consolidation or merger of the Company or any Subsidiary Guarantor or sale of all or substantially all of the property of the Company or any Subsidiary Guarantor in compliance with the provisions of Article Eleven, Section 15.03(a) or Section 15.03(b)(i) hereof, as the case may be, (E) by a Subsidiary to its stockholders not prohibited by this Indenture, (F) which are Restricted Investments or Restricted Payments permitted by Section 4.09, or (G) which consist of extensions, modifications, renewals or exchanges of Restricted Investments pursuant to clause (b) of the definition thereof, so long as neither the Company nor any of its Subsidiaries receives any cash proceeds as a result of such transaction. Attributable Debt: The term "Attributable Debt" shall mean, with respect to a Refinancing Sale and Leaseback Transaction, as of the date of consummation of such transaction, the greater of (a) the Fair Market Value of the property subject to such Refinancing Sale and Leaseback Transaction and (b) the present value (discounted at the interest rate borne by the Notes, compounded semi-annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Refinancing Sale and Leaseback Transaction (including any period for which such lease has been extended). Bank: The term "Bank" shall mean any of the financial institutions that are, or from time to time become, lenders under the Credit Agreement. 10 18 Bank Agent: The term "Bank Agent" shall mean BankAmerica Business Credit, Inc., as agent under the Credit Agreement, and any successor agent appointed under the Credit Agreement or any agent under any agreement or agreements pursuant to which Indebtedness under the Credit Agreement has been Refinanced (or successively Refinanced) and as to whom the Company has notified the Trustee and the noteholders pursuant to the terms of this Indenture. Bank Guarantors: The term "Bank Guarantors" shall mean each of the following Persons, as long as such Person guarantees any Indebtedness under the Credit Agreement: Akron Holding Company, an Ohio corporation, Kaiser Aluminum & Chemical Investment, Inc., a Delaware corporation, Kaiser Aluminum Properties, Inc., a Delaware corporation, Kaiser Aluminum Technical Services, Inc., a California corporation, Oxnard Forge Die Company, Inc., a California corporation, Kaiser Aluminium International, Inc., a Delaware corporation, KAC, KFC, each of their respective successors, each Subsidiary Guarantor and each Non-Recourse Guarantor so long as such Non-Recourse Guarantor does not constitute a Subsidiary Guarantor and would not be required to become a Subsidiary Guarantor hereunder. Board of Directors: The term "Board of Directors," when used with reference to the Company, shall mean the Board of Directors of the Company, or the executive committee of the Board of Directors of the Company, or any other duly authorized committee of the Board of Directors of the Company. Board Resolution: The term "Board Resolution" shall mean, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee. Business Day: The term "Business Day" shall mean a day other than a Saturday, a Sunday or a day in The City of New York, New York, Houston, Texas or San Francisco, California on which banking institutions are authorized or obligated by law, regulation or executive order to be closed. Capital Stock: The term "Capital Stock" shall mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of capital stock, partnership interests or other undivided ownership interests in such Person, and warrants, options and similar rights (other than debt securities convertible into capital stock) to acquire such capital stock, partnership interests or other undivided ownership interests in such Person. Capitalized Lease Obligations: The term "Capitalized Lease Obligations" shall mean, with respect to any Person, the obligations of such Person to pay rent or other amounts under any lease of (or other agreement conveying the right to use) real or personal property, which obligations are required to be classified and accounted for as a capital lease obligation on a balance sheet of such Person under GAAP and, for purposes of this Indenture, the amount of such obligations at any date shall be the amount of the liability thereof at such date, determined in accordance with GAAP. CARIFA Financing: The term "CARIFA Financing" shall mean the $60,000,000 CBI Industrial Revenue Bonds, Caribbean Basin Projects Financing Authority CBI Industrial Revenue Bonds 1991 Series A and Series B (Alumina Partners of Jamaica Project) issued pursuant to that certain Bond Purchase Agreement dated as of December 1, 1991, among the Caribbean Basin Projects Financing Authority, Alumina Partners of Jamaica and PaineWebber Incorporated of Puerto Rico, and any letters of credit supporting such bonds. 11 19 Cash Equivalents: The term "Cash Equivalents" shall mean, with respect to any Person: (A) Government Securities having maturities of not more than one year from the date of acquisition, (B) certificates of deposit of any commercial bank incorporated under the laws of the United States, or any state, territory or commonwealth thereof, of recognized standing having capital and unimpaired surplus in excess of $100,000,000 and whose short-term commercial paper rating at the time of acquisition is at least A-2 or the equivalent by Standard & Poor's Corporation or at least P-2 or the equivalent by Moody's Investors Services, Inc. (any such bank, an "Approved Bank"), which certificates of deposit have maturities of not more than one year from the date of acquisition, (C) repurchase obligations with a term of not more than 31 days for underlying securities of the types described in clauses (A) , (B) and (D) of this definition entered into with any Approved Bank, (D) commercial paper or finance company paper issued by any Person incorporated under the laws of the United States, or any state thereof, and rated at least A-2 or the equivalent by Standard & Poor's Corporation or at least P-2 or the equivalent by Moody's Investors Services, Inc., and in each case maturing not more than one year from the date of acquisition, and (E) investments in money market funds that are registered under the Investment Company Act of 1940, which have net assets of at least $100,000,000 and at least 85% of whose assets consist of investments or other obligations of the type described in clauses (A) through (D) above. Center for Technology: The term "Center for Technology" shall mean the Company's facilities located in Pleasanton, California. Commission: The term "Commission" shall mean the United States Securities and Exchange Commission. Common Stock: The term "Common Stock" shall mean the Company's common stock, par value $.01 per share, as it exists on the date of this Indenture. Company: The term "Company" shall mean Kaiser Aluminum & Chemical Corporation, a Delaware corporation, and, subject to the provisions of Article Eleven, shall also include its successors and assigns. Consolidated Amortization Expense: The term "Consolidated Amortization Expense" shall mean, with respect to any Person for any period, the amortization expense (including without limitation goodwill, deferred financing charges and other intangible items) of such Person and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. Consolidated Cash Flow Available for Fixed Charges: The term "Consolidated Cash Flow Available for Fixed Charges" shall mean (without duplication), with respect to any Person for any period, the sum of the amounts for such period of (i) Consolidated Net Income, (ii) Consolidated Fixed Charges, (iii) Consolidated Income Tax Expense (other than income taxes (including credits) with respect to items of Net Income not included in the definition of Consolidated Net Income), (iv) Consolidated Depreciation Expense, (v) Consolidated Amortization Expense and (vi) any other non-cash items reducing Consolidated Net Income, minus any non-cash items increasing Consolidated Net Income, all as determined on a consolidated basis for such Person and its Subsidiaries in accordance with GAAP; provided, however, 12 20 that (X) if, during such period, such Person or any of its Subsidiaries shall have engaged in any Asset Sale, Consolidated Cash Flow Available for Fixed Charges of such Person and its Subsidiaries for such period shall be reduced by an amount equal to the Consolidated Cash Flow Available for Fixed Charges (if positive) directly attributable to the assets that are the subject of such Asset Sale for such period, or increased by an amount equal to the Consolidated Cash Flow Available for Fixed Charges (if negative) directly attributable to the assets that are the subject of such Asset Sale for such period and (y) if, during such period, such Person or any of its Subsidiaries shall have acquired any material assets out of the ordinary course of business, Consolidated Cash Flow Available for Fixed Charges shall be calculated on a pro forma basis as if such asset acquisition and related financing had occurred at the beginning of such period. Consolidated Depreciation Expense: The term "Consolidated Depreciation Expense" shall mean, with respect to any Person for any period, the depreciation and depletion expense (including without limitation the amortization expense associated with Capitalized Lease Obligations) of such Person and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. Consolidated Fixed Charge Coverage Ratio: The term "Consolidated Fixed Charge Coverage Ratio" shall mean, with respect to any Person as of the date of the transactions giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date"), the ratio of (i) the aggregate amount of Consolidated Cash Flow Available for Fixed Charges of such Person for the four fiscal quarters immediately prior to the Transaction Date for which financial information in respect thereof is available to (ii) the aggregate Consolidated Fixed Charges of such Person for the fiscal quarter in which the Transaction Date occurs and the three fiscal quarters immediately subsequent to such fiscal quarter to be accrued during such period (based upon the pro forma amount of Indebtedness to be outstanding on the Transaction Date), assuming for the purposes of this measurement that the interest rates on which floating interest rate obligations of such Person are based equal such rates in effect on the Transaction Date; provided, however, that if the Company or any of its Subsidiaries has incurred Interest Hedging Obligations which would have the effect of changing the interest rate on any Indebtedness for such four quarter period (or any portion thereof), the resulting rate shall be used for such four quarter period or portion thereof; and provided, further, that any Consolidated Fixed Charges with respect to Indebtedness incurred or for which such Person otherwise becomes liable during the fiscal quarter in which the Transaction Date occurs shall be calculated as if such Indebtedness was so incurred on the first day of the fiscal quarter in which the Transaction Date occurs. Consolidated Fixed Charges: The term "Consolidated Fixed Charges" shall mean (without duplication), with respect to any Person for any period, the sum of: (i) the interest expense of such Person and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP (less, to the extent included therein, (a) the portion of the interest expense required to be funded or economically borne by the Company's minority partners in the Company's joint ventures and (b) interest expense related to the PIK Note), (ii) all fees, commissions, discounts and other charges of such Person and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, with respect to letters of credit and bankers' acceptances and the costs (net of benefits) associated with Interest Hedging Obligations, (iii) the aggregate amount of dividends paid or other similar distributions made by such Person and its Subsidiaries during such period with respect to preferred stock (including preference stock) of such Person or its Subsidiaries determined on a consolidated basis in accordance with GAAP, and 13 21 (iv) amortization or write-off of debt discount in connection with any Indebtedness of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP (excluding, to the extent otherwise included, (A) the amortization or write-off of any deferred financing costs in connection with the amendment or refinancing of the Credit Agreement and the Old Credit Agreement and/or the repurchase, defeasance or redemption of the 14 1/4% Senior Subordinated Notes and (B) the amortization or write-off of any debt discount and the premiums paid in excess of the principal amount in connection with the repurchase, defeasance or redemption of the 14 1/4% Senior Subordinated Notes). Consolidated Income Tax Expense: The term "Consolidated Income Tax Expense" shall mean (without duplication), with respect to any Person for any period, the aggregate of the income tax expense (net of applicable credits) of such Person and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. Consolidated Net Income: The term "Consolidated Net Income" shall mean, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Subsidiaries for such period taken as a single accounting period, all as determined on a consolidated basis in accordance with GAAP, excluding (in each case to the extent otherwise included): (i) extraordinary gains but not extraordinary losses and excluding gains from extinguishment of debt, (ii) the Net Income of any Person that is not a Subsidiary of such Person or that is accounted for on the equity method of accounting, except to the extent of the amount of dividends or other distributions (other than dividends or distributions of Capital Stock) actually paid to such Person or any of its Subsidiaries by such other Person during such period, (iii) except to the extent included by clause (ii), the Net Income of any Person accrued prior to the date it becomes a Subsidiary of such Person or is merged into or consolidated with such Person or any of its Subsidiaries or that Person's assets are acquired by such Person or any of its Subsidiaries, (iv) the Net Income of any Subsidiary of such Person during such period (A) to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary of 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 governmental regulation applicable to that Subsidiary or (B) in the case of a foreign Subsidiary or a Subsidiary with significant foreign source income, to the extent such Net Income has not been distributed to such Person and such distribution would result in a material tax liability not otherwise deducted from the calculation of Consolidated Net Income whether or not such deduction is required by GAAP, (v) net after tax gains from Asset Sales (but not excluding the net after tax losses from Asset Sales) and (vi) interest income arising from the Existing Intercompany Note, except to the extent such interest income is actually received by the Company in cash; provided, however, that: (1) in determining Consolidated Net Income with respect to the Company there shall be disregarded (a) any charge with respect to premiums paid in excess of the principal amount in connection with the repurchase, defeasance or redemption of the 14 1/4% Senior Subordinated Notes and (b) the 14 22 amortization or write-off of any unamortized deferred financing costs and debt discount (other than original issue discount with respect to Indebtedness Incurred after the date hereof) in connection with the amendment or refinancing of the Credit Agreement and the Old Credit Agreement and/or the repurchase, defeasance or redemption of the 14 1/4% Senior Subordinated Notes, and (2) the Net Income of each of the Specified Parties otherwise included in the Consolidated Net Income of the Company shall not be subject to any of the limitations contained in clauses (ii) and (iv)(B) of this definition so long as the Company's cash management and intercompany practices with respect to such entity, as the case may be, for such period are consistent with past practice. Consolidated Net Worth: The term "Consolidated Net Worth" shall mean, with respect to any Person as of any date, the total stockholders' equity of such Person as of such date plus the amount of Indebtedness outstanding under the PIK Note as of such date, less, to the extent otherwise included, amounts attributable to Redeemable Stock and, in the case of the Company, the amount attributable to the Existing Intercompany Note, in each case determined on a consolidated basis in accordance with GAAP; provided, however, that in determining Consolidated Net Worth with respect to the Company there shall be disregarded: (i) any charge with respect to premiums paid in excess of the principal amount in connection with the repurchase, defeasance or redemption of the 14 1/4% Senior Subordinated Notes and (ii) the amortization or write-off of any unamortized deferred financing costs or debt discount (other than original issue discount with respect to Indebtedness Incurred after the date hereof) in connection with the amendment or refinancing of the Credit Agreement and the Old Credit Agreement and/or the repurchase, defeasance or redemption of the 14 1/4% Senior Subordinated Notes. Credit Agreement: The term "Credit Agreement" shall mean that certain Credit Agreement, dated as of February 15, 1994, among the Company, KAC, the financial institutions that are, or from time to time become, parties thereto, BankAmerica Business Credit, Inc., as agent, including all related notes, collateral documents and guarantees, and any agreement (including all related notes, collateral documents and guarantees) pursuant to which Indebtedness thereunder has been Refinanced (or successively Refinanced), in each case as any of the same has been or may be amended, supplemented, restated, restructured or otherwise modified from time to time (in each case, in whole or in part). Currency Hedging Obligation: The term "Currency Hedging Obligation" with respect to any Person shall mean the monetary obligations of such Person pursuant to any foreign exchange contract, currency swap agreement, option or futures contract, forward contract or other similar agreement or arrangement designed to protect such Person or any of its Subsidiaries against fluctuations in currency values. Defaulting Equity Owner: The term "Defaulting Equity Owner" shall mean, with respect to any Permitted Entity, any Equity Owner who causes an Equity Owner Default. Equity Owner: The term "Equity Owner" shall mean, with respect to any Permitted Entity, any holder of an Ownership Interest in such Permitted Entity. Equity Owner Default: The term "Equity Owner Default" shall mean, with respect to any issuance of Permitted Entity Securities to the Equity Owners of a Permitted Entity, the failure by one or more of such Equity Owners to acquire such Permitted Entity Securities in an amount corresponding to at least its Ownership Interest of such Permitted Entity and, as a result thereof, such Equity Owner 15 23 becomes subject to, directly or indirectly, a dilution of its interest in the future net income of such Permitted Entity and/or a penalty pursuant to the terms of the governing documents of such Permitted Entity. Event of Default: The term "Event of Default" shall mean any event specified in Section 6.01, continued for the period of time, if any, and after the giving of notice, if any, therein designated. Exchange Act: The term "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Securities and Exchange Commission thereunder. Existing Intercompany Note: The term "Existing Intercompany Note" shall mean the Non-Negotiable Intercompany Note, dated December 21, 1989, issued by KAC to the Company in an initial principal amount of $818,585,280, as such Non-Negotiable Intercompany Note may be amended. Fair Market Value: The term "Fair Market Value" shall mean, with respect to any property other than cash, the fair market value of such property as determined in good faith by the Board of Directors of the Company, whose determination shall be evidenced by a Board Resolution; provided, however, that, in the event the Company makes a payment in the form of or otherwise transfers property other than cash to, or receives property other than cash from, an Affiliate in an amount in excess of $10,000,000, the Company, in addition, shall have received an opinion from an independent investment banking firm of national standing selected by the Company to the effect that the Board of Director's determination of fair market value is fair. GAAP: The term "GAAP" shall mean 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 in any event (i) giving effect to, but excluding the effect of any one-time charge related to the implementation of, Statement of Financial Accounting Standards No. 106 (Employers' Accounting for Postretirement Benefits Other Than Pensions) and (ii) giving effect to Statement of Financial Accounting Standards No. 109 (Accounting for Income Taxes). Government Securities: The term "Government Securities" shall mean direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States of America is pledged. Guarantee: The term "Guarantee" shall mean, with respect to any Subsidiary Guarantor, the guarantee of such Subsidiary Guarantor set forth in Article Fifteen. Improvements: The term "Improvements" shall mean any accessories, accessions, additions, attachments, substitutions, replacements, improvements, parts and other property now or hereafter affixed to any U.S. Fixed Assets or used in connection therewith. Indebtedness: The term "Indebtedness" shall mean, with respect to any Person at any date, any of the following (without duplication): (a) the principal amount of all obligations (unconditional or contingent) of such Person for borrowed money (whether or not recourse is 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 16 24 by debentures, notes or other similar instruments (including, without limitation, reimbursement obligations with respect to letters of credit and bankers' acceptances); (b) all obligations of such Person to pay the deferred purchase price of property or services, except (X) accounts payable and other current liabilities arising in the ordinary course of business and (y) compensation, pension obligations and other obligations arising from employee benefits and employee arrangements; (c) Capitalized Lease Obligations of such Person; (d) 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; (e) preferred stock (including preference stock) that is Redeemable Stock (the amount of the Indebtedness in respect of such preferred stock to be equal to the aggregate liquidation value thereof); (f) all Indebtedness of others guaranteed by such Person; (g) pension obligations and other similar obligations arising from employee benefits, to the extent unfunded and assumed by such Person after the date of the initial issuance of the Notes in the acquisition, by such Person, of the assets or Capital Stock of another Person ("Assumed Pension Obligations"); and (h) all obligations under Refinancing Sale and Leaseback Transactions; and the amounts thereof shall be the outstanding balance of any such unconditional obligations as described in clauses (a) through (f) (other than clause (d)), and the maximum liability of any such contingent obligations at such date (other than with respect to clause (d)) and, in the case of clause (d), the lesser of the fair market value at such date of any asset subject to any Lien securing the Indebtedness of others and the amount of the Indebtedness secured and, in the case of clause (g), the amount of Assumed Pension Obligations shall be the amount determined by the Company in good faith as evidenced by a certificate of the Chief Financial Officer of the Company delivered to the Trustee and, in the case of clause (h), the Attributable Debt with respect to such Refinancing Sale and Leaseback Transactions; provided, however, that Indebtedness shall not include: (A) the obligations of such Person and/or any of its Subsidiaries to purchase or sell goods, services or technology utilized in their bauxite, aluminum and alumina business and related extensions thereof, including on a take-or-pay basis, pursuant to agreements entered into in the ordinary course of business consistent with past practice, or to fund or guarantee the obligations of National Refractories & Minerals Corporation or any of its Affiliates in an aggregate principal amount at any time outstanding not exceeding $7,500,000; (B) obligations of such Person arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business, provided that such obligations are extinguished within two Business Days of their incurrence (or, in the case of foreign overdrafts, within five Business Days of their incurrence) unless covered by an overdraft credit line; (C) obligations of such Person resulting from the endorsement of negotiable instruments for collection in the ordinary course of business; 17 25 (D) Indebtedness consisting of letters of credit to the extent collateralized by cash or Cash Equivalents; and (E) Liens on assets of KAAC granted to secure Indebtedness of QAL, provided that such Liens are (i) in existence on the date of this Indenture, (ii) similar in all material respects to Liens in existence on the date of this Indenture or (iii) not on assets consisting of cash, Cash Equivalents or fixed assets and such assets are used or to be used in connection with the business of QAL. Indenture: The term "Indenture" shall mean this instrument as originally executed, or, if amended or supplemented as herein provided, as so amended or supplemented. Interest Hedging Obligation: The term "Interest Hedging Obligation" with respect to any Person shall mean the monetary obligations of such Person pursuant to any interest rate swap agreement, interest rate collar agreement, interest rate cap agreement, options or futures contract, forward contract or other agreement or arrangement designed to protect such Person or any of its Subsidiaries against fluctuations in interest rates. KAAC: The term "KAAC" shall mean Kaiser Alumina Australia Corporation, a Delaware corporation, and its successors. KAC: The term "KAC" shall mean Kaiser Aluminum Corporation, a Delaware corporation, and its successors. KFC: The term "KFC" shall mean Kaiser Finance Corporation, a Delaware corporation, and its successors. KJC: The term "KJC" shall mean Kaiser Jamaica Corporation, a Delaware corporation, and its successors. Lien: The term "Lien" shall mean, with respect to any asset of any Person, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). Maximum Secured Amount: The term "Maximum Secured Amount" shall mean, at any time (i) $300,000,000, plus (ii) Net Betterments at such time, plus (iii) the outstanding amount of Indebtedness relating to the CARIFA Financing secured by a Lien on Permitted Collateral, but in no event more than $43,000,000, minus (iv) in the event of a sale of Permitted Collateral which is subject to a Lien permitted by clause (i) of Section 4.11(b) of this Indenture, the amount, if any, of the net proceeds thereof required to be applied to a permanent repayment or commitment reduction in respect of the Indebtedness secured by such Lien, minus (v) in the event of the Refinancing of any Indebtedness secured by a Lien permitted by clause (i) of Section 4.11(b), the lesser of (A) the amount of Indebtedness, if any, not secured by Permitted Collateral which Refinances, in whole or in part, such Indebtedness secured by a Lien permitted by clause (i) of Section 4.11(b) of this Indenture and (B) the amount, if any, by which the Maximum Secured Amount immediately prior to such Refinancing, in whole or in part, of such Indebtedness secured by a Lien permitted by clause (i) of Section 4.11(b) of this Indenture exceeds the aggregate amount of Indebtedness which is secured by a Lien on Permitted Collateral permitted by clause (i) or clause (viii)(a) of Section 4.11(b) of this Indenture after giving effect to such Refinancing. 18 26 MAXXAM: The term "MAXXAM" shall mean MAXXAM Inc., a Delaware corporation, and its successors. Net Betterments: The term "Net Betterments" shall mean the amount, if any, by which capital expenditures (determined in accordance with GAAP) by the Company or any of its Subsidiaries in respect of the Permitted Collateral on a cumulative basis for the period from the date hereof through the date of determination exceeds depreciation (determined in accordance with GAAP) in respect of the Permitted Collateral on a cumulative basis for such period (provided, however, that with respect to any Permitted Collateral existing at the time of the merger of a subsidiary of MAXXAM with and into KAC on October 28, 1988 (the "Merger"), the depreciation shall be the historical depreciation before adjustments to reflect the acquisition of the Company in the Merger), but in no event less than zero, provided, that in the event any Permitted Collateral ceases to constitute Permitted Collateral in accordance with the definition thereof, only the amount of Net Betterments in respect of such Permitted Collateral at such time shall be included in any subsequent calculation of Net Betterments and provided, further, that (a) Improvements which are subject to a Lien permitted by clause (iv), (v) or (vi) of Section 4.11(b) and (b) U.S. Fixed Assets to the extent subject to a Lien permitted by clause (ix) of Section 4.11(b) shall not be included in the determination of Net Betterments. Net Cash Proceeds: The term "Net Cash Proceeds" shall mean 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, or could freely be, converted into United States dollars) by or on behalf of the Company and/or any of its Subsidiaries (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise or the cash realization of any non-cash proceeds of any Asset Sale, but, in each case, only as and when, and to the extent, received) from an Asset Sale, in each case and without duplication, net of: (i) all legal, title and recording tax expenses, commissions, consulting fees, investment banking, broker's and accounting fees and expenses and fees and expenses incurred in obtaining regulatory approvals in connection with such Asset Sale, (ii) the amounts of (A) any repayments of debt secured, directly or indirectly, by Liens on the assets which are the subject of such Asset Sale or (B) any repayments of debt associated with such assets which is due by reason of such Asset Sale (i.e., such disposition is permitted by the terms of the instruments evidencing or applicable to such debt, or by the terms of a consent granted thereunder, on the condition that the proceeds (or portion thereof) of such disposition be applied to such debt), provided, that this clause (B) shall not apply with respect to any U.S. Fixed Assets which do not constitute Permitted Collateral, and, in the case of clauses (A) and (B), other fees, expenses and other expenditures, in each case, reasonably incurred as a consequence of such repayment of debt (whether or not such fees, expenses or expenditures are then due and payable or made, as the case may be), (iii) all amounts deemed appropriate by the Company (as evidenced by a signed certificate of the Chief Financial Officer of the Company delivered to the Trustee) to be provided as a reserve, in accordance with GAAP ("GAAP Reserves"), 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, and (v) with respect to Asset Sales by Subsidiaries of the Company, the portion of such cash payments attributable to Persons holding a minority interest in such Subsidiary; 19 27 provided, in each such case, that such fees and expenses and other amounts are not payable to an Affiliate of the Company (except for amounts payable pursuant to the Tax Sharing Agreements), and provided, further, that required redemptions of existing preferred stock (including preference stock) of the Company outstanding on the date hereof or issued pursuant to collective bargaining arrangements and related employee benefit arrangements in effect on the date hereof, in each case, from Persons other than Affiliates of the Company, shall be deemed to be a fee, expense or other expenditure of such Asset Sale. Notwithstanding the foregoing, Net Cash Proceeds shall not include proceeds received in a foreign jurisdiction from an Asset Sale of an asset located outside the United States to the extent: (i) such proceeds cannot under applicable law be transferred to the United States or (ii) such transfer would result (in the good faith determination of the Board of Directors of the Company set forth in a Board Resolution) in a foreign tax liability that would be materially greater than if such Asset Sale occurred in the United States; provided that if, as, and to the extent that any of such proceeds may lawfully be (in the case of clause (i)) or are (in the case of clause (ii)) transferred to the United States, such proceeds shall be deemed to be cash payments that are subject to the terms of this definition of Net Cash Proceeds. Subject to the provisions of the next preceding sentence, Net Cash Proceeds shall also include: (i) cash distributions actually received by or on behalf of the Company or any of its Subsidiaries from any Non-Affiliate Joint Venture of the Company representing the proceeds of a transaction by such Non-Affiliate Joint Venture that would constitute an Asset Sale if such Non-Affiliate Joint Venture were a Subsidiary of the Company and (ii) the amount of any reversal of GAAP Reserves (but only as and when, and to the extent, reversed) which amount is otherwise a deduction from Net Cash Proceeds. Net Income: The term "Net Income" shall mean, with respect to any Person for any period, the net income (loss) of such Person for such period determined in accordance with GAAP. Non-Affiliate Joint Venture: The term "Non-Affiliate Joint Venture" shall mean any joint venture, partnership or other Person (other than the Company or a Subsidiary of the Company) in which the Company and/or its Subsidiaries have an ownership interest equal to or greater than 5% and in which no Affiliate of the Company has a direct or an indirect ownership interest other than by virtue of the direct or indirect ownership interest in such Non-Affiliate Joint Venture held (in the aggregate) by the Company and/or one or more of its Subsidiaries, provided that such Non-Affiliate Joint Venture is engaged in one or more of the lines of business in which the Company or its Subsidiaries or its Non- Affiliate Joint Ventures are engaged in as of the date of this Indenture or reasonably related extensions of such lines. Non-Defaulting Equity Owner: The term "Non-Defaulting Equity Owner" shall mean, with respect to any Permitted Entity, any Equity Owner that is not a Defaulting Equity Owner. Non-Recourse Guarantor: The term "Non-Recourse Guarantor" shall mean a Subsidiary of the Company that guarantees any Indebtedness under the Credit Agreement, provided that such guarantee is non-recourse to the assets of such Subsidiary other than to intercompany Indebtedness owed, or from time to time owing, by the Company to such Subsidiary, and all monetary proceeds therefrom. 20 28 Note or Notes; outstanding: The terms "Note" or "Notes" shall mean any Note or Notes, as the case may be, authenticated and delivered under this Indenture. The term "outstanding," when used with reference to Notes, shall, subject to the provisions of Section 8.04, mean, as of any particular time, all Notes authenticated and delivered by the Trustee under this Indenture, except (a) Notes theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (b) Notes, or portions thereof, for which the payment of principal, interest, any redemption price, any Change of Control Purchase Price or any Asset Sale Purchase Price in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent), provided that such Notes shall have reached their stated maturity or, if such Notes are to be or may be redeemed or purchased prior to the maturity thereof, notice of such redemption or purchase shall have been given as in Article Three provided, or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Notes in lieu of or in substitution for which other Notes shall have been authenticated and delivered pursuant to the terms of Section 2.07, unless proof satisfactory to the Trustee is presented that any such Notes are held by bona fide holders in due course. Noteholder; registered holder: The terms "noteholder," "holder of Notes," "registered holder" or other similar term shall mean any person who shall at the time be the registered holder of any Note or Notes on the registry books of the Company kept for that purpose in accordance with the provisions of this Indenture. Officers' Certificate: The term "Officers' Certificate" shall mean a certificate of the Company signed on behalf of the Company by the Chairman of the Board, the President or any Vice President and by the Chief Financial Officer, the Controller, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company. Each such certificate shall include the statements provided for in Section 14.05 if and to the extent required by the provisions thereof. Old Credit Agreement: The term "Old Credit Agreement" shall mean that certain Credit Agreement, dated as of December 13, 1989, among the Company, KAC, the financial institutions party thereto, Bank of America National Trust and Savings Association, as agent, and Mellon Bank, N.A., as collateral agent, which was replaced by the Credit Agreement. Opinion of Counsel: The term "Opinion of Counsel" shall mean an opinion in writing signed by legal counsel, who may be an employee of, or of counsel to, the Company and who shall be reasonably satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 14.05 if and to the extent required by the provisions thereof. Ownership Interest: The term "Ownership Interest" shall mean, with respect to any Equity Owner of a Permitted Entity at the time of the determination thereof, the proportion held at such time by such Equity Owner of the outstanding Permitted Entity Securities of such Permitted Entity that are last entitled to payment upon liquidation or dissolution as provided in the governing instruments of such Permitted Entity or pursuant to an agreement among the Equity Owners of such Permitted Entity. 21 29 Permitted Collateral: The term "Permitted Collateral" shall mean real property (as set forth in Schedule B hereto), plant and equipment of the Company or any of its Subsidiaries located in the United States of America which, as of the date of issuance of the Notes, secures Indebtedness under the Credit Agreement (whether or not the Liens on such real property, plant or equipment are perfected at such time), together with any Improvements thereto or thereon, any real property that is contiguous to or structurally related to such real property (the "Contiguous Property") and any real property, plant or equipment, whether owned on the date of the issuance of the Notes or thereafter acquired, located or used at any time after the date of issuance of the Notes at a facility (other than the Company's Gramercy alumina refinery) owned, leased, occupied or used by the Company or any of its Subsidiaries as of the date of issuance of the Notes or on any Contiguous Property, and any proceeds thereof, provided, that notwithstanding anything to the contrary contained in this Indenture, any Permitted Collateral which is released from all Liens thereon securing Indebtedness and which does not become subject to a new Lien within 60 days of such release securing Indebtedness which Refinances any of the Indebtedness (in whole or in part) previously secured by such Permitted Collateral shall not thereafter constitute "Permitted Collateral" under the Indenture. Permitted Dividend Encumbrance: The term "Permitted Dividend Encumbrance" shall mean, with respect to any Person, any consensual encumbrances or restrictions on the ability of such Person to pay dividends or make any other distributions on its Capital Stock or pay any Indebtedness owed to the Company or any Subsidiaries of the Company (or, in the case of a Permitted Entity, to its Equity Owners) or to make loans or advances or transfer any of its assets to the Company or any Subsidiary of the Company (or, in the case of a Permitted Entity, to its Equity Owners) existing under or by reason of any of: (i) this Indenture; (ii) Indebtedness permitted under Section 4.10(b)(ii); (iii) Indebtedness or other obligations in existence on the date of this Indenture and customary rights of first refusal with respect to the Company's and its Subsidiaries' interests in their respective Subsidiaries, Non-Affiliate Joint Ventures and Permitted Entities; (iv) applicable law and agreements with foreign governments with respect to assets located in their jurisdictions; (v) (A) customary provisions restricting (i) the subletting or assignment of any lease or (ii) the transfer of copyrighted or patented materials, (B) provisions in agreements that restrict the assignment of such agreements or rights thereunder or (C) provisions of a customary nature contained in the terms of Capital Stock restricting the payment of dividends and the making of distributions on Capital Stock; (vi) Indebtedness or other obligations of any other Person acquired (whether pursuant to a purchase of stock or assets) (including any Non-Affiliate Joint Venture of the Company or Permitted Entity that becomes a Subsidiary of the Company) or applicable to any assets at the time such Person or assets were acquired by the Company, its Subsidiaries or a Permitted Entity, in each case which Indebtedness and obligations (A) were not created in anticipation of such acquired Person becoming a Subsidiary of the Company or a Permitted Entity, as the case may be, or such assets being acquired by the Company, its Subsidiaries or such Permitted Entity, as the case may be, and (B) which encumbrances and restrictions are not applicable to any Person or the property or assets of any Person other than the Person or the property or assets of the Person so acquired (including the Capital Stock of such Person) 22 30 or any newly organized entity formed to effect such acquisition and, in each case, the monetary proceeds thereof; (vii) encumbrances and restrictions with respect to such Person imposed in connection with an agreement for the sale or disposition of such Person or its assets; (viii) encumbrances and restrictions applicable only to (A) Alpart and its assets and Capital Stock with respect to Indebtedness permitted to be Incurred by Alpart pursuant to Section 4.10(a), (B) Alpart, KJC and AJI and their respective assets and Capital Stock with respect to Indebtedness permitted to be Incurred pursuant to Section 4.10(b)(iii), (C) KAAC and its assets and Capital Stock with respect to Indebtedness permitted to be Incurred pursuant to Section 4.10(b)(iv) and (D) the Person that Incurred such Indebtedness and such Person's assets and Capital Stock with respect to Indebtedness permitted to be Incurred pursuant to Section 4.10(b)(viii) or (ix); in each case provided, that the Board of Directors of the Company has determined in good faith that such encumbrances and restrictions would not singly or in the aggregate have a materially adverse effect on the holders of the Notes; (ix) Indebtedness of a Person that was a Subsidiary at the time of Incurrence and the Incurrence of which Indebtedness is permitted by Section 4.10, provided that such encumbrances and restrictions apply only to such Subsidiary and its assets, and provided, further, that the Board of Directors of the Company has determined in good faith, at the time of creation of each such encumbrance or restriction, that such encumbrances and restrictions would not singly or in the aggregate have a materially adverse effect on the holders of the Notes; (x) the subordination of (A) any Indebtedness owed by the Company or any of its Subsidiaries to the Company or any other Subsidiary to (B) any other Indebtedness of the Company or any of its Subsidiaries, provided (A) such other Indebtedness is permitted under this Indenture and (B) the Board of Directors of the Company has determined in good faith, at the time of creation of each such encumbrance or restriction, that such encumbrances and restrictions would not singly or in the aggregate have a materially adverse effect on the holders of the Notes; (xi) the subordination of (A) any Indebtedness owed by a Permitted Entity to its Equity Owners or any other Person to (B) any other Indebtedness of such Permitted Entity, provided (I) such other Indebtedness, at the time of the Incurrence thereof, is permitted by the definition of Permitted Entity and (II) the Board of Directors of the Company has determined in good faith, at the time of creation of each such encumbrance or restriction, that such encumbrances and restrictions would not singly or in the aggregate have a materially adverse effect on the holders of the Notes; (xii) Refinancing Indebtedness that is otherwise permitted in connection with any Refinanced Indebtedness,provided that, in the case of all Refinancing Indebtedness other than Refinancing Indebtedness Incurred with respect to Indebtedness permitted under Section 4.10(b)(ii), any such encumbrances or restrictions shall not be materially less favorable to the holders of the Notes; and (xiii) the sale or other disposition of property subject to a Lien securing Indebtedness, provided that such Lien and such Indebtedness are otherwise permitted by this Indenture. Permitted Entity: The term "Permitted Entity" shall mean any Person (other than a Subsidiary Guarantor) designated as such by a Board Resolution and as to which: (i) the Company, any Subsidiary Guarantor or any Permitted Entity own all or a portion of the Permitted Entity Securities of such Person; 23 31 (ii) no more than 10 unaffiliated Equity Owners own of record any Permitted Entity Securities of such Person; (iii) at all times, each Equity Owner owns a proportion of each class of Permitted Entity Securities of such Person outstanding equal to such Equity Owner's Ownership Interest at such time, other than as a result of an Equity Owner Default; (iv) no Indebtedness or preferred stock (including preference stock) is or has been Incurred by such Person that is outstanding other than (X) Permitted Entity Securities held by Equity Owners and/or (y) if such Person is a Subsidiary of the Company, Indebtedness permitted to be Incurred by such Subsidiary at the time of the Incurrence thereof under Sections 4.10(b)(v) and 4.10(b)(xiii); (v) there exist no consensual encumbrances or restrictions on the ability of such Person to (X) pay dividends or make any other distributions to its Non-Defaulting Equity Owners or (y) make loans or advances or transfer any of its assets to its Non-Defaulting Equity Owners, in each case other than Permitted Dividend Encumbrances of such Permitted Entity; (vi) the Company, any Subsidiary Guarantor or any Permitted Entity has the right at any time (whether by agreement, operation of law or otherwise) to (A) require the Permitted Entity that it owns an Ownership Interest in to dissolve, liquidate or wind up its affairs (subject to any right of the other Equity Owners and/or such Permitted Entity to acquire all of the Permitted Entity Securities owned by such Equity Owner) and, subject to applicable law, to distribute its remaining assets to its Equity Owners after payment to creditors or (B) have all of the Permitted Entity Securities that it owns purchased by such Permitted Entity and/or other Equity Owners; and (vii) the business engaged by such Person is one in which the Company or its Subsidiaries or its Non-Affiliate Joint Ventures were engaged on the date of this Indenture or reasonably related thereto or is the business of holding or disposing of Permitted Entity Securities. Permitted Entity Securities: The term "Permitted Entity Securities" shall mean, with respect to any Permitted Entity, any Capital Stock or Indebtedness (whether or not a security) of such Permitted Entity, other than Indebtedness permitted to be Incurred by such Permitted Entity pursuant to clause (iv)(y) of the definition of Permitted Entity, but in any event including Permitted Indebtedness described in clause (b) of the definition thereof. Permitted Indebtedness: The term "Permitted Indebtedness" shall mean: (a) Indebtedness and preferred stock (including preference stock) of the Company and its Subsidiaries existing on the date of this Indenture, including, but not limited to, the Subordinated Notes; (b) Indebtedness (including Redeemable Stock) owed or issued by the Company to a Subsidiary or owed or issued by a Subsidiary to the Company, any other Subsidiary of the Company or to any other holder of Capital Stock of such Subsidiary in proportion to such holder's ownership interest in such Subsidiary; (c) Indebtedness and preferred stock (including preference stock) of a Permitted Entity to the extent not prohibited by clause (iii) or clause (iv)(X) of the definition thereof; (d) Indebtedness of the Company and its Subsidiaries by reason of entering into indemnification agreements and guarantees in connection with the disposition of assets, provided that the Indebtedness 24 32 with respect to such indemnification agreements and guarantees shall be limited to the amount of the net proceeds of such disposition; (e) guarantees, letters of credit and indemnity agreements relating to performance and surety bonds incurred in the ordinary course of business; (f) Indebtedness of a Subsidiary of the Company (including undrawn amounts under lines of credit that are subsequently drawn upon) issued, assumed or guaranteed by such Subsidiary prior to the date upon which such Subsidiary becomes a Subsidiary of the Company (excluding Indebtedness incurred by such entity in connection with, or in contemplation of, its becoming a Subsidiary of the Company), provided that such Indebtedness and the holders thereof do not, at any time, have direct or indirect recourse to any property or assets of the Company and its Subsidiaries other than the property and assets of such acquired entity and its Subsidiaries, including the Capital Stock thereof, or any newly organized entity formed to effect such acquisition, and, in each case, the monetary proceeds thereof; (g) Indebtedness incurred by the Company in connection with the purchase, redemption, retirement or other acquisition by the Company of the USWA Preferred Stock outstanding on the date hereof (plus additional shares of such USWA Preferred Stock issued as dividends thereon or on such shares issued as dividends); (h) Indebtedness of the Company and its captive wholly owned insurance Subsidiaries in respect of letters of credit in an aggregate amount not to exceed at any one time outstanding $20,000,000 issued for the account of the Company or such Subsidiaries in support of certain self-insurance and reinsurance obligations entered into from time to time by the Company or such captive wholly owned insurance Subsidiaries of the Company; (i) Indebtedness consisting of industrial revenue bonds and related indemnity agreements; and (j) prior to the merger of the Company and KAC, Indebtedness in respect of the Preferred Dividend Intercompany Notes. Person: The term "Person" shall mean any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof. PIK Note: The term "PIK Note" shall mean that certain PIK Note issued by the Company to a subsidiary of MAXXAM on December 15, 1992, in the principal amount of $2.5 million, bearing interest at a rate equal to 12% per annum and due on June 30, 1995. Preferred Dividend Intercompany Notes: The term "Preferred Dividend Intercompany Notes" shall mean (i) the intercompany note in respect of the Series A Shares, (ii) the intercompany note in respect of the PRIDES and (iii) any other intercompany note representing a loan by KAC to the Company from the proceeds of an offering of preferred stock by KAC which loan shall have a term not in excess of five years from the date of issuance and shall be in an amount equal to the aggregate dividends scheduled to accrue on such preferred stock during the term thereof and payable at approximately the same times and in approximately the same amounts as such dividends are payable, provided, that (a) the aggregate amount of all such intercompany notes referred to in this clause (iii) shall not exceed $50,000,000 at any one time outstanding and (b) the remaining net proceeds from such preferred stock offering shall have been used by KAC to make a capital contribution to (or to purchase common stock of) the Company. 25 33 Preferred Stock ($100): The term "Preferred Stock ($100)" shall mean the Company's 4 1/8% Preference Stock, par value $100 per share, 4 3/4% Preference Stock (1957 Series), par value $100 per share, 4 3/4% Preference Stock (1959 Series), par value $100 per share, and 4 3/4% Preference Stock (1966 Series), par value $100 per share. Principal; principal amount: The terms "principal" or "principal amount" of a Note shall mean the principal amount of such Note as set forth on the face of such Note. Prospectus: The term "Prospectus" shall mean that certain prospectus dated February --, 1994, relating to the offering by the Company of the Notes. QAL: The term "QAL" shall mean Queensland Alumina Limited, a Queensland, Australia corporation, and its successors. Redeemable Stock: The term "Redeemable Stock" shall mean, with respect to any Person, any preferred Capital Stock of such Person, that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, in whole or in part, pursuant to a sinking fund obligation or otherwise, or, at the option of the holder thereof, is redeemable in whole or in part, or is exchangeable into a security of a Person other than the issuer of such Capital Stock that is owned by such Person or its Subsidiaries or into indebtedness of, or that is owned by, such Person or its Subsidiaries, in each case on or prior to the scheduled maturity date of the Notes. Refinance: The term "Refinance" shall mean to renew, extend, refund, replace, restructure, refinance, amend or modify any Indebtedness. The term "Refinancing" shall have a correlative meaning. Refinancing Sale and Leaseback Transaction: The term "Refinancing Sale and Leaseback Transaction" shall mean any sale and leaseback transaction with respect to which the Attributable Debt is at least $100,000,000, and which is designated by the Company as a Refinancing Sale and Leaseback Transaction in a notice to the Trustee pursuant to the terms hereof, which notice shall indicate the Attributable Debt with respect to such Refinancing Sale and Leaseback Transaction. Responsible Officer: The term "responsible officer," when used with respect to the Trustee, shall mean any officer in its principal corporate trust office and every other officer and assistant officer to whom any corporate trust matter is referred because of his knowledge of and familiarity with the particular subject. Restricted Investment: The term "Restricted Investment" shall mean, with respect to any Person: (i) any amount paid, or any property transferred, in each case, directly or indirectly by such Person for Capital Stock or other securities of, or as a contribution to, any Affiliate of the Company; (ii) any direct or indirect loan or advance by such Person to any Affiliate of the Company other than accounts receivable of such Person relating to the purchase and sale of inventory, goods or services arising in the ordinary course of business; (iii) any direct or indirect guarantee by such Person of any obligations, contingent or otherwise, of any Affiliate of the Company; and 26 34 (iv) the acquisition by such Person of, or any investment by such Person in, any Capital Stock or similar interest of any other Person (other than the Company); provided, however, that the following shall not be Restricted Investments: (a) investments in or acquisitions of Capital Stock or similar interests in any Person (other than a Person in which Affiliates of the Company have an interest other than through the Company, its Subsidiaries and its Non-Affiliate Joint Ventures) that: (I) is or becomes, at the time of the acquisition thereof, a Subsidiary of the Company and is or is to be primarily engaged in an operating business or (II) is, at the time of the acquisition thereof, engaged or to be engaged primarily in businesses in which the Company or its Subsidiaries or its Non-Affiliate Joint Ventures were engaged on the date of this Indenture or reasonably related extensions thereof, provided that such securities are not, at the time of the acquisition thereof (without regard to any exchanges, modifications or other changes thereto subsequent to such acquisition), registered under the Exchange Act; (b) Restricted Investments of such Person existing as of the date of this Indenture and any extension, modification or renewal of such Restricted Investment (but not increases thereof, other than as a result of the accrual or accretion of interest or original issue discount pursuant to the terms of such Restricted Investment), or any Restricted Investment made in connection with an exchange of such Restricted Investment with the issuer thereof; (c) investments in or acquisitions of Permitted Entity Securities of any Permitted Entity; (d) transactions with officers or directors of the Company or any Subsidiary of the Company entered into in the ordinary course of business (including compensation or employee benefit arrangements with any officer or director of the Company or any Subsidiary of the Company); (e) investments in or acquisitions of Capital Stock or similar interests in Persons (other than Affiliates of the Company) received in the bankruptcy or reorganization of or by such Person or any exchange of such investment with the issuer thereof or taken in settlement of or other resolution of claims or disputes, and, in each case, extensions, modifications and renewals thereof; and (f) investments in Persons (other than Affiliates of the Company) received by such Person as consideration from Asset Sales to the extent not prohibited by Section 4.14 (including, for the purposes of this definition, those sales, transfers and other dispositions described in clause (B) and the transactions described in clause (D) of such definition) or any exchange of such investment with the issuer thereof, and extensions, modifications and renewals thereof. Securities Act of 1933: The term "Securities Act of 1933" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated by the Securities and Exchange Commission thereunder. Significant Subsidiary: The term "Significant Subsidiary" shall have the meaning assigned to that term under Regulation S-X of the Securities Act as in effect on the date of this Indenture; provided, however, that (i) each Subsidiary Guarantor on the date of this Indenture shall be deemed to be a Significant Subsidiary of the Company for so long as such Subsidiary is a Subsidiary Guarantor and (ii) 27 35 each of VALCO, KAAC and Alpart, and each Subsidiary of the Company that, directly or indirectly, holds an interest in VALCO, Alpart or QAL, and each Subsidiary Guarantor that becomes a Subsidiary Guarantor after the date of this Indenture (so long as such Subsidiary Guarantor is a Subsidiary Guarantor) shall be deemed to be a Significant Subsidiary if it (singly, or, in the case of VALCO, Alpart or QAL, together with the other Subsidiaries of the Company that hold an interest in such entity) meets the total assets test of the term "Significant Subsidiary" under Regulation S-X as in effect on the date of this Indenture, but substituting 5% in such test for 10%. Specified Parties: The term "Specified Parties" shall mean each of AJI, Alpart, KAAC, KJC, VALCO, Kaiser Aluminium International, Inc., a Delaware corporation, and its successors, Kaiser Bauxite Company, a Nevada corporation, and its successors, Kaiser Jamaica Bauxite Company, a Jamaican partnership, and its successors, and Queensland Alumina Security Corporation, a Delaware corporation, and its successors. Subordinated Notes: The term "Subordinated Notes" shall mean the Company's 12 3/4% Senior Subordinated Notes due 2003, as amended from time to time, issued pursuant to the Subordinated Note Indenture. Subordinated Note Indenture: The term "Subordinated Note Indenture" shall mean the indenture, dated as of February 1, 1993, among the Company, as issuer, the parties named therein as and, if applicable, thereafter becoming guarantors, and The First National Bank of Boston, a national banking association, as trustee, as amended or supplemented from time to time in accordance with the terms thereof. Subsidiary: The term "Subsidiary" shall mean any corporation or other entity of which more than 50% of the equity interest (which for a corporation shall be the outstanding stock having ordinary voting power to elect a majority of the Board of Directors of such corporation, irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned (either alone or through Subsidiaries or together with Subsidiaries) by the Company or another Subsidiary; provided, however, that Queensland Alumina Security Corporation, a Delaware corporation, shall be deemed not to be a Subsidiary of the Company or any of its Subsidiaries and shall be deemed to be a Non- Affiliate Joint Venture (for as long as it meets the definition of Non-Affiliate Joint Venture and for as long as its operations remain substantially the same), and provided, further, that, for purposes of the definitions of Asset Sale and Net Cash Proceeds and for purposes of Section 4.14, each of Alpart and VALCO, so long as it is not a wholly owned Subsidiary, shall be deemed not to be a Subsidiary of the Company or any of its Subsidiaries and shall be deemed to be a Non-Affiliate Joint Venture of the Company (for as long as it meets the definition of Non-Affiliate Joint Venture). For purposes of this definition, any directors' qualifying shares shall be disregarded in determining the ownership of a Subsidiary. Subsidiary Guarantors: The term "Subsidiary Guarantors" shall mean the Persons from time to time named as Subsidiary Guarantors in this Indenture or that become Subsidiary Guarantors hereunder, and each of their respective successors, provided, however, that in the event that a Subsidiary Guarantor is released from its Guarantee in accordance with the terms of this Indenture, such Subsidiary Guarantor shall without any further action no longer be a Subsidiary Guarantor for any purpose of this Indenture or the Notes. On the date of this Indenture, the Subsidiary Guarantors are AJI, KFC, KAAC and KJC. Tax Sharing Agreements: The term "Tax Sharing Agreements" shall mean, collectively, the tax-sharing agreement between the Company and KAC, dated as of June 30, 1993, and the tax-sharing 28 36 agreement between the Company and MAXXAM, dated as of December 21, 1989, as each is described in the Prospectus and as each may be amended in accordance with Section 4.08(b)(x) of this Indenture. Trust Indenture Act of 1939: The term "Trust Indenture Act of 1939" shall mean the Trust Indenture Act of 1939 as it was in force at the date of this Indenture, except as provided by Article Ten. Trustee; principal office: The term "Trustee" shall mean First Trust National Association, a national banking association, until a successor replaces it in accordance with the provisions of Article Seven. The term "principal office of the Trustee" shall mean the office of the Trustee at which at any particular time its corporate trust business may be principally administered, which office at the date hereof is located at First Trust Center, 180 East 5th Street, St. Paul, Minnesota 55101. U.S. Fixed Assets: The term "U.S. Fixed Assets" shall mean, at any time, any real property, plant or equipment of the Company or any of its Subsidiaries located at such time in the United States of America, now owned or hereafter acquired, together with any fixed assets that are Improvements thereto or thereon and any fixed assets that are proceeds thereof. USWA Preferred Stock: The term "USWA Preferred Stock" shall mean the shares of the Company's Cumulative (1985 Series A) Preference Stock and shares of the Company's Cumulative (1985 Series B) Preference Stock that have been or may in the future be issued in connection with the Kaiser Aluminum USWA Employee Stock Ownership Plan and/or the Kaiser Aluminum Salaried Employee Stock Ownership Plan. VALCO: The term "VALCO" shall mean Volta Aluminium Company Limited, a Ghanaian corporation, and its successors. SECTION 1.02. References are to Indenture. Unless the context otherwise requires, all references herein to "Articles," "Sections" and other subdivisions refer to the corresponding Articles, Sections and other subdivisions of this Indenture, and the words "herein," "hereof," hereby," "hereunder" and words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision hereof. SECTION 1.03. Other definitions. The following terms are defined in the referenced section of this Indenture and have the meaning set forth therein for all purposes in this Indenture (except as otherwise expressly provided or unless the context otherwise requires): Term Defined in Section - ---- ------------------ "applicants" . . . . . . . . . . . . . . . . . . . . . . 5.02(b) "Asset Sale Offer" . . . . . . . . . . . . . . . . . . . 4.14(b) "Asset Sale Offer Amount" . . . . . . . . . . . . . . . 4.14(b) "Asset Sale Purchase Date" . . . . . . . . . . . . . . . 4.14(b) "Asset Sale Purchase Notice" . . . . . . . . . . . . . . 4.14(b) "Asset Sale Purchase Price" . . . . . . . . . . . . . . 4.14(b) "Change of Control" . . . . . . . . . . . . . . . . . . 3.05(a) "Change of Control Purchase Date" . . . . . . . . . . . 3.05(a) "Change of Control Purchase Notice". . . . . . . . . . . 3.05(c) "Change of Control Purchase Price" . . . . . . . . . . . 3.05(a) 29 37 "Controlled Non-Affiliate Joint Venture" . . . . . . . . 4.09(a) "Incur" . . . . . . . . . . . . . . . . . . . . . . . . 4.10(a) "Notice of Default" . . . . . . . . . . . . . . . . . . 6.01(c) "Other Indebtedness" . . . . . . . . . . . . . . . . . . 4.10(c) "PRIDES" . . . . . . . . . . . . . . . . . . . . . . . . 4.09(b)(IX) "record date" . . . . . . . . . . . . . . . . . . . . . 2.03 "Refinanced Indebtedness" . . . . . . . . . . . . . . . 4.10(b)(vi) "Refinancing Indebtedness" . . . . . . . . . . . . . . . 4.10(b)(vi) "Restricted Payment" . . . . . . . . . . . . . . . . . . 4.09(a) "Series A Shares" . . . . . . . . . . . . . . . . . . . 4.09(b)(IX) "Specified Pari Passu Indebtedness" . . . . . . . . . . 4.14(b) "surviving corporation" . . . . . . . . . . . . . . . . 11.01(a) "Twenty-Five Million Threshold" . . . . . . . . . . . . 4.14(c) "Voting Stock" . . . . . . . . . . . . . . . . . . . . . 3.05(a) The following terms are defined in the referenced section of this Indenture and have the meaning set forth therein for purposes provided therein, and such definitions are limited to those sections of the Indenture specifically referenced: Defined in Definition Limited Term Section to Section - ---- --------- ------------------- "amount" . . . . . . . . . . . . 7.08(d) . . . . . . . . 7 .08 "cash transaction" . . . . . . . 7.13(c) . . . . . . . . 7 .13 "Company" . . . . . . . . . . . 7.08(d) . . . . . . . . 7 .08 "Company" . . . . . . . . . . . 7.13(c) . . . . . . . . 7 .13 "defaults" . . . . . . . . . . . 6.07 . . . . . . . . . 6 .07 "defaults" . . . . . . . . . . . 7.13(c) . . . . . . . . 7 .13 "director" . . . . . . . . . . . 7.08(d) . . . . . . . . 7 .08 "dividends" . . . . . . . . . . 7.13(a) . . . . . . . . 7 .13(a) "executive officer" . . . . . . 7.08(d) . . . . . . . . 7 .08 "in default" . . . . . . . . . . 7.08(c) . . . . . . . . 7 .08(c)(6), (7), (8) and (9) "other indenture securities" . . 7.13(c) . . . . . . . . 7 .13 "outstanding" . . . . . . . . . . . . . . . . . . . . . 7 .08(d)7.08 "person" . . . . . . . . . . . . 7.08(d) . . . . . . . . 7 .08 "security" . . . . . . . . . . 7.08(c) . . . . . . . . 7 .08(c)(6), (7), (8) and (9) "security" . . . . . . . . . . . 7.08(d) . . . . . . . . 7 .08 (other than 7.08(c)(6), (7), (8) and (9)) "self liquidating paper" . . . . 7.13(c) . . . . . . . . 7 .13 "trust" . . . . . . . . . . . . 7.08(d) . . . . . . . . 7 .08 "voting security" . . . . . . . 7.08(d) . . . . . . . . 7 .08 30 38 ARTICLE TWO ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES SECTION 2.01. Designation, amount, authentication and delivery of Notes. The Notes shall be designated as the Company's ---% Senior Notes due 2002. Notes for an aggregate principal amount of two hundred twenty five million dollars ($225,000,000), upon the execution of this Indenture, or from time to time thereafter, may be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes to or upon the written order of the Company, signed by its Chairman of the Board, President or a Vice President, without any further corporate action by the Company. The aggregate principal amount of Notes authorized by this Indenture is limited to two hundred twenty five million dollars ($225,000,000), and, except as provided in this Section 2.01 and in Section 2.07, the Company shall not execute and the Trustee shall not authenticate or deliver Notes in excess of such aggregate principal amount. Nothing contained in this Section 2.01 or elsewhere in this Indenture, or in the Notes, is intended to or shall limit execution by the Company or authentication or delivery by the Trustee of Notes under the circumstances contemplated by Sections 2.05, 2.06, 2.07, 3.03, 3.05 and 10.04. SECTION 2.02. Form of Notes and Trustee's certificate. The definitive Notes and the Trustee's certificate of authentication to be borne by the Notes shall be substantially in the form set forth in the Recitals of this Indenture, which are part of this Indenture, and may have such letters, numbers or other marks of identification or designation and such legends or endorsements printed, lithographed or engraved thereon as the officers executing the same may deem appropriate and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Notes may be listed, or to conform to usage. SECTION 2.03. Date of Notes and denominations. The Notes shall bear interest at the rate per annum of --%, payable semi-annually on February 15 and August 15, shall mature on February --, 2002 and shall be issuable as registered Notes without coupons in denominations of $1,000 and any integral multiple thereof. The person in whose name any Note is registered at the close of business on any record date (as hereinbelow defined) with respect to any interest payment date shall be entitled to receive the interest payable thereon on such interest payment date notwithstanding the cancellation of such Note upon any registration of transfer or exchange thereof subsequent to such record date and prior to such interest payment date, unless such Note shall have been redeemed on a date fixed for redemption subsequent to such record date and prior to such interest payment date, or unless an Event of Default shall have occurred and be continuing as the result of a default in the payment of interest due on such interest payment date on any Note, in which case such defaulted interest shall be paid to the person in whose name such Note (or any Note or Notes issued upon registration of transfer or exchange thereof) is registered on the record date for the payment of such defaulted interest. The principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest on the Notes shall be payable at the office or agency to be maintained by the Company in accordance with the provisions of Section 4.02; provided, however, that payment of interest may be made at the option of the Company by check mailed by first-class mail to the address of the person entitled thereto as such address shall appear on the registry books of the Company. The term "record date" as used in this Section 2.03 with 31 39 respect to any interest payment date shall mean the close of business on the February 1 or August 1, as the case may be, next preceding such interest payment date, whether or not such February 1 or August 1 is a Business Day, and such term, as used in this Section 2.03, with respect to the payment of any defaulted interest shall mean the tenth day next preceding the date fixed by the Company for the payment of defaulted interest whether or not a Business Day, but in no case shall such record date be less than ten days after notice thereof shall have been mailed by or on behalf of the Company to all registered holders of Notes at their addresses. The Notes shall be dated the date of their authentication. Except as provided in the next sentence, interest shall accrue on the Notes from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from February --, 1994. Each Note authenticated between the record date for any interest payment date and such interest payment date shall be dated the date of its authentication but shall bear interest from such interest payment date; provided, however, that if and to the extent the Company shall default in the payment of the interest due on such interest payment date, then any Note so authenticated shall bear interest from the February 15 or August 15, as the case may be, next preceding the date of such Note to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for on the Notes, from February --, 1994. Interest on the Notes shall be computed on the basis of a 360-day year comprised of twelve 30-day months. SECTION 2.04. Execution of Notes. The Notes shall be signed on behalf of the Company, manually or in facsimile, by its Chairman of the Board or its President or a Vice President under its corporate seal (which may be in facsimile) reproduced thereon and attested, manually or in facsimile, by its Secretary or an Assistant Secretary. Only such Notes as shall bear thereon a certificate of authentication substantially in the form hereinbefore recited, signed manually by the Trustee, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such signature by the Trustee upon any Note executed by the Company shall be conclusive evidence that the Note so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company whose signature appears on any of the Notes, manually or in facsimile, shall cease to be such officer before such Notes so signed shall have been authenticated and delivered by the Trustee, such Notes nevertheless may be authenticated and delivered as though the person whose signature appears on such Notes had not ceased to be such officer of the Company; and any Note may be signed, and the corporate seal reproduced thereon may be attested, on behalf of the Company, manually or in facsimile, by persons as, at the actual date of the execution of such Note, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such officer. SECTION 2.05. Exchange and transfer of Notes. Notes may be exchanged for a like aggregate principal amount of Notes in other authorized denominations. Notes to be exchanged shall be surrendered at the office or agency to be maintained by the Company in accordance with the provisions of Section 4.02, and the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor the Note or Notes which the noteholder making the exchange shall be entitled to receive. The Company shall keep, at the office or agency to be maintained by the Company in accordance with the provisions of Section 4.02, a register or registers in which, subject to such reasonable regulations as it may prescribe, the Company shall register Notes and shall register the transfer of Notes as in this 32 40 Article Two provided. Upon surrender for registration of transfer of any Note at such office or agency, the Company shall execute and the Trustee shall authenticate and deliver in the name of the transferee or transferees a new Note or Notes for a like aggregate principal amount. All Notes presented or surrendered for exchange, registration of transfer, redemption, purchase or payment shall, if so required by the Company or the Trustee or any Note registrar (if other than the Trustee), be accompanied by a written instrument or instruments of transfer, in form satisfactory to the Company and the Trustee or the Note registrar (if other than the Trustee), duly executed by the registered holder or by his attorney duly authorized in writing and, in every case, each Note presented or surrendered for registration of transfer shall be accompanied by the assignment form attached to the Notes, duly executed by the registered holder or by his attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto. The Company shall not be required to issue, register the transfer of or exchange any Notes for a period of fifteen days next preceding any date for the selection of Notes to be redeemed. The Company shall not be required to register the transfer of or exchange any Note called or being called for redemption except, in the case of any Note to be redeemed in part, the portion thereof not to be so redeemed. The Company shall not be required to register the transfer of or exchange any Note in respect of which a Change of Control Purchase Notice or an Asset Sale Purchase Notice has been given (unless such notice has been withdrawn in accordance with Section 3.06 or 4.14) except, in the case of any Note to be purchased in part, the portion thereof not to be so purchased. SECTION 2.06. Temporary Notes. Pending the preparation of definitive Notes, the Company may execute and the Trustee shall authenticate and deliver temporary Notes (printed, lithographed or typewritten) of any authorized denomination and substantially in the form of the definitive Notes, but with or without a recital of specific redemption prices and with such omissions, insertions and variations as may be appropriate for temporary Notes, all as may be determined by the Company. Temporary Notes may contain such reference to any provisions of the Indenture as may be appropriate. Every temporary Note shall be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Notes. Without unnecessary delay the Company will execute and deliver to the Trustee definitive Notes and thereupon any or all temporary Notes may be surrendered in exchange therefor, at the office or agency to be maintained by the Company in accordance with the provisions of Section 4.02, and the Trustee shall authenticate and deliver in exchange for such temporary Notes an equal aggregate principal amount of definitive Notes. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under this Indenture, and shall be subject to the same provisions hereof, as definitive Notes authenticated and delivered hereunder. SECTION 2.07. Mutilated, destroyed, lost or stolen Notes. In case any temporary or definitive Note shall become mutilated or be destroyed, lost or stolen, the Company, in the case of any mutilated Note shall, and in the case of any destroyed, lost or stolen Note may, execute, and upon its request the Trustee shall authenticate and deliver, a new Note bearing a number, letter or other distinguishing symbol not contemporaneously outstanding in exchange and substitution for the mutilated Note, or in lieu of and in substitution for the Note so destroyed, lost or stolen, or, instead of issuing a substituted Note, if any such Note shall have matured or shall be about to mature or shall have been selected for redemption or if the Company shall have received a Change of Control Purchase Notice or an Asset Sale Purchase Notice in respect of any such Note (unless such notice has been withdrawn in accordance with Section 3.06 or 4.14), the Company may pay the same without surrender thereof except in the case of a mutilated 33 41 Note. In every case the applicant for a substituted Note or for such payment shall furnish to the Company and to the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and to the Trustee evidence to their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof. The Trustee may authenticate any such substituted Note and deliver the same, or the Trustee or any paying agent of the Company may make any such payment, upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Note, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. Every substituted Note issued pursuant to the provisions of this Section 2.07 shall constitute an additional contractual obligation of the Company whether or not the destroyed, lost or stolen Note shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. All Notes shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes, and shall preclude (to the extent lawful) any and all other rights or remedies, notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.08. Cancellation of surrendered Notes. All Notes surrendered for the purpose of payment, redemption, purchase by the Company at the option of the holder, exchange, substitution or registration of transfer, shall, if surrendered to the Company or any paying agent or Note registrar, be delivered to the Trustee and the same, together with Notes surrendered to the Trustee for cancellation, shall be cancelled by it, and no Notes shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee shall destroy cancelled Notes and shall deliver certificates of destruction thereof to the Company. If the Company shall purchase or otherwise acquire any of the Notes, however, such purchase or acquisition shall not operate as a payment, redemption or satisfaction of the indebtedness represented by such Notes unless and until the Company, at its option, shall deliver or surrender the same to the Trustee for cancellation. ARTICLE THREE REDEMPTION AND PURCHASES OF NOTES SECTION 3.01. Redemption prices. The Company may, at its option, redeem at any time all or from time to time any part of the Notes, on any date prior to maturity at the redemption prices specified in the Notes, together with accrued and unpaid interest thereon to but excluding the date fixed for redemption and in the manner set forth in this Article Three. The Company, however, shall not have the right to redeem any of the Notes prior to February 15, 1998. SECTION 3.02. Notice of redemption; selection of Notes. In case the Company shall desire to exercise such right to redeem all or, as the case may be, any part of the Notes in accordance with the right reserved so to do, the Company, or, at the Company's request, the Trustee in the name and at the expense of the Company, shall fix a date for redemption and give notice of such redemption to holders of the Notes to be redeemed as hereinafter in this Section 3.02 provided. Notice of redemption shall be given to the holders of Notes to be redeemed as a whole or in part by mailing by first-class mail a notice of such redemption not less than fifteen nor more than sixty days 34 42 prior to the date fixed for redemption to their last addresses as they shall appear upon the registry books of the Company, but any failure to give such notice by mailing to the holder of any Note designated for redemption as a whole or in part, or any defect therein, shall not affect the validity of the proceedings for the redemption of any other Notes. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives the notice. Each such notice of redemption shall specify the total principal amount to be redeemed, the date fixed for redemption and the redemption price at which Notes are to be redeemed, and shall state that payment of the redemption price of the Notes to be redeemed will be made at the office or agency to be maintained by the Company in accordance with the provisions of Section 4.02, upon presentation and surrender of such Notes, that interest accrued to but not including the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon will cease to accrue and that the only remaining right of the noteholder is to receive payment of the redemption price plus such accrued interest upon surrender. If less than all the Notes are to be redeemed, the notice of redemption to each holder also shall state the aggregate principal amount of Notes to be redeemed and shall identify the Notes of such holder to be redeemed. In case any Note is redeemed in part only, the notice which relates to such Note shall state the portion of the principal amount thereof to be redeemed (which shall be $1,000 or an integral multiple thereof), and shall state that on and after the date fixed for redemption, upon surrender of such Note, the holder will receive, without charge, a new Note or Notes of authorized denominations in the principal amount thereof remaining unredeemed. Each notice shall give the name and address of each paying agent. On or prior to the date fixed for redemption specified in the notice of redemption given as provided in this Section 3.02, the Company will deposit with the Trustee or with one or more paying agents (or, if the Company is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 4.04(c)) an amount of money sufficient to redeem on the date fixed for redemption all the Notes or portions of Notes so called for redemption (other than Notes or portions thereof called for redemption on that date which have been delivered by the Company to the Trustee for cancellation) at the applicable redemption price, together with accrued interest to but not including the date fixed for redemption. If less than all the Notes then outstanding are to be redeemed, the Company shall give the Trustee, at least twenty-five days (or such shorter period acceptable to the Trustee) in advance of the date fixed for redemption, notice of the aggregate principal amount of Notes to be redeemed, and thereupon the Trustee shall select in such manner as it shall deem appropriate and fair, in its discretion, the Notes or portions thereof to be redeemed and shall thereafter promptly notify the Company of the Notes or portions thereof to be redeemed within a sufficient period of time in order that the notice provision in Section 3.02 may be satisfied. SECTION 3.03. When Notes called for redemption become due and payable. If the giving of notice of redemption shall have been completed as provided in Section 3.02, the Notes or portions of Notes specified in such notice shall become due and payable on the date and at the place stated in such notice at the applicable redemption price, together with interest accrued to (but not including) the date fixed for redemption, and on and after such date fixed for redemption (unless the Company shall default in the payment of such Notes at the redemption price, together with interest accrued to (but not including) the date fixed for redemption) interest on the Notes or portions of Notes so called for redemption shall cease to accrue whether or not such Notes are presented for payment and such Notes or portions thereof shall be deemed not to be outstanding hereunder and shall not be entitled to any right or benefit hereunder 35 43 except to receive payment of the redemption price plus accrued interest to but not including the redemption date. On presentation and surrender of such Notes for redemption at said place of payment in said notice specified on or after the date fixed for redemption, the said Notes shall be paid and redeemed by the Company at the applicable redemption price, together with interest accrued to (but not including) the date fixed for redemption. If the date fixed for redemption is an interest payment date, such payment shall not include accrued interest, which interest shall be paid in the usual manner otherwise provided for herein. Upon presentation of any Note which is redeemed in part only, the Company shall execute and register and the Trustee shall authenticate and deliver to the holder thereof at the expense of the Company, a new Note or Notes in principal amount equal to the unredeemed portion of the Note so presented. SECTION 3.04. Cancellation of redeemed Notes. All Notes surrendered to the Trustee, upon redemption pursuant to the provisions of this Article Three, shall be forthwith cancelled by it. SECTION 3.05. Purchase of Notes at option of the holder upon Change of Control. (a) If on or prior to maturity, there shall have occurred a Change of Control, the Company shall offer to purchase each Note at a purchase price in cash equal to 101% of the principal amount thereof plus interest accrued to (but not including) the Change of Control Purchase Date (the "Change of Control Purchase Price"), on the date that is thirty Business Days after the occurrence of the Change of Control (the "Change of Control Purchase Date"), subject to the satisfaction by or on behalf of the holder of the requirements set forth in Section 3.05(c). Following a Change of Control, the Company shall not be obligated to purchase any Notes pursuant to this Section 3.05(a) or give any notice under Section 3.05(b) with respect to any subsequent Change of Control. The Company's obligation to purchase Notes as provided hereunder shall for all purposes hereof be satisfied by, and shall cease upon, the deposit of funds with the Trustee as provided for in Section 3.07. A "Change of Control" shall be deemed to have occurred at such time as MAXXAM, directly or indirectly, shall cease to have (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 Voting Stock, 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 Voting Stock, 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 of the Company necessary to effectuate any actions by the Board of Directors of the Company; and provided, further, that the foregoing minimum percentages shall be deemed not satisfied if any person or group (as defined in Section 13(d)(3) of the Exchange Act as in effect on the date of this Indenture) shall, directly or indirectly, own more of the total Voting Stock entitled to vote generally in the election of directors of the Company than MAXXAM. "Voting Stock" means, with respect to any person, the capital stock of such person having general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such person (irrespective of whether or not at the time capital stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). (b) Within ten Business Days after the occurrence of a Change of Control, the Company shall mail a written notice of Change of Control by first-class mail to the Trustee and to each holder (and to beneficial owners as required by applicable law, including without limitation, Rule 13e-4 of the Exchange Act, if applicable) and shall cause a copy of such notice to be published in a daily newspaper of national 36 44 circulation. The notice shall include a form of Change of Control Purchase Notice (as described below) to be completed by the holder and shall state: (1) the events causing a 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 3.05 must be given; (3) the Change of Control Purchase Date; (4) the Change of Control Purchase Price; (5) the name and address of the Trustee and the office or agency referred to in Section 4.02; (6) that the Notes must be surrendered to the Trustee or the office or agency referred to in Section 4.02 to collect payment; (7) that the Change of Control Purchase Price for any Note as to which a 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 Note as described in (6); (8) the procedures the holder must follow to exercise rights under this Section 3.05 and a brief description of those rights; and (9) the procedures for withdrawing a Change of Control Purchase Notice. (c) To accept the offer to purchase Notes described in Section 3.05(a), a holder must deliver a written notice of purchase (a "Change of Control Purchase Notice") to the Trustee or to the office or agency referred to in Section 4.02 at any time prior to the close of business on the Business Day immediately preceding the Change of Control Purchase Date, stating: (1) the name of the holder, the principal amount of Notes, the certificate number or numbers of the Note or Notes which the holder will deliver to be purchased and a statement that the offer to purchase is being accepted; (2) the portion of the principal amount of the Note which the holder will deliver to be purchased, which portion must be $1,000 or an integral multiple thereof; and (3) that such Note shall be purchased on the Change of Control Purchase Date pursuant to the terms and conditions specified in the Notes. The delivery of the Note, by hand or by registered mail prior to, on or after the Change of Control Purchase Date (together with all necessary endorsements), to the Trustee or to the office or agency referred to in Section 4.02 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 3.05 only if the Note so delivered to the Trustee or such office or agency 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 Notes 37 45 with respect to which the Change of Control Purchase Notice has not been received by the Company prior to the close of business on the Business Day immediately preceding the Change of Control Purchase Date. In the event that the offer to purchase described in Section 3.05(a) shall be accepted in accordance with the terms hereof, the Company shall purchase from the holder thereof, pursuant to this Section 3.05, a portion of a Note if the principal amount of such portion is $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to the purchase of all of a Note also apply to the purchase of such portion of such Note. Any purchase by the Company contemplated pursuant to the provisions of this Section 3.05 shall be consummated by the delivery by the Trustee or other paying agent of the consideration to be received by the holder promptly following the later of the Change of Control Purchase Date and the time of delivery of the Note. Notwithstanding anything herein to the contrary, any holder delivering to the Trustee or to the office or agency referred to in Section 4.02, the Change of Control Purchase Notice contemplated by this Section 3.05(c) shall have the right to withdraw such Change of Control Purchase Notice by delivery of a written notice of withdrawal to the Trustee or to such office or agency in accordance with Section 3.06 at any time prior to the close of business on the Business Day next preceding the Change of Control Purchase Date. SECTION 3.06. Effect of Change of Control Purchase Notice. Upon receipt by the Company of the Change of Control Purchase Notice specified in Section 3.05(c), the holder of the Note 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 solely the Change of Control Purchase Price with respect to such Note. 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 (X) the Change of Control Purchase Date (provided the conditions in Section 3.05(c), as applicable, have been satisfied) and (y) the date of delivery of such Note to the Trustee or to the office or agency referred to in Section 4.02 by the holder thereof in the manner required by Section 3.05(c). A Change of Control Purchase Notice may be withdrawn by means of a written notice of withdrawal delivered to the office of the Trustee or to the office or agency referred to in Section 4.02 at any time on or prior to the close of business on the Business Day next preceding the Change of Control Purchase Date, specifying: (1) the certificate number or numbers of the Note or Notes in respect of which such notice of withdrawal is being submitted; (2) the principal amount of the Note or Notes with respect to which such notice of withdrawal is being submitted; and (3) the principal amount, if any, of such Note or Notes which remains subject to the original Change of Control Purchase Notice, and which has been or will be delivered for purchase by the Company. There shall be no purchase of any Notes pursuant to Section 3.05 if there has occurred (prior to, on or after, as the case may be, the giving, by the holders of such Notes, of the required Change of 38 46 Control Purchase Notice), and is continuing an Event of Default (other than a default in the payment of the Change of Control Purchase Price with respect to such Notes). SECTION 3.07. Deposit of Change of Control Purchase Price. On or prior to the Change of Control Purchase Date, the Company shall deposit with the Trustee (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 as provided in Section 4.04(c)) an amount of cash in immediately available funds sufficient to pay the aggregate Change of Control Purchase Price of all the Notes or portions thereof which are to be purchased on the Change of Control Purchase Date. Upon such deposit, the Company shall be deemed to have satisfied its obligations to purchase Notes pursuant to Section 3.05. If cash sufficient to pay the Change of Control Purchase Price of all Notes or portions thereof to be purchased on the Change of Control Purchase Date is deposited with the Trustee as of the Change of Control Purchase Date, interest shall cease to accrue (whether or not any such Note is delivered to the Trustee or any other office or agency maintained for such purpose) on such Notes (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, upon surrender of such Notes). SECTION 3.08. Covenant to comply with securities laws upon purchase of Notes. In connection with any offer to purchase or any purchase of securities under Section 3.05 hereof, the Company shall (i) comply with Section 14(e) under the Exchange Act (or any successor provision thereof), if applicable, and (ii) otherwise comply with all Federal and state securities laws regulating the purchase of the Notes so as to permit the rights and obligations under Section 4.05 to be exercised in the time and in the manner specified in Sections 4.05 and 4.06. SECTION 3.09. Repayment to the Company. The Trustee shall return to the Company any cash, together with interest or dividends, if any, thereon (subject to the provisions of Section 7.05) held by it for the payment of the Change of Control Purchase Price of the Notes that remain unclaimed as provided in Section 12.04 hereof; provided, however, that to the extent that the aggregate amount of cash deposited by the Company pursuant to Section 3.07 exceeds the aggregate Change of Control Purchase Price of the Notes or portions thereof to be purchased on the Change of Control Purchase Date, then promptly after the Change of Control Purchase Date, the Trustee shall return any such excess to the Company together with interest or dividends, if any, thereon (subject to the provisions of Section 7.05). ARTICLE FOUR PARTICULAR COVENANTS OF THE COMPANY The Company covenants as follows: SECTION 4.01. Payments on the Notes. The Company will duly and punctually pay or cause to be paid the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest on each of the Notes at the time and place such amounts may become due and payable and in the manner provided in the Notes and this Indenture. SECTION 4.02. Maintenance of office or agency for registration of transfer, exchange and payment of Notes. So long as any of the Notes shall remain outstanding, the Company will maintain an office or agency in the Borough of Manhattan, City of New York, State of New York, where the Notes may be surrendered for exchange or registration of transfer as in this Indenture provided, and where notices and demands to or upon the Company in respect to the Notes or of this Indenture may be served, 39 47 and where the Notes may be presented or surrendered for payment, redemption or purchase. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, City of New York, State of New York for such purposes. The Company will give to the Trustee notice of the location of any such office or agency and of any change of location thereof. In case the Company shall fail to maintain any such office or agency or shall fail to give such notice of the location or of any change in the location thereof, such surrenders, presentations and demands may be made and notices may be served at the principal office of the Trustee in St. Paul, Minnesota, and the Company hereby appoints the Trustee its agent to receive at the aforesaid office all such surrenders, presentations, notices and demands. SECTION 4.03. Appointment to fill a vacancy in the office of Trustee. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 7.10, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 4.04. Provision as to paying agent. (a) If the Company shall appoint a paying agent other than the Trustee, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 4.04, (1) that it will hold all sums held by it as such agent for the payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest on the Notes (whether such sums have been paid to it by the Company or by any other obligor on the Notes) in trust for the benefit of the holders of the Notes, and will notify the Trustee of the receipt of sums to be so held, (2) that it will give the Trustee notice of any failure by the Company (or by any other obligor on the Notes) to make any payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest on the Notes when the same shall be due and payable, and (3) that it will at any time during the continuance of any Event of Default specified in subsection (a) or (b) of Section 6.01, upon the written request of the Trustee, deliver to the Trustee all sums so held in trust by it. If any obligations under the Credit Agreement are outstanding, the Company will notify the Bank Agent of the name and address of any paying agent other than the Company or the Trustee. (b) If the Company shall not act as its own paying agent, it will, prior to each due date of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest on any Notes, deposit with such paying agent a sum sufficient to pay the principal, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest so becoming due, such sum to be held in trust for the benefit of the holders of Notes entitled to such principal, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest, and (unless such paying agent is the Trustee) the Company will promptly notify the Trustee of its failure so to act. (c) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest 40 48 on the Notes, set aside, segregate and hold in trust for the benefit of the persons entitled thereto, a sum sufficient to pay such principal, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest so becoming due and will notify the Trustee of any failure to take such action. (d) Anything in this Section 4.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by it, or by any paying agent hereunder, as required by this Section 4.04, such sums to be held by the Trustee upon the trusts herein contained. (e) Anything in this Section 4.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 4.04 is subject to the provisions of Sections 12.03 and 12.04. SECTION 4.05. Maintenance of corporate existence. So long as any of the Notes shall remain outstanding, the Company will at all times (except as otherwise provided or permitted in this Section 4.05 or elsewhere in this Indenture) do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate existence of each Subsidiary; provided, however, that nothing herein shall require the Company to continue the corporate existence of any Subsidiary other than a Subsidiary Guarantor (so long as any such Subsidiary is a Subsidiary Guarantor) if in the judgment of the Company it shall be necessary, advisable or in the interest of the Company to discontinue the same; and provided, further, that any Subsidiary Guarantor may: (a) merge or consolidate with or into the Company or any other Subsidiary Guarantor or transfer all or substantially all of its property to the Company or any other Subsidiary Guarantor; (b) merge or consolidate with or into any other Person or transfer all or substantially all of its property to any other Person as provided in Section 15.03; and (c) liquidate or dissolve under the laws of its jurisdiction of formation, provided that such Subsidiary Guarantor is wholly owned directly by the Company and/or another Subsidiary Guarantor. SECTION 4.06. Officers' Certificate as to default and statement as to compliance. The Company will, so long as any of the Notes are outstanding: (a) deliver to the Trustee, promptly upon becoming aware of any Event of Default or any event which after the passage of time or notice would become an Event of Default, an Officers' Certificate specifying such event or Event of Default; (b) deliver to the Trustee within one hundred and twenty days after the end of each fiscal year of the Company, beginning with the fiscal year ending December 31, 1994, a statement as to compliance signed on behalf of the Company by the Chairman of the Board or the President or any Vice President and by the Chief Financial Officer, Treasurer or Controller of the Company stating as to each signer thereof that: (1) a review of the activities of the Company during such year and of performance under this Indenture has been made under his supervision, and (2) to the best of his knowledge, based on such review, there is no Event of Default or event which with notice or the passage of time would become an Event of Default which has occurred and is continuing, or, if there is such an event or Event of Default, specifying each such event or Event of Default known to him and the nature and status thereof; and 41 49 (c) deliver to the Trustee within five days after becoming aware of the occurrence thereof written notice of any acceleration which, with the giving of notice and the lapse of time, would be an Event of Default within the meaning of Section 6.01(d). SECTION 4.07. Usury laws. The Company, to the extent it may lawfully do so, will not voluntarily claim, and will actively resist any attempts to claim, the benefit of any usury laws against any holder of the Notes. SECTION 4.08. Restrictions on transactions with Affiliates. (a) The Company shall not, and shall not permit any of its Subsidiaries or its Non-Affiliate Joint Ventures to, enter into any transaction or series of related transactions with any Affiliate of the Company, unless: (i) the terms thereof are no less favorable to the Company, such Subsidiary or such Non-Affiliate Joint Venture, as the case may be, than those that could reasonably be expected to be obtained in a comparable transaction with an unrelated Person, (ii) such transaction or series of related transactions shall have been approved as meeting such standard, in good faith, by a majority of the independent members of the Board of Directors of the Company evidenced by a Board Resolution and (iii) if the amount of such transaction or the aggregate amount of such series of related transactions is greater than $10,000,000, the Company, such Subsidiary and/or such Non-Affiliate Joint Venture, as the case may be, shall have received an opinion that such transaction or series of related transactions is fair to the Company, such Subsidiary and/or such Non-Affiliate Joint Venture, as the case may be, from a financial point of view, from an independent investment banking firm of national standing selected by the Company. The Company shall deliver to the Trustee, within 60 days after the end of each fiscal quarter of the Company, an Officers' Certificate which (x) shall specify the aggregate dollar amount of transactions (other than transactions referred to in Section 4.08(b)) with Affiliates of the Company occurring during such fiscal quarter, and (y) with respect to any transaction with an Affiliate of the Company, or series of related transactions (other than transactions referred to in Section 4.08(b)) with Affiliates of the Company, occurring during such fiscal quarter, shall briefly describe such transaction or transactions. (b) The provisions contained in the foregoing paragraphs of this Section 4.08 shall not apply to: (i) the making of any Restricted Payments and Restricted Investments otherwise permitted by Section 4.09 (other than 4.09(b)(IV)), (ii) the making of payments permitted by the Tax Sharing Agreements, (iii) the making of payments to MAXXAM for reimbursement for actual services provided thereby to the Company or its Subsidiaries or Non-Affiliate Joint Ventures based on actual costs and an allocable share of overhead expenses, (iv) compensation (in the form of reasonable director's fees and reimbursement or advancement of reasonable out-of-pocket expenses) paid to any director of the Company or its Subsidiaries or Non-Affiliate Joint Ventures for services rendered in such person's capacity as 42 50 a director and indemnification and directors' and officers' liability insurance in connection therewith, (v) compensation, indemnification and other benefits paid or made available to officers and employees of the Company or its Subsidiaries or Non-Affiliate Joint Ventures for services actually rendered, comparable to those generally paid or made available by entities engaged in the same or similar businesses (including reimbursement or advancement of reasonable out-of-pocket expenses and directors' and officers' liability insurance), (vi) loans to officers, directors and employees of the Company or its Subsidiaries for business or personal purposes and other loans and advances to such officers, directors and employees for travel, entertainment, moving and other relocation expenses, in each case made in the ordinary course of business and consistent with past practices of the Company and its Subsidiaries, (vii) any amendment to the Existing Intercompany Note that extends the maturity thereof or reduces the interest rate thereon, or any other amendment thereto that does not materially adversely affect the holders of the Notes, (viii) the dividend by the Company of all or any portion of the Existing Intercompany Note and accrued interest thereon, (ix) any merger, consolidation, transfer or sale permitted by Section 11.01(b), and (x) any amendment to the Tax Sharing Agreements, provided that a majority of the independent members of the Board of Directors of the Company evidenced by a Board Resolution determines that such amendment would not materially adversely affect the holders of the Notes. SECTION 4.09. Limitations on Restricted Payments and Restricted Investments. (a) The Company shall not, directly or indirectly, (i) declare or pay any dividend or make any distribution in respect of its Capital Stock (other than dividends payable in Capital Stock of the Company other than Redeemable Stock), (ii) make or permit any of its Subsidiaries to make any payment on account of the purchase, redemption or other acquisition or retirement of any Capital Stock of the Company other than through the issuance solely of Capital Stock of the Company (other than Redeemable Stock) or rights thereto, provided that any Subsidiary of the Company may purchase Capital Stock of the Company from the Company or from any other Subsidiary of the Company (which purchase shall not be a Restricted Payment or a Restricted Investment), (iii) make or permit any of its Subsidiaries to make any voluntary purchase, redemption or other acquisition or retirement for value of any Indebtedness that is subordinated (pursuant to its terms) in right and priority of payment to the Notes or any Subsidiary Guarantor's obligations under its Guarantee, as the case may be, other than purchases, redemptions or other acquisitions or retirements of Permitted Indebtedness described in clause (b) of the definition thereof or purchases, redemptions or other acquisitions otherwise permitted by the terms hereof, (each of the foregoing in clauses (i), (ii) and (iii) a "Restricted Payment"), (iv) to the extent the Company or its Subsidiaries exercise actual control over a Non-Affiliate Joint Venture existing on the date of this Indenture or formed or acquired after the date of this Indenture (each a "Controlled Non-Affiliate Joint Venture"), permit such Controlled Non-Affiliate Joint Venture to make any Restricted Investment or (v) make or permit any of its Subsidiaries to make any Restricted Investment, unless at the time of, and after giving effect to, each such Restricted Payment or Restricted Investment: 43 51 (A) no Event of Default (and no event that, after notice or lapse of time or both, would become an Event of Default) shall have occurred and be continuing (or would occur and be continuing after giving effect thereto); and (B) the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.0 to 1; and (C) the sum of: (x) the aggregate amount expended for all Restricted Payments after December 31, 1992, and (y) the aggregate amount of Restricted Investments (less the amount of (1) such Restricted Investments returned in cash, or in property if made in property, (2) any guarantee that constitutes a Restricted Investment, to the extent it has been released, and (3) any direct liabilities or obligations to be assumed or discharged in connection with such Restricted Investments (in either case without recourse to the Company, any of its Subsidiaries or any Controlled Non-Affiliate Joint Venture) if such liability or obligation had been a liability or obligation of the Company, any of its Subsidiaries or any Controlled Non-Affiliate Joint Venture) (in each case, the amount expended for such Restricted Payments and Restricted Investments or the amount of any Restricted Investments returned, if paid or returned in property other than in cash or a sum certain guaranteed, to be the Fair Market Value of such property), would not exceed the sum of: (I) 50% of the Consolidated Net Income of the Company (or, if the aggregate Consolidated Net Income of the Company for any such period shall be a deficit, minus 100% of such deficit) accrued on a cumulative basis for the period (taken as one accounting period) from January 1, 1993 to the end of the Company's most recently ended fiscal quarter for which financial statements are available at the time such Restricted Payment or Restricted Investment is being made, and (II) the aggregate net proceeds, including the Fair Market Value of property other than cash, received by the Company as capital contributions to the Company after December 31, 1992, or from the issue or sale (other than to a Non-Affiliate Joint Venture or to a Subsidiary of the Company), after December 31, 1992, of Capital Stock other than Redeemable Stock (including Capital Stock, other than Redeemable Stock, issued upon the conversion of, or in exchange for, indebtedness or Redeemable Stock, and including upon exercise of warrants or options or other rights to purchase such Capital Stock, issued after December 31, 1992), or from the issue or sale, after December 31, 1992 of any debt or other security of the Company convertible or exercisable into such Capital Stock that has been so converted or exercised; provided, however, that in no event shall the Company make, or permit any of its Subsidiaries to make, a Restricted Payment or Restricted Investment pursuant to this Section 4.09(a) to or in MAXXAM or any Affiliate of MAXXAM if, after giving effect thereto, (A) the aggregate amount of all Restricted Payments and Restricted Investments (less the amount of (1) such Restricted Investments returned in cash, or in property if made in property, (2) any guarantee that constitutes a Restricted Investment, to the extent it has been released, and (3) any direct liabilities or obligations to be assumed or discharged in connection with such Restricted Investments (in either case without recourse to the Company, any of its Subsidiaries 44 52 or any Controlled Non-Affiliate Joint Venture) if such liability or obligation had been a liability or obligation of the Company, any of its Subsidiaries or any Controlled Non-Affiliate Joint Venture) made pursuant to this Section 4.09(a) in any calendar year to or in MAXXAM or any Affiliate of MAXXAM, less (B) the aggregate amount of such Restricted Payments and Restricted Investments made to or in KAC in such calendar year which are distributed or paid within thirty days thereafter by KAC to its holders of Common Stock other than MAXXAM and any Affiliate of MAXXAM, would exceed (C) $75,000,000; and provided, further, that notwithstanding the foregoing, the Company may make any such Restricted Payment or Restricted Investment to or in MAXXAM or any Affiliate of MAXXAM if, after giving pro forma effect thereto, the Company's senior debt rating would be Baa3 (or the equivalent) or better by Moody's Investor Services, Inc. (or a successor rating agency) or BBB- (or the equivalent) or better by Standard & Poor's Corporation (or a successor rating agency). (b) The foregoing provisions of this Section 4.09 shall not be violated by reason of the following Restricted Payments: (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 by the Company 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 4.09(a); (II) the retirement of any shares of the Company's Capital Stock by exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Non-Affiliate Joint Venture or to a Subsidiary of the Company) of other shares of its Capital Stock other than Redeemable Stock or out of the proceeds of a substantially concurrent capital contribution to the Company, provided, however, that, to the extent the proceeds are so used, a sale of Capital Stock or capital contribution permitted by this clause (II) shall be excluded in determining the aggregate net proceeds received by the Company referred to under clause (II) of Section 4.09(a); (III) the payments provided for by clauses (ii), (iii), (iv) and (v) and the transactions described in clauses (vi), (vii), (viii) and (ix) (so long as, in the case of clause (ix), immediately following such transaction, the Consolidated Net Worth of the entity that survives such transaction is not materially lower than the Consolidated Net Worth of the Company immediately prior to such transaction) of Section 4.08(b); (IV) the voluntary purchase, redemption or other acquisition or retirement for value of Indebtedness that is subordinated (pursuant to its terms) in right and priority of payment to the Notes or any Subsidiary Guarantor's obligation under its Guarantee, as the case may be, to the extent that the aggregate amount expended (exclusive of amounts expended pursuant to clauses (V) and (VIII) of this Section 4.09(b)) for all such voluntary purchases, redemptions or other acquisitions or retirements after the date hereof (the amount expended for such purchases, redemptions or other acquisitions or retirements, if paid in property other than in cash or a sum certain guaranteed, to be the Fair Market Value of such property) does not exceed the aggregate net proceeds, including the Fair Market Value of property other than cash, received by the Company or any Subsidiary Guarantor from the issue or sale (other than an issuance or sale to the Company or a Non-Affiliate Joint Venture or Subsidiary of the Company), after the date hereof, of Indebtedness that is subordinated (pursuant to its terms) in right and priority of payment to the Notes or such Subsidiary Guarantor's obligation under its Guarantee, as the case may be, and that is otherwise permitted to be incurred pursuant to this Indenture,provided that, to the extent the proceeds of Indebtedness so subordinated to the Notes or any Subsidiary 45 53 Guarantor's obligation under its Guarantee, as the case may be, are so used, the net proceeds of issuance of any such Indebtedness upon conversion into Capital Stock shall not be included in determining the aggregate net proceeds received by the Company referred to under clause (II) of Section 4.09(a); (V) the voluntary purchase, redemption or other acquisition or retirement for value of any Indebtedness that is subordinated (pursuant to its terms) in right and priority of payment to the Notes or any Subsidiary Guarantor's obligation under its Guarantee, as the case may be, by exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Non-Affiliate Joint Venture or to a Subsidiary of the Company) of Capital Stock (other than Redeemable Stock) of the Company, provided, however, that, to the extent the proceeds are so used, the issuance of Capital Stock as permitted by this clause (V) shall not be included in determining the aggregate net proceeds received by the Company referred to under clause (II) of Section 4.09(a); (VI) the payment of dividends on, and the purchase, redemption, retirement or other acquisition of, the USWA Preferred Stock or the Preferred Stock ($100),provided that no such payment is made, directly or indirectly, to an Affiliate of the Company; (VII) the payment to KAC of an amount not to exceed $300,000 in any fiscal year for the payment of KAC's reasonable out-of- pocket expenses, provided that no part of such amount is paid directly or indirectly to any other Affiliate of the Company and that, at the time of each such payment, the Company is in compliance with clause (A) of Section 4.09(a); (VIII) Restricted Payments and Restricted Investments after February 1, 1993, other than Restricted Payments and Restricted Investments permitted by Section 4.09(a) or clauses (I) through (VII) of Section 4.09(b), in an aggregate amount such that the sum of: (X) the aggregate amount expended for all such Restricted Payments after February 1, 1993 made pursuant to this clause (VIII); and (y) the aggregate amount of all Restricted Investments made after February 1, 1993 pursuant to this clause (VIII) (less the amount of (1) such Restricted Investments returned in cash, or in property if made in property, (2) any guarantee that constitutes a Restricted Investment, to the extent it has been released, and (3) any direct liabilities or obligations to be assumed or discharged in connection with such Restricted Investments (in either case without recourse to the Company, any of its Subsidiaries or any Controlled Non-Affiliate Joint Venture) if such liability or obligation had been a liability or obligation of the Company, any of its Subsidiaries or any Controlled Non-Affiliate Joint Venture) (in each case, the amount expended for such Restricted Payments and Restricted Investments or the amount of any Restricted Investments returned, if paid or returned in property other than in cash or a sum certain guaranteed, to be the Fair Market Value of such property) would not exceed $50,000,000,provided that at the time of each such Restricted Payment or Restricted Investment made pursuant to this clause (VIII), no Event of Default (and no event that, after notice or lapse of time or both, would become an Event of Default) shall have occurred and be continuing (or would occur and be continuing after giving effect thereto); andprovided, further, that in no event shall the Company make, or permit any of its Subsidiaries to make, a 46 54 Restricted Payment or Restricted Investment pursuant to this clause (VIII) to or in MAXXAM or any Affiliate of MAXXAM if, after giving effect thereto, (A) the aggregate amount of all Restricted Payments and Restricted Investments (less the amount of (1) such Restricted Investments returned in cash, or in property if made in property, (2) any guarantee that constitutes a Restricted Investment, to the extent it has been released, and (3) any direct liabilities or obligations to be assumed or discharged in connection with such Restricted Investments (in either case without recourse to the Company, any of its Subsidiaries or any Controlled Non-Affiliate Joint Venture) if such liability or obligation had been a liability or obligation of the Company, any of its Subsidiaries or any Controlled Non-Affiliate Joint Venture) made pursuant to this clause (VIII) to or in MAXXAM or any Affiliate of MAXXAM, less (B) the aggregate amount of such Restricted Payments and Restricted Investments made to or in KAC which are distributed or paid within thirty days thereafter by KAC to its holders of Common Stock other than MAXXAM and Affiliates of MAXXAM, would exceed (C) $20,000,000; and (IX) in the event that the Company merges with or into KAC and the Preferred Dividend Intercompany Notes are extinguished, the payment of dividends on shares of KAC's Preferred Redeemable Increased Dividend Equity Securities, ---% PRIDES, Convertible Preferred Stock (the "PRIDES") or shares of KAC's Series A Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares") and any other preferred stock of KAC the proceeds of which gave rise to a Preferred Dividend Intercompany Note, in an aggregate amount not to exceed the outstanding principal amount of such Preferred Dividend Intercompany Notes at the time of such merger. No payments and other transfers made under clauses (II) through (VII) and (IX) of this Section 4.09(b) shall reduce the amount available for Restricted Payments and Restricted Investments under Section 4.09(a); payments and other transfers made under clauses (I) and (VIII) of this Section 4.09(b) shall reduce the amount available for Restricted Payments and Restricted Investments under Section 4.09(a). SECTION 4.10. Limitation on Indebtedness and Preferred Stock. (a) The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or become liable with respect to, or extend the maturity of or become liable for the payment of, contingently or otherwise (collectively "Incur"), any preferred stock (including preference stock) or Indebtedness, except that, without duplication, the Company, the Subsidiary Guarantors and Alpart may Incur preferred stock (including preference stock) or Indebtedness (including, without duplication, guarantees of Indebtedness of the Company and its Subsidiaries otherwise permitted by this Indenture) if after giving effect thereto and the receipt and application of the proceeds therefrom, and assuming that the full amount of Indebtedness permitted to be Incurred under Section 4.10(b)(ii) (after taking into account any reduction in such amount as set forth in such Section 4.10(b)(ii)) has been Incurred (assuming, for purposes of this calculation, an interest rate on such additional Indebtedness equal to the weighted average interest rate on the Indebtedness then outstanding under Section 4.10(b)(ii)), the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.0 to 1; provided, however, that Indebtedness of Alpart Incurred pursuant to this clause (a) shall not exceed an aggregate of $150,000,000 at any one time outstanding, plus an amount equal to the reasonable fees and expenses in connection with the Incurrence of such Indebtedness. (b) Notwithstanding the foregoing paragraph (a) of this Section 4.10, the following shall be permitted: 47 55 (i) the Company and the Subsidiary Guarantors may Incur Indebtedness in respect of the Notes; (ii) the Company and the Subsidiary Guarantors may Incur Indebtedness (without duplication), and the Bank Guarantors may guarantee such Indebtedness, under the Credit Agreement, in connection with Refinancing Sale and Leaseback Transactions or otherwise in an aggregate amount at any one time outstanding not to exceed $375,000,000, as reduced from time to time by any permanent reduction in such amount as set forth in a Board Resolution; (iii) (A) Alpart may Incur Indebtedness in an aggregate amount not to exceed $150,000,000 at any one time outstanding and (B) the Company, KJC and AJI (without duplication) may Incur Indebtedness in an aggregate amount not to exceed at any one time outstanding the product of (I) $150,000,000 multiplied by (II) the Company's then percentage ownership interest in Alpart;provided, howeve, that the aggregate Indebtedness (without duplication) Incurred pursuant to clauses (A) and (B) of this clause (b)(iii) may not exceed $150,000,000 at any one time outstanding; andprovided, further, that in each case the proceeds of such Indebtedness are used solely for capital improvements and expenditures, expansion and working capital with respect to Alpart and/or to reimburse the partners of Alpart for advances to Alpart used solely for capital improvements and expenditures, expansion and working capital with respect to Alpart, plus in each case an amount equal to the reasonable fees and expenses in connection with the Incurrence of such Indebtedness; (iv) the Company and/or KAAC (without duplication) may Incur Indebtedness in an amount not to exceed $75,000,000 at any one time outstanding, the proceeds of which are used solely for capital improvements and expenditures, expansion and working capital with respect to QAL and/or to reimburse the stockholders of QAL for advances to QAL used solely for capital improvements and expenditures, expansion and working capital with respect to QAL, plus an amount equal to the reasonable fees and expenses in connection with the Incurrence of such Indebtedness; (v) VALCO may Incur Indebtedness, and the Company may guarantee such Indebtedness, in an aggregate amount (without duplication) not to exceed $25,000,000 at any one time outstanding, the proceeds of which are used solely for capital improvements and expenditures, expansion and working capital with respect to VALCO and/or to reimburse the shareholders of VALCO for advances to VALCO used solely for capital improvements and expenditures, expansion and working capital, plus an amount equal to the reasonable fees and expenses in connection with the Incurrence of such Indebtedness; (vi) the Company and its Subsidiaries may Incur Indebtedness ("Refinancing Indebtedness") that serves to Refinance, in whole or in part, the Indebtedness permitted by clauses (a) and (b) of this Section 4.10 (the "Refinanced Indebtedness"), or any one or more successive Refinancings of any thereof; provided, however, that: (A) such Refinancing Indebtedness is in an aggregate amount not to exceed the aggregate amount of such Refinanced Indebtedness (including accrued interest thereon and undrawn amounts under credit arrangements otherwise permitted to be Incurred pursuant to this Indenture), the amount of any premium required to be paid in connection with such Refinancing pursuant to the terms of such Refinanced Indebtedness or the amount of any reasonable and customary premium determined by the Company to be necessary to accomplish such Refinancing by means of a redemption, tender offer, 48 56 privately negotiated transaction, defeasance or other similar transaction, and an amount equal to the reasonable fees and expenses in connection with the Incurrence of such Refinancing Indebtedness; (B) neither the Company nor any of its Subsidiaries is an obligor of such Refinancing Indebtedness, except to the extent that such Person (I) was an obligor of such Refinanced Indebtedness or (II) is otherwise permitted, at the time such Refinancing Indebtedness is Incurred, to be an obligor of such Refinancing Indebtedness; and (C) in the case of any Refinanced Indebtedness that is subordinated (pursuant to its terms) in right and priority of payment to the Notes or any Subsidiary Guarantor's obligation under its Guarantee, as the case may be, such Refinancing Indebtedness (I) has a final maturity and weighted average maturity at least as long as such Refinanced Indebtedness and (II) is subordinated (pursuant to its terms) in right and priority of payment to the Notes or such Subsidiary Guarantor's obligation under its Guarantee, as the case may be, at least to the same extent as such Refinanced Indebtedness; (vii) the Company may Incur Capitalized Lease Obligations not exceeding $50,000,000 at any one time outstanding in connection with the sale and leaseback of all or a portion of the Company's interest in the Center for Technology, provided that the Net Cash Proceeds therefrom are applied as provided by Section 4.14; (viii) the Company and its Subsidiaries may Incur Indebtedness, without duplication, the proceeds of which are used solely to finance the construction, acquisition or the acquisition and retrofitting of an aluminum smelter or smelters or related facilities (or interests therein) and the reasonable fees and expenses in connection with the Incurrence of such Indebtedness, in an amount not to exceed $150,000,000 in any fiscal year (without cumulation of unused amounts to successive years); (ix) the Company and its Subsidiaries may Incur Indebtedness, the proceeds of which are used solely to finance the construction or acquisition of a fabrication plant or plants or related facilities and the reasonable fees and expenses in connection with the Incurrence of such Indebtedness, in an aggregate amount not to exceed $25,000,000 in any fiscal year (without cumulation of unused amounts to successive years); (x) the Company and its Subsidiaries may Incur preferred stock (including preference stock) that is not Redeemable Stock; provided, however, that in the case of preferred stock (including preference stock) Incurred by any Subsidiary of the Company that is not a Subsidiary Guarantor, such preferred stock shall be issuedpro rata to the holders of Capital Stock of such Subsidiary; (xi) the Company and its Subsidiaries may Incur preferred stock (including preferred stock and preference stock that is Redeemable Stock),provided that such preferred stock or preference stock is issued to the Company, any of its Subsidiaries or pro rata to the holders of Capital Stock of any such Subsidiary; (xii) the Company and its Subsidiaries may Incur Permitted Indebtedness; and (xiii) the Company and its Subsidiaries may Incur Indebtedness in an amount at any one time outstanding not to exceed $75,000,000, provided that the amount of such Indebtedness that 49 57 may be Incurred by Subsidiaries of the Company (other than Subsidiary Guarantors that are not Permitted Entities) shall not exceed $25,000,000 at any one time outstanding, andprovided, further, that, to the extent any such Indebtedness is Incurred from a Bank or an affiliate thereof, the Bank Guarantors may guarantee such Indebtedness. (c) Notwithstanding the foregoing, no Subsidiary of the Company shall assume, guarantee or in any other manner become liable with respect to any Indebtedness of the Company or a Subsidiary Guarantor (other than such Subsidiary) ("Other Indebtedness") which is subordinated (pursuant to its terms) in right and priority of payment to any other Indebtedness of the Company or such Subsidiary Guarantor unless such Subsidiary also assumes, guarantees or otherwise becomes liable with respect to the Notes on a substantially similar basis for so long as such Subsidiary is liable with respect to such Other Indebtedness; provided, however, that if such Other Indebtedness is subordinated (pursuant to its terms) in right and priority of payment to the Notes or any Subsidiary Guarantor's obligation under its Guarantee, as the case may be, any such assumption, guarantee or other liability of such Subsidiary with respect to such Other Indebtedness shall be subordinated to such Subsidiary's assumption, guarantee or other liability with respect to the Notes to the same extent as such subordinated Indebtedness is subordinated to the Notes or such Subsidiary Guarantor's obligation under its Guarantee, as the case may be; and provided, further, that this paragraph shall not be applicable to any assumption, guarantee or other liability of any Subsidiary of the Company which existed at the time such Person became a Subsidiary of the Company and was not Incurred in connection with, or in contemplation of, such Person becoming a Subsidiary of the Company, or any Refinancing Indebtedness in connection therewith complying with Section 4.10(b)(vi) (provided, that the guarantee of such Refinancing Indebtedness is on substantially the same terms as the guarantee of the Refinanced Indebtedness). In the event that any Subsidiary of the Company (other than a Subsidiary Guarantor) is required to guarantee the Notes pursuant to the next preceding sentence, the Company shall cause such Subsidiary to (a) execute and deliver to the Trustee a supplemental indenture in form and substance reasonably satisfactory to the Trustee pursuant to which such Subsidiary shall be named as an additional Subsidiary Guarantor for so long as such Subsidiary Guarantor is so obligated with respect to such Other Indebtedness and (b) deliver to the Trustee an Opinion of Counsel reasonably satisfactory to the Trustee that such supplemental indenture has been duly executed and delivered by such Person. (d) For the purpose of determining compliance with this Section 4.10, in the event that any Indebtedness is permitted to be Incurred pursuant to more than one clause of Section 4.10(b), the Incurrence of such Indebtedness shall not limit the amount of Indebtedness otherwise permitted to be Incurred, and shall not be required to be included, under more than one such clause. SECTION 4.11. Limitation on Liens. (a) The Company shall not, and shall not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of their respective U.S. Fixed Assets to secure, directly or indirectly, any Indebtedness, unless the Notes are equally and ratably secured on a senior basis for so long as such secured Indebtedness is so secured. (b) Notwithstanding anything to the contrary, this Section 4.11 shall not prohibit: (i) Liens on the Permitted Collateral securing outstanding Indebtedness permitted by this Indenture in an aggregate principal amount not to exceed the Maximum Secured Amount at the time such Indebtedness is Incurred; 50 58 (ii) Liens in existence on the date of the issuance of the Notes after giving effect thereto which Liens, if such Liens secure a single or related items of Indebtedness in a principal amount in excess of $5,000,000, are referred to in Schedule A hereto; (iii) Liens in favor of the Company or any Subsidiary Guarantor; (iv) Liens on U.S. Fixed Assets of a person existing at the time such person is merged into or consolidated with the Company or any Subsidiary of the Company, provided, that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any other U.S. Fixed Assets of the Company or any Subsidiary of the Company; (v) Liens on U.S. Fixed Assets existing at the time of acquisition thereof by the Company or any Subsidiary of the Company, provided, that such Liens were in existence prior to the contemplation of such acquisition and do not extend to any other U.S. Fixed Assets of the Company or any Subsidiary of the Company; (vi) Liens securing Indebtedness permitted by clauses (vii), (viii) and (ix) of Section 4.10(b), provided, that such Liens do not extend to any U.S. Fixed Assets other than the Center for Technology in the case of clause (vii), the applicable aluminum smelter or smelters and related facilities in the case of clause (viii) and the applicable fabrication plant or plants and related facilities in the case of clause (ix), and, in each case, together with any Improvements thereto or thereon and any proceeds thereof; (vii) Liens securing Indebtedness permitted by clause (e) of the definition of Permitted Indebtedness; (viii) Liens securing the Indebtedness permitted by clauses (iii), (iv) or (v) of Section 4.10(b) provided that such Liens do not extend to any U.S. Fixed Assets other than (a) Permitted Collateral (in which case the principal amount of such Indebtedness shall be included in the calculation of the Maximum Secured Amount for purposes of clause (i) of this paragraph and such Liens shall only be permitted if the requirements of clause (i) are satisfied) and (b) the Capital Stock and assets of Alpart, KJC and AJI in the case of clause (iii), the Capital Stock and assets of KAAC in the case of clause (iv), and the Capital Stock and assets of VALCO in the case of clause (v), plus, in each case, the proceeds thereof; (ix) Liens securing Indebtedness consisting of Capitalized Lease Obligations, mortgage financings, industrial revenue bonds or other monetary obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or installation of U.S. Fixed Assets used in the business of the Company and its Subsidiaries, or repairs, additions or Improvements to such U.S. Fixed Assets, provided, that such Liens (a) secure Indebtedness in an amount not in excess of the original purchase price or the original cost of any such U.S. Fixed Assets or repair, addition or Improvement thereto (plus an amount equal to the reasonable fees and expenses in connection with the Incurrence of such Indebtedness), (b) do not extend to any other U.S. Fixed Assets (other than Improvements thereto or thereon and any proceeds thereof) of the Company or any Subsidiary of the Company (and, in the case of a repair, addition or Improvement, such Lien extends only to the U.S. Fixed Assets (and Improvements thereto or thereon) repaired, added to or improved), and (c) secure Indebtedness incurred no later than 180 days after the acquisition or final completion of such construction, repair, addition or Improvement; 51 59 (x) Liens securing any Refinancings (in whole or in part) of any Indebtedness secured by the Liens described in clauses (ii), (iv), (v), (vi), (viii) or (ix) of this paragraph, and any successive Refinancings of any thereof (together with any increased amount of such Indebtedness specifically permitted pursuant to Section 4.10(b) to cover the reasonable fees and expenses incurred in connection with a Refinancing)),provided that each such Lien (unless otherwise permitted by this paragraph) does not extend to any additional U.S. Fixed Assets (other than Improvements thereto or thereon and any proceeds thereof); (xi) Liens on U.S. Fixed Assets securing Indebtedness in an aggregate principal amount not to exceed $10,000,000; and (xii) Liens on any U.S. Fixed Assets consisting of easements, covenants, restrictions, exceptions, reservations and similar matters which do not materially impair the use of such U.S. Fixed Assets for the uses for which it is held and which Liens are granted to secure Indebtedness secured by Liens permitted by the foregoing clauses (i) through (xi). (c) For purposes of this Section 4.11, the Notes will be considered equally and ratably secured on a senior basis with any other Lien if the Lien securing the Notes is of at least equal priority and covers the same U.S. Fixed Assets as such other Lien, provided, that if the Indebtedness secured by such other Lien is expressly subordinated in right and priority of payment by its terms to the Notes, the Lien securing the Notes will be senior to such other Lien. (d) For the purpose of determining compliance with this Section 4.11, in the event that any Lien is permitted pursuant to more than one clause of Section 4.11(b), such Lien shall not limit any other Lien otherwise permitted, and shall not be required to be included under more than one such clause. SECTION 4.12. Subsidiary guarantees, etc. (a) If the Company or any Subsidiary Guarantor shall transfer or cause to be transferred, in one or a series of related transactions, any property or assets (including, without limitation, businesses, divisions, real property, assets or equipment) to any Subsidiary of the Company or to any Non-Affiliate Joint Venture of the Company, the Company shall cause such transferee Subsidiary or Non-Affiliate Joint Venture to (i) execute and deliver to the Trustee a supplemental indenture in form and substance reasonably satisfactory to the Trustee pursuant to which such transferee Subsidiary or Non-Affiliate Joint Venture shall be named as an additional Subsidiary Guarantor and (ii) deliver to the Trustee an Opinion of Counsel reasonably satisfactory to the Trustee that such supplemental indenture has been duly executed and delivered by such Person. (b) The provisions set forth in the immediately preceding paragraph shall not apply to the following transfers of property or assets by the Company or any Subsidiary Guarantor: (A) transfers of property or assets (other than cash) to Subsidiaries of the Company and Non-Affiliate Joint Ventures, provided that such transfer is made in exchange for cash in an amount equal to the Fair Market Value of such property or assets; (B) transfers of property or assets to Subsidiary Guarantors; (C) the use of the proceeds of Indebtedness described in Sections 4.10(b)(iii), (iv), (v), (viii) and (ix); 52 60 (D) transfers to Alpart of the proceeds of Indebtedness described in Section 4.10(a) to the extent that Alpart is an obligor or guarantor of such Indebtedness; (E) the provision of, and the payment for, goods and services, working capital and technology to Subsidiaries of the Company and Non-Affiliate Joint Ventures in each case in the ordinary course of the businesses in which the Company or its Subsidiaries or its Non-Affiliate Joint Ventures were engaged on the date of this Indenture or reasonably related extensions thereof; (F) transfers of assets to a Subsidiary of the Company immediately prior to the sale of such Subsidiary; (G) transfers of cash or Cash Equivalents to Non-Affiliate Joint Ventures engaged or to be engaged in the business of bauxite mining and/or alumina refining and/or aluminum smelting and/or fabrication and/or reasonably related extensions thereof; (H) transfers of cash, Cash Equivalents, property or other assets to a Permitted Entity in exchange for Permitted Entity Securities of such Permitted Entity if, immediately after giving effect to such transfer, such Permitted Entity remains a Permitted Entity; (I) transfers of Capital Stock or other equity interests to the issuer of such Capital Stock or other equity interests such that immediately after giving effect to such transfer and related transfers, the proportional beneficial ownership by the transferor of the class of Capital Stock or equity interests so transferred is not reduced; and (J) other transfers of assets, provided that the aggregate amount thereof (if other than cash, such amount shall be the Fair Market Value of such asset at the time of such transfer), less the aggregate amount of such assets returned to the Company or any Subsidiary Guarantor (if returned other than in cash, the amount of such assets shall be the Fair Market Value of such assets at the time so returned), does not exceed, in the aggregate, the greater of (i) $25,000,000 or (ii) 5% of the Company's Consolidated Net Worth, calculated after giving effect to such transfers and returns. (c) If any of the Company's existing or future Subsidiaries (other than a Bank Guarantor) or existing or future Non-Affiliate Joint Ventures shall guarantee, directly or indirectly, or become a direct obligor with respect to, Indebtedness under the Credit Agreement or any Refinancings thereof, the Company shall cause each such Subsidiary or Non-Affiliate Joint Venture to (A) execute and deliver to the Trustee a supplemental indenture in form and substance reasonably satisfactory to the Trustee pursuant to which such Subsidiary or Non- Affiliate Joint Venture shall be named as an additional Subsidiary Guarantor for as long as such Subsidiary or Non-Affiliate Joint Venture is so obligated with respect to such Indebtedness and (B) deliver to the Trustee an Opinion of Counsel reasonably satisfactory to the Trustee that such supplemental indenture has been duly executed and delivered by such Person. (d) Sections 4.12(a) and (b) shall not apply to any Restricted Investment or Restricted Payment otherwise permitted by Section 4.09. (e) The Company shall not permit any Permitted Entity to cease to be a Permitted Entity except: (i) pursuant to a liquidation or dissolution of such Permitted Entity or a transfer of all or substantially all of the properties and assets of such Permitted Entity to its Equity Owners in 53 61 proportion to their interests, including by way of merger or consolidation of such Permitted Entity with or into its sole Equity Owner; (ii) pursuant to a sale in compliance with Section 4.14 of all of the Permitted Entity Securities of such Permitted Entity held directly or indirectly by the Company or any Subsidiary Guarantor; or (iii) if such Permitted Entity becomes a Subsidiary Guarantor. (f) Notwithstanding anything in this Section 4.12 to the contrary, VALCO shall be permitted to merge with or into, or distribute substantially all of its assets and liabilities to, a Permitted Entity, provided that, at the time of such merger or distribution, such Permitted Entity has no more than $50,000 of assets other than Capital Stock or other similar interests in VALCO. Upon the consummation of any transaction contemplated by this clause (f), the entity surviving such merger or distribution shall not be required (i) to become a Subsidiary Guarantor pursuant to this Section 4.12 or (ii) if such entity has no assets except as contemplated in this clause (f) or meets the conditions of clause (e) of this Section 4.12, to remain a Permitted Entity pursuant to the this Section 4.12. SECTION 4.13. Limitation on dividends and other payment restrictions affecting Subsidiaries. The Company shall not, and shall not permit its Subsidiaries to, create or otherwise suffer to exist any consensual encumbrances or restrictions on the ability of any Subsidiary to pay dividends or make any other distributions on its Capital Stock or pay any Indebtedness owed to the Company or any Subsidiaries of the Company or to make loans or advances or transfer any of its assets to the Company or any Subsidiary of the Company; provided, however that this Section 4.13 shall not prohibit Permitted Dividend Encumbrances. SECTION 4.14. Limitation on Asset Sales. (a) The Company shall not, and shall not permit any of its Subsidiaries to, consummate any Asset Sale unless at least 75% of the consideration therefor received by the Company or such Subsidiary (exclusive of indemnities) is in the form of cash or Cash Equivalents, provided that this sentence shall not apply to the sale or disposition of assets as a result of a foreclosure (or a secured party taking ownership of such assets in lieu of foreclosure) or as a result of an involuntary proceeding in which the Company cannot, directly or through its Subsidiaries, direct the type of proceeds received. The amount of (i) any liabilities of the Company or any Subsidiary of the Company that are actually assumed by the transferee in such Asset Sale, or for which the Company and its Subsidiaries are fully released, shall be deemed to be cash for purposes of determining the percentage of cash consideration received by the Company or its Subsidiaries and (ii) any notes or other obligations received by the Company or any Subsidiary of the Company from such transferee that are immediately converted (or are converted within thirty days of the related Asset Sale) by the Company or such Subsidiary into cash shall be deemed to be cash for purposes of determining the percentage of cash consideration received by the Company or its Subsidiaries. (b) The Company shall apply any Net Cash Proceeds received after the date of this Indenture to (A) the prepayment of Indebtedness in respect of or under the Credit Agreement and any other Indebtedness of the Company (other than the Notes) entitled to receive payment pursuant to the terms thereof (excluding Indebtedness that is subordinated by its terms to the Notes or the Guarantee thereof) (the "Specified Pari Passu Indebtedness"), unless the holders thereof elect not to receive such prepayment and (B) an offer to purchase (an "Asset Sale Offer") the then outstanding Notes, on any Business Day occurring no later than 175 days after the receipt by the Company (or any of its Subsidiaries, if 54 62 applicable) of such Net Cash Proceeds (the "Asset Sale Purchase Date," which date shall be deferred to the extent necessary to permit the Asset Sale Offer to remain open for the period required by applicable law), at a price (the "Asset Sale Purchase Price") equal to 100% of the principal amount thereof together with accrued interest, if any, to but not including the Asset Sale Purchase Date pursuant to the provisions set forth below. Such Asset Sale Offer with respect to the Notes shall be in an aggregate principal amount (the "Asset Sale Offer Amount") equal to the Net Cash Proceeds (rounded down to the nearest $1,000) from the Asset Sales to which the Asset Sale Offer relates multiplied by a fraction, the numerator of which is the principal amount of the Notes outstanding (determined as of the close of business on the day immediately preceding the date notice of such Asset Sale Offer is mailed) and the denominator of which is the principal amount of the Notes outstanding plus the aggregate principal amount of Indebtedness under the Credit Agreement and the Specified Pari Passu Indebtedness outstanding (determined as of the close of business on the day immediately preceding the date notice of such Asset Sale Offer is mailed). If (X) no Indebtedness is outstanding in respect of or under the Credit Agreement or the Specified Pari Passu Indebtedness or (y) the holders of such Indebtedness entitled to receive payment elect not to receive the payments provided for in the previous sentence, or (z) the application of such Net Cash Proceeds results in the complete prepayment of such Indebtedness, then in each case any remaining portion of such Net Cash Proceeds will be required to be applied to an Asset Sale Offer to purchase the Notes. (c) Notice of an Asset Sale Offer shall be mailed by the Company to all holders at their last registered address within 145 days of the receipt by the Company or any of its Subsidiaries of such Net Cash Proceeds. The Asset Sale Offer shall remain open from the time of mailing until the last Business Day before the Asset Sale Purchase Date, but in no event for a period less than twenty-four days or less than that required by applicable law. The notice shall state: (1) that the Asset Sale Offer is being made pursuant to this Section 4.14; (2) the Asset Sale Offer Amount, the purchase price and the Asset Sale Purchase Date; (3) the name and address of the Trustee and that Notes must be surrendered to the Trustee to collect the purchase price; (4) that any Note not tendered or accepted for payment will continue to accrue interest; (5) that any Note accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest on and after the Asset Sale Purchase Date; (6) that each holder electing to have a Note purchased pursuant to an Asset Sale Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note (the "Asset Sale Purchase Notice") completed, to the Trustee at the address specified in the notice at least five Business Days before the Asset Sale Purchase; (7) that holders will be entitled to withdraw their election if the Trustee receives, not later than one Business Day prior to the Asset Sale Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the holder, the principal amount of the Notes the holder delivered for purchase, the certificate number of each Note the holder delivered for purchase and a statement that such holder is withdrawing his, her or its election to have such Notes purchased; 55 63 (8) that if Notes in a principal amount in excess of the Asset Sale Offer Amount are surrendered pursuant to the Asset Sale Offer, the Company shall purchase Notes on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Notes in denominations of $1,000 or integral multiples thereof shall be acquired); and (9)(X) that Notes may be purchased in whole or in part (in denominations of $1,000 or integral multiples thereof) and (y) that holders whose Notes are purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered. On or before the Asset Sale Purchase Date, the Company shall (i) accept for payment Notes (having denominations of $1,000 or integral multiples thereof) surrendered pursuant to the Asset Sale Offer (on a pro rata basis if required pursuant to paragraph (c)(8) above), (ii) deposit by 10:30 a.m. New York City time, on the Asset Sale Purchase Date, with the Trustee money in immediately available funds sufficient to pay the Asset Sale Purchase Price of all Notes or portions thereof so accepted and (iii) deliver Notes so accepted to the Trustee together with an Officers' Certificate stating the Notes or portions thereof accepted for payment by the Company. The Trustee shall promptly mail or deliver to holders of Notes so accepted payment in an amount equal to the purchase price, and the Company shall execute and the Trustee shall promptly authenticate and mail or deliver to such holders a new Note equal in principal amount to any unpurchased portion of the Note surrendered. Any Notes not so accepted shall be promptly mailed or delivered to the holder thereof. The Company will publicly announce the results of the Asset Sale Offer on, or as soon as practicable after, the Asset Sale Purchase Date. Notwithstanding the foregoing, the Company shall not be required to make an Asset Sale Offer until the aggregate amount of Net Cash Proceeds so to be applied pursuant to this Section 4.14 exceeds $25,000,000 (the "Twenty-Five Million Threshold") and then the total amount of such Net Cash Proceeds shall be required to be so applied in accordance with this Section 4.14. The Company may credit against its obligation to offer to repurchase Notes pursuant to this Section 4.14 the principal amount of Notes acquired or held by the Company subsequent to the date of the Asset Sale giving rise to such Asset Sale Offer and surrendered for cancellation or redeemed or called for redemption subsequent to such date and not previously used to satisfy any obligation of the Company to redeem or offer to purchase Notes. In no event shall any Net Cash Proceeds that are applied to an Asset Sale Offer be required to be applied to more than one Asset Sale Offer. (d) Notwithstanding the provisions of clauses (a) and (b) of this Section 4.14, the Company shall have no obligation to make an Asset Sale Offer pursuant to this Section 4.14 if, and to the extent, the Company or any of its Subsidiaries commits within 140 days of the receipt of such Net Cash Proceeds to reinvest (whether by acquisition of an existing business or expansion, including, without limitation, capital expenditures) such Net Cash Proceeds in one or more of the lines of business (including capital expenditures) in which the Company or its Subsidiaries or its Non-Affiliate Joint Ventures were engaged on the date of this Indenture or reasonably related extensions of such lines of business, provided that such Net Cash Proceeds are substantially so utilized no later than the last day of the twelfth consecutive month (or, in the event the amount of such Net Cash Proceeds from a single Asset Sale or series of related Asset Sales exceeds $200,000,000, the twenty- fourth consecutive month) following the month in which such Net Cash Proceeds are received. (e) Notwithstanding the foregoing, if an Asset Sale consists of a sale of (i) all or a portion of the property, plant or equipment of the Company's Gramercy alumina refinery, whether now owned or hereafter acquired, or any proceeds thereof or (ii) any U.S. Fixed Assets acquired after the date of this Indenture which do not constitute Permitted Collateral, the Company shall make an Asset Sale Offer with the Net Cash Proceeds received from such Asset Sale (without regard to the Twenty-Five Million 56 64 Threshold) to the extent the Company has not committed within 140 days of the receipt of such Net Cash Proceeds to reinvest (whether by acquisition of an existing business or expansion, including, without limitation, capital expenditures) such Net Cash Proceeds in U.S. Fixed Assets (other than Permitted Collateral), provided that such Net Cash Proceeds are substantially so utilized no later than the last day of the twelfth consecutive month (or, in the event the amount of such Net Cash Proceeds from a single Asset Sale or series of related Asset Sales exceeds $200,000,000, the twenty-fourth consecutive month) following the month in which such Net Cash Proceeds are received. ARTICLE FIVE NOTEHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 5.01. Company to furnish Trustee information as to names and addresses of noteholders. The Company will furnish or cause to be furnished to the Trustee: (a) semi-annually, not more than fifteen days after each record date for the payment of interest, a list, in such form as the Trustee may reasonably require, of the names and addresses of the noteholders as of such record date as the case may be, and (b) at such other times as the Trustee may request in writing, within thirty days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than fifteen days prior to the time such list is furnished; provided, however, that so long as the Trustee is the Note registrar, no such list shall be required to be furnished. Any such list may be dated as of a date not more than fifteen days prior to the time such information is furnished or caused to be furnished, and need not include information received after such date. SECTION 5.02. Preservation and disclosure of lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Notes (1) contained in the most recent list furnished to it as provided in Section 5.01 and (2) received by it in the capacity of paying agent (if so acting) or Note registrar. The Trustee may destroy any list furnished to it as provided in Section 5.01 upon receipt of a new list so furnished. (b) In case three or more holders of Notes (hereinafter referred to as "applicants") apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned a Note for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Notes with respect to their rights under this Indenture or under the Notes, and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five Business Days after the receipt of such application, at its election either (1) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 5.02, or 57 65 (2) inform such applicants as to the approximate number of holders of Notes whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 5.02, and as to the approximate cost of mailing to such noteholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each noteholder whose name and address appears in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 5.02, a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of Notes or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. After opportunity for hearing upon the objections specified in the written statement so filed, the Commission may, and if demanded by the Trustee or by such applicants shall, enter an order either sustaining one or more of such objections or refusing to sustain any of them. If the Commission shall enter an order refusing to sustain any of such objections, or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all objections so sustained have been met, and shall enter an order so declaring, the Trustee shall mail copies of such material to all noteholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of the Notes, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any paying agent nor the Note registrar shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Notes in accordance with the provisions of subsection (b) of this Section 5.02, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b), nor shall any such disclosure be deemed a violation of existing law, or any law hereafter enacted which does not specifically refer to Section 312 of the Trust Indenture Act of 1939. SECTION 5.03. Reports by the Company. (a) The Company covenants and agrees to file with the Trustee within fifteen days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act. If the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act, the Company shall nonetheless file with the Commission and the Trustee copies of such annual reports and such information, documents and other reports as it would file if it were subject to the requirements of Section 13 or 15(d) of the Exchange Act. (b) The Company covenants and agrees to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such additional information, documents, and reports with respect to compliance by the Company with the 58 66 conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations, including, in the case of annual reports, certificates or opinions of independent public accountants, conforming to the requirements of Section 14.05, as to compliance with conditions or covenants, compliance with which is subject to verification by accountants. (c) The Company covenants and agrees to transmit to the holders of Notes within thirty days after the filing thereof with the Trustee, in the manner and to the extent provided in subsection (c) of Section 5.04 with respect to reports pursuant to subsection (a) of said Section 5.04, such summaries of any information, documents and reports required to be filed by the Company pursuant to subsections (a) and (b) of this Section 5.03 as may be required by rules and regulations prescribed from time to time by the Commission. (d) The Company covenants and agrees to furnish to the Trustee, not less often than annually, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer as to his or her knowledge of the Company's compliance with all conditions and covenants under this Indenture. For purposes of this paragraph (d), such compliance shall be determined without regard to any period of grace or requirement of notice provided under this Indenture. SECTION 5.04. Reports by the Trustee. (a) On or before May 15, 1994, and on or before May 15 in every year thereafter, so long as any Notes are outstanding hereunder, the Trustee, if required to do so by the provisions of the Trust Indenture Act of 1939, shall transmit to the noteholders, as hereinafter in this Section 5.04 provided, a brief report dated as of March 15 of the year in which such report is made with respect to any of the following events which may have occurred within the previous 12 months (but if no such event has occurred within such period no report need be transmitted): (1) any change to its eligibility under Section 7.09 and its qualifications under Section 7.08; (2) the creation of or any material change to a relationship specified in paragraphs (1) through (10) of Section 7.08(c); (3) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report, and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Notes, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to state such advances if such advances so remaining unpaid aggregate not more than 0.5% of the principal amount of the Notes outstanding on the date of such report; (4) the amount, interest rate, and maturity date of all other indebtedness owing by the Company (or by any other obligor on the Notes) to the Trustee in its individual capacity, on the date of such report, with a brief description of any property held as collateral security therefor, except an indebtedness based upon a creditor relationship arising in any manner described in paragraph (2), (3), (4) or (6) of subsection (b) of Section 7.13; (5) any change to the property and funds, if any, physically in the possession of the Trustee (as such) on the date of such report; and 59 67 (6) any action taken by the Trustee in the performance of its duties under this Indenture which it has not previously reported and which in its opinion materially affects the Notes, except action in respect of a default, notice of which has been or is to be withheld by it in accordance with the provisions of Section 6.07. (b) The Trustee shall transmit to the noteholders, as hereinafter provided, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) since the date of the last report transmitted pursuant to the provisions of subsection (a) of this Section 5.04 (or if no such report has yet been so transmitted, since the date of execution of this Indenture), for the reimbursement of which it claims or may claim a lien or charge prior to that of the Notes on property or funds held or collected by it as Trustee, and which it has not previously reported pursuant to this subsection, except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of Notes outstanding at such time, such report to be transmitted within ninety days after such time. (c) Reports pursuant to this Section 5.04 shall be transmitted by mail (i) to all holders of Notes, as the names and addresses of such holders appear upon the registry books of the Company, (ii) to all noteholders who have, within the two years preceding such transmission, filed their names and addresses with the Trustee for that purpose, and, (iii) except in the case of reports pursuant to Section 5.04(b), to all holders of Notes whose names and addresses have been furnished to or obtained by the Trustee pursuant to Section 5.01. (d) A copy of each such report shall, at the time of such transmission to noteholders, be filed by the Trustee with each stock exchange (if any) upon which the Notes are listed or admitted for trading and also with the Commission. The Company will notify the Trustee when and as the Notes become listed on any stock exchange. ARTICLE SIX REMEDIES OF THE TRUSTEE AND NOTEHOLDERS ON EVENT OF DEFAULT SECTION 6.01. Events of Default defined. In case one or more of the following Events of Default shall have occurred and be continuing: (a) default in the payment of any installment of interest upon any of the Notes as and when the same shall become due and payable, and continuance of such default for a period of thirty days; or (b) default in the payment of the principal of, Change of Control Purchase Price, Asset Sale Purchase Price, or premium, if any, on any of the Notes as and when the same shall become due and payable either at maturity, upon redemption or purchase by the Company pursuant to Article Three, by declaration or otherwise; or (c) failure on the part of the Company, duly to observe or perform in any material respect any other of the covenants or agreements on the part of the Company in the Notes or in this Indenture for a period of sixty days after the date on which written notice of such failure, which notice must specify the failure, demand it be remedied and state that the notice is a "Notice of Default," shall have been given to the Company by the Trustee by registered mail, which notice the Trustee shall give upon receipt of 60 68 requests to do so by the holders of at least 25% of the aggregate principal amount of the Notes at the time outstanding, or to the Company and the Trustee by the holders of at least 25% of the aggregate principal amount of the Notes at the time outstanding; or (d) a default under any mortgage, indenture, or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company or any Subsidiary, whether such indebtedness now exists or shall hereafter be created, in an aggregate principal amount exceeding $25,000,000, which default (a) in the case of a failure to make payment on any such indebtedness, shall not have been waived, cured or otherwise ceased to exist within 30 days thereafter, or (b) in the case of any default other than a payment default referred to in clause (a), shall have resulted in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, or with respect to which the principal amount remains unpaid upon its stated maturity; or (e) a final judgment which, together with other outstanding final judgments against the Company and its Significant Subsidiaries, exceeds an aggregate of $25,000,000 (to the extent such judgments are not covered by valid and collectible insurance from solvent unaffiliated insurers) shall be entered against the Company and/or its Significant Subsidiaries and (i) within 30 days after entry thereof, judgments exceeding such amount shall not have been discharged, settled or bonded or execution thereof stayed pending appeal or, within 30 days after the expiration of any such stay, such judgments exceeding such amount shall not have been discharged, settled or bonded or execution thereof stayed or (ii) an enforcement proceeding shall have been commenced (and not discharged, settled or bonded or execution thereof stayed) by any creditor upon judgments exceeding such amount; or (f) a court having jurisdiction in the premises shall have entered a decree or order for relief against the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or for all or any substantial part of its property, or ordering the winding-up or liquidation of its affairs, and such decree or order shall have remained unstayed and in effect for a period of ninety consecutive days; or (g) the Company shall have commenced a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall have consented to the entry of an order for relief in an involuntary case under any such law, or shall have consented to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or similar official) of the Company or for all or any substantial part of its property, or shall have made an assignment for the benefit of creditors, or shall have taken any corporate action in furtherance of any of the foregoing; or (h) the Guarantee of any Subsidiary Guarantor shall be held to be unenforceable or invalid by a final non-appealable order or judgment issued by a court of competent jurisdiction or shall cease for any reason to be in full force and effect with respect to such Subsidiary Guarantor, or any Subsidiary Guarantor or any Person acting by or on behalf of any Subsidiary Guarantor shall deny or disaffirm its obligations under its Guarantee; then, in the case of an Event of Default specified in clause (a), (b), (c), (d), (e) or (h), and in each and every such case, unless the principal of all the Notes shall have already become due and payable, either the Trustee or the holders of not less than 25% of the aggregate principal amount of the Notes then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by noteholders), may, and the Trustee shall if requested to do so by the holders of not less than 25% of the aggregate 61 69 principal amount of the Notes then outstanding hereunder, declare the principal amount and accrued interest to the date of declaration of all the Notes to be due and payable immediately. Upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Notes contained to the contrary notwithstanding. If an Event of Default specified in clause (f) or (g) above occurs, such amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any noteholder. SECTION 6.02. Payment of Notes on default; suit therefor. The Company covenants that (1) in case default shall be made in the payment of any installment of interest on any of the Notes, as and when the same shall become due and payable, and such default shall have continued for a period of thirty days, or (2) in case default shall be made in the payment of the principal of, and premium, if any, Change of Control Purchase Price or Asset Sale Purchase Price on any of the Notes when the same shall have become due and payable, whether upon maturity of the Notes or upon redemption or purchase by the Company pursuant to Article Three or upon declaration or otherwise then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Notes, the whole amount that then shall have become due and payable on all such Notes for such amounts, as the case may be, with interest upon the overdue principal, premium, if any, Change of Control Purchase Price or Asset Sale Purchase Price, as the case may be, and installments of interest (to the extent permitted by law) at the rate of interest borne by the Notes; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any expense or liabilities incurred by the Trustee hereunder other than through its negligence or bad faith. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor upon the Notes, and collect in the manner provided by law out of the property of the Company or any other obligor upon the Notes wherever situated the moneys adjudged or decreed to be payable. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor upon the Notes under any applicable bankruptcy, insolvency or similar law or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in case of any other similar judicial proceedings relative to the Company or any other obligor upon the Notes, or to creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal, Change of Control Purchase Price or Asset Sale Purchase Price, as the case may be, of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 6.02, shall be entitled and empowered by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest owing and unpaid in respect of the Notes, and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and of the noteholders allowed in any judicial proceeding relative to the Company or any other obligor upon the Notes, its creditors, or its property, and to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute the same after the deduction of its reasonable charges and expenses; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the noteholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the noteholders, to pay to the Trustee any amount due it for compensation and expenses, including reasonable counsel fees incurred by 62 70 it up to the date of such distribution. To the extent that such payment of reasonable compensation, expenses, liabilities and counsel fees out of the estate in any such proceedings shall be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, moneys, securities and other property which the holders of the Notes may be entitled to receive in such proceedings, whether in liquidation or under any plan of reorganization or arrangement or otherwise. All rights of action and of asserting claims under this Indenture, or under any of the Notes, may be enforced by the Trustee without the possession of any of the Notes, or the production thereof on any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment, subject to the payment of the reasonable expenses, disbursements and compensation of the Trustee, its agents and attorneys, shall be for the ratable benefit of the holders of the Notes. SECTION 6.03. Application of moneys collected by Trustee. Any moneys collected by the Trustee pursuant to Section 6.02 shall be applied to the payment of all amounts due the Trustee pursuant to Section 7.06 and thereafter in the order following, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the several Notes, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: FIRST: In case no principal of, Change of Control Purchase Price or Asset Sale Purchase Price on the outstanding Notes shall have become due and be unpaid, to the payment of interest on the Notes, in the order of the maturity of the installments of such interest, with interest upon the overdue installments of interest (so far as permitted by law and to the extent that such interest has been collected by the Trustee) at the rate of interest borne by the Notes, such payments to be made ratably to the persons entitled thereto, without discrimination or preference; SECOND: In case any principal of, Change of Control Purchase Price or Asset Sale Purchase Price on the outstanding Notes shall have become due, by declaration or otherwise, to the payment of the whole amount then owing and unpaid upon the Notes for principal, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest, as the case may be, with interest on the overdue principal, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and installments of interest (so far as permitted by law and to the extent that such interest has been collected by the Trustee), as the case may be, at the rate of interest borne by the Notes; and in case such moneys shall be insufficient to pay in full the whole amount so due and unpaid upon the Notes, then to the payment of such principal, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest, without preference or priority of any one such applicable amount over another, or of any installment of interest over any other installment of interest, ratably to the aggregate of such principal, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and accrued and unpaid interest; and THIRD: To the payment of the remainder, if any, to the Company, its successors or assigns, or to whosoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct. SECTION 6.04. Limitation on suits by holders of Notes. No holder of any Note shall have any right by virtue or by availing of any provision of this Indenture to institute any suit, action or proceeding or to seek any remedy in equity or at law upon or under or with respect to this Indenture or the Notes or for the appointment of a receiver or trustee, or for any other remedy, unless such holder previously 63 71 shall have given to the Trustee written notice of default and of the continuance thereof, as hereinabove provided, and unless also the holders of not less than 25% of the aggregate principal amount of the Notes then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding or to seek such remedy in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee, for sixty days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 6.06; it being understood and intended, and being expressly covenanted by the taker and holder of every Note with every other taker and holder and the Trustee, that no one or more holders of Notes shall have any right in any manner whatever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other of such Notes, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Notes. For the protection and enforcement of the provisions of this Section 6.04, each and every noteholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Note to receive payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest, as the case may be, on such Note, on or after the respective due dates expressed in such Note, or to institute suit for the enforcement of any such payment on or after such respective dates or to demand purchase of its Notes pursuant to Article Three or Section 4.14, shall not be impaired or affected without the consent of such holder. SECTION 6.05. Proceedings by Trustee; remedies cumulative and continuing; delay or omission not waiver of default. In case of a default hereunder, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. All powers and remedies given by this Article Six to the Trustee or to the noteholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any thereof or of any other powers and remedies available to the Trustee or the holders of the Notes, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee or of any holder of any of the Notes to exercise any right or power accruing upon any default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 6.04, every power and remedy given by this Article Six or by law to the Trustee or to the noteholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the noteholders. SECTION 6.06. Rights of holders of majority in principal amount of Notes to direct Trustee and to waive defaults. The holders of a majority of the aggregate principal amount of the Notes at the time outstanding (determined as provided in Section 8.04), or, if a record date is set in accordance with Section 8.05, as of such record date, shall have the right to 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; provided, however, that subject to the provisions of Section 7.01, the Trustee shall have the right to decline to follow any such direction if the Trustee shall determine that the action so directed may not lawfully be taken, or if the Trustee in good faith shall, by a responsible officer or 64 72 officers of the Trustee, determine that the proceedings so directed would be illegal or involve it in personal liability or be unjustly prejudicial to the noteholders not joining therein, and provided further that nothing in this Indenture shall impair the right of the Trustee in its discretion to take any action deemed proper by the Trustee and which is not inconsistent with such direction by noteholders. Prior to the declaration of the maturity of the Notes as provided in Section 6.01, the holders of a majority of the aggregate principal amount of the Notes at the time outstanding (determined as provided in Sections 8.04 and 8.05) may on behalf of the holders of all of the Notes waive any past default hereunder and its consequences, except a default in the payment of principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest on any of the Notes or a default under Article Four or any other covenant or provision hereof which under Article Ten cannot be modified or amended without the consent of the holder of each outstanding Note. In the case of any such waiver the Company, the Trustee and the holders of the Notes shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 6.07. Trustee to give notice of defaults known to it, but may withhold in certain circumstances. The Trustee shall, within ninety days after the occurrence of a default hereunder, give to the noteholders, in the manner and to the extent provided in subsection (c) of Section 6.04 with respect to reports pursuant to subsection (a) of Section 6.04, notice of such defaults known to the Trustee unless such defaults shall have been cured or waived before the giving of such notice (the term "defaults" for the purposes of this Section 6.07 being hereby defined to be the events specified in clauses (a), (b), (c), (d), (e), (f), (g) and (h) of Section 6.01, not including any periods of grace provided for in clauses (a), (c), (d) and (e), respectively, and irrespective of the giving of notice specified in clauses (c) and (d)); provided that, except in the case of default in the payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest on any of the Notes, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors and/or responsible officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the noteholders. SECTION 6.08. Requirement of an undertaking to pay costs in certain suits under the Indenture or against the Trustee. All parties to this Indenture agree, and each holder of any Note by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, 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, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 6.08 shall not apply to any suit instituted by the Trustee, to any suit instituted by any noteholder, or group of noteholders, holding in the aggregate more than 10% of the aggregate principal amount of the Notes outstanding, or to any suit instituted by any noteholder for the enforcement of the payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest on any Note on or after the due date expressed in such Note. SECTION 6.09. Waiver of stay or extension laws. The Company covenants (to the extent that it may lawfully do so) that it will 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 benefits or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to 65 73 the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SEVEN CONCERNING THE TRUSTEE SECTION 7.01. Duties and responsibilities of Trustee. 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. In case an Event of Default has occurred (which has not been cured or waived) the Trustee shall exercise such of 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 man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct; provided, however, that (a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred: (1) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a responsible officer or officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken, suffered or omitted to be taken by it in good faith in accordance with the direction of the holders of not less than a majority in principal amount of the Notes at the time outstanding (determined as provided in Section 8.04 or 8.05) relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. 66 74 SECTION 7.02. Reliance on documents, opinions, etc. Subject to the provisions of Section 7.01: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, note 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) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an instrument signed in the name of the Company by the Chairman of the Board, the President or any Vice President and the Secretary or any Assistant Secretary or the Treasurer or any Assistant Treasurer (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors of the Company may be evidenced to the Trustee by a copy thereof certified by the Secretary or any Assistant Secretary of the Company; (c) the Trustee may consult with counsel and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the noteholders, pursuant to the provisions of this Indenture, unless such noteholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; but nothing herein contained shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default (which has not been cured or waived), to exercise such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs; (e) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; (f) prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, 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, consent, order, approval, bond, note or other paper or document, unless requested in writing so to do by the holders of not less than a majority in aggregate principal amount of the Notes then outstanding (determined as provided in Section 8.04 or 8.05); provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require from the noteholders reasonable indemnity against such expenses or liability as a condition to so proceeding. The reasonable expenses of every such examination shall be paid by the Company or, if paid by the Trustee, shall be repaid by the Company upon demand; and (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. SECTION 7.03. No responsibility for recitals, etc. The recitals contained herein and in the Notes (other than the certificate of authentication on the Notes) shall be taken as the statements of the 67 75 Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representation as to the validity or sufficiency of this Indenture or of the Notes. The Trustee shall not be accountable for the use or application by the Company of any of the Notes or of the proceeds of such Notes, or for the use or application of any moneys paid over by the Trustee in accordance with any provision of this Indenture, or for the use or application of any moneys received by any paying agent other than the Trustee. SECTION 7.04. Trustee, paying agent or Note registrar may own Notes. The Trustee, any paying agent or Note registrar, in its individual or any other capacity, may become the owner or pledgee of Notes with the same rights it would have if it were not Trustee, paying agent or Note registrar. SECTION 7.05. Moneys received by Trustee to be held in trust without interest. Subject to the provisions of Section 12.04, all moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law or by any national securities exchanges on which the Notes are listed or admitted for trading. The Trustee shall be under no liability for interest on any moneys received by it hereunder except such as it may agree with the Company to pay thereon. SECTION 7.06. Compensation and expenses of Trustee. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in connection with the acceptance or administration of its trust under this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of the Trustee or its agents and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability under this Indenture in connection with the exercise of its powers or duties hereunder. The obligations of the Company under this Section 7.06 to compensate the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture or resignation or removal of the Trustee. Such additional indebtedness shall be secured by a Lien upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Notes. SECTION 7.07. Right of Trustee to rely on Officers' Certificate where no other evidence specifically prescribed. Subject to the provisions of Section 7.01, whenever in the administration of the provisions of this Indenture, the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such Certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted by it under the provisions of this Indenture in reliance thereon. 68 76 SECTION 7.08. Conflicting interest of Trustee. (a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section 7.08, then, within ninety days after ascertaining that it has such conflicting interest, and if the default (as defined in Section 7.08(c)) to which such conflicting interest relates has not been cured or duly waived or otherwise eliminated before the end of such ninety-day period, the Trustee shall either eliminate such conflicting interest or, except as otherwise provided in this Section 7.08, resign in the manner and with the effect specified in Section 7.10, and the Company shall take prompt steps to have a successor appointed in the manner provided in Section 7.10. (b) In the event that the Trustee shall fail to comply with the provisions of subsection (a) of this Section 7.08, the Trustee shall, within ten days after the expiration of such ninety-day period, transmit notice of such failure to the noteholders in the manner and to the extent provided in subsection (c) of Section 5.04 with respect to reports pursuant to subsection (a) of Section 5.04. (c) For the purposes of this Section 7.08, the Trustee shall be deemed to have a conflicting interest if the Notes are in default (defined as the occurrence of any event specified in Section 6.01, but exclusive of any period of grace or requirement of notice) and (1) the Trustee is trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the Company are outstanding, unless such other indenture is a collateral trust indenture under which the only collateral consists of Notes issued under this Indenture, provided that there shall be excluded from the operation of this paragraph any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding if (i) this Indenture and such other indenture or indentures are wholly unsecured and such other indenture or indentures are hereafter qualified under the Trust Indenture Act of 1939, unless the Commission shall have found and declared by order pursuant to Subsection (b) of Section 305 or Subsection (c) of Section 307 of the Trust Indenture Act of 1939 that differences exist between the provisions of this Indenture and the provisions of such other indenture or indentures which are so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture and such other indenture or indentures, or (ii) the Company shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that the trusteeship under this Indenture and such other indenture is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under one of such indentures; (2) the Trustee or any of its directors or executive officers is an underwriter for the Company; (3) the Trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with an underwriter for the Company; (4) the Trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee, or representative of the Company, or of an underwriter (other than the Trustee itself) for the Company who is currently engaged in the business of underwriting, except that (A) one individual may be a director and/or an executive officer of the Trustee and a director and/or an executive officer of the Company, but may not be at the same time an executive officer of both the Trustee and the Company; (B) if and so long as the number of directors of the 69 77 Trustee in office is more than nine, one additional individual may be a director and/or an executive officer of the Trustee and a director of the Company; and (C) the Trustee may be designated by the Company or by any underwriter for the Company to act in the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent, or depositary, or in any other similar capacity, or, subject to the provisions of paragraph (1) of this subsection (c), to act as trustee whether under an indenture or otherwise; (5) ten percent or more of the voting securities of the Trustee is beneficially owned either by the Company or by any director, partner, or executive officer thereof, or 20 percent or more of such voting securities is beneficially owned, collectively, by any two or more of such persons; or 10 percent or more of the voting securities of the Trustee is beneficially owned either by an underwriter for the Company or by any director, partner, or executive officer thereof, or is beneficially owned, collectively, by any two or more such persons; (6) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, (A) five percent or more of the voting securities, or 10 percent or more of any other class of security, of the Company, not including the Notes issued under this Indenture and securities issued under any other indenture under which the Trustee is also trustee, or (B) 10 percent or more of any class of security of an underwriter for the Company; (7) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, five percent or more of the voting securities of any person who, to the knowledge of the Trustee, owns 10 percent or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, the Company; (8) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, 10 percent or more of any class of security of any person who, to the knowledge of the Trustee, owns 50 percent or more of the voting securities of the Company; (9) the Trustee owns on the date of default upon the Notes (defined as the occurrence of any event specified in Section 6.01, but exclusive of any period of grace or requirement of notice) or any anniversary of such default while such default upon the Notes remains outstanding, in the capacity of executor, administrator, testamentary orinter vivos trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of 25 per cent or more of the voting securities, or of any class of security, of any person, the beneficial ownership of a specified percentage of which would have constituted a conflicting interest under paragraph (6), (7), or (8) of this subsection (c). As to any such securities of which the Trustee acquired ownership through becoming executor, administrator, or testamentary trustee of an estate which included them, the provisions of the preceding sentence shall not apply, for a period of two years from the date of such acquisition, to the extent that such securities included in such estate do not exceed 25 percent of such voting securities or 25 percent of any such class of security. Promptly after the dates of any such default upon the Notes and annually in each succeeding year that the Notes remain in default, the Trustee shall make a check of its holdings of such securities in any of the above-mentioned capacities as of such dates. If the Company fails to make payment in full of principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest on any of the Notes when and as the same becomes due and payable and such failure continues for 30 days thereafter, the Trustee shall make a prompt check of its holdings of such securities in any of the above-mentioned capacities as of the date of the expiration of such 30-day period, and after such date, notwithstanding the foregoing provisions of this paragraph (9), all such securities so held by the Trustee, with sole or joint control over such securities vested in 70 78 it, shall, but only so long as such failure shall continue, be considered as though beneficially owned by the Trustee for the purposes of paragraphs (6), (7) and (8) of this subsection (c); or (10) except under the circumstances described in paragraphs (1), (3), (4), (5) or (6) of Section 311(b) of the Trust Indenture Act of 1939, the Trustee shall become a creditor of the Company. The specifications of percentages in paragraphs (5) to (9), inclusive, of this subsection (c) shall not be construed as indicating that the ownership of such percentages of the securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purpose of paragraph (3) or (7) of this subsection (c). For the purposes of paragraphs (6), (7), (8) and (9) of this subsection (c) only, (A) the terms "security" and "securities" shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay moneys lent to a person by one or more banks, trust companies or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness; (B) an obligation shall be deemed to be "in default" when a default in payment of principal shall have continued for thirty days or more and shall not have been cured; and (C) the Trustee shall not be deemed to be the owner or holder of (i) any security which it holds as collateral security (as trustee or otherwise) for an obligation which is not in default as defined in clause (B) above, or (ii), any security which it holds as collateral security under this Indenture, irrespective of any default hereunder, or (iii) any security which it holds as agent for collection, or as custodian, escrow agent, or depositary, or in any similar representative capacity. Except as above provided, the word "security" or "securities" as used in this Indenture, shall mean any note, stock, treasury stock, bond, note, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. Except in the case of a default in the payment of the principal of or interest on the Notes, or in the payment of any sinking or purchase fund installment, the Trustee shall not be required to resign as provided by this Section 7.08 if the Trustee shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that (i) the default under this Indenture may be cured or waived during a reasonable period and under the procedures described in such application, and (ii) a stay of the Trustee's duty to resign will not be inconsistent with the interests of holders of the Notes. The filing of such an application shall automatically stay the performance of the duty to resign until the Commission orders otherwise. Any resignation of the Trustee shall become effective only upon the appointment of a successor trustee and such successor's acceptance of such an appointment. (d) For the purposes of this Section 7.08: (1) The term "underwriter" when used with reference to the Company shall mean every person, who, within one year prior to the time as of which the determination is made, has 71 79 purchased from the Company with a view to, or has offered or sold for the Company in connection with, the distribution of any security of the Company outstanding at such time, or has participated or has had a direct or indirect participation in any such undertaking, or has participated or has had a participation in the direct or indirect underwriting of any such undertaking, but such term shall not include a person whose interest was limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. (2) The term "director" shall mean any director of a corporation or any individual performing similar functions with respect to any organization whether incorporated or unincorporated. (3) The term "person" shall mean an individual, a corporation, a partnership, an association, a joint-stock company, a trust, an unincorporated organization, or a government or political subdivision thereof. As used in this paragraph, the term "trust" shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security. (4) The term "voting security" shall mean any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or pursuant to any trust, agreement or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person. (5) The term "Company" shall mean any obligor upon the Notes. (6) The term "executive officer" shall mean the president, every vice-president, every trust officer, the cashier, the secretary, and the treasurer of a corporation, and any individual customarily performing similar functions with respect to any organization whether incorporated or unincorporated, but shall not include the chairman of the board of directors. The percentages of voting securities and other securities specified in this Section 7.08 shall be calculated in accordance with the following provisions: (A) A specified percentage of the voting securities of the Trustee, the Company or any other person referred to in this Section 7.08 (each of whom is referred to as a "person" in this paragraph) means such amount of the outstanding voting securities of such person as entitles the holder or holders thereof to cast such specified percentage of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person. (B) A specified percentage of a class of securities of a person means such percentage of the aggregate amount of securities of the class outstanding. (C) The term "amount," when used in regard to securities, means the principal amount if relating to evidences of indebtedness, the number of shares if relating to capital shares, and the number of units if relating to any other kind of security. (D) The term "outstanding" means issued and not held by or for the account of the issuer. The following securities shall not be deemed outstanding within the meaning of this definition: 72 80 (i) securities of an issuer held in a sinking fund relating to securities of the issuer of the same class; (ii) securities of an issuer held in a sinking fund relating to another class of securities of the issuer, if the obligation evidenced by such other class of securities is not in default as to principal or interest or otherwise; (iii) securities pledged by the issuer thereof as security for an obligation of the issuer not in default as to principal or interest or otherwise; and (iv) securities held in escrow if placed in escrow by the issuer thereof; provided, however, that any voting securities of an issuer shall be deemed outstanding if any person other than the issuer is entitled to exercise the voting rights thereof. (E) A security shall be deemed to be of the same class as another security if both securities confer upon the holder or holders thereof substantially the same rights and privileges, provided, however, that, in the case of secured evidences of indebtedness, all of which are issued under a single indenture, differences in the interest rates or maturity dates of various series thereof shall not be deemed sufficient to constitute such series different classes, and provided, further, that, in the case of unsecured evidences of indebtedness, differences in the interest rates or maturity dates thereof shall not be deemed sufficient to constitute them securities of different classes, whether or not they are issued under a single indenture. SECTION 7.09. Requirements for eligibility of Trustee. The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States or any State or territory thereof or of the District of Columbia or a corporation or other person permitted to act as the Trustee by the Commission (pursuant to the requirements of Section 310(a)(1) of the Trust Indenture Act of 1939), authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $25,000,000, and subject to supervision or examination by Federal, State, Territorial, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 7.09, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Trustee shall not be an obligor upon the Notes or a person directly or indirectly controlling, controlled by, or under common control with such obligor. In addition, the Trustee shall at all times be approved to serve as transfer agent and registrar by any securities exchange on which the Notes are listed or admitted for trading. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 7.09, the Trustee shall resign immediately in the manner and with the effect specified in Section 7.10. SECTION 7.10. Resignation or removal of Trustee. (a) The Trustee, or any trustee hereafter appointed, may at any time resign by giving written notice of such resignation to the Company and to the noteholders, such notice to the noteholders to be given, by mailing (by first-class mail) the notice to their addresses as they shall appear on the registry books of the Company within thirty days after such notice is given to the Company. Upon receiving such notice of resignation and evidence satisfactory to it of such mailing, the Company shall promptly appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors of the Company, one copy of which instrument shall be delivered to the resigning Trustee and one copy to 73 81 the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within thirty days after the mailing of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any noteholder who has been a bona fide holder of a Note or Notes for at least six months may, subject to the provisions of Section 6.08, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (1) the Trustee shall fail to comply with the provisions of subsection (a) of Section 7.08 after written request therefor by the Company or by any noteholder who has been a bona fide holder of a Note or Notes for at least six months, or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 7.09 and shall fail to resign after written request therefor by the Company or by any such noteholder, or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors of the Company, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 6.08, any noteholder who has been a bona fide holder of a Note or Notes for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) Any resignation or removal of the Trustee and appointment of any successor trustee pursuant to any of the provisions of this Section 7.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 7.11. SECTION 7.11. Acceptance by successor to Trustee; notice of succession of a Trustee. Any successor trustee appointed as provided in Section 7.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 7.06, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee of such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 7.06. 74 82 No successor trustee shall accept appointment as provided in this Section 7.11 unless at the time of such acceptance, such successor trustee shall be qualified under the provisions of Section 7.08 and eligible under the provisions of Section 7.09. Upon acceptance of appointment by a successor trustee as provided in this Section 7.11, the Company shall mail to the noteholders by first-class mail notice thereof. If the Company fails to mail such notice within thirty days after acceptance of appointment by the successor trustee, the successor trustee shall, in its discretion, cause such notice to be mailed at the expense of the Company. SECTION 7.12. Successor to Trustee by merger, consolidation or succession to business; notice by Trustee of change in its location. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger or conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding, provided such corporation shall be qualified under the provisions of Section 7.08 and eligible under the provisions of Section 7.09. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Notes 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 Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes 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 Notes in the name of any predecessor Trustee shall apply only to its successor, or successors by merger, conversion or consolidation. The Trustee will give the Company prompt notice of any change in the location of the Trustee's principal office. SECTION 7.13. Limitations on rights of Trustee as a creditor. (a) Subject to the provisions of subsection (b) of this Section 7.13, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Company or of any other obligor on the Notes within three months prior to a default, as defined in subsection (c) of this Section 7.13, or subsequent to such a default, then, unless and until such default shall be cured or waived, the Trustee shall set apart and hold in a special account for the benefit of, the Trustee individually, the holders of the Notes, and the holders of other indenture securities (as defined in subsection (c) of this Section 7.13) (1) an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal or interest, effected after the beginning of such three months' period, and valid as against the Company and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in paragraph (2) of this subsection, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the Company upon the date of such default; and 75 83 (2) all property received by the Trustee in respect of any claims as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such three months' period, or an amount equal to the proceeds of any such property if disposed of, subject, however, to the rights, if any, of the Company and its other creditors in such property or such proceeds. Nothing herein contained, however, shall affect the right of the Trustee (A) to retain for its own account (i) payments made on account of any such claim by any person (other than the Company) who is liable thereon, and (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third person, and (iii) distributions made in cash, securities, or other property in respect of claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to any applicable bankruptcy, insolvency or similar law; (B) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such three months' period; (C) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such three months' period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default, as defined in subsection (c) of this Section 7.13, would occur within three months; or (D) to receive payment on any claim referred to in paragraph (B) or (C), against the release of any property held as security for such claim as provided in such paragraph (B) or (C), as the case may be, to the extent of the fair value of such property. For the purposes of paragraphs (B), (C) and (D) above, property substituted after the beginning of such three months' period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released, and to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any preexisting claim of the Trustee as such creditor, such claim shall have the same status as such preexisting claim. If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned between the Trustee, the noteholders, and the holders of other indenture securities in such manner that the Trustee, the noteholders and the holders of other indenture securities realize, as a result of payments from such special account and payments of dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to applicable law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of receipt by it from the Company of the funds and property in such special account and before crediting to the respective claims of the Trustee, the noteholders, and the holders of other indenture securities dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to applicable law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term "dividends" shall include any distribution with respect to 76 84 such claim in bankruptcy or receivership or in proceedings for reorganization pursuant to applicable law, whether such distribution is made in cash, securities, or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership or proceeding for reorganization is pending shall have jurisdiction (i) to apportion between the Trustee, the noteholders, and the holders of other indenture securities, in accordance with the provisions of this paragraph, the funds and property held in such special account and the proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the provisions of this paragraph due consideration in determining the fairness of the distributions to be made to the Trustee, the noteholders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. Any trustee who has resigned or been removed after the beginning of such three months' period shall be subject to the provisions of this subsection (a) as though such resignation or removal had not occurred. If any trustee has resigned or been removed prior to the beginning of such three months' period, it shall be subject to the provisions of this subsection (a) if and only if the following conditions exist: (i) the receipt of property or reduction of claim which would have given rise to the obligation to account, if such trustee had continued as trustee, occurred after the beginning of such three months' period; and (ii) such receipt of property or reduction of claim occurred within three months after such resignation or removal. (b) There shall be excluded from the operation of subsection (a) of this Section 8.13 a creditor relationship arising from (1) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of one year or more at the time of acquisition by the Trustee; (2) advances authorized by a receivership or bankruptcy court of competent jurisdiction, or by this Indenture, for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advance and of the circumstances surrounding the making thereof is given to the noteholders at the time and in the manner provided in Section 5.04 with respect to reports pursuant to subsections (a) and (b) thereof, respectively; (3) disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, paying agent, fiscal agent or depositary, or other similar capacity; (4) an indebtedness created as a result of services rendered or premises rented; or an indebtedness created as a result of goods or securities sold in a cash transaction as defined in subsection (c) of this Section 7.13; 77 85 (5) the ownership of stock or of other securities of a corporation organized under the provisions of Section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of the Company; or (6) the acquisition, ownership, acceptance or negotiation of any drafts, bills of exchange, acceptances or obligations which fall within the classification of self-liquidating paper as defined in subsection (c) of this Section 7.13. (c) As used in this Section 7.13: (1) the term "default" shall mean any failure to make payment in full of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest upon any of the Notes or upon the other indenture securities when and as any such amounts become due and payable. (2) the term "other indenture securities" shall mean securities upon which the Company is an obligor (as defined in the Trust Indenture Act of 1939) outstanding under any other indenture (A) under which the Trustee is also trustee, (B) which contains provisions substantially similar to the provisions of subsection (a) of this Section 7.13, and (C) under which a default exists at the time of the apportionment of the funds and property held in said special account. (3) the term "cash transaction" shall mean any transaction in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand. (4) the term "self-liquidating paper" shall mean any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Company for the purpose of financing the purchase, processing, manufacture, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or lien upon, the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the security, provided the security is received by the Trustee simultaneously with the creation of the creditor relationship with the Company arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation. (5) the term "Company" shall mean any obligor upon the Notes. ARTICLE EIGHT CONCERNING THE NOTEHOLDERS SECTION 8.01. Evidence of action by noteholders. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Notes may take any action (including the making of any demand or request, the giving of any notice, consent, or waiver or the taking of any other action), the fact that the holders of such specified percentage, determined as of the time such action was taken or, if a record date was set with respect thereto pursuant to Section 8.05, as of such record date, have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by noteholders in person or by agent or proxy appointed in writing, or (b) by the record of the holders of Notes voting in favor thereof at any meeting of noteholders duly 78 86 called and held in accordance with the provisions of Article Nine, or (c) by a combination of such instrument or instruments and any such record of such a meeting of noteholders. SECTION 8.02. Proof of execution of instruments and of holding of Notes. Subject to the provisions of Sections 7.01, 7.02 and 9.05, proof of the execution of any instrument by a noteholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Notes shall be proved by the register of such Notes, or by a certificate of the registrar thereof. The Trustee may accept such other proof or require such additional proof of any matter referred to in this Section 8.02 as it shall deem reasonable. The record of any noteholders' meeting shall be proved in the manner provided in Section 9.06. SECTION 8.03. Who may be deemed owners of Notes. Prior to due presentation for registration of transfer, the Company, the Trustee, any paying agent and any Note registrar may deem and treat the person in whose name any Note shall be registered upon the books of the Company as the absolute owner of such Note (whether or not such Note shall be overdue and notwithstanding any notation of ownership or other writing thereon) for the purposes of receiving payment of or on account of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest on such Note and for all other purposes; and neither the Company nor the Trustee nor any paying agent nor any Note registrar shall be affected by any notice to the contrary. All such payments so made to, or upon the order of, any such holder shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Note. SECTION 8.04. Notes owned by Company or controlled by controlling persons disregarded for certain purposes. In determining whether the holders of the requisite aggregate principal amount of Notes have concurred in any demand, direction, request, notice, consent, waiver or other action under this Indenture, Notes which are owned by the Company or any other obligor on the Notes or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Notes shall be disregarded and deemed not to be outstanding for the purpose of any such determination, provided that for the purposes of determining whether the Trustee shall be protected in relying on any such demand, direction, request, notice, consent or waiver, only Notes which the Trustee knows are so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 8.04, if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Notes and that the pledgee is not a person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 8.05. Record date for action by noteholders. Whenever in this Indenture it is provided that holders of a specified percentage in aggregate principal amount of the Notes may take any action (including the making of any demand or request, the giving of any direction, notice, consent or waiver or the taking of any other action), other than any action taken at a meeting of noteholders called pursuant to Article Nine, the Company, pursuant to a resolution of its Board of Directors, or the holders of at least 10% in aggregate principal amount of the Notes then outstanding, may request the Trustee to fix a record date for determining noteholders entitled to notice of and to take any such action. In case the Company or the holders of Notes in the amount above specified shall desire to request noteholders 79 87 to take any such action and shall request the Trustee to fix a record date with respect thereto by written notice setting forth in reasonable detail the noteholder action to be requested, the Trustee shall promptly (but in any event within five days of receipt of such request) fix a record date which shall be a Business Day not less than fifteen nor more than twenty days after the date on which the Trustee receives such request. If the Trustee shall fail to fix a record date as hereinabove provided, then the Company or the holders of Notes in the amount above specified may fix the same by mailing notice thereof (the record date so fixed to be a Business Day not less than fifteen nor more than twenty days after the date on which such written notice shall be given) to the Trustee. If a record date is fixed according to this Section 8.05, only persons shown as noteholders on the registry books of the Company at the close of business on the record date so fixed shall be entitled to take the requested action and the taking of any such action by the holders on the record date of the required percentage of the aggregate principal amount of the Notes shall be binding on all noteholders, provided that the taking of the requested action by the holders on the record date of the percentage in aggregate principal amount of the Notes specified in this Indenture in connection with such action shall have been evidenced to the Trustee, as provided in Section 8.01, not later than one hundred eighty days after such record date. SECTION 8.06. Instruments executed by noteholders bind future holders. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 8.01, of the taking of any action by the holders of the percentage in aggregate principal amount of the Notes specified in this Indenture in connection with such action, any holder of a Note which is shown by the evidence to be included in the Notes the holders of which have consented to such action may, by filing written notice with the Trustee at its principal office and upon proof of holding as provided in Section 8.02, revoke such action so far as concerns such Note. Except as aforesaid any such action taken by the holder of any Note and any direction, demand, request, waiver, consent, vote or other action of the holder of any Note which by any provisions of this Indenture is required or permitted to be given shall be conclusive and binding upon such holder and upon all future holders and owners of such Note, and of any Note issued in lieu thereof, irrespective of whether or not any notation in regard thereto is made upon such Note. Any action taken by the holders of the percentage in aggregate principal amount of the Notes specified in this Indenture in connection with such action shall be conclusively binding upon the holders of all the Notes. ARTICLE NINE NOTEHOLDERS' MEETINGS SECTION 9.01. Purposes for which meetings may be called. A meeting of noteholders may be called at any time and from time to time pursuant to the provisions of this Article Nine for any of the following purposes: (1) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by noteholders pursuant to any of the provisions of Article Six; (2) to remove the Trustee and appoint a successor trustee pursuant to the provisions of Article Seven; (3) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 10.02; or 80 88 (4) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of the Notes under any other provisions of this Indenture or under applicable law. SECTION 9.02. Manner of calling meetings; record date. The Trustee may at any time call a meeting of noteholders to take any action specified in Section 9.01 to be held at such time and at such place in the Borough of Manhattan, City of New York, State of New York, as the Trustee shall determine. Notice of every meeting of the noteholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting shall be mailed not less than twenty nor more than sixty days prior to the date fixed for the meeting to such noteholders at their addresses as such addresses appear on the registry books of the Company. For the purpose of determining noteholders entitled to notice of any meeting of noteholders, the Trustee shall fix in advance a date as the record date for such determination, such date to be a Business Day not more than ten days prior to the date of the mailing of such notice as hereinabove provided. Only persons in whose name any Note shall be registered upon the registry books of the Company at the close of business on a record date fixed by the Trustee as aforesaid, or by the Company or the noteholders as in Section 9.03 provided, shall be entitled to notice of the meeting of noteholders with respect to which such record date was so fixed. SECTION 9.03. Call of meeting by Company or noteholders. In case at any time the Company, pursuant to a resolution of its Board of Directors, or the holders of at least 10% in aggregate principal amount of the Notes then outstanding, shall have requested the Trustee to call a meeting of noteholders to take any action authorized in Section 9.01 by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed notice of such meeting within twenty days after receipt of such request, then the Company or the holders of Notes in the amount above specified, as the case may be, may fix the record date with respect to, and determine the time and the place in said Borough of Manhattan, City of New York, State of New York, for, such meeting and may call such meeting to take any action authorized in Section 9.01, by mailing notice thereof as provided in Section 9.02. The record date fixed as provided in the preceding sentence shall be set forth in a written notice to the Trustee and shall be a Business Day not less than fifteen nor more than twenty days after the date on which such notice is sent to the Trustee. SECTION 9.04. Who may attend and vote at meetings. Only persons entitled to receive notice of a meeting of noteholders and their respective proxies duly appointed by an instrument in writing shall be entitled to vote at such meeting. The only persons who shall be entitled to be present or to speak at any meeting of noteholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. When a determination of noteholders entitled to vote at any meeting of noteholders has been made as provided in this Section, such determination shall apply to any adjournment thereof. SECTION 9.05. Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of noteholders, in regard to proof of the holding of Notes and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. Except as otherwise permitted or required by any such regulations, the holding of Notes shall be proved in the manner specified in Section 8.02. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by noteholders as provided in Section 9.03, 81 89 in which case the Company or the noteholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by a vote of the holders of a majority in principal amount of the Notes represented at the meeting and entitled to vote. Subject to the provisions of Section 8.04, at any meeting each noteholder or proxy entitled to vote thereat shall be entitled to one vote for each $1,000 principal amount of Notes held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Note challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Notes held by him or instruments in writing as aforesaid duly designating him as the person to vote on behalf of other noteholders. Any meeting of noteholders duly called pursuant to the provisions of Section 9.02 or 9.03 may be adjourned from time to time, and the meeting may be held as so adjourned without further notice. At any meeting of noteholders, the presence of persons who held, or who are acting as proxy for persons who held, an aggregate principal amount of Notes on the record date for such meeting sufficient to take action on the business for the transaction of which such meeting was called shall constitute a quorum, but, if less than a quorum is present, the persons holding or representing a majority in aggregate principal amount of the Notes represented at the meeting may adjourn such meeting with the same effect, for all intents and purposes, as though a quorum had been present. SECTION 9.06. Manner of voting at meetings and record to be kept. The vote upon any resolution submitted to any meeting of noteholders shall be by written ballots on each of which shall be subscribed the signature of the noteholder or proxy casting such ballot, the principal amount and, if practicable, the identifying number or numbers of the Notes held or represented in respect of which such ballot is cast. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of noteholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 9.02. The record shall show the aggregate principal amount and, if practicable, the identifying numbers of the Notes voting in favor of or against any resolution. Each counterpart of such record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the counterparts shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee. Any counterpart record so signed and verified shall be conclusive evidence of the matters therein stated and shall be the record referred to in clause (b) of Section 8.01. SECTION 9.07. Exercise of rights of Trustee and noteholders not to be hindered or delayed. Nothing in this Article Nine shall be deemed or construed to authorize or permit, by reason of any call of a meeting of noteholders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the noteholders under any of the provisions of this Indenture or of the Notes. 82 90 ARTICLE TEN SUPPLEMENTAL INDENTURES SECTION 10.01. Purposes for which supplemental indentures may be entered into without consent of noteholders. The Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall comply with the provisions of the Trust Indenture Act of 1939 as then in effect) for one or more of the following purposes: (a) to comply with Article Eleven and Sections 4.10(c), 4.12(a), 4.12(c) and 15.03; (b) to add to the covenants of the Company such further covenants, restrictions or conditions as its Board of Directors shall consider to be for the protection of the holders of Notes, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default. (c) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture or any supplemental indenture as shall not adversely affect the rights of the holders of the Notes; (d) to provide for the issuance under this Indenture of Notes, whether or not then outstanding, in coupon form (including Notes registrable as to principal only) and to provide for exchangeability of such Notes with Notes issued hereunder in fully registered form and to make all appropriate changes for such purpose; and (e) to comply with the requirements of the New York Stock Exchange or any other national securities exchange on which the Notes may be issued or admitted for trading, provided such changes do not adversely affect the rights of any holder of Notes. The Trustee is hereby authorized to join with the Company in the execution and delivery of any such supplemental indenture, to make any further appropriate agreement and stipulations which may be therein contained and to accept the conveyance, transfer, mortgage, pledge or assignment of, any property thereunder, provided that if any such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. Any supplemental indenture authorized by the provisions of this Section 10.01 may be executed by the Company and the Trustee without the consent of the holders of any of the Notes at the time outstanding, notwithstanding any of the provisions of Section 10.02. SECTION 10.02. Modification of Indenture with consent of holders of a majority in principal amount of Notes. With the consent (evidenced as provided in Section 8.01) of the holders of not less 83 91 than a majority in aggregate principal amount of the Notes at the time outstanding (determined as provided in Sections 8.04 and 8.05), or, if a record date is set with respect to such consent in accordance with Section 8.05, as of such record date, the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall comply with the provisions of the Trust Indenture Act of 1939 as then in effect) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Notes; provided, however, that without the consent of each holder of an outstanding Note affected, no such supplemental indenture shall (i) extend the stated maturity of any Note, reduce the interest rate, extend the time or alter the manner of payment of interest thereon, reduce the principal amount thereof or alter the timing of or reduce any premium payable upon the redemption thereof or the amount payable thereon in the event of acceleration or the amount thereof payable in bankruptcy, or (ii) reduce the aforesaid percentage of aggregate principal amount of Notes, the consent of the holders of which is required for any such supplemental indenture. Upon the request of the Company, accompanied by a copy of a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of noteholders as aforesaid, the Trustee shall join with the Company in the execution and delivery of such supplemental indenture, provided that if such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the noteholders under this Section 10.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution and delivery by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section 10.02, the Company shall mail a notice to the noteholders, setting forth in general terms the substance of such supplemental indenture. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 10.03. Effect of supplemental indentures. Upon the execution and delivery of any supplemental indenture pursuant to the provisions of this Article Ten, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Notes shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 10.04. Notes may bear notation of changes by supplemental indentures. Notes authenticated and delivered after the execution and delivery of any supplemental indenture pursuant to the provisions of this Article Ten, or after any action taken at a noteholders' meeting pursuant to Article Nine, may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture or as to any action taken at any such meeting. If the Company shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Company, to any modification of this Indenture contained in any such supplemental indenture may be prepared by the Company, authenticated by the Trustee and delivered in exchange for the Notes then outstanding upon 84 92 surrender of such Notes. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such supplemental indenture or noteholders' meeting. SECTION 10.05. Officers' Certificate and Opinion of Counsel. The Trustee may receive upon its request and, subject to the provisions of Sections 7.01 and 7.02, may rely upon an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any such indenture complies with the provisions of this Article Ten. ARTICLE ELEVEN CONSOLIDATION, MERGER AND SALE SECTION 11.01. Company may consolidate, etc., on certain terms. (a) Nothing contained in this Indenture or in any of the Notes shall prevent any consolidation or merger of the Company with or into any other corporation or corporations (whether or not affiliated with the Company) or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale or conveyance of all or substantially all the property of the Company to any other corporation (whether or not affiliated with the Company) whether in a single transaction or series of related transactions; provided, however, and the Company hereby covenants and agrees, that any such consolidation, merger, sale or conveyance shall be upon the condition that (i) immediately after giving effect to such consolidation, merger, sale or conveyance, the corporation (whether the Company or such other corporation) formed by or surviving any such consolidation or merger, or to which such sale or conveyance shall have been made, whether the Company or such other corporation (the "surviving corporation"), shall not be in default in the performance or observance of any of the terms, covenants and conditions of this Indenture to be kept or performed by the Company, (ii) the surviving corporation (if other than the Company) shall be a corporation organized under the laws of The United States of America or any State thereof, (iii) immediately after giving effect to such consolidation, merger, sale or conveyance, the surviving corporation (whether the Company or such other corporation) could incur $1.00 of Indebtedness pursuant to Section 4.10(a), (iv) the surviving corporation (if other than the Company) shall expressly assume the due and punctual payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest on all of the Notes, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be performed or observed by the Company, by supplemental indenture complying with the requirements of Article Ten, satisfactory in form to the Trustee, executed and delivered to the Trustee by such corporation and (v) immediately after giving effect to such consolidation, merger, sale or conveyance, the surviving corporation (whether the Company or such other corporation) shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction. If at any time there be any consolidation or merger or sale or conveyance of property to which the covenant of this Section 11.01 is applicable, then, in any such event, the surviving corporation will promptly deliver to the Trustee: (1) an Officers' Certificate stating that as of the time immediately after the effective date of any such transaction the covenants contained in this Section 11.01 have been complied with; and 85 93 (2) an Opinion of Counsel stating that such covenants have been complied with and that any instrument or instruments executed in the performance of such covenants comply with the requirements thereof. (b) Notwithstanding the foregoing Section 11.01(a), (i) the Company may consolidate or merge with or into, or sell or convey all or substantially all of its property to, KAC; provided, however, that the surviving corporation (if other than the Company) shall expressly assume by supplemental indenture complying with the requirements of Article Ten, satisfactory in form to the Trustee, the due and punctual payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest on all of the Notes, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be performed or observed by the Company and (ii) the Company may consolidate or merge with or into, or sell or convey all or substantially all of its property to, a Subsidiary Guarantor; provided, that the surviving corporation (if other than the Company) shall expressly assume by supplemental indenture complying with the requirements of Article Ten, satisfactory in form to the Trustee, the due and punctual payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest on all of the Notes, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be performed or observed by the Company. SECTION 11.02. Successor corporation to be substituted. In case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor corporation, in the manner hereinabove provided, of the due and punctual payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest on all of the Notes and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part and the Company shall be relieved of all its obligations and duties under this Indenture and the Notes. Such successor corporation thereupon may cause to be signed, and may issue either in its own name or in the name of the Company, any or all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor corporation (instead of the Company) and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Notes which previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication, and any Notes which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Notes so issued shall in all respects have the same legal rank and benefit under this Indenture as the Notes theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Notes had been issued at the date of the execution hereof. In case of any such consolidation, merger, sale or conveyance such changes in phraseology and form (but not in substance) may be made in the Notes thereafter to be issued as may be appropriate. SECTION 11.03. Opinion of Counsel. The Trustee, subject to the provisions of Sections 7.01 and 7.02, may receive upon its request and rely on an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale or conveyance, and any such assumption, complies with the provisions of this Article Eleven. 86 94 ARTICLE TWELVE SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS SECTION 12.01. Satisfaction and discharge of Indenture. If at any time (a) the Company shall deliver to the Trustee for cancellation all Notes theretofore authenticated and delivered, other than (1) any Notes which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.07 or (2) any Note for the payment of the principal of which money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 12.04, and not theretofore cancelled, or (b) (1) all the Notes not theretofore cancelled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be or may be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption and (2) the Company has deposited with the Trustee, in trust, money or non- callable Government Securities maturing as to principal and interest in such amounts and at such times as are sufficient (in the opinion of a nationally recognized firm of independent certified accountants expressed in a written certification thereof delivered to the Trustee), without consideration of any reinvestment of such interest, to pay at maturity or upon redemption all of such Notes (other than any Notes which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.07) not theretofore cancelled or delivered to the Trustee for cancellation, including principal, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest due or to become due to such date of maturity or date fixed for redemption, as the case may be, and if in either case the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel complying with Section 14.05 and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture, except for those provisions which expressly survive as provided below; the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses theretofore and thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Notes. Notwithstanding the foregoing, the Company's obligations in Sections 2.05, 2.07, 4.01, 4.02, 4.04, 5.01, 5.02, 7.06, 12.03 and 12.04 shall survive until the Notes are no longer outstanding. Thereafter, only the Company's obligations in Sections 7.06, 12.03 and 12.04 shall survive. After a deposit made pursuant to this Section 12.01, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under the Notes and this Indenture, except for those surviving obligations specified above. SECTION 12.02. Application by Trustee of funds deposited for payment of Notes. All amounts deposited with the Trustee pursuant to Section 12.01 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Company acting as its own paying agent), to the holders of the particular Notes, for the payment or redemption of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest. 87 95 SECTION 12.03. Repayment of moneys held by paying agent. In connection with the satisfaction and discharge of this Indenture, all moneys then held by any paying agent under the provisions of this Indenture shall, upon demand of the Company, be paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such moneys. SECTION 12.04. Repayment of moneys held by Trustee. The Trustee shall promptly pay to the Company upon written request any excess money or securities held by it at any time. Any moneys deposited with the Trustee or any paying agent for the payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest on any Notes and not applied but remaining unclaimed by the holders of Notes for two years after the date upon which such payment shall have become due, shall be promptly repaid (together with any interest earned thereon) to the Company by the Trustee or by such paying agent; and thereupon the Trustee and such paying agent shall be released from all further liability with respect to such moneys, and the holder of any of the Notes entitled to receive such payment shall thereafter look only to the Company for the payment thereof, provided, however, that the Trustee or such paying agent, before being required to make any such repayment, may, at the expense of the Company, mail to the holders of Notes at their last known address or cause to be published once in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, City of New York, State of New York, a notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than thirty days from the date of such mailing or publication, any unclaimed balance of such money then remaining will be paid to the Company. SECTION 12.05. Reinstatement. If the Trustee is unable to apply any money or securities deposited by the Company with the Trustee in accordance with Section 12.01 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, then the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 12.01 until such time as the Trustee is permitted to apply all such money or securities deposited by the Company with the Trustee in accordance with Section 12.01; provided that if the Company has made any payment of principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest on any Notes because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the holders of such Notes to receive such payment from the money or securities deposited by the Company and held by the Trustee. ARTICLE THIRTEEN IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 13.01. Incorporators, stockholders, officers and directors of Company exempt from individual liability. No recourse under or upon any obligation, covenant or agreement of this Indenture or any indenture supplemental hereto or of any Note, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, stockholders, officers or directors, as such, of the Company or of any successor corporation, or any of them, because of the 88 96 creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Notes or implied therefrom; and that any and all such personal liability of every name and nature, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, stockholder, officer or director, as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Notes or implied therefrom are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of such Notes. ARTICLE FOURTEEN MISCELLANEOUS PROVISIONS SECTION 14.01. Successors and assigns of Company bound by Indenture. All the covenants, stipulations, promises and agreements in this Indenture contained by or in behalf of the Company shall bind its successors and assigns, whether so expressed or not. SECTION 14.02. Acts of board, committee or officer of successor corporation valid. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. SECTION 14.03. Required notices or demands may be served by mail; waiver. Any notice or demand which by any provisions of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Notes to or on the Company may be given or served by being deposited postage prepaid (except as provided in Section 6.01(c)) by first class mail in a post office letter box addressed (until another address is filed by the Company with the Trustee for such purpose), as follows: Kaiser Aluminum & Chemical Corporation, 5847 San Felipe, Suite 2600, Houston, Texas 77057, Attention: Secretary. Any notice, direction, request or demand by any noteholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made at the principal office of the Trustee, to the attention of the Corporate Trust Department. Any notice or communication to a noteholder shall be mailed by first-class mail to his address shown on the Company's registry. Failure to mail a notice or communication to a noteholder or any defect in it shall not affect its sufficiency with respect to other noteholders. If a notice or communication is mailed in the manner so provided within the time prescribed, it is duly given, whether or not the addressee receives it. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the person entitled to receive such notice, either before or after the event or action relating thereto, and such waiver shall be equivalent of such notice. Waivers of notice by noteholders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case, by reason of the suspension of regular mail service or as a result of a strike, work stoppage or similar activity, or any act of God or any other cause, it shall be impractical to mail any notice as required by this Indenture, then any manner of giving such notice as shall be made with the approval of the Trustee shall constitute sufficient giving of notice hereunder. 89 97 SECTION 14.04. Indenture and Notes to be construed in accordance with the laws of the State of New York. THIS INDENTURE AND EACH NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE WITHOUT REGARD TO THE PRINCIPLES OF THE CONFLICT OF LAWS PROVISIONS THEREOF. SECTION 14.05. Evidence of compliance with conditions precedent. Upon any demand, request or application by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such demand, request or application as to which the furnishing of such document is specifically required by any provision of this Indenture relating to such particular application or demand, no additional certificate or opinion need be furnished. Each certificate (other than those provided for in Section 5.03(d)) or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or 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 has made such examination or investigation as is necessary to enable him 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 condition or covenant has been complied with. Any certificate, statement or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of or representations by counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous. Any certificate, statement or opinion of counsel may be based, insofar as it relates to factual matters, information with respect to which is in the possession of the Company, upon the certificate, statement or opinion of or representations by an officer or officers of the Company or public officials, unless such counsel knows that the certificate, statement or opinion or representations with respect to the matters upon which his certificate, statements or opinion may be based as aforesaid are erroneous. Any certificate, statement or opinion of an officer of the Company or of counsel may be based, insofar as it relates to accounting matters, upon a certificate or opinion of or representations by an accountant or firm of accountants unless such officer or counsel, as the case may be, knows that the certificate or opinion or representations with respect to the accounting matters upon which his certificate, statement of opinion may be based as aforesaid are erroneous. Any certificate or opinion of any independent firm of public accountants filed with the Trustee shall contain a statement that such firm is independent. SECTION 14.06. Payments due on Saturdays, Sundays and holidays. In any case where the date of payment of principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest on the Notes or the date fixed for redemption or purchase of any Note shall not be a Business Day, then payment of principal, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price or interest need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date of payment or the date fixed for 90 98 redemption or purchase, and no interest shall accrue on or after such original date of payment or such original date fixed for redemption or purchase. SECTION 14.07. Provisions required by Trust Indenture Act of 1939 to control. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by operation of the following sentence, the imposed duties shall control. The provisions of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939 that impose duties on any person (including provisions automatically deemed included in this Indenture unless this Indenture provides that such provisions are excluded) are a part of and govern this Indenture, whether or not physically contained herein. SECTION 14.08. Provisions of the Indenture and Notes for the sole benefit of the parties and the noteholders. Nothing in this Indenture or in the Notes, expressed or implied, shall give or be construed to give any person, firm or corporation, other than the parties hereto and the holders of the Notes, any legal or equitable right, remedy or claim under or in respect of this Indenture, or under any covenant, condition or provision herein contained; all its covenants, conditions and provisions being for the sole benefit of the parties hereto and of the holders of the Notes. SECTION 14.09. Severability. In case any one or more of the provisions contained in this Indenture or in the Notes shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Notes, but this Indenture and such Notes shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. SECTION 14.10. Indenture may be executed in counterparts; acceptance by Trustee. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. First Trust National Association hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. SECTION 14.11. Article and Section headings. The Article and Section references herein and in the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 14.12. No Adverse Interpretation of Other Instruments. This Indenture shall not be used to interpret another indenture, loan or debt agreement of the Company or any Subsidiary or Affiliate of the Company. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. ARTICLE FIFTEEN GUARANTEE OF NOTES SECTION 15.01. Guarantee. Subject to the provisions of this Article Fifteen, each Subsidiary Guarantor, jointly and severally, hereby unconditionally guarantees to each holder of a Note authenticated and delivered by the Trustee (i) the due and punctual payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest on such Note, when and as the same shall become due and payable, whether at maturity, by acceleration or otherwise, the due and punctual payment of interest on the overdue principal of, premium, Change of Control Purchase Price, Asset Sale Purchase Price and interest, if any, on the Notes, to the extent lawful, and the due and punctual performance of all other obligations of the Company to the holders of the Notes or the Trustee all in accordance with the terms of such Note and of this Indenture and (ii) in the case of any extension 91 99 of time of payment or renewal of any Notes or any of such other obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, at stated maturity, by acceleration or otherwise. Each Subsidiary Guarantor hereby agrees that its obligations hereunder shall be absolute and unconditional, irrespective of, and shall be unaffected by, any invalidity, irregularity or unenforceability of any such Note or this Indenture, any failure to enforce the provisions of any such Note or this Indenture, any waiver, modification or indulgence granted to the Company with respect thereto, by the holder of such Note or the Trustee, or any other circumstances which may otherwise constitute a legal or equitable discharge of a surety or guarantor. Each Subsidiary Guarantor hereby waives diligence, presentment, filing of claims with a court in the event of merger or bankruptcy of the Company, any right to require a proceeding first against the Company, the benefit of discussion, protest or notice with respect to any such Note or the indebtedness evidenced thereby and all demands whatsoever, and covenants that this Guarantee will not be discharged as to any such Note except by payment in full of the principal thereof, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Asset and interest thereon or as provided in Sections 12.01, 15.03 and 15.05. Each Subsidiary Guarantor further agrees that, as between such Subsidiary Guarantor, on the one hand, and the holders of Notes and the Trustee, on the other hand, (i) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article Six for the purposes of this Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (ii) in the event of any declaration of acceleration of such obligations as provided in Article Six, such obligations (whether or not due and payable) shall, subject to the other provisions of this Article Fifteen, forthwith become due and payable by such Subsidiary Guarantor for the purpose of this Guarantee. In addition, without limiting the foregoing provisions, upon the effectiveness of an acceleration under Article Six, the Trustee shall promptly make a demand for payment on the Notes under the Guarantee provided for in this Article Fifteen. Each Subsidiary Guarantor shall be subrogated to all rights of the holder of any Notes against the Company in respect of any amounts paid to the holder of Notes by such Subsidiary Guarantor pursuant to the provisions of this Guarantee; provided, that such Subsidiary Guarantor shall not be entitled to enforce, or to receive any payments arising out of or based upon, such right of subrogation until the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest on all Notes shall have been paid in full. SECTION 15.02. Guarantee senior in respect of Subordinated Notes. Each Subsidiary Guarantor, for itself, its successors and assigns, hereby acknowledges that the Guarantee issued hereunder in respect of the Notes shall hereafter constitute for all purposes Senior Indebtedness of such Subsidiary Guarantor under the terms of the Subordinated Note Indenture to the extent that such Subsidiary Guarantor is a guarantor under the Subordinated Note Indenture. SECTION 15.03. Subsidiary Guarantors may consolidate, etc., on certain terms. (a) Notwithstanding any other provision of this Indenture (i) a Subsidiary Guarantor may consolidate or merge with or into, or sell or convey all or substantially all of its property to, the Company, provided, that the surviving corporation (if other than the Company) shall expressly assume by supplemental indenture complying with the requirements of Article Ten, satisfactory in form to the Trustee, the due and punctual payment of the principal of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price and interest on all of the Notes, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be performed or observed by the Company and (ii) a Subsidiary Guarantor may consolidate or merge with or into, or sell or convey all or substantially all of its property to, any other Subsidiary Guarantor. 92 100 (b) Nothing contained in this Indenture or in any of the Notes shall prevent any consolidation or merger of any Subsidiary Guarantor with or into any other corporation or corporations (whether or not affiliated with such Subsidiary Guarantor), or successive consolidations or mergers in which such Subsidiary Guarantor or its successor or successors shall be a party or parties, or shall prevent any sale or conveyance of the property of any Subsidiary Guarantor as an entirety or substantially as an entirety to any other corporation (whether or not affiliated with such Subsidiary Guarantor) authorized to acquire and operate the same, whether in a single transaction or a series of related transactions; provided, however, that each Subsidiary Guarantor hereby covenants and agrees that any such consolidation, merger, sale or conveyance shall be upon the condition that: (i) in the event that the surviving corporation is a Subsidiary of the Company, then (A) such surviving corporation (if other than such Subsidiary Guarantor) shall be a corporation organized under the laws of the United States of America or any State thereof, (B) such surviving corporation (if other than such Subsidiary Guarantor) shall assume the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed by such Subsidiary Guarantor by supplemental indenture complying with the requirements of Article Ten, satisfactory in form to the Trustee, executed and delivered to the Trustee, (C) immediately after giving effect to such consolidation, merger, sale or conveyance, the Company could incur $1.00 of Indebtedness pursuant to Section 4.10(a) and (D) immediately after giving effect to such consolidation, merger, sale or conveyance, the surviving corporation (whether such Subsidiary Guarantor or such other corporation) shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of such Subsidiary Guarantor immediately prior to such transaction; and (ii) in the event that the surviving corporation is not a Subsidiary of the Company, then such consolidation, merger, sale or conveyance shall otherwise have been made in compliance with the terms of this Indenture (including, without limitation, Section 4.14). In the event that the surviving corporation is a Subsidiary of the Company, (I) such Subsidiary Guarantor shall deliver to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such merger, consolidation or transfer and such supplemental indenture comply with this Section 15.03(b) and that all conditions precedent herein provided relating to such transaction have been complied with and (II) in case of any such consolidation, merger, sale or conveyance and upon the assumption by the surviving corporation (if other than such Subsidiary Guarantor), by supplemental indenture executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual performance of all the covenants and conditions of this Indenture to be performed by such Subsidiary Guarantor, such surviving corporation shall succeed to and be substituted for such Subsidiary Guarantor, with the same effect as if it had been named herein as such Subsidiary Guarantor and in the case of any such sale or conveyance, such Subsidiary Guarantor (if not the surviving corporation) shall be relieved of all of its obligations and duties under this Indenture and the Notes. SECTION 15.04. Application of certain terms and provisions to the Subsidiary Guarantors. (a) For purposes of any provision of this Indenture which provides for the delivery by any Subsidiary Guarantor of an Officer's Certificate and/or an Opinion of Counsel, the definitions of such terms in Section 1.01 shall apply to such Subsidiary Guarantor as if references therein to the Company were references to such Subsidiary Guarantor. (b) The Subsidiary Guarantors shall comply with all reporting requirements of Section 5.03 as if references therein to the Company were references to the Subsidiary Guarantors. (c) Any request, direction, order or demand which by any provision of this Indenture is to be made by any Subsidiary Guarantor, shall be sufficient if evidenced as described in Section 7.02 as if references therein to the Company were references to such Subsidiary Guarantor. 93 101 (d) Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Notes to or on any Subsidiary Guarantor may be given or served as described in Section 14.03 as if references therein to the Company were references to such Subsidiary Guarantor. (e) Upon any demand, request or application by any Subsidiary Guarantor to the Trustee to take any action under this Indenture, such Subsidiary Guarantor shall furnish to the Trustee such certificates and opinions as are required in Section 14.05 as if all references therein to the Company were references to such Subsidiary Guarantor. SECTION 15.05. Release of Guarantee. (a) If at any time any Subsidiary Guarantor ceases to be a Bank Guarantor, is not a Subsidiary Guarantor under the Subordinated Note Indenture and no Event of Default (or event or condition which with the giving of notice or the passage of time would be an Event of Default) then exists and is continuing, and either (X) such Subsidiary Guarantor has not Incurred any Indebtedness or preferred stock (including preference stock) after the date hereof that is then outstanding other than Indebtedness Incurred pursuant to Section 4.10(a) (but only to the extent such Indebtedness is also Indebtedness of Alpart), Section 4.10(b)(iii) or Section 4.10(b)(iv) and, in each case, permitted refinancings thereof, or (y) the Notes are then rated Baa3 (or the equivalent) or better by Moody's Investor Services, Inc. (or a successor rating agency) or BBB- (or the equivalent) or better by Standard & Poor's Corporation (or a successor rating agency), then such Person shall cease to be a Subsidiary Guarantor hereunder upon the delivery of the Officers' Certificate and Opinion of Counsel set forth in paragraph (b) of this Section 15.05. Thereafter, the Guarantee given by such Subsidiary Guarantor shall no longer have any force or effect and such Person shall be relieved of all of its obligations and duties under this Indenture and the Notes. (b) Upon any Subsidiary Guarantor ceasing to be a Bank Guarantor, the Company may, at its option, deliver to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such Subsidiary Guarantor is no longer a Bank Guarantor, is not a Subsidiary Guarantor under the Subordinated Note Indenture and that no Event of Default (or event or condition which with the giving of notice or the passage of time would become an Event of Default) exists and is continuing and that all conditions precedent herein provided relating to Section 15.05(a) have been complied with. (c) Upon the sale or disposition (by merger or otherwise, including, without limitation, pursuant to Section 15.03(b)(ii)) of a Subsidiary Guarantor (or the Company's or a Subsidiary's interest therein) by the Company or a Subsidiary of the Company to a Person that is not the Company or a Subsidiary of the Company and which sale or disposition is otherwise in compliance with the terms of this Indenture (including, without limitation, Section 4.14), the obligations of such Subsidiary Guarantor under its Guarantee shall be deemed released without any further action required on the part of the Trustee, such Subsidiary Guarantor, the Company or any holder of the Notes, provided that any guarantee of such Subsidiary Guarantor with respect to the Credit Agreement and the Subordinated Notes, and any renewals, extensions, refundings, replacements, restructurings or refinancings, amendments and modifications thereof, if any, has been or is simultaneously released. At the request of the Company, the Trustee shall execute and deliver an appropriate instrument evidencing such release. (d) Upon the release of any Subsidiary Guarantor from its Guarantee pursuant to any provision of this Indenture, each other Subsidiary Guarantor not so released shall remain liable for the full amount of principal of, and interest on, the Notes as and to the extent provided in this Indenture. 94 102 IN WITNESS WHEREOF, each of KAISER ALUMINUM & CHEMICAL CORPORATION, KAISER ALUMINA AUSTRALIA CORPORATION, ALPART JAMAICA INC., KAISER FINANCE CORPORATION and KAISER JAMAICA CORPORATION has caused this Indenture to be signed and acknowledged by its Chairman of the Board, its President or one of its Vice Presidents, and its corporate seal to be affixed hereunto, and the same to be attested by one of its Vice Presidents; and FIRST TRUST NATIONAL ASSOCIATION has caused this Indenture to be signed and acknowledged by one of its Vice Presidents, has caused its corporate seal to be affixed hereunto, and the same to be attested by one of its Trust Officers, all as of the day and year first written above. KAISER ALUMINUM & CHEMICAL CORPORATION By: ------------------------------------------ Name: Title: [SEAL] Attest: KAISER ALUMINA AUSTRALIA CORPORATION By: ------------------------------------------ Name: Title: [SEAL] Attest: ALPART JAMAICA INC. By: ------------------------------------------ Name: Title: [SEAL] Attest: 95 103 KAISER FINANCE CORPORATION By: ------------------------------------------ Name: Title: [SEAL] Attest: KAISER JAMAICA CORPORATION By: ------------------------------------------ Name: Title: [SEAL] Attest: FIRST TRUST NATIONAL ASSOCIATION as Trustee By: ------------------------------------------ Name: Title: [SEAL] Attest: - ------------------------------------------- Trust Officer 96 104 SCHEDULE A SCHEDULE OF LIENS SECURING INDEBTEDNESS IN EXCESS OF $5,000,000 [To Be Provided By The Company] 97 105 SCHEDULE B REAL PROPERTY CONSTITUTING PERMITTED COLLATERAL [To Be Provided By The Company] 98
   1


                                                                           O'M&M
                                                                           DRAFT
                                                                          2/7/94


                                  $250,000,000


                                CREDIT AGREEMENT


                         dated as of February 15, 1994


                                    between


                    KAISER ALUMINUM & CHEMICAL CORPORATION,

                          KAISER ALUMINUM CORPORATION,



                        CERTAIN FINANCIAL INSTITUTIONS,


                                      and


                       BANKAMERICA BUSINESS CREDIT, INC.,

                                    as Agent
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                               TABLE OF CONTENTS


PAGE ---- I DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.1. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2. Use of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 1.3. Cross-References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 1.4. Accounting and Financial Determinations and Other Terms . . . . . . . . . . . . . . . . 40 II COMMITMENTS AND BORROWING PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 2.1. Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 2.1.1. Revolving Commitment . . . . . . . . . . . . . . . . . . . . . . . . . 41 2.1.2. Swingline Commitment . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.1.4. Borrowing Base Determinations . . . . . . . . . . . . . . . . . . . . 43 2.2. Reduction of Revolving Commitment Amount . . . . . . . . . . . . . . . . . . . . . . . . 44 2.3. Borrowing Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 2.4. Agent's Books and Records; Monthly Statements . . . . . . . . . . . . . . . . . . . . . 46 III REPAYMENTS, PREPAYMENTS, INTEREST, AND FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 3.1. Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 3.2. Voluntary Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 3.3. Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 3.3.1. Prepayment Under, or Cash Collateralization of, Revolving Commitment . . . . . . . . . . . . . . . . . . . . . . . . . 47 3.3.3. Cash Dominion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 3.3.4. Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.4. Interest Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.4.1. Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.4.2. Continuation and Conversion Elections . . . . . . . . . . . . . . . . 51 3.4.3. Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 3.4.4. Default Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 3.4.5. Interest Payment Dates . . . . . . . . . . . . . . . . . . . . . . . . 53 3.4.6. Maximum Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 3.5. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 3.5.1. Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 3.5.2. Audit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 3.5.3. Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 IV CERTAIN LIBO RATE AND OTHER PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 4.1. Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 4.2. Deposits Unavailable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 4.3. Increased Costs, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 4.4. Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 4.5. Increased Capital Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 4.6. Taxes, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 4.7. Payments, Computations, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 4.8. Sharing of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 4.9. Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
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PAGE ---- 4.10. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 4.11. Change of Lending Office, Replacement of Lender, etc . . . . . . . . . . . . . . . . . . 64 4.12. Computation of Additional Amounts Due . . . . . . . . . . . . . . . . . . . . . . . . . 65 V LETTERS OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 5.1. Requests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 5.2. Issuance and Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 5.3. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 5.4. Other Lenders' Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 5.5. Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 5.6. Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 5.7. Mandatory Payment to Agent of Letter of Credit Outstandings . . . . . . . . . . . . . . 70 5.8. L/C Collateral Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 5.8.1. Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 5.8.2. Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 5.8.3. Application of Funds . . . . . . . . . . . . . . . . . . . . . . . . . 71 5.8.4. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 5.9. Nature of Reimbursement Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 72 5.10. Indemnification by Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 VI PARENT GUARANTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 6.1. Parent Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 6.2. Renewal, etc. of Obligations; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . 73 6.3. No Impairment, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 6.4. Reinstatement; Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 VII CONDITIONS TO EXTENSIONS OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 7.1. Initial Credit Extension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 7.1.1. Resolutions, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 7.1.2. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 7.1.3. Payment of Outstanding Indebtedness . . . . . . . . . . . . . . . . . 76 7.1.4. Parent Pledge Agreement . . . . . . . . . . . . . . . . . . . . . . . 76 7.1.5. Company Pledge Agreement . . . . . . . . . . . . . . . . . . . . . . . 77 7.1.6. Security Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 77 7.1.7. Company Trademark Security Agreement; Company Patent Security Agreement . . . . . . . . . . . . . . . . . . 78 7.1.8. Company Mortgages; Company Deeds of Trust . . . . . . . . . . . . . . 78 7.1.9. Subsidiary Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . 79 7.1.10. Subsidiary Pledge Agreement . . . . . . . . . . . . . . . . . . . . . 79 7.1.11. Intercompany Note Pledge Agreement . . . . . . . . . . . . . . . . . . 80 7.1.12. Opinions of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . 80 7.1.13. Closing Fees, Expenses, etc . . . . . . . . . . . . . . . . . . . . . 80 7.1.14. Environmental Reports . . . . . . . . . . . . . . . . . . . . . . . . 80 7.1.15. Investment Account Letter . . . . . . . . . . . . . . . . . . . . . . 81 7.1.16. Sufficient Quantities, etc . . . . . . . . . . . . . . . . . . . . . . 81 7.1.17. Availability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 7.1.18. Issuance of Senior Debt and Equity . . . . . . . . . . . . . . . . . . 81
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PAGE ---- 7.2. All Credit Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 7.2.1. Compliance with Warranties, No Default, etc . . . . . . . . . . . . . 82 7.2.2. Credit Request; Borrowing Base Certificate . . . . . . . . . . . . . . 84 7.2.3. Satisfactory Legal Form . . . . . . . . . . . . . . . . . . . . . . . 84 VIII REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 8.1. Organization, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 8.2. Due Authorization, Non-Contravention, etc . . . . . . . . . . . . . . . . . . . . . . . 85 8.3. Government Approval, Regulation, etc . . . . . . . . . . . . . . . . . . . . . . . . . . 85 8.4. Validity, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 8.5. Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 8.6. No Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 8.7. Absence of Default or Violation of Law . . . . . . . . . . . . . . . . . . . . . . . . . 88 8.8. Litigation, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 8.9. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 8.10. Ownership of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 8.11. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 8.12. Pension and Welfare Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 8.13. Environmental Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 8.14. Regulations G, U, and X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 8.15. Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 8.16. Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 8.17. Accuracy of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 8.18. Joint Venture Contingent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 93 8.19. Mortgaged Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 IX COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 9.1. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 9.1.1. Financial Information, Reports, Notices, etc . . . . . . . . . . . . 94 9.1.2. Compliance with Laws, etc . . . . . . . . . . . . . . . . . . . . . . 97 9.1.3. Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . 97 9.1.4. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 9.1.5. Books and Records; Audits; Confidentiality . . . . . . . . . . . . . . 99 9.1.6. Environmental Covenant . . . . . . . . . . . . . . . . . . . . . . . . 101 9.1.7. Performance of Instruments . . . . . . . . . . . . . . . . . . . . . . 102 9.1.8. Maintenance of Collateral . . . . . . . . . . . . . . . . . . . . . . 102 9.1.9. Collateral Reporting . . . . . . . . . . . . . . . . . . . . . . . . . 103 9.1.10. Delivery; Further Assurances . . . . . . . . . . . . . . . . . . . . . 103 9.1.11. Real Property; Title Policies; Surveys . . . . . . . . . . . . . . . . 106 9.1.12. Intercompany Demand Notes . . . . . . . . . . . . . . . . . . . . . . 107 9.2. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 9.2.1. Business Activities . . . . . . . . . . . . . . . . . . . . . . . . . 107 9.2.2. Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 9.2.3. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 9.2.4. Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . 114 9.2.5. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
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PAGE ---- 9.2.6. Restricted Payments, etc . . . . . . . . . . . . . . . . . . . . . . . 117 9.2.7. Capital Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . 120 9.2.8. Rental Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 121 9.2.9. Take or Pay Contracts . . . . . . . . . . . . . . . . . . . . . . . . 121 9.2.10. Consolidation, Merger, etc . . . . . . . . . . . . . . . . . . . . . . 121 9.2.11. Asset Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . 122 9.2.12. Sale or Discount of Receivables . . . . . . . . . . . . . . . . . . . 123 9.2.13. Restrictions on Actions under Certain Agreements . . . . . . . . . . . 124 9.2.14. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . 125 9.2.15. Negative Pledges, etc . . . . . . . . . . . . . . . . . . . . . . . . 126 9.2.16. Sale-Leaseback Transactions . . . . . . . . . . . . . . . . . . . . . 126 9.2.17. Change of Location or Name . . . . . . . . . . . . . . . . . . . . . . 127 9.2.18. Intercompany Transfers of Property . . . . . . . . . . . . . . . . . . 127 9.2.19. Inconsistent Agreements . . . . . . . . . . . . . . . . . . . . . . . 128 X EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 10.1. Listing of Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 10.1.1. Non-Payment of Obligations . . . . . . . . . . . . . . . . . . . . . . 129 10.1.2. Breach of Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . 129 10.1.3. Non-Performance of Certain Covenants and Obligations . . . . . . . . . 129 10.1.4. Non-Performance of Certain Covenants and Obligations . . . . . . . . . 129 10.1.5. Non-Performance of Other Covenants and Obligations . . . . . . . . . . 130 10.1.6. Default on Other Indebtedness . . . . . . . . . . . . . . . . . . . . 130 10.1.7. Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 10.1.8. Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 10.1.9. Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . 131 10.1.10. Bankruptcy, Insolvency, etc . . . . . . . . . . . . . . . . . . . . . 131 10.1.11. Subordinated Debt and Senior Debt . . . . . . . . . . . . . . . . . . 132 10.1.12. Impairment of Certain Documents . . . . . . . . . . . . . . . . . . . 132 10.2. Action if Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 10.3. Action if Other Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 XI THE ADMINISTRATIVE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 11.1. Appointment; Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 11.2. Funding Reliance, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 11.3. Exculpation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 11.4. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 11.5. Credit Extensions by the Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 11.6. Credit Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 11.7. Copies, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 11.8. Designation of Additional Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 11.9. Certain Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 11.10. Approval of Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 XII MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 12.1. Waivers, Amendments, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 12.2. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
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