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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 19981999
Commission file number 1-9447
KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3030279
(State of Incorporation) (I.R.S. Employer Identification No.)
5847 SAN FELIPE, SUITE 2600, HOUSTON, TEXAS 77057-3010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 267-
3777267-3777
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, $.01 par value New York Stock Exchange
value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X NoNO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
As of March 23, 1999,January 28, 2000, there were 79,153,54379,405,333 shares of the Common Stock of the
registrant outstanding. Based upon the New York Stock Exchange closing price on
March 23, 1999,January 28, 2000, the aggregate market value of the registrant's Common Stock
held by non-
affiliatesnon-affiliates was $143.7$183.1 million.
Certain portions of the registrant's annual report to
shareholders for the fiscal year ended December 31, 1998, are
incorporated by reference into Parts I, II, and IV of this Report
on Form 10-K.
Certain portions of the registrant's definitive proxy statement to be filed not
later than 120 days after the close of the registrant's fiscal year are
incorporated by reference into Part III of this Report on Form 10-K.
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2
NOTE
Kaiser Aluminum Corporation's Report on Form 10-K filed with the Securities and
Exchange Commission includes all exhibits required to be filed with the Report.
Copies of this Report on Form 10-K, including only Exhibit 21 of the exhibits
listed on pages 2369 - 2875 of this Report, are available without charge upon
written request. The registrant will furnish copies of the other exhibits to
this Report on Form 10-K upon payment of a fee of 25 cents per page. Please
contact the office set forth below to request copies of this Report on Form 10-K
and for information as to the number of pages contained in each of the other exhibits
and to request copies of such exhibits:
Corporate Secretary
Kaiser Aluminum Corporation
5847 San Felipe, Suite 2600
Houston, Texas 77057
(713) 267-3777
(i)
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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TABLE OF CONTENTS
Page
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PART I 1
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 14
PART II 14
Page
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PART I........................................................................................................ 1
ITEM 1. BUSINESS.................................................................................... 1
ITEM 2. PROPERTIES.................................................................................. 15
ITEM 3. LEGAL PROCEEDINGS........................................................................... 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 17
PART II....................................................................................................... 17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................................................... 17
ITEM 6. SELECTED FINANCIAL DATA..................................................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................................... 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................. 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................. 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................................................... 61
PART III...................................................................................................... 61
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................... 61
ITEM 11. EXECUTIVE COMPENSATION...................................................................... 61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................................................ 61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................. 61
PART IV....................................................................................................... 61
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K....................................................................... 61
SCHEDULE I ............................................................................................ 64
SIGNATURES ............................................................................................ 68
INDEX OF EXHIBITS............................................................................................. 69
EXHIBIT 21 SUBSIDIARIES................................................................................ 76
(ii)
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KAISER ALUMINUM CORPORATION AND RELATED STOCKHOLDER MATTERS 14
ITEM 6. SELECTED FINANCIAL DATA 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 16
PART III 16
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 16
ITEM 11. EXECUTIVE COMPENSATION 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
16
PART IV 16
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 16
SCHEDULE I 18
SIGNATURES 22
INDEX OF EXHIBITS 23
EXHIBIT 21 SUBSIDIARIES 29
(ii)SUBSIDIARY COMPANIES
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K (the "Report") contains statements which
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Report (see, for example, Item 1. "Business - Incident at
Gramercy Facility,"" - Strategic Initiatives," " - Business Operations," " -
Competition," " - Research and Development," " - Environmental Matters," and " -
Factors Affecting Future Performance," Item 3. "Legal Proceedings," and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"). Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will," "should,"
"plans" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. Readers are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties, and that actual
results may vary materially from those in the forward-looking statements as a
result of various factors. These factors include the effectiveness of
management's strategies and decisions, general economic and business conditions,
developments in technology, new or modified statutory or regulatory
requirements, and changing prices and market conditions. This
Report and the financial portion of the Company's 1998 Annual
Report to Shareholders (see Items 6 through 8Certain sections of
this Report)Report identify other factors that could cause differences between such
differences.forward-looking statements and actual results. No assurance can be given that
these are all of the factors that could cause actual results to vary materially
from the forward-
lookingforward-looking statements.
General
Kaiser Aluminum Corporation (the "Company"), a Delaware corporation organized in
1987, is a subsidiary of MAXXAM Inc. ("MAXXAM"). MAXXAM and one of its
wholly-owned subsidiaries together own approximately 63% of the Company's Common
Stock, with the remaining approximately 37% publicly held. The Company, through
its wholly-owned subsidiary, Kaiser Aluminum & Chemical 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 from alumina, and the manufacture of fabricated (including
semi-fabricated) aluminum products. In addition to the production utilized by
KACC in its operations, KACC sells significant amounts of alumina and primary
aluminum in domestic and international markets. In 1998,1999, KACC produced
approximately 2,964,000 tons*2,524,000 tons[1] of alumina, of which approximately 76%83% was sold
to third parties, and produced approximately 387,000426,400 tons of primary aluminum,
of which approximately 68%62% was sold to third parties. KACC is also a
major domestic supplier of fabricated aluminum products. In 1998,1999, KACC shipped
approximately 405,000389,000 tons of fabricated aluminum products to third parties,
which accounted for approximately 5% of total United States domestic shipments.
The Company's operations are conducted through KACC's business units. The
following table sets forth total shipments and intersegment transfers of KACC's
alumina, primary aluminum, and fabricated aluminum operations:
-----------
*
Year Ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
(in thousands of tons)
ALUMINA: (1)
Shipments to Third Parties 2,093.9 2,250.0 1,929.8
Intersegment Transfers 757.3 750.7 968.0
-------- -------- --------
PRIMARY ALUMINUM: 2,851.2 3,000.7 2,897.8
-------- -------- --------
Shipments to Third Parties 295.6 263.2 327.9
Intersegment Transfers 171.2 162.8 164.2
-------- -------- --------
466.8 426.0 492.1
-------- -------- --------
FLAT-ROLLED PRODUCTS 217.9 235.6 247.9
ENGINEERED PRODUCTS 171.1 169.4 152.1
(1) As a result of the explosion at the Gramercy alumina refinery in July 1999,
which completely curtailed production ("the Gramercy incident"), shipments
to third parties and intersegment transfers for 1999 include approximately
264,000 tons of
- ----------------
[1] All references to tons in this Report refer to metric tons of
2,204.6 pounds.
Year Ended December 31,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(in thousands of tons)
ALUMINA:
Shipments to Third Parties 2,250.0 1,929.8 2,073.7
Intersegment Transfers 750.7 968.0 912.4
-------------- -------------- --------------
3,000.7 2,897.8 2,986.1
-------------- -------------- --------------
PRIMARY ALUMINUM:
Shipments to Third Parties 263.2 327.9 355.6
Intersegment Transfers 162.8 164.2 128.3
-------------- -------------- --------------
426.0 492.1 483.9
-------------- -------------- --------------
FLAT-ROLLED PRODUCTS: 235.6 247.9 204.8
ENGINEERED PRODUCTS: 169.4 152.1 122.3
1
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 1. BUSINESS (CONTINUED)
alumina purchased and resold to certain unaffiliated customers and 131,000
tons of alumina purchased and transferred to the Company's primary aluminum
business unit. See Note 112 of Notes to Consolidated Financial Statements containedfor
additional information regarding the impact of the Gramercy incident.
See Note 12 of Notes to Consolidated Financial Statements for segment and
geographical financial information.
Incident at Gramercy Facility
On July 5, 1999, KACC's Gramercy, Louisiana alumina refinery was extensively
damaged by an explosion in the digestion area of the plant. Twenty-four
employees were injured in the incident, several of them severely. As a result of
the incident, alumina production at the facility was completely curtailed.
Production at the plant is currently expected to remain completely curtailed
until the third quarter of 2000 when KACC expects to begin partial production.
Based on current estimates, full production is expected to be achieved during
the first quarter of 2001 or shortly thereafter. KACC has received the
regulatory permit required to operate the plant once the facility is ready to
resume production. In the interim, KACC is purchasing alumina from third
parties, in excess of the amounts of alumina available from other KACC-owned
facilities, to supply major customers' needs and to meet intersegment
requirements.
The cause of the incident is under investigation by KACC and governmental
agencies. In January 2000, the U.S. Mine Safety and Health Administration
("MSHA") issued 21 citations in connection with its investigation of the
incident. The citations allege, among other things, that certain aspects of the
plant's operations were unsafe and that such mode of operation contributed to
the explosion. To date, no monetary penalty has been proposed by MSHA. Although
the Company expects that a fine will be levied, the Company cannot predict the
amount of any such fine(s). It is possible that other civil or criminal fines or
penalties could be levied against KACC. KACC has previously announced that it
disagrees with the substance of the citations and has challenged them. However,
as more fully explained below, based on what is known to date and discussions
with the Company's 1998 Annual Reportadvisors, the Company believes that the financial impact of
this incident (in excess of insurance deductibles and self-retention provisions)
will be largely offset by insurance coverage. Deductibles and self-retention
provisions under the insurance coverage for the incident total $5.0 million,
which amounts have been charged to Shareholders (the "Annual
Report")Cost of products sold in 1999.
As of December 31, 1999, the Company had recorded estimated recoveries for
clean-up, site preparation and business interruption costs incurred of
approximately $55.0 million. As of December 31, 1999, approximately $50.0
million of insurance recoveries had been received. Additionally through February
29, 2000, KACC had received approximately $25.0 million of additional insurance
recoveries. Also, based on discussions with the insurance carriers and their
representatives and third party engineering reports, KACC recorded a pretax gain
of $85.0 million, representing the difference between the minimum expected
property damage reimbursement amount and the net carrying value of the damaged
property of $15.0 million. KACC continues to work with the insurance carriers to
maximize the amount of recoveries and to minimize, to the extent possible, the
period of time between when KACC expends funds and when it is incorporated herein by reference.reimbursed.
However, KACC will likely have to fund an average of 30 - 60 days of property
damage and business interruption activity, unless some other arrangement is
agreed with the insurance carriers, and such amounts will be significant. The
Company believes it has sufficient financial resources to fund the construction
and business interruption costs on an interim basis. However, no assurances can
be given in this regard. If insurance recoveries were to be delayed or if there
were to be other significant uses of KACC's existing Credit Agreement capacity,
delays in the rebuilding of the Gramercy refinery could occur and could have a
material adverse impact on the Company's and KACC's liquidity and operating
results.
See Note 2 of Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financing Activities and Liquidity" for more detailed information regarding the
impacts of the Gramercy incident.
Labor Matters
Substantially all of KACC's hourly workforce at the Gramercy, Louisiana, alumina
refinery, Mead and Tacoma, Washington, aluminum smelters, Trentwood, Washington,
rolling mill, and Newark, Ohio, extrusion facility were covered by a master
labor agreement with the United Steelworkers of America (the "USWA") which
expired on September 30, 1998. The parties did not reach an agreement prior to
the expiration of the master agreement and the USWA chose to strike. In January
1999, KACC declined an offer by the USWA to have the striking workers return to
work at the five plants without a new agreement. KACC imposed a lock-out to
support its bargaining position and continues to operate the plants with
salaried employees and other workers as it has since the strike began.
Based on operating results to date, the
Company believes that a significant business interruption will
not occur.
As a result of the USWA strike, KACC temporarily curtailed
three out of a total of eleven potlines at its Mead and Tacoma,
Washington, aluminum smelters at September 30, 1998. The
curtailed potlines represent approximately 70,000 tons of annual
production capacity out of a total combined production capacity
of 273,000 tons per year at the facilities. In February 1999,
KACC began restarting the two curtailed potlines at its Mead
smelter representing approximately 50,000 tons of the previously
idle capacity. KACC has also announced that it has completed
preparations to restart 20,000 tons of idle capacity at its
Tacoma smelter. However, the timing for any restart of the
Tacoma potline has yet to be determined and will depend upon
market conditions and other factors. Costs associated with the
preparation and restart of the potlines at the Mead and Tacoma
facilities are expected to adversely affect the Company's first
quarter results.2
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 1. BUSINESS (CONTINUED)
While the Company initially experienced an adverse strike-related impact on its
profitability, in the fourth quarter of 1998, the Company currently believes that KACC's operations at the
affected facilities, excluding the Gramercy facility (see "- Incident at
Gramercy Facility" above), have been substantially stabilized and will be able
to run at, or near, full capacity, and that the incremental costs associated
with operating the affected plants during the dispute were virtually eliminated
or substantially reduced as of Januaryin early 1999 (excluding the impacts of the restart costs discussed above and the effect of
market factors such as the continued market-relatedpartial curtailment at the Tacoma smelter)smelter
(see " - Business Operations - Primary Aluminum Business Unit" in this Report).
However, no assurances can be given that KACC's efforts to run the plants on a
sustained basis, without a significant business interruption or material adverse
impact on the Company's operating results, will be successful.
Further, the Company believes that charges of unfair labor practices made
against KACC by the USWA are without merit. See Note 10 of Notes to Consolidated
Financial Statements.
KACC and the USWA continue to communicate. The objective of KACC has been, and
continues to be, to negotiate a fair labor contract that is consistent with its
business strategy and the commercial realities of the marketplace.
See Note 1 of Notes to Consolidated Financial Statements, "- Labor Related
Costs," and Note 910 of Notes to Consolidated Financial Statements, "- Labor Matters"
in the Annual Report.
Strategic Initiatives
KACC's strategic objectives include the improvement of the
earnings from its existing businesses; the redeployment of its
existing investment in assets that are not strategically
essential to continued profit growth; the addition of assets to
its growth businesses; and the improvement of its financial
structure.
In 1996, the Company set a goal of achieving $120.0 million of
pre-tax cost reductions and other profit improvements,
independent of metal price changes, with the full effect planned
to be realized in 1998 and beyond, measured against 1996 results.
The Company believes that KACC's operations had achieved the run
rate necessary to meet this objective prior to the end of the
third quarter of 1998, when the impact of such items as smelter
operating levels, the USWA strike and foreign currency changes
are excluded from the analysis. Further, the Company believes
that KACC has implemented the steps that will allow it to sustain
the stated goal over the long term. The Company remains
committed to sustaining the full $120.0 million improvement and
to generating additional profit improvements in future years;
however, no assurances can be given that the Company will be
successful in this regard. See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Labor Matters, -Matters" for additional information with respect to the USWA
dispute.
Strategic Initiatives
and - Valco Operating Level",
and Note 1 of Notes to Consolidated Financial Statements "- Labor
Related Costs" in the Annual Report.
In addition to workingKACC's strategy is to improve its financial results by: increasing the
performancecompetitiveness of its existing plants; continuing its cost reduction
initiatives; adding assets to businesses it expects to grow; pursuing
divestitures of non-core businesses; and strengthening its financial position.
In 1999, KACC completed the acquisition of the Company's existing assets,remaining 45% interest in Kaiser
LaRoche Hydrate Partners ("KLHP"), an alumina marketing venture, for a purchase
price of approximately $10.0 million and the Company has devoted significant
efforts analyzingsale of its existing asset portfolio with the intent of
focusing50% interest in AKW L.
P. ("AKW") to its efforts and capital in sectors of the industry that
are considered most attractive, and in which the Company believes
it is well positioned to capture value.partner for $70.4 million. The initial steps of
thisstrategic analysis process also
resulted in the June 1997 acquisition of the
Bellwood extrusion facility, the May 1997 formation of AKW L.P.
("AKW"), a joint venture that designs, manufacturesCompany's agreement in January 2000 to sell KACC's Micromill(TM)
assets and sells
heavy duty aluminum wheels, the rationalization of certain of the
Company's engineered products operations, and the Company's
investment to expand its capacity for heat treat flat-rolled
products at its Trentwood, Washington, rolling mill. The
restructuring activities resulted in the Company recording a net
pre-tax charge of $19.7 million in June 1997.technology. See Notes 3 and 4 of Notes to Consolidated Financial
Statements infor information on the Annual
Report.
The portfolio analysis process also resulted in the Company's
fourth quarter 1998 decision to seek a strategic partner for
further developmentAKW and deployment of KACC's Micromill(TM)
technology. While technological progress has been good,
management concluded that additional time and investment would be
required for success. Given the Company's other strategic
priorities, the Company believes that introducing added
commercial and financial resources is the appropriate course of
action for capturing the maximum long term value. This change in
strategic course required a different accounting treatment, and
the Company correspondingly recorded a $45.0 million impairment
charge to reduce the carrying value of the Micromill assets to
approximately $25.0 million. See Note 3 of Notes to Consolidated
Financial Statements in the Annual Report.sales.
Another area of emphasis has been a continuing focus on managing the Company's
legacy liabilities. One element of this processThe Company believes that KACC has been actively pursuing claims in respect of insurance coverage
foravailable to recover certain incurred and future environmental costs.costs and a
substantial portion of its asbestos-related costs and is actively pursuing
claims in this regard. During the fourth quarter of 1998, KACC received recoveries totaling
approximately $35.0 million from certain of its insurers related to current and
future environmental claims. The timing and amount of future recoveries of
asbestos-related claims against certainfrom insurance carriers remains a major priority of the
Company, but will depend on the pace of claims review and processing by such
carriers and the resolution of any disputes regarding coverage under the
insurance policies that may arise. However, during 1999, KACC reached
preliminary agreements under which it expects to collect a substantial portion
of its insurers. Recoveries of
$12.0 million were deemed to be allocable to previously accrued
(expensed) items and were reflected in earnings during the fourth
quarter of 1998. The remaining recoveries were offset against
increases in the total amount of environmental reserves. No
assurances can be given that the Company will be successful in
other attempts to recover incurred or future costs2000 expected asbestos-related payments from other
insurers or that the amount of any recoveries received will
ultimately be adequate to cover costs incurred.certain insurance carriers.
See Note 910 of Notes to Consolidated Financial Statements infor additional
information regarding the Annual Report.
In early 1999, the Company's program to focus its effortslegacy liabilities and capital in sectors of the industry which it considers to be the
most attractive, and in which the Company believes it is well
positioned to capture value, has resulted in an agreement to sell
one joint venture interest and a separate agreement to purchase
another. In January 1999, KACC signed a letter of intent to sell
its 50% interest in AKW to its joint venture partner. The
transaction, which would result in the Company recognizing a
substantial gain, is currently expected to close on or about
March 31, 1999. However, as the transaction is subject to
negotiation of a definitive purchase agreement, no assurances can
be given that this transaction will be consummated. Also, in
February 1999, KACC completed the acquisition of the remaining
45% interest in Kaiser LaRoche Hydrate Partners, an alumina
marketing venture, from its joint venture partner for a cash
purchase price of approximately $10.0 million. See Note 12 of
Notes to Consolidated Financial Statements in the Annual Report.
Additional portfolio analysis and initiatives are continuing.related insurance coverages.
Sensitivity to Prices and Hedging Programs
The Company's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree upon the volume and mix of all products sold and on KACC's hedging strategies.sold. Primary
aluminum prices have historically been subject to significant cyclical
fluctuations. Alumina prices, as well as fabricated aluminum product prices
(which vary considerably among products), are significantly influenced by
changes in the price of primary aluminum and generally lag behind primary
aluminum prices.prices by up to three months. In addition, the Company's operations are
exposed to risks from fluctuating energy prices for fuels used in the production
process and from foreign currency movements in respect of material cash
commitments to foreign subsidiaries and affiliates. From time to time in the
ordinary course of business, KACC enters into
3
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 1. BUSINESS (CONTINUED)
hedging transactions to provide price risk management in respect of its net exposure
resulting from (i)
anticipated sales of alumina, primary aluminum,earnings and fabricated
aluminum products, less (ii) expected purchases ofcash flow related to the above items. While such hedging
activities typically are designed to provide protection against unfavorable
price charges, they can, in certain items,
such as aluminum scrap, rolling ingot, and bauxite, whose prices
fluctuate withcircumstances, limit the price of primary aluminum. Forward sales
contracts are used by KACC to lock-in or fix the effective price
that KACC will receive for its sales. KACC also uses option
contracts (i) to establish a minimum price for its product sales,
(ii) to establish a "collar" or range of prices for its
anticipated sales, and/or (iii) to permit KACCCompany's ability
to realize possible upsidefavorable price movements.changes and can also impact the Company's liquidity.
See Note 1 of Notes to Consolidated Financial Statements, " - Derivative
Financial Instruments," Note 11 of Notes to Consolidated Financial Statements
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market-related Factors"Financial Activities and Note 1 - "Derivative Financial
Instruments" and Note 10 of Notes to Consolidated Financial
Statements in the Annual Report.Liquidity," for additional information.
Business Operations
KACC conducts its business through four main business units, each of which is
discussed below.
-o Alumina Business Unit
The following table lists KACC's bauxite mining and alumina refining facilities
as of December 31, 1998:1999:
Annual
Production Total
Capacity Annual
Company Available to Production
Activity Facility Location Ownership the Company Capacity
- -------- -------- -------- --------- ------------ ---------- -------------- -------------- -------------- ---------------- --------------
(tons) (tons)
Bauxite Mining KJBC(1)KJBC Jamaica 49.0% 4,500,000 4,500,000
Alpart(2)Alpart(1) Jamaica 65.0% 2,275,000 3,500,000
-------------- ----------------------- ---------
6,775,000 8,000,000
============== ======================= =========
Alumina Refining GramercyGramercy(2) Louisiana 100.0% 1,050,000 1,050,0001,075,000 1,075,000
Alpart Jamaica 65.0% 942,500 1,450,000
QAL Australia 28.3% 1,032,950 3,650,000
-------------- --------------
3,025,450 6,150,000
============== ==============--------- ---------
3,050,450 6,175,000
========= =========
--------------- ------------
(1) Although KACC owns 49% of Kaiser Jamaica Bauxite Company
("KJBC"), it has the right to receive all of KJBC's output.
(2) Alumina Partners of Jamaica ("Alpart") bauxite is refined into alumina
at the Alpart refinery.
KACC's principal customers for bauxite and alumina consist of
other aluminum producers that purchase bauxite and
smelter-grade alumina, trading intermediaries who resell raw
materials to end-users, and users of chemical-grade alumina. The
Company believes that among alumina producers(2) Production is currently completely curtailed. See discussion below.
KACC is the world's
second largest sellera major producer of smelter-grade alumina to third parties.and sells significant amounts of its alumina
production in domestic and international markets. KACC's strategy is to sell a
substantial portion of the alumina available to it in excess of its internal
smelting requirements under multi-year sales contracts with prices linked to the
price of primary aluminum. See "- Competition" and "- Sensitivity to Prices and
Hedging Programs" in this Report.
Bauxite mined in Jamaica by KJBC is refined into alumina at
KACC's plant at Gramercy, Louisiana, or is sold to third parties.
In 1979, theThe Government of Jamaica has granted KACC a mining lease for the mining of
bauxite sufficient to supplywhich will, at a minimum, satisfy the bauxite requirements of KACC's
then-existingGramercy, Louisiana alumina refineriesrefinery so that it will be able to produce at their annual
capacitiesits
current rated capacity until 2020. Kaiser Jamaica Bauxite Company ("KJBC") mines
bauxite from the land which is subject to the mining lease as an agent for KACC.
Although KACC owns 49% of 1,656,000 tons perKJBC, it is entitled to, and generally takes, all of
its bauxite output. A substantial majority of the bauxite mined by KJBC is
refined into alumina at the Gramercy facility and the remainder is sold to a
third party. KJBC's operations have been impacted by the Gramercy incident.
Subject to the rebuilding of the Gramercy facility with a double digest bauxite
system, the Government of Jamaica has recently agreed to grant KACC an
additional bauxite mining lease. The new mining lease will be effective upon the
expiration of the current lease in 2020 and will enable the Gramercy facility to
produce at its rated capacity for an additional ten year until January 31, 2020.period. See Note 2 of
Notes to Consolidated Financial Statements for a detailed discussion of the
Gramercy incident.
4
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS (CONTINUED)
Alumina fromproduced by the Gramercy plant is primarily sold to third parties.parties but a
portion is used by KACC in its operations. Production at the Gramercy refinery
is currently completely curtailed as it was extensively damaged by an explosion
in the digestion area of the plant in July 1999. Production at the plant is
currently expected to remain curtailed until the third quarter of 2000 when
partial production is expected to begin. Based on current estimates, full
production is expected to be achieved during the first quarter of 2001 or
shortly thereafter. In the interim, KACC is purchasing alumina from third
parties, in excess of the amounts of alumina available from other KACC-owned
facilities, to supply major customers' needs as well as to meet intersegment
requirements. The Company believes that the cost to rebuild the Gramercy
Louisiana,facility and the adverse impact of the incident on operations will be largely
offset by insurance coverage. See Note 2 of Notes to Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financing Activities and Liquidity" for additional
information regarding the impacts of the Gramercy incident. Also, the Gramercy
refinery is one of the five KACC plants which is subject to the continuing USWA
dispute. See "-Labor
Matters" in this Report, and "Management's Discussion and
AnalysisNote 10 of Notes to Consolidated Financial Condition and Results of Operations -Statements, "- Labor
Matters" infor a discussion of the Annual Report.labor dispute.
In February 1999, KACC, through a subsidiary, purchased its partner's 45%
interest in Kaiser LaRoche Hydrate Partners,KLHP, a partnership which markets chemical-gradechemical grade alumina
manufactured byat KACC's Gramercy facility. These products areSee "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview - Strategic
Initiatives" for additional information. Chemical grade alumina is sold at a
premium price over smelter-gradesmelter grade alumina, and this acquisition will permit KACC
to expand its market position in this business in North America. See "Management's Discussion and AnalysisHowever, these
operations have been impacted by the Gramercy incident. KACC has entered into
the necessary arrangements to allow it to supply a significant portion of Financial Condition and Results of Operations - Strategic
Initiatives"its
customers' chemical grade alumina needs. The Company believes that any
incremental costs incurred in the Annual Report.connection with such arrangements, as well as lost
profits, will be substantially covered by KACC's insurance.
Alpart holds bauxite reserves and owns a 1,450,000 ton per year alumina plant
located in Jamaica. KACC owns a 65% interest in Alpart, and Hydro Aluminium Jamaica a.s
("Hydro") owns the remaining 35% interest. KACC has management responsibility
for the facility on a fee basis. KACC and Hydro have agreed to be responsible
for their proportionate shares of Alpart's costs and expenses. The Government of
Jamaica has granted Alpart a mining lease and has entered into other agreements
with Alpart designed to assure that sufficient reserves of bauxite will be
available to Alpart to operate its refinery, as it may be expanded up to a
capacity of 2,000,000 tons per year, through the year 2024.
In 1999, Alpart and JAMALCO, a joint venture between affiliates of Alcoa Inc.
and the governmentGovernment of Jamaica, reached an
agreementagreed to form a joint venture bauxite mining operation tojoint
venture that will consolidate their bauxite mining operations in Jamaica, with
the objective of optimizing mining operating and capital costs. The transaction is subject to various conditions. Subject to
satisfaction of those conditions, the joint
venture is expectedagreement also grants Alpart certain rights to acquire bauxite mined
from JAMALCO's reserves. The joint venture will commence operations duringin the second halffirst
quarter of 1999.2000.
KACC owns a 28.3% interest in Queensland Alumina Limited ("QAL"), which owns the
largest and one of the most competitive alumina refineries in the world, located
in Queensland, Australia. QAL refines bauxite into alumina, essentially on a
cost basis, for the account of its stockholdersshareholders under long-term tolling
contracts. The stockholders,shareholders, including KACC, purchase bauxite from another QAL
stockholdershareholder under long-term supply contracts. KACC has contracted with QAL to
take approximately 792,000868,000 tons per year of capacityalumina or pay standby charges. KACC
is unconditionally obligated to pay amounts calculated to service its share
($97.6103.6 million at December 31, 1998)1999) of certain debt of QAL, as well as other
QAL costs and expenses, including bauxite shipping costs.
In 1999, KACC sold alumina in 1998 to approximately 2021 customers, the largest and top
five of which accounted for approximately 19%23% and 67%72% of suchnet sales,
respectively. All of KACC's third-party sales of bauxite in 19981999 were made to
one customer, which representssales represent approximately 6%7% of total bauxite and
alumina third party revenues.net sales. KACC's principal customers for bauxite and
alumina consist of other aluminum producers that purchase bauxite and smelter
grade alumina, trading intermediaries who resell raw materials to end-users, and
users of chemical grade alumina.
5
9
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS (CONTINUED)
o Primary Aluminum Business Unit
The following table lists KACC's primary aluminum smelting facilities as of
December 31, 1998:1999:
Annual Rated Total 19981999
Capacity Annual Average
Company Available to Rated Operating
Location Facility Ownership the Company Capacity Rate
--------------- -------------- -------------- -------------- -------------- --------------- -------- -------- --------- ------------- -------- ---------
(tons) (tons)
DomesticUnited States
Washington Mead 100% 200,000 200,000 103% 102%(1)
Washington Tacoma 100% 73,000 73,000 94%
-------------- --------------73%(1)
------- -------
Subtotal 273,000 273,000
-------------- --------------------- -------
International
Ghana Valco 90% 180,000 200,000 25%57%(2)
Wales, United Kingdom Anglesey 49% 66,150 135,000 100%
-------------- --------------102%
------- -------
Subtotal 246,150 335,000
-------------- --------------------- -------
Total 519,150 608,000
============== ===================== =======
---------------- --------
(1) In1999 operating rates were affected by the continuing USWA dispute. See
discussion below.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview - Valco Operating Level" for
additional information regarding recent years the Mead smelter has consistently operated
at an annual rate in excess of its rated capacity of 200,000
tons. As a result of the strike-related partial curtailment
of the Mead smelter, the 1998 averageand future operating rate declined
from that of a year ago but remained above 100% of rated
capacity.
KACC's principal primary aluminum customers consist of large
trading intermediaries and metal brokers. In 1998, KACC sold its
primary aluminum production not utilized for internal purposes to
approximately 42 customers, the largest and top five of which
accounted for approximately 30% and 58% of such sales,
respectively. See "- Competition" in this Report. Marketing and
sales efforts are conducted by personnel located in Pleasanton,
California; Houston, Texas; and Tacoma and Spokane, Washington.
A majority of the business unit's sales are based upon long-term
relationships with metal merchants and end-users.levels.
KACC has developed and installed proprietary retrofit and control technology in
all of its smelters, as well as at third party locations. This technology -
which includes the redesign of the cathodes, anodes and bus that conduct
electricity through reduction cells, improved feed systems that add alumina to
the cells, computerized process control and energy management systems, and
furnace technology for baking of anode carbon - has significantly contributed to
increased and more efficient production of primary aluminum and enhanced KACC's
ability to compete more effectively with the industry's newer smelters.
KACC engages in efforts to license this technology and sell
technical and managerial assistance to other producers worldwide,
and may participate in joint ventures or similar business
partnerships which employ KACC's technical and managerial
knowledge. See "-Research and Development" in this Report.
Domestic Smelters
The Mead facility uses pre-bake technology and produces primary
aluminum.technology. Approximately 64%77% of Mead's 19981999
production was used at KACC's Trentwood, Washington, rolling mill, and the
balance was sold to third parties. KACC has modernized and expanded the carbon
baking furnace at its Mead smelter. The project has improved the reliability of
the carbon baking operations, increased productivity, enhanced safety, and
improved the environmental performance of the facility. The first stage of this
project, the construction of a new 90,000 ton per year furnace, was completed in
1997. The remaining modernization work was completed in early 1999. The Tacoma
facility uses Soderberg technology and produces primary aluminum and high-grade,
continuous-cast, redraw rod, which currently commands a premium price in excess
of the price of primary aluminum. Both smelters have achieved significant
production efficiencies through retrofit technology and a variety of cost
controls, leading to increases in production volume and enhancing their ability
to compete with newer smelters. The business unit maintains specialized
laboratories and a miniature carbon plant in the state of Washington which
concentrate on the development of cost-effective technical innovations such as
equipment and process improvements.
The Mead and Tacoma, Washington, smelters are two of the five KACC plants which
are subject to the continuing USWA dispute. See "-Labor Matters" in this Report.
KACC has modernized and expanded the carbon baking furnacetemporarily curtailed three out
of a total of eleven potlines at its Mead smelterand Tacoma, Washington, aluminum
smelters at an estimated cost of approximately $55.3 million.
The project has improved the reliabilitySeptember 30, 1998, as a result of the carbon baking
operations, increased productivity, enhanced safety, and improvedUSWA strike. The curtailed
potlines represented approximately 70,000 tons of annual production capacity out
of a total combined production capacity of 273,000 tons per year at the
environmental performancefacilities. Restarts of the facility. The first stage
of this project, the construction oftwo Mead potlines were completed during mid-1999.
While a new $40.0 million 90,000
ton per year furnace, was completed in 1997. The remaining
modernization work was completed in 1998 and early 1999. A portion of this project was financed with the net proceeds
(approximately $18.6 million)curtailed potline at Tacoma has been restarted to meet
internal requirements, the timing for a complete restart of 7.6% Solid Waste Disposal
Revenue Bonds due 2027 issued in March 1997 by the Industrial
Development Corporationpotline
(representing approximately 10,000 tons of Spokane County, Washington.
Foreign Smeltersidle production capacity) has yet to
be determined and will depend upon market conditions and other factors. See Note
10 of Notes to Consolidated Financial Statements, " - Labor Matters" for a
discussion of the labor dispute on smelting production rates.
6
10
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS (CONTINUED)
KACC manages, and owns a 90% interest in, the Volta Aluminium Company Limited
("Valco") aluminum smelter in Ghana. The Valco smelter uses pre-bake technology
and processes alumina supplied by KACC and the other participant into primary
aluminum under tolling contracts which provide for proportionate payments by the
participants. KACC's share of the primary aluminum is sold to third parties.
During mostValco's operating level has been subject to fluctuations resulting from the
amount of 1998, the Valco smelter operated only one of its
five potlines, as compared to 1997, when Valco operated four
potlines. Each of Valco's potlines produces approximately 40,000
tons of primary aluminum per year. Valco received compensation
(in the form of energy credits to be utilized over the last half
of 1998 and during 1999) frompower it is allocated by the Volta River Authority ("VRA")
in lieu. The
operating level over the last five years has ranged from one to four out of the power necessary to run twoa
total of the potlines that
were curtailed during 1998.five potlines. During 1999, Valco operated an average of three
potlines. The compensation substantially
mitigated the financial impact of the curtailment of such lines.Company expects Valco did not receive any compensation from the VRA for one
additional potline which was curtailed in January 1998. Based on
Valco's proposed 1999 power allocation from the VRA, Valco has
announced that it expects to operate three linesfour potlines during 1999.
The decision to operate at that level was based on the power
allocation that2000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview - Valco has received from the VRA as well as
consideration of marketOperating Level" for additional information
regarding past and other factors. Valco has notified
the VRA that it believes it had the contractual rights at the
beginning of 1998 to sufficient energy to run four and one-half
potlines for the balance of the year. Valco continues to seek
compensation from the VRA with respect to the January 1998
reduction of its power allocation. Valco and the VRA also are in
continuing discussions concerning other matters, including steps
that might be taken to reduce the likelihood of power
curtailments in the future. No assurances can be given as to the
success of these discussions.future operating levels.
KACC owns a 49% interest in the Anglesey Aluminium Limited ("Anglesey") aluminum
smelter and port facility at Holyhead, Wales. The Anglesey smelter uses pre-bake technology. KACC
supplies 49% of Anglesey's alumina requirements and purchases 49% of Anglesey's
aluminum output. KACC sells its share of Anglesey's output to third parties.
KACC's principal primary aluminum customers consist of large trading
intermediaries and metal brokers. In 1999, KACC sold its primary aluminum
production not utilized for internal purposes to approximately 42 customers, the
largest and top five of which accounted for approximately 29% and 68% of net
sales, respectively. See "- Competition" in this Report. Marketing and sales
efforts are conducted by personnel located in Houston, Texas; and Tacoma and
Spokane, Washington.
Electric Power
Electric power represents an important production cost for KACC at its aluminum
smelters. For a discussion ofinformation on this subject, see "Factors" - Factors Affecting Future
Performance - Electric Power"The operations of KACC's smelters depend on attaining reliable and
affordable electric power" in this Report.
-o Flat-Rolled Products Business Unit
----------------------------------
The flat-rolled products business unit operates the Trentwood, Washington,
rolling mill. The Trentwood facility accounted for
approximately 58% of KACC's 1998 fabricated aluminum products
shipments. The business unit suppliessells to the aerospace and general engineering
markets (producing heat treat sheet and plate products), the beverage container
market (producing body, lid, and tab stock), and the specialty coil markets
(producing automotive brazing sheet, wheel, and tread products), both directly
and through distributors. The Trentwood facility is one of the five KACC plants
which is subject to the continuing USWA dispute. See Note 10 of Notes to
Consolidated Financial Statements, "- Employees and Labor Matters" in this Report, and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Labor Matters" infor additional information
on the Annual Report.labor dispute.
KACC continues to enhanceshift the process and product mix of its Trentwood rolling mill away from
beverage can body stock toward higher value added product lines, such as heat
treat, beverage can lid and tab stock, automotive, and other niche businesses in
an effort to maximize its profitability
and maintain full utilization of the facility. In 1998, KACC
continued to implement a plan to improve the reliability and to
expand the annual production capacity of heat treat flat-rolled
products at the Trentwood facility by approximately one-third
over 1996 levels. Approximately $8.0 million remains to be spent
to implement the plan.profitability. Global sales of KACC's heat treat
products are made primarily to the aerospace and general engineering markets, and remained strong in the first half of
1998 after record shipments in 1997; demand for such products
softened in the second half of 1998.markets. In
1998,1999, the business unit shipped products to approximately 141147 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 18% of the business unit's revenue.net sales.
KACC's flat-rolled products are also sold to beverage container manufacturers
located primarily in the western United StatesNorth America and in the Asian Pacific Rim
countries where the Trentwood plant's location
provides KACC with a transportation advantage.countries. Quality of products for the beverage container industry, service,
price, and timeliness of delivery are the primary bases on which KACC competes.
KACC is one of the highest quality producers of
aluminum beverage can stock in the world. In 1998,1999, the business unit had approximately 2125 domestic and foreign can stock
customers, supplying approximately 4135 can plants worldwide. The largest and top
five of such customers accounted for approximately 12% and 35%36%, respectively, of
the business unit's revenue.net sales. See "- Competition" in this Report. The marketing
staff for the business unit is located at the Trentwood facility
and in Pleasanton, California.facility. Sales are made
directly to end-
useend-use customers and distributors from four sales offices in the
United States, from a sales office in England, and by independent sales agents
in Asia and Latin America.
The Micromill facility was constructed near Reno, Nevada, in 1996
as a demonstration and production facility. Micromill technology
is based on a proprietary thin-strip, high-speed, continuous-belt
casting technique linked directly to hot and cold rolling mills.
KACC is continuing its efforts to implement the Micromill
technology on a full-scale basis. However, the Micromill
technology has not yet been fully implemented or commercialized,
and there can be no assurance that it will be successfully
implemented and commercialized for use at full-scale facilities.
KACC has decided to seek a strategic partner for further
development and deployment of the Micromill technology. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations7
11
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
- Strategic Initiatives" and Note 3 of
Notes to Consolidated Financial Statements in the Annual Report.
---------------------------------------------------------------------------------
ITEM 1. BUSINESS (CONTINUED)
o Engineered Products Business Unit
---------------------------------
The engineered products business unit operates soft-alloy and hard-alloy
extrusion facilities and engineered component (forgings) facilities in the
United States and Canada. Major markets for extruded products are in the
transportation industry, to which the business unit providessells extruded shapes for
automobiles, light-duty vehicles, heavy duty trucks and trailers, cabs, and shipping
containers, and in the distribution, durable goods, defense, building and
construction, ordnance and electrical markets.
The business unit suppliessells forged parts to customers in the automotive, commercial
vehicleheavy-duty
truck, general aviation, rail, machinery and equipment, and ordnance markets.
The high strength-to-weight properties of forged aluminum make it particularly
well-suited for automotive applications. The business unit maintains its
headquarters and a sales and
engineering office in Southfield, Michigan, which works with automobile makers
and other customers and plant personnel to create new automotive component
designs and to improve existing products.
Soft-alloy extrusion facilities are located in Los Angeles, California; Sherman,
Texas; Richmond, Virginia; and London, Ontario, Canada. Each of the soft-alloy
extrusion facilities has fabricating capabilities and provides finishing
services. Products manufactured at these facilities include rod, bar, tube,
shapes, and billet. The Richmond, Virginia, facility was acquired in mid-1997mid- 1997
and increased KACC's extruded products capacity and enhanced its existing
extrusion business due to that facility's ability to manufacture seamless tubing
and large circle size extrusions and to serve the distribution and ground
transportation industries. A 1999 acquisition of an extrusion press in the Los
Angeles area also increased capacity in both seamless tube and rod and bar
products. Hard-alloy rod and bar extrusion facilities are located in Newark,
Ohio, and Jackson, Tennessee, and produce screw machine stock, redraw rod,
forging stock, and billet. The Newark facility is one of the five KACC plants
which is subject to the continuing USWA dispute. See Note 10 of Notes to
Consolidated Financial Statements, "- Labor Matters" in this Report,
and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Labor Matters" infor additional information
on the Annual Report.labor dispute. A facility located in Richland, Washington, produces
seamless tubing in both hard and soft alloys for the automotive, other
transportation, export, recreation, agriculture, and other
industrial markets.alloys. The business unit also operates aan
aluminum cathodic protection business located in Tulsa, Oklahoma, that extrudes
both aluminum and magnesium.Oklahoma. The business
unit operates forging facilities at Oxnard, California, and Greenwood, South
Carolina, and a machine shop at Greenwood, South Carolina. KACC has
entered into an agreement to sell itssold a small
casting operations in Canton, Ohio.Ohio in May 1999.
In 1997, KACC and Accuride Corporation ("Accuride") formed AKW L.P. to design,
manufacture and sell heavy-dutyheavy aluminum truck wheels. In JanuaryApril 1999, KACC signed a letter of intent to sellsold its
50% interest in AKW to its partner,Accuride for $70.4 million, which would resultresulted in the Company recognizing
a substantial gain. The Company expects the transaction to close
on or about March 31, 1999; however, as the transaction is
subject to certain conditions, no assurances can be given that
the transaction will be consummated.net
pre-tax gain of $50.5 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Strategic Initiatives" and Note
123 of Notes to Consolidated Financial Statements in the Annual Report.Statements.
In 1998,1999, the engineered products business unit had approximately 445400 customers,
the largest and top five of which accounted for approximately 5% and 18%,
respectively, of the business unit's revenue.net sales. See "- Competition" in this Report.below. Sales
are made directly from plants as well asand from marketing locations elsewhere in the
United States.
Competition
KACC competes globally with both domestic and foreign producers of bauxite, alumina, and primary aluminum, and
with domestic and
foreign fabricators.fabricated aluminum products. Many of KACC's competitors have greater financial
resources than KACC. 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.
Aluminum competes in many markets with steel, copper, glass, plastic, and other
materials. In the United States, beverageBeverage container materials, including aluminum, face increased
competition from plastics as increased polyethylene terephthalate ("PET")
container capacity is brought on line by plastics manufacturers. KACC competes
with numerous domestic and international fabricators in the sale of fabricated
aluminum products. KACC manufactures and markets fabricated aluminum products
for the transportation, packaging, construction, and consumer durables markets
in the United States and abroad. Sales in these markets are made directly and
through distributors to a large number of customers. Competition in the sale of
fabricated products is based upon quality, availability, price and service,
including delivery performance. KACC concentrates its fabricating operations on
selected products in which it believes it has production expertise, high-quality
capability, and geographic and other competitive advantages. 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 KACC's customers, including intermediaries, would not have a material
adverse effect on the Company's financial condition or results of operations.
8
12
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS (CONTINUED)
See the discussion of competitive conditions, markets, and principal methods of
competition in the description of each business unit under the headings
"-Alumina Business Unit," "-Primary Aluminum Business Unit," "-Flat-Rolled
Products Business Unit," and "-Engineered Products Business Unit" in this
Report.
Research and Development
KACC conducts research and development activities principally at
two facilities - CFT in Pleasanton, California, and the Northwest
Engineering Center adjacent to the Mead smelter in Spokane,
Washington. Net expenditures for Company-sponsored research and development activities were
$11.0 million in 1999, $13.7 million in 1998, and $19.7 million in 1997,1997.
Approximately $.8 million of the 1999 research and $20.5 milliondevelopment net expenditures
were attributable to the development of the Micromill assets and technology,
which were sold in 1996.January 2000 (see Note 4 of Notes to Consolidated Financial
Statements). KACC's research staff totaled 5250 at December 31, 1998.1999. KACC
estimates that research and development net expenditures will be in the range of
$10$9.0 million to $15$11.0 million in 1999.
CFT performs research and development of aluminum process and
product technologies to support KACC's business units and new
business opportunities. In 1998 patents were issued to KACC
concerning the manufacture of continuous cast can sheet, the
brazing of aluminum alloys for heat exchanger applications,
improved lead-free aluminum machining alloys, and joining methods
for aluminum extrusions used in transportation applications. In
1998 CFT continued to support the development of the Micromill
technology deployed at the Micromill facility near Reno, Nevada,
for the production of can sheet and other sheet products. The
Northwest Engineering Center maintains specialized laboratories
and a miniature carbon plant where experiments with new anode and
cathode technology are performed. The Northwest Engineering
Center supports KACC's primary aluminum smelters, and
concentrates on the development of cost-effective technical
innovations such as equipment and process improvements.
KACC licenses its technology and sells technical and managerial
assistance to other producers worldwide. KACC's technology has
been installed in alumina refineries, aluminum smelters and
rolling mills located in the United States and fourteen foreign
countries.2000.
Employees
During 1998,1999, KACC employed an average of approximately 9,2008,600 persons, compared
with an average of approximately 9,200 persons in 1998 and approximately 9,600
persons in 1997 and 1996.1997. At December 31, 1998,1999, KACC employed approximately 8,900 persons; this8,300
persons. The foregoing employee counts for 1999 and 1998 include the USWA
workers who are currently subject to the lockout imposed by KACC as a result of
the continuing labor dispute. Since the inception of the labor dispute, KACC has
operated the five affected facilities with temporary workers who are not
included in the employee counts for 1999 and 1998. The average number does not include personsof
temporary workers employed temporarily during 1999 at the five plants affected by the USWA
labor dispute atwas approximately 25% less than the five
facilities subjectaverage number of USWA workers
employed prior to the labor dispute.
In 1998,The labor agreements with employees at the Alpart entered into a new three-year labor agreement
with workers at its refinery in Jamaica and the
Valco entered into a
new three-year labor agreement with workers at its smelter in Ghana. Each agreement includes productivity improvements.Ghana both expire in 2001.
Environmental Matters
The Company and KACC are subject to a wide variety of international, federal,
state and local environmental laws and regulations. For a discussion of this
subject, see "Factors Affecting Future Performance - Environmental ContingenciesKACC's current or past
operations subject it to environmental compliance, clean-up and Asbestos Contingencies" in this Report.damage claims
that may be costly" below.
Factors Affecting Future Performance
This section discusses certain factors that could cause actual results to vary,
perhaps materially, from the results described in forward-looking statements
made in this Report. Forward-
lookingForward-looking statements in this Report are not
guarantees of future performance and involve significant risks and
uncertainties. ActualIn addition to the factors identified below, actual results may
vary materially from those in such forward-
lookingforward-looking statements as a result of a
variety of other factors including the effectiveness of management's strategies
and decisions, general economic and business conditions, developments in
technology, new or modified statutory or regulatory requirements, and changing
prices and market conditions. This Report also identifies other factors that
could cause such differences. No assurance can be given that these factors and the specific factors discussed below are
all of the factors that could cause actual results to vary materially from the
forward-looking statements.
- Sensitivity to Prices and Hedging Programs
------------------------------------------
The Company's operating resultso Our earnings are sensitive to changesa number of variables
Our operating earnings are sensitive to a number of variables over which we have
no direct control. Two key variables in thethis regard are commodity prices of alumina,for
primary aluminum and fabricatedgeneral economic conditions.
The commodity price of primary aluminum products, and also depend to a significant degree upon the volume
and mix of all products sold and on KACC's hedging strategies.significantly affects our financial
results. Primary aluminum prices historically have historically been subject to significant
cyclical price fluctuations. Alumina prices, as well as
fabricated aluminum product prices (which vary considerably among
products), are significantly influenced byThe Company believes the timing of changes in the
market price of primary aluminum and generally lag behind primary aluminum
prices.are largely unpredictable. Since 1993, the Average
Midwest United States transaction price (the "AMT Price"price") for primary aluminum has ranged from
approximately $.50 to $1.00 per pound. During 1998, the AMT Price per pound of primary aluminum declined
during the year, beginning the year in the $.70 to $.75 range and
ending the year in the low $.60 range. Subsequent to 1998, the
AMT Price continued to decline, and at February 26, 1999, the AMT Price was approximately $.58price averaged $.66
per pound. From timeAt January 28, 2000, the AMT price was $.84 per pound. Although KACC
attempts to timemitigate the impact of low prices through hedging activity (as
described below), changes in market prices for primary aluminum typically
influence the realized prices for KACC's products, most directly in the ordinary coursealumina
and primary aluminum businesses.
9
13
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS (CONTINUED)
Changes in global, regional, or country-specific economic conditions can have a
significant impact on overall demand for aluminum-intensive fabricated products
in the transportation, distribution, and packaging markets. Such changes in
demand can directly affect our earnings by impacting the overall volume and mix
of business,such products sold. To the extent that these end-use markets weaken, demand
can also diminish for alumina and primary aluminum.
o Our profits and cash flows may be adversely impacted by the results of
KACC's hedging programs
We are exposed to the risk of fluctuating aluminum prices, which influence the
prices at which KACC sells its products. KACC enters into hedging transactions
to provide price risk management in
respect oflimit its net exposure resulting from (i)(1) its anticipated sales of alumina,
primary aluminum, and fabricated aluminum products, less (ii)(2) its expected purchasescosts
of purchasing certain items such as aluminum scrap, bauxite and rolling ingot, and bauxite,
whose prices fluctuate with the price of primary aluminum. No assurance can be givenSuch hedging
transactions may involve the use of forward sales contracts, which effectively
fix the price at which KACC sells its products, or the use of option contracts,
which set a floor or a ceiling or both on the price at which KACC sells its
products. To the extent that the prices for primary aluminum exceed the fixed or
ceiling prices established by KACC's hedging programtransactions, our profits and cash
flow would be lower than they otherwise would have been. As a result of KACC's
hedging activities, at December 31, 1999, approximately 70% and 40% of KACC's
net hedgeable volume with respect to 2000 and 2001, respectively, is subject to
minimum and maximum contract prices. The average minimum contract price with
respect to each period is significantly below the average AMT price for the week
ended January 28, 2000. The average maximum contract price with respect to 2000
is below the average AMT price for the week ended January 28, 2000. The average
maximum contract price with respect to 2001 approximates the AMT price for the
week ended January 28, 2000. Because the average maximum contract price of our
2000 and 2001 hedging positions approximates or is below the AMT price for the
week ended January 28, 2000, we will adequately reducenot realize the full benefit of such AMT
price or any subsequent price increases that may occur with respect to the
volumes covered by our 2000 and 2001 hedging positions.
Hedging activities can also have a temporary adverse impact on our and KACC's
liquidity. KACC has established credit limits with certain counterparties
related to open forward sales and option contracts. When unrealized gains or
losses on open positions are in excess of such credit limits, KACC is entitled
to receive margin advances from the counterparties or is required to make margin
advances to counterparties, as the case may be. At December 31, 1999, KACC had
made margin advances of $38.0 million and had posted letters of credit totaling
$40.0 million in lieu of making margin advances. Increases in primary aluminum
prices subsequent to December 31, 1999, could result in KACC having to make
additional margin advances or post additional letters of credit and such amounts
could be significant. KACC's exposure to margin advances is expected to improve
throughout 2000 as its year 2000 positions, which have a lower average maximum
contract price than KACC's 2001 positions, expire. KACC is considering various
financing and hedging strategies to limit its exposure to further margin
advances in the riskevent of fluctuatingaluminum price increases. However, we cannot assure you
KACC will be successful in this regard.
A portion of the metal hedging transactions KACC has entered into do not qualify
for "hedge" accounting under current accounting guidelines, even though they are
consistent with its hedging objectives. Accordingly, we must reflect the change
in the market value of these transactions in each period's earnings. This can
cause material swings in our reported financial results when period-end to
period-end movements in prices are large. A total of approximately $32.8 million
of net pre-tax mark-to-market charges was reflected in the Company's 1999
results. If the forward price for primary aluminum prices.were to increase further from
the year-end price, additional mark-to-market charges would be required and the
charges could be significant.
KACC is exposed to energy price risk from fluctuating prices for
fuel oil and natural gas consumed in the production process. From time to time in the ordinary course of business KACCalso enters into
hedging transactions with major suppliers of energy and energy related financial
instruments.instruments to reduce its exposure to the energy price risk from fluctuating
prices for fuel oil and diesel oil used in its production process. In addition,
KACC also enters into foreign exchange contracts to hedge materialits cash commitments toin
respect of foreign subsidiaries and affiliates. No assurance can be givenHowever, we cannot assure you
that KACC's hedging programstrategies will adequately reduce KACC'sour exposure to the risk fromof
fluctuating prices for fuel oil, natural gas,diesel oil and foreign currencies.
Notecurrencies or that the
results of such hedging transactions will be more favorable than if KACC had not
entered into such transactions.
o KACC's substantial indebtedness and high leverage could adversely affect us
KACC is highly leveraged and has significant debt services requirements. As of
December 31, 1999, KACC's total debt was approximately $972.8 million which does
not give effect to $103.6 million of our guaranteed debt of unconsolidated
affiliates and
10
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS (CONTINUED)
$57.6 million of Notesother guarantees and letters of credit. The ratio of our total
debt to Consolidated Financial Statementsstockholders' equity was approximately 15 to 1. In addition, we expect
KACC to borrow additional amounts under its credit agreement, as amended (the
"Credit Agreement"), or from other sources in the Annual Reportfuture, if available.
KACC's high level of debt affects our operations in several important ways:
o a large portion of the cash KACC generates is incorporated herein by reference. See also
"Quantitativeused to pay interest;
o the agreements governing such debt may limit KACC's and Qualitative Disclosures about Market Risk"our flexibility in
this Report,planning for and Note 1 "- Derivative Financial Instruments" of
Notesreacting to Consolidated Financial Statementschanges in our business conditions;
o KACC and we may be more vulnerable in the Annual Report.
- Leverage
--------
The Company's ratioevent of consolidated indebtednessa downturn in our
business, the aluminum industry or general economic conditions;
o some or all of the agreements governing such debt limit KACC's and/or our
ability to consolidated
net worthborrow additional money, to pay dividends and to consolidate or
merge with other companies;
o a high level of debt may impair KACC's and our ability to obtain additional
financing for working capital, capital expenditures, acquisitions, general
corporate and other purposes;
o KACC may experience a competitive disadvantage because it is greatermore highly
leveraged than the comparable ratio of mostsome of its North Americancompetitors; and
o the agreements governing such debt permit KACC's and our creditors to
accelerate payments if KACC or we default or experience a change in the
control of our ownership as set forth in such agreements.
KACC's ability to make payments on and to refinance such debt depends on its
ability to generate cash in the future. This, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors beyond KACC's control.
KACC will need to refinance all or a substantial portion of such debt on or
before its maturity. KACC has a $325.0 million Credit Agreement which expires in
August 2001. As of February 29, 2000, KACC had $212.6 million of unused
availability remaining under the Credit Agreement after allowing for $30.0
million of outstanding borrowings and $82.4 million for outstanding letters of
credit. In addition, as of December 31, 1999, KACC had $850.2 million of public
notes outstanding, of which $224.6 million principal amount of senior notes are
due in 2002, $400.0 million principal amount of senior subordinated notes are
due in 2003 and $225.6 million principal amount of senior notes are due in 2006.
We cannot assure you that KACC will be able to refinance such debt on acceptable
terms, if at all.
o The explosion at the Gramercy alumina refinery could result in adverse
consequences to us
On July 5, 1999, KACC's Gramercy, Louisiana, alumina refinery was extensively
damaged by an explosion. The cause of the explosion is under investigation by
various governmental agencies. In January 2000, the U.S. Mine Safety and Health
Administration ("MSHA") issued 21 citations in connection with its investigation
of the Gramercy incident. The citations allege, among other things, that certain
aspects of the plant's operations were unsafe and that such mode of operation
contributed to the explosion. Additional civil or criminal fines or penalties
are still possible. To date, no monetary penalty has been proposed by MSHA.
Although the Company expects that a fine will be levied, the Company cannot
predict the amount of any such fine(s). It is possible that other civil or
criminal fines or penalties could be levied against KACC. KACC has previously
announced that it disagrees with the substance of the citations and has
challenged them. Twenty-four employees were injured in the incident, several of
them severely. KACC may be liable for claims relating to the injured employees.
The incident has also resulted in thirty-six class action lawsuits being filed
against KACC alleging, among other things, property damage and personal injury.
The aggregate amount of damages sought in the lawsuits cannot be determined at
this time. While we believe KACC's insurance will cover the majority of these
lawsuits and claims relating to the injured employees, it is anticipated that
any civil or criminal fines or penalties will not be covered by such insurance.
11
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS (CONTINUED)
Production at the plant is expected to be completely curtailed until the third
quarter of 2000 when we expect partial production to begin and, based on our
current estimates, we expect full production to be achieved during the first
quarter of 2001 or shortly thereafter. KACC has received the regulatory permit
required to operate the plant once the facility is ready to resume production.
In addition, shortly after the incident, KACC declared force majeure with
respect to certain of its sales contracts with customers. KACC could experience
the loss of one or more customers as a result of the Gramercy incident. Such a
loss would adversely affect the plant's competitive position unless KACC is able
to gain new customers. KACC is working with its customers to ensure a continued
supply of alumina by purchasing alumina for its customers in the open market at
prices in excess of the prices KACC is currently receiving from its customers.
KACC is also currently purchasing alumina in the open market for a portion of
its internal requirements. While the excess cost of such open market purchases
is expected to be substantially offset by insurance recoveries, if, in the
future, KACC is not successful in assuring an adequate supply of alumina at a
competitive price for its smelters or if delays in the rebuild were to occur and
certain sublimits within its insurance coverage were deemed to apply, our
results could be negatively affected.
KACC continues to work with the insurance carriers to maximize the amount of
recoveries and to minimize, to the extent possible, the period of time between
when KACC expends funds and when it is reimbursed. However, KACC will likely
have to fund an average of 30 - 60 days of property damage and business
interruption activity, unless some other arrangement is agreed with the
insurance carriers, and such amounts could be significant. If insurance
recoveries were to be delayed or if there were other significant uses of KACC's
existing Credit Agreement capacity, delays in the rebuilding of the Gramercy
refinery could occur and could have a material adverse impact on KACC's and our
liquidity and operating results.
Based on what is known to date and discussions with our advisors, we believe
that the financial impact of this incident (in excess of the $5 million of
insurance deductibles and self-retention provisions, which has already been
recorded) will be largely offset by insurance coverage. However, delays in
receiving insurance proceeds could adversely affect the timing of rebuilding the
Gramercy refinery and could have an adverse impact on KACC's and our operating
results and liquidity.
o KACC's labor dispute could adversely affect us
Substantially all of KACC's hourly work force at its Gramercy, Louisiana,
alumina refinery; Mead and Tacoma, Washington aluminum smelters, Trentwood,
Washington, rolling mill; and Newark, Ohio, extrusion facility were covered by a
master labor agreement with the USWA which expired on September 30, 1998. The
parties did not reach an agreement prior to the expiration of the master
agreement and the USWA chose to strike. In January 1999, KACC declined an offer
by the USWA to have the striking workers return to work at the five plants
without a new agreement. KACC imposed a lock-out to support its bargaining
position and continues to operate the plants (excluding our Gramercy facility)
with salaried employees and other workers as it has since the strike began.
The labor dispute with the USWA involves a number of uncertainties, including
the ultimate cost of a settlement with the USWA and the resolution of the USWA's
appeal of a ruling by the Oakland, California, regional office of the National
Labor Relations Board (the "NLRB") that was favorable to KACC. Although we are
satisfied with the productivity improvements achieved by the temporary work
force at these plants and although turnover rates have declined significantly
since the beginning of the dispute, there can be no assurance about KACC's
ability to retain and motivate such a work force for an indefinite period.
Since the beginning of the dispute, KACC has held periodic but unsuccessful
talks with the USWA to seek a new labor agreement. KACC's proposal to the union
has encompassed wage and benefit increases in exchange for productivity
improvements. We believe such a proposal would result in a significant net
reduction in operating costs for the affected plants compared to pre-strike
levels. However, upon settlement, KACC's and our earnings may reflect a one-time
charge for certain costs associated with the new labor agreement. There can be
no assurance that this proposal will be accepted.
In July 1999, the Oakland, California regional office of the NLRB dismissed the
USWA's allegations of unfair labor practices against KACC. In September 1999,
the union filed an appeal of this ruling with the NLRB general counsel's office
in Washington, D.C. If the original decision were to be reversed, the matter
would be referred to an administrative judge for a hearing whose outcome would
be subject to additional appeal either by the USWA or KACC. This process could
take months or years. There can be no certainty that the original NLRB decision
will be upheld. If these proceedings eventually resulted in a definitive ruling
12
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS (CONTINUED)
against KACC, KACC could be obligated to provide back pay to USWA members at the
five plants. The amount of such back pay could be significant. Back pay, if any,
would not cover the period prior to the USWA's January 1999 offer to return to
work.
The USWA has publicly stated that it is conducting a corporate campaign against
KACC. Such campaigns are often conducted by unions during a labor dispute and
are designed to bring public pressure to bear on a company in the belief that
such pressure will expedite the settlement of the dispute. As part of its
corporate campaign against KACC, the USWA has engaged in a number of activities,
including contacting KACC's customers, suppliers, members of the investment
community, clergymen, and various public agencies with whom KACC has ongoing
relationships. Although such efforts on the part of the USWA have generated
publicity in the news media, we believe that they have had little or no material
impact on our operations. We do not know if the corporate campaign will continue
or, if so, how long it might continue, or what specific actions the USWA may
take. We do not know if such efforts may have a material impact on KACC's
operations in the future.
o The asbestos-related lawsuits against KACC could continue to increase and
could adversely impact our financial position
KACC is a defendant in numerous lawsuits in which the plaintiffs allege that
they have injuries caused by exposure to asbestos during, and as a result of,
their employment or association with KACC, or exposure to products containing
asbestos produced or sold by KACC. The lawsuits generally relate to products
KACC sold twenty or more years ago. On December 31, 1999, there were 100,000
claims pending, compared with 86,400 claims at December 31, 1998. KACC has
reached agreements under which it expects to settle approximately 31,900 of the
claims pending on December 31, 1999 over an extended period.
Our December 31, 1999, balance sheet includes a liability for estimated
asbestos-related costs of $387.8 million. We cannot assure you that this
liability will not increase in the future. In determining the amount of the
liability, we have only included estimates for the cost of claims for a ten year
period through 2009 because we do not have a reasonable basis for estimating
costs beyond that period. However, we expect that these costs may continue
beyond 2009 and that they could be substantial.
We believe KACC has insurance coverage for a substantial portion of such
asbestos-related costs. Accordingly, our December 31, 1999, balance sheet
includes a long term receivable for estimated insurance recoveries of $315.5
million.
As a result of the net increases in our estimates for such asbestos-related
liabilities and receivables during 1999, we recorded pre-tax charges of $53.2
million during the year ended December 31, 1999.
Prior to insurance recoveries, we estimate that KACC's annual cash payments for
asbestos-related costs will be approximately $75.0 - $85.0 million for each of
the years 2000 through 2002, approximately $35.0 - $55.0 million for each of the
years 2003 and 2004, and a total of $58.0 million beyond 2004. We believe that
KACC will recover a substantial portion of these payments from insurance, but
cannot assure you that KACC will receive substantial insurance payments or that
the timing of such payments will occur in the year KACC is required to make the
payments. However, KACC has reached preliminary agreements with certain
insurance carriers under which it expects to collect a substantial portion of
its anticipated 2000 asbestos-related payments. However, delays in receiving
these or future repayments would have an adverse impact on KACC's liquidity.
We continue to monitor claims activity, the status of lawsuits, legislative
developments and other factors. We cannot assure you that our estimates of
liabilities and recoveries will not change in the future. We also cannot assure
you that the amounts related to future asbestos-related claims will not exceed
KACC's aggregate insurance coverage.
o We have recently experienced net losses
We reported a net loss of $54.1 million for the year ended December 31, 1999.
There can be no assurance that we will operate profitability in future periods.
o We operate in a highly competitive industry
The production of alumina, primary and fabricated aluminum products is highly
competitive. There are numerous companies who operate in the aluminum industry.
Certain of our competitors who generallyare substantially larger, have greater financial
resources than the Company. Due to its highly leveraged
condition, the Company is more sensitive than less leveraged
companies to certain factors affecting its operations, including
changes in the prices for its products, changes in interest
rates,we do and general economic conditions. See "Management's
Discussionmay have other strategic advantages.
13
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS (CONTINUED)
o The operation of KACC's smelters depends on obtaining reliable and
Analysis of Financial Condition and Results of
Operations - Financing Activities and Liquidity" in the Annual
Report.
- Electric Power
--------------affordable electric power
The process of converting alumina into aluminum requires significant amounts of
electric power, and thepower. The cost of electric power is an important production cost for KACC at itsof
KACC's aluminum smelters. A portion ofKACC has smelters located in Mead and Tacoma,
Washington, Ghana, and Wales, the United Kingdom.
Pacific Northwest
o KACC purchases electric power used atfor the Mead and Tacoma, Washington, smelters
as well as the rolling mill at
Trentwood, Washington, is purchased from the Bonneville Power Administration (the "BPA"("BPA") under, which supplies
approximately half of the electric power for the two plants, and from other
suppliers. The power contracts whichwith the BPA expire in September 2001, and
a portionthe power contracts with other suppliers expire at various times though
September 2001.
The BPA is engaged in the process of such electric power is purchased
from other suppliers. KACC has long-term arrangements, expiring
in 2015, withdetermining the BPA for the transmissionallocation and price
of electric power byto its customers for the BPAperiod October 2001 to those facilities. The amount of electric power which
may be provided by the BPA to KACC after the expiration of the
contracts in 2001 is not yet determined; however, the Company
believesSeptember
2006. We believe that adequate electric power will be available atduring that
time,period, from the BPA and from other suppliers, for the operation of its
facilitiesKACC's
smelters in Washington. The electricprice of power supplied topurchased from the BPA could be
significantly greater than the current price for such power, which would
have an adverse effect on the profitability of such facilities.
Ghana
o Electric power for the 90%-owned Valco smelter in Ghana is produced by hydroelectric
generators andoperated by the Volta River Authority ("VRA"). The delivery of
electric power to the smelter is subject to interruption from time to timeperiodically
because of drought and other factors beyond the control of Valco. SuchElectric
power is supplied under an agreementa contract with the VRA which expires in 2017. The
agreementpower contract indexes a portion of the price of power to the market price
of primary aluminum, and provides for a review and adjustment of the base
power rate and the price index every five years. SuchIn December 1999, Valco
and the VRA reached an agreement that provides for sufficient power to
operate four of Valco's five potlines in 2000 and 2001. In addition, the
agreement provides a reviewframework for resolving longer-term issues. This
framework, among other things, is now underway together with discussions
concerninganticipated to result in an improvement
in the reliability of Valco's long-term power supply and an increase in the
price of power beginning in 2000, which increase will be partially offset
in 2000 and 2001 by compensation Valco will receive from the VRA with
respect to the provision of power in 1998 and 1999. However, we cannot
provide assurance that in the long-term supply of power.Valco will continue to be
allocated sufficient power to operate at the desired operating levels past
2001 or that such power will be available at an affordable price.
Wales
o Electric power for the 49%-owned Anglesey smelter in Wales is supplied under an agreementa
contract which expires in 2001. KACC is workingAnglesey expects to addressenter into a new power
agreement during the first quarter of 2000 under which the existing
contract would terminate early, in April 2000, and the new agreement would
replace it for the period April 2000 through September 2005. We expect that
the price of power under the new agreement will be significantly greater
than the price under the present contract, which would have an adverse
effect on KACC's financial results associated with the Anglesey smelter.
However, Anglesey has ongoing initiatives to offset the impact of increased
energy costs through cost reduction and revenue enhancement initiatives by
2001. However, we cannot assure you that these power supply and power price issues; however, there
caninitiatives will be
nosuccessful in fully offsetting such increased energy costs.
We cannot provide assurance that electric power at affordable prices will be
available in the future for these smelters.
See "Management's
Discussiono KACC's current or past operations subject it to environmental compliance,
clean-up and Analysisdamage claims that may be costly
The operations of Financial Condition and Results of
Operations - Valco Operating Level" in the Annual Report.
- Labor Matters
-------------
The material under the heading "Labor Matters" at page 2 of this
Report is incorporated hereinKACC's facilities are regulated by reference.
In connection with the USWA strike and subsequent lock-out by
KACC, certain allegations of unfair labor practices ("ULPs") have
been filed with the National Labor Relations Board by the USWA
and its members. KACC has responded to all such allegations and
believes that they are without merit. If the allegations were
sustained, KACC could be required to make locked-out employees
whole for back wages from the date of the lock-out in January
1999. While uncertainties are inherent in the final outcome of
such matters, the Company believes that the resolution of the
alleged ULPs should not result in a material adverse impact on
the Company's consolidated financial position, results of
operations, or liquidity.
- Environmental Contingencies and Asbestos Contingencies
------------------------------------------------------
The Company and KACC are subject to a wide variety of
international, federal, state and local environmental laws. These environmental
laws and
regulations (the "Environmental Laws"). The Environmental Laws regulate, among other things,things:
o air and water emissions and discharges;
o the generation, storage, treatment, transportation and disposal of solid
and hazardous waste; and
14
18
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS (CONTINUED)
o the release of hazardous or toxic substances, pollutants and contaminants
into the environment;environment.
Compliance with these environmental laws is costly. While legislative,
regulatory and economic uncertainties make it difficult for us to project future
spending for these purposes, we currently anticipate that in certain instances, the 2000 - 2001
period KACC's environmental condition of industrial property priorcapital spending will be approximately $13.0 million
per year and that KACC's operating costs will include pollution control costs
totaling approximately $35.0 million per year. However, subsequent changes in
environmental laws may change the way KACC must operate and may force KACC to
transfer or sale. In
addition, the Company and KACC are subject to various federal,
state, and local workplace health and safety laws and regulations
("Health Laws").
From time to time, KACC is subject, with respect to itsspend more then we currently project.
Additionally, KACC's current and former operations can subject it to fines or
penalties assessed for alleged breaches of the Environmental and Health Lawsenvironmental laws and to claims and
litigation brought by federal, state or local agencies and by
private partiesother actions
seeking remedialclean-up or other enforcement actionremedies under the Environmental and Health Laws orthese environmental laws. KACC also may
be subject to damages related to alleged injuries to health or to the
environment, including claims with respect to certain waste disposal sites and
the remediationclean-up of sites presentlycurrently or formerly operatedused by KACC.
Currently, KACC
currently is subject to certain lawsuits under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). KACC, along
with certain other entities,companies, has been named as a Potentially Responsible Party
("PRP") for remedialclean-up costs at certain third-party sites listed on the National
Priorities List under CERCLA and, in certain instances,CERCLA. As a result, KACC may be exposed not only to joint and several liability for thoseits
assessed share of clean-up but also the costs or
damagesof others if they are unable to
natural resources.pay. Additionally, KACC's Mead, Washington, facility has been listed on the
National Priorities List under CERCLA.
The Washington State Department of Ecology has advisedCERCLA and KACC that
there are several options for remediation at the Mead facility
that wouldwill be acceptablerequired to the Department. KACC expects thatimplement one
of theseseveral acceptable remedial options will be agreed upon and
incorporated into a Consent Decree.suggested by the regulatory authorities.
In addition,response to environmental concerns, we have established environmental
accruals representing our estimate of the costs we reasonably expect KACC to
incur in connection with certain of its asset sales, KACC has agreed to indemnify the
purchasers with respect to certain liabilities (and associated
expenses) resulting from acts or omissions arising prior to such
dispositions, including environmental liabilities.
Based on the Company's evaluation of these and other
environmental matters, the Company has established environmental
accruals, primarily related to potential solid waste disposal and
soil and groundwater remediation matters. At December 31, 1998,
the balance of such accruals, whichOur estimates are primarily included in
Long-term liabilities, was $50.7 million. These environmental
accruals represent the Company's estimate of costs reasonably
expected to be incurred based on presently
enacted laws, and
regulations, currently available facts, existing technology, and the Company'sour assessment of the likely remediation
to be performed. The Company expects remediation to occur overperformed in each case. At December 31, 1999, the next several years and estimatesbalance of our accruals,
which are primarily included in our long-term liabilities, was $48.9 million. We
estimate that the annual expenditures to becosts charged to these environmental accruals will be
approximately $3.0 million to $8.0$9.0 million per year for the years 19992000 through
20032004 and an aggregate of approximately $29.0$23.0 million thereafter. However, we
cannot assure you that KACC's actual costs will not exceed our current
estimates. As additional facts develop, definitive clean-up plans are
developed and definitive remediation
plans andestablished, the necessary regulatory approvals for implementation of
remediation are establishedreceived, or alternativeother
technologies are developed, changes in these and other factors may result in
actualKACC's costs exceeding our current expectations. We believe that it is
reasonably possible that costs associated with these environmental matters may
exceed current accruals by amounts that could range, in the current environmental accruals. Cash
expendituresaggregate, up to an
estimated $30.0 million. As the resolution of $3.5 million in 1998, $5.6 million in 1997,these matters is subject to
further regulatory review and $8.8 million in 1996 were chargedapproval, no assurance can be given as to previously established
accruals relating to environmental costs. Approximately $4.5
millionwhen the
factors upon which a substantial portion of this estimate is based can be
expected to be chargedresolved. However, we are currently working to such accruals in 1999. In
addition to cash expenditures charged to environmental accruals,
environmental capital spending was $5.7 million in 1998, $6.8
million in 1997, and $18.4 million in 1996. Annual operating
costs for pollution control, not including corporate overhead or
depreciation, were approximately $34.3 million in 1998, $27.5
million in 1997, and $30.1 million in 1996. Legislative,
regulatory and economic uncertainties make it difficult to
project future spending for these purposes. However, the Company
currently anticipates that in the 1999-2000 period, environmental
capital spending will be approximately $11.0 million per year,
and operating costs for pollution control will be approximately
$38.0 million per year.
While uncertainties are inherent in the final outcomeresolve certain of
these environmental matters, and it is presently impossible to
determine the actual costs that ultimately may be incurred, the
Company currently believes that the resolution of such
uncertainties should not have a material adverse effect on the
Company's consolidated financial position, results of operations,
or liquidity.matters.
o KACC is a defendantsubject to political and regulatory risks in a number of lawsuits, some of which
involve claims of multiple persons, in which the plaintiffs
allege that certain of their injuries were caused by, among other
things, exposure to asbestos during, and as a result of, their
employment or association withcountries
KACC or exposure to products
containing asbestos produced or sold by KACC. The lawsuits
generally relate to products KACC has not manufactured for at
least 20 years. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Commitments and
Contingencies"operates facilities in the Annual Report.
The portion of Note 9 of Notes to Consolidated Financial
Statements in the Annual Report under the headings "Environmental
Contingencies"U.S. and "Asbestos Contingencies" is incorporated
herein by reference.
- Year 2000 Disclosure Statement
------------------------------
The Company utilizes software and related technologies throughout
its business that will be affected by the date change to the year
2000. There may also be technology embedded in certain of the
equipment owned or used by the Company that is susceptible to the
year 2000 date change as well. The Company has implemented a
company-wide program to coordinate the year 2000 efforts of its
individual business units and to track their progress. The
intent of the program is to make sure that critical items are
identified on a sufficiently timely basis to assure that the
necessary resources can be committed to address any material risk
areas that could prevent the Company's systems and assets from
being able to meet the Company's business needs and objectives.
In addition to addressing the Company's internal systems, the
company-wide program involves identification of key suppliers,
customers, and other third-party relationships that could be
impacted by year 2000 issues.
While the Company believes that its program is sufficient to
identify the critical issues and associated costs necessary to
address possible year 2000 problems in a timely manner, there can
be no assurances that the program, or underlying steps
implemented, will be successful in resolving all such issues by
the Company's mid-1999 goal. If the steps taken by the Company
(or critical third parties) are not made in a timely manner, or
are not successful in identifying and remediating all significant
year 2000 issues, business interruptions or delays could occur
and could have a material adverse impact on the Company's results
and financial condition. However, based on the information the
Company has gathered to date and the Company's expectationsnumber of its ability to remediate problems encountered, the Company
currently believes that no significant business interruptions
that would have a material impact on the Company's results or
financial condition will be encountered. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000" in the Annual Report.
- Foreign Activities
------------------
The Company's operations are located in several foreignother countries,
including Australia, Canada, Ghana, Jamaica, and the United Kingdom. Foreign operations,While we
believe KACC's relationships in general, may be more
vulnerable than domestic operations because of a variety of
political or governmental actions and other factors which may,
for example, disrupt or restrict operations and markets, impose
taxes and levies, impose import or export restrictions, restrict
the movement of funds, or impose limitations on foreign exchange
transactions. While the Company believes that its relationships
with the governments of the countries in which it conductsoperates are generally
satisfactory, we cannot assure you that future country developments or
governmental actions will not adversely affect KACC's operations directlyparticularly or
through joint ventures continue to be
satisfactory, there can be no assurance as to the future
influencealuminum industry generally. Among the risks inherent in KACC's operations
are unexpected changes in regulatory requirements, unfavorable legal rulings,
new or increased taxes and levies, and new or increased import or export
restrictions. KACC's operations outside of the foregoing factors.U.S. are subject to a number of
additional risks, including but not limited to currency exchange rate
fluctuations, currency restrictions, and nationalization of assets.
ITEM 2. PROPERTIES
The locations and general character of the principal plants, mines, and other
materially important physical properties relating to KACC's operations are
described in Item 1 "- Business Operations" and those descriptions are
incorporated herein by reference. KACC owns in fee or leases all the real estate
and facilities used in connection with its business. Plants and equipment and
other facilities, other than the Gramercy, Louisiana alumina refinery (see Item
1 "- Incident at Gramercy Facility"), are generally in good condition and
suitable for their intended uses, subject to changing environmental
requirements. Although KACC's domestic aluminum smelters and alumina facility
were initially designed early in KACC's history, they have been modified
frequently over
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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the years to incorporate technological advances in order to improve efficiency,
increase capacity, and achieve energy savings. The Company believes that KACC's
plants are cost competitive on an international basis.
KACC's obligations under the Credit Agreement entered into on
February 15, 1994, as amended (the "Credit Agreement"), are secured by, among other
things, mortgages on KACC's major domestic plants (other than the Gramercy
alumina refinery and
Nevada Micromill)refinery). See Note 5 of Notes to Consolidated Financial Statements in the Annual Report.for
further discussion.
ITEM 3. LEGAL PROCEEDINGS
This section contains statements which constitute "forward-
looking"forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. See
Item 1 inof this Report for cautionary information with respect to such
forward-looking statements.
Hammons v. Alcan Aluminum Corp. et alGramercy Litigation
On MarchJuly 5, 1996,1999, KACC's Gramercy, Louisiana, alumina refinery was extensively
damaged by an explosion in the digestion area of the plant. The cause of the
accident is under investigation by KACC and various governmental agencies. In
January 2000, MSHA issued 21 citations in connection with its investigation of
the Gramercy incident. The citations allege, among other things, that certain
aspects of the plant's operations were unsafe and that such mode of operation
contributed to the explosion. To date, no monetary penalty has been proposed by
MSHA. Although the Company expects that a fine will be levied, the Company
cannot predict the amount of any such fine(s). It is possible that other civil
or criminal fines or penalties could be levied against KACC. KACC has previously
announced that it disagrees with the substance of the citations and has
challenged them.
Twenty-four employees were injured in the incident, several of them severely.
KACC may be liable for claims relating to the injured employees. The incident
has also resulted in thirty-six lawsuits, most of which were styled as class
action complaint wassuits, being filed against the
Company, Alcan Aluminum Corp., Aluminum CompanyKACC on behalf of America,
Alumax, Inc, Reynolds Metal Company,more than 13,000 claimants.
The lawsuits allege, among other things, property damage and the Aluminum Associationpersonal injury.
Such lawsuits were initially filed, on dates ranging from July 5, 1999, through
December 26, 1999, in the SuperiorFortieth Judicial District Court of California for the CountyParish of Los
Angeles, alleging thatSt.
John the defendants conspired,Baptist, State of Louisiana, or in violation of
the California Cartwright Act (Bus. & Prof. Code Section 16720 &
16750), in conjunction with a Memorandum of Understanding ("MOU")
entered into in 1994 by representatives of Australia, Canada, the
European Union, Norway, the Russian Federation and the United
States, to restrict the production of primary aluminum resulting
in rises in prices for primary aluminum and aluminum products.
The complaint sought certification of a class consisting of
persons who at any time between January 1, 1994, and the date of
the complaint purchased aluminum or aluminum products
manufactured by one or more of the defendants and estimated
damages sustained by the class to be $4.4 billion during the year
1994, before trebling. On July 11, 1996, the United StatesTwenty-Third Judicial District
Court granted summary judgment in favorfor the Parish of the CompanySt. James, State of Louisiana, and other defendants and dismissed the complaint as to all
defendants. On July 18, 1996, the plaintiff filed a notice of
appealsuch lawsuits have
been removed to the United StatesStated District Court, Eastern District of Appeals forLouisiana,
and are consolidated under the Ninth
Circuit. On December 11, 1997,caption Carl Bell, et al. v. Kaiser Aluminum &
Chemical Corporation, No. 99-2078, et seq. Plaintiffs have filed motions to
remand the United States Courtactions to state court, and the federal court has taken the matter
under advisement. The cases are currently stayed pending mediation between the
parties. The aggregate amount of Appeals fordamages sought in the Ninth Circuit affirmed the decisionlawsuits cannot be
determined at this time. See Note 2 of the
District Court. On December 23, 1997, the plaintiff filed a
petition for rehearing en banc, which was denied May 4, 1998. On
August 12, 1998, the plaintiff filed a petition with the Supreme
Court of the United States for a writ of certiorari, which
petition was denied on October 19, 1998. The plaintiff
subsequently requested reconsideration of its petition which was
also denied.Notes to Consolidated Financial
Statements.
Asbestos-related Litigation
KACC is a defendant in a number of lawsuits, some of which involve claims of
multiple persons, in which the plaintiffs allege that certain of their injuries
were caused by, among other things, exposure to asbestos during, and as a result
of, their employment or association with KACC or exposure to products containing
asbestos produced or sold by KACC. The lawsuits generally relate to products
KACC has not manufactured for at least 20 years. For additional information, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Commitments and Contingencies" in the Annual Report.
The portion of Note 910 of Notes
to Consolidated Financial Statements in the Annual Report under the heading "Asbestos Contingencies"
is incorporated herein by reference.
Labor Matters
In connection with the USWA strike and subsequent lock-out by KACC, certain
allegations of unfair labor practices ("ULPs") have
beenwere filed by the USWA with the
National Labor Relations Board by("NLRB"). In July 1999, the USWA
and its members. KACC has responded to all such allegations and
believes that they are without merit. If the allegations were
sustained, KACC could be required to make locked-out employees
whole for back wages from the dateOakland, California,
regional office of the lock-outNLRB dismissed all material charges filed against KACC.
In September 1999, the union filed an appeal of this ruling with the NLRB
general counsel's office in January
1999. While uncertainties are inherent inWashington, D.C. The portion of Note 10 of Notes to
Consolidated Financial Statements under the final
outcome of such matters, the Company believes that the resolution
of the alleged ULPs should not result in a material adverse
impact on the Company's consolidated financial position, results
of operations, or liquidity.heading "Labor Matters" is
incorporated herein by reference.
Other Matters
Various other lawsuits and claims are pending against KACC. While uncertainties
are inherent in the final outcome of such matters and it is presently impossible
to determine the actual costs that ultimately may be incurred, management
believes that the resolution of such uncertainties and the incurrence of such
costs should not have a material adverse effect on the Company's consolidated
financial position, results of operations, or liquidity. See Note 10 of Notes to
Consolidated Financial Statements.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the
Company duringDuring the fourth quarter of 1998.1999, written consents of the holders of the
Company's Common Stock were solicited to approve an amendment to the Company's
Restated Certificate of Incorporation to increase the number of shares of Common
Stock which the Company has authority to issue by 25,000,000, from 100,000,000
to 125,000,000, and, consequently, to increase the total number of shares of all
classes of stock which the Company has authority to issue by 25,000,000, from
120,000,000 to 145,000,000. The amendment was approved in January 2000, with
50,383,413 consents submitted for the amendment, 24,007 consents submitted
against the amendment, and 13,702 consents submitted abstaining.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol "KLU"."KLU." The number of record holders of the Company's Common Stock at
March 23, 1999,January 28, 2000, was 337. Page 57
of the Annual Report, and the317. The information in Note 5 of Notes to Consolidated
Financial Statements under the heading "Loan"Debt Covenants and Restrictions" at page 39 of the Annual Report, areis
incorporated herein by reference. The Company has not paid any dividends on its
Common Stock during the two most recent fiscal years. The high and low sales
prices for the Company's Common Stock for each quarterly period of 1999, 1998
and 1997, as reported on the New York Stock Exchange is set forth in the
Quarterly Financial Data on page 58 in this Report and is incorporated herein by
reference.
The Credit Agreement (Exhibits 4.12 through 4.28 to this Report) contains restrictions on the ability of the Company to pay
dividends on or make distributions on account of the Company's Common Stock, and
the Credit Agreement and the Indentures
(Exhibits 4.1 through 4.11 to this Report)indentures governing KACC's public debt contain
restrictions on the ability of the Company's subsidiaries to transfer funds to
the Company in the form of cash dividends, loans or advances. Exhibits 4.1 through 4.28 to this Report,See Note 5 of
Notes to Consolidated Financial Statements in the Annual Report, and the information under the headings "Financing" Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financing Activities
and Liquidity"Liquidity and "CapitalCapital Structure" at pages 25 - 26 of the Annual
Report, are incorporated herein by reference.for additional information.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company is incorporated herein by reference to
the table at page 1 of this Report, to the table at pages 18 - 19 of
the Annual Report,Management's Discussion and Analysis of Financial Condition and Results of
Operations, to Note 1 of Notes to Consolidated Financial Statements, in the Annual Report, and to The
Five-Year Financial Data on pages 5859 - 59 of the Annual60 in this Report.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 18 - 28Kaiser Aluminum Corporation ("Kaiser" or the "Company"), through its wholly
owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), operates in
all principal aspects of the Annual Reportaluminum industry through the following business
segments: Bauxite and alumina, Primary aluminum, Flat-rolled products and
Engineered products. The Company uses a portion of its bauxite, alumina, and
primary aluminum production for additional processing at certain of its
downstream facilities. Intersegment transfers are incorporated hereinvalued at estimated market
prices. The table below provides selected operational and financial information
on a consolidated basis with respect to the Company for the years ended December
31, 1999, 1998, and 1997. The following data should be read in conjunction with
the Company's consolidated financial statements and the notes thereto, contained
elsewhere herein. See Note 12 of Notes to Consolidated Financial Statements for
further information regarding segments. (All references to tons refer to metric
tons of 2,204.6 pounds.)
Year Ended December 31,
------------------------------------------------
(In millions of dollars, except shipments and prices) 1999 1998 1997
- ----------------------------------------------------- ---------- ---------- ----------
Shipments: (000 tons)
Alumina
Third Party 2,093.9(1) 2,250.0 1,929.8
Intersegment 757.3(1) 750.7 968.0
---------- ---------- ----------
Total Alumina 2,851.2 3,000.7 2,897.8
---------- ---------- ----------
Primary Aluminum
Third Party 295.6 263.2 327.9
Intersegment 171.2 162.8 164.2
---------- ---------- ----------
Total Primary Aluminum 466.8 426.0 492.1
---------- ---------- ----------
Flat-Rolled Products 217.9 235.6 247.9
---------- ---------- ----------
Engineered Products 171.1 169.4 152.1
---------- ---------- ----------
Average Realized Third Party Sales Price:(2)
Alumina (per ton) $ 177 $ 197 $ 198
Primary Aluminum (per pound) $ .67 $ .71 $ .75
Net Sales:
Bauxite and Alumina
Third Party (includes net sales of bauxite) $ 397.9(1) $ 472.7 $ 411.7
Intersegment 129.0(1) 135.8 201.7
---------- ---------- ----------
Total Bauxite & Alumina 526.9 608.5 613.4
---------- ---------- ----------
Primary Aluminum
Third Party 439.1 409.8 543.4
Intersegment 240.6 233.5 273.8
---------- ---------- ----------
Total Primary Aluminum 679.7 643.3 817.2
---------- ---------- ----------
Flat-Rolled Products 576.2 714.6 743.3
Engineered Products 542.6 581.3 581.0
Minority Interests 88.5 78.0 93.8
Eliminations (369.6) (369.3) (475.5)
---------- ---------- ----------
Total Net Sales $ 2,044.3 $ 2,256.4 $ 2,373.2
========== ========== ==========
Operating Income (Loss):
Bauxite & Alumina $ (6.0)(3) $ 42.0(7) $ 54.2
Primary Aluminum 8.0(4) 49.9(7) 148.3
Flat-Rolled Products 17.1 70.8(7) 28.2(8)
Engineered Products 38.6 47.5(7) 42.3(8)
Micromill (30.7)(5) (63.4)(5) (24.5)
Eliminations 6.9 8.9 (5.9)
Corporate (62.8) (65.1) (74.6)(8)
---------- ---------- ----------
Total Operating Income (Loss) $ (28.9) $ 90.6 $ 168.0
========== ========== ==========
Net Income (Loss) $ (54.1)(6) $ .6 $ 48.0
========== ========== ==========
Capital Expenditures $ 68.4 $ 77.6 $ 128.5
========== ========== ==========
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(1) Net sales for the year ended December 31, 1999, included approximately 264
tons of alumina purchased from third parties and resold to certain
unaffiliated customers and 131 tons of alumina purchased from third
parties and transferred to the Company's primary aluminum business unit.
(2) Average realized prices for the Company's Flat-rolled products and
Engineered products segments are not presented as such prices are subject
to fluctuations due to changes in product mix. Average realized third
party sales prices for alumina and primary aluminum include the impact of
hedging activities.
(3) Operating income (loss) for the year ended December 31, 1999, included
charges of $5.0 related to insurance deductibles and self-insurance
provisions and estimated business interruption insurance recoveries
totaling $41.0. Additionally, depreciation was suspended for the Gramercy,
Louisiana alumina refinery for the last six months of 1999, as a result of
the July 5, 1999, incident. Depreciation expense for the Gramercy refinery
for the six months ended June 30, 1999, was approximately $6.0.
(4) Operating income (loss) for the year ended December 31, 1999, included
potline restart costs of $12.8.
(5) Operating income (loss) for the years ended December 31, 1999 and 1998
included non-cash charges of $19.1 and $45.0, respectively, related to the
impairment of the Company's Micromill assets.
(6) Net income (loss) for the year ended December 31, 1999, included a pre-tax
gain of $85.0 on involuntary conversion at Gramercy facility, which amount
represents the difference between the minimum expected property damage
reimbursement amount for the Gramercy alumina refinery and the net
carrying value of the damaged property.
(7) Operating income (loss) for the year ended December 31, 1998, for the
Bauxite and alumina, Primary aluminum, Flat-rolled products and Engineered
products segments included unfavorable strike-related impacts of
approximately $11.0, $29.0, $16.0, and $4.0, respectively.
(8) Operating income (loss) for the year ended December 31, 1997, included
pre-tax charges of $2.6, $12.5 and $4.6 related to restructuring of
operations for the Flat-rolled products, Engineered products and Corporate
segments, respectively.
This section contains statements which constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear in a number of places in this section (see "Overview,"
"Results of Operations," "Liquidity and Capital Resources" and "Other Matters").
Such statements can be identified by reference.the use of forward-looking terminology
such as "believes," "expects," "may," "estimates," "will," "should," "plans" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and that actual results may vary materially
from those in the forward-looking statements as a result of various factors.
These factors include the effectiveness of management's strategies and
decisions, general economic and business conditions, developments in technology,
new or modified statutory or regulatory requirements and changing prices and
market conditions. No assurance can be given that these are all of the factors
that could cause actual results to vary materially from the forward-looking
statements.
OVERVIEW
Market-related Factors
The Company's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree on the volume and mix of all products sold and on KACC's
hedging strategies. Primary aluminum prices have historically been subject to
significant cyclical price fluctuations. See Notes 1 and 11 of Notes to
Consolidated Financial Statements for a discussion of KACC's hedging activities.
Changes in global, regional, or country-specific economic conditions can have a
significant impact on overall demand for aluminum-intensive fabricated products
in the transportation, distribution, and packaging markets. Such changes in
demand can directly affect the Company's earnings by impacting the overall
volume and mix of such products sold. To the extent that these end-use markets
weaken, demand can also diminish for what the Company sometimes refers to as the
"upstream" products: alumina and primary aluminum.
During 1999, the Average Midwest United States transaction price ("AMT price")
per pound of primary aluminum declined to a low of approximately $.57 per pound
in February 1999 and then began a steady increase ending 1999 at $.79 per pound.
During 1998, the AMT price per pound of primary aluminum experienced a steady
decline during the year, beginning the year in the $.70 to $.75 range and ending
the year in the low $.60 range. During 1997, the AMT price remained in the $.75
to $.80 price range for the first eleven months before declining to the low $.70
range in December.
Subsequent to December 31, 1999, the AMT price continued to rise. At January 28,
2000, the AMT price was approximately $.84 per pound.
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Incident at Gramercy Facility
On July 5, 1999, KACC's Gramercy, Louisiana alumina refinery was extensively
damaged by an explosion in the digestion area of the plant. Twenty-four
employees were injured in the incident, several of them severely. As a result of
the incident, alumina production at the facility was completely curtailed.
Production at the plant is currently expected to remain completely curtailed
until the third quarter of 2000 when KACC expects to begin partial production.
Based on current estimates, full production is expected to be achieved during
the first quarter of 2001 or shortly thereafter. KACC has received the
regulatory permit required to operate the plant once the facility is ready to
resume production.
The cause of the incident is under investigation by KACC and governmental
agencies. In January 2000, the U.S. Mine Safety and Health Administration
("MSHA") issued 21 citations in connection with its investigation of the
incident. The citations allege, among other things, that certain aspects of the
plant's operations were unsafe and that such mode of operation contributed to
the explosion. To date, no monetary penalty has been proposed by MSHA. Although
the Company expects that a fine will be levied, the Company cannot predict the
amount of any such fine(s). It is possible that other civil or criminal fines or
penalties could be levied against KACC. KACC has previously announced that it
disagrees with the substance of the citations and has challenged them. However,
as more fully explained below, based on what is known to date and discussions
with the Company's advisors, the Company believes that the financial impact of
this incident (in excess of insurance deductibles and self-retention provisions)
will be largely offset by insurance coverage. Deductibles and self-retention
provisions under the insurance coverage for the incident total $5.0 million,
which amounts were charged to Cost of products sold in 1999.
KACC's insurance policies provide that KACC will be reimbursed for the costs of
repairing or rebuilding the damaged portion of the facility using new materials
of like kind and quality with no deduction for depreciation. Based on
discussions with the insurance carriers and their representatives and third
party engineering reports, KACC recorded a pretax gain of $85.0 million,
representing the difference between the minimum expected property damage
reimbursement amount and the net carrying value of the damaged property of $15.0
million. The receivable attributable to the minimum expected property damage
reimbursement has been classified as a long-term item in Other assets, despite
the fact that substantially all such amounts are expected to be spent during
2000, as such proceeds will be invested in property, plant and equipment. The
overall impact of recognizing the gain will be a significant increase in
stockholders' equity and an increase in deprecation expense in future years once
production is restored.
The Gramercy facility has incurred incremental costs for clean-up and other
activities during 1999 and will continue to incur such costs in 2000. These
clean-up and site preparation activities have been offset by accruals of
approximately $14.0 million for estimated insurance recoveries.
KACC's insurance policies provide for the reimbursement of specified continuing
expenses incurred during the interruption period plus lost profits (or less
expected losses) plus other expenses incurred as a result of the incident. KACC
had recorded expected business interruption insurance recoveries totaling $19.0
million and $41.0 million in the quarter and year ended December 31, 1999, as a
reduction of Cost of products sold, which amounts substantially offset actual
expenses incurred during these periods. However, the business interruption
insurance amounts recorded represent estimates of KACC's business interruption
coverage, based on preliminary discussions with the insurance carriers and their
representatives, and are, therefore, subject to change. KACC currently believes
that additional amounts may be recoverable. Any adjustments to the recorded
amounts of expected recovery will be reflected from time to time as such amounts
are agreed to by the insurance carriers. The amounts of such adjustments could
be material.
Since production has been curtailed at the Gramercy facility, KACC has, for the
time being, suspended depreciation of the facility. Depreciation expense for the
first six months of 1999 was approximately $6.0 million. However, KACC believes
that the depreciation expense that would have been incurred may, at least in
part, be recoverable under its business interruption insurance coverage.
The incident has also resulted in thirty-six class action lawsuits being filed
against KACC alleging, among other things, property damage and personal injury.
In addition, a claim for alleged business interruption losses has been made by a
neighboring business. The aggregate amount of damages sought in the lawsuits and
other claims cannot be determined at this time; however, KACC does not currently
believe the damages will exceed the amount of coverage under its liability
policies.
Claims relating to all of the injured employees are expected to be covered under
KACC's workers' compensation or liability policies. However, the aggregate
amount of workers' compensation claims cannot be determined at this time and it
is possible that such claims could exceed KACC's coverage limitations. While it
is presently impossible to determine the aggregate amount
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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of claims that may be incurred, or whether they will exceed KACC's coverage
limitations, KACC currently believes that any amount in excess of the coverage
limitations will not have a material effect on the Company's consolidated
financial position or liquidity. However, it is possible that as additional
facts become available, additional charges may be required and such charges
could be material to the period in which they are recorded.
Labor Matters
Substantially all of KACC's hourly workforce at the Gramercy, Louisiana, alumina
refinery, Mead and Tacoma, Washington, aluminum smelters, Trentwood, Washington,
rolling mill, and Newark, Ohio, extrusion facility were covered by a master
labor agreement with the United Steelworkers of America (the "USWA") which
expired on September 30, 1998. The parties did not reach an agreement prior to
the expiration of the master agreement and the USWA chose to strike. In January
1999, KACC declined an offer by the USWA to have the striking workers return to
work at the five plants without a new agreement. KACC imposed a lock-out to
support its bargaining position and continues to operate the plants with
salaried employees and other workers as it has since the strike began.
As a result of the USWA strike, the Company temporarily curtailed three out of a
total of eleven potlines at its Mead and Tacoma, Washington, aluminum smelters
at September 30, 1998 (representing approximately 70,000 tons per year of
production capacity out of a total combined production capacity of 273,000 tons
per year at the facilities). Restarts of the two Mead potlines were completed
during mid-1999. While a portion of the curtailed potline at Tacoma has been
restarted to meet internal requirements, the timing for a complete restart of
the potline (representing approximately 10,000 tons of idle production capacity)
has yet to be determined and will depend upon market conditions and other
factors.
While the Company initially experienced an adverse strike-related impact on its
profitability in the fourth quarter of 1998, the Company currently believes that
KACC's operations at the affected facilities have been substantially stabilized
and will be able to run at, or near, full capacity, and that the incremental
costs associated with operating the affected plants during the dispute were
virtually eliminated as of January 1999 (excluding the impacts of the restart
costs discussed above and the effect of market factors such as the continued
market-related curtailment at the Tacoma smelter). However, no assurances can be
given that KACC's efforts to run the plants on a sustained basis, without a
significant business interruption or material adverse impact on the Company's
operating results, will be successful.
KACC and the USWA continue to communicate. The objective of KACC has been, and
continues to be, to negotiate a fair labor contract that is consistent with its
business strategy and the commercial realities of the marketplace.
Strategic Initiatives
KACC's strategy is to improve its financial results by: increasing the
competitiveness of its existing plants; continuing its cost reduction
initiatives; adding assets to businesses it expects to grow; pursuing
divestitures of its non-core businesses; and strengthening its financial
position.
In addition to working to improve the performance of the Company's existing
assets, the Company has devoted significant efforts analyzing its existing asset
portfolio with the intent of focusing its efforts and capital in sectors of the
industry that are considered most attractive, and in which the Company believes
it is well positioned to capture value. The initial steps of this process
resulted in the June 1997 acquisition of the Bellwood extrusion facility, the
May 1997 formation of AKW L.P. ("AKW"), the rationalization of certain of the
Company's engineered products operations and the Company's investment to expand
its production capacity for heat treat flat-rolled products at its Trentwood,
Washington, rolling mill.
This process has continued in 1999. In February 1999, KACC completed the
acquisition of the remaining 45% interest in Kaiser LaRoche Hydrate Partners
("KLHP"), an alumina marketing venture, from its joint venture partner for a
cash purchase price of approximately $10.0 million. Additionally, in April 1999,
KACC completed the sale of its 50% interest in AKW, to its partner for $70.4
million. The strategic analysis process also resulted in the Company's decision
in the latter part of 1998 to seek a strategic partner for the further
development and deployment of KACC's Micromill(TM) technology and to KACC's
later agreement in January 2000 to sell the Micromill assets and technology, for
a nominal payment at closing and future payments based on subsequent performance
and profitability of the Micromill technology.
Another area of emphasis has been a continuing focus on managing the Company's
legacy liabilities. The Company believes that KACC has insurance coverage
available to recover certain incurred and future environmental costs and a
substantial portion of its asbestos-related costs and is actively pursing claims
in this regard. During 1998, KACC received recoveries totaling
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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approximately $35.0 million from certain of its insurers related to current and
future environmental claims. The timing and amount of future recoveries of
asbestos-related claims from insurance carriers remain a major priority of the
Company, but will depend on the pace of claims review and processing by such
carriers and the resolution of any disputes regarding coverage under the
insurance policies. However, during 1999, KACC reached preliminary agreements
under which it expects to collect a substantial portion of its expected
asbestos-related payments from certain insurance carriers in 2000.
Additional portfolio analysis and initiatives are continuing.
Valco Operating Level
In 1999, the power allocation for KACC's 90%-owned Volta Aluminium Company
Limited ("Valco") smelter in Ghana was sufficient for the smelter to operate
three out of a total of five potlines as of January 1. Each of Valco's potlines
is capable of producing approximately 40,000 tons per year of primary aluminum.
However, production was well below this level in the first half of the year due
to the timing of restarts for the two incremental potlines. Consequently, to
compensate for the low production in the first half of the year, Valco operated
above an equivalent three-potline annual rate during the last six months of
1999. At December 31, 1999, Valco was operating four potlines.
Valco operated only one potline during most of 1998. However, Valco earned
compensation in 1998 (in the form of energy credits to be utilized over the last
half of 1998 and during 1999) from the Volta River Authority ("VRA") in lieu of
the power necessary to run two of the potlines that were curtailed during 1998.
The compensation substantially mitigated the financial impact in 1998 of the
curtailment of such lines. However, Valco did not receive any compensation from
the VRA for one additional potline which was curtailed in January 1998.
Under a December 1999 agreement between Valco and the VRA, Valco's power
allocation for 2000 and 2001 will be sufficient for the smelter to operate four
of its five potlines. Valco and the VRA also reached an agreement in December
1999 that provides a framework for resolving longer-term issues. This framework,
among other things, is anticipated to result in an improvement in the
reliability of Valco's long-term power supply and an increase in the price for
power beginning in 2000. The increase in the price for power will be partially
offset by net payments of approximately $13 million Valco will receive from the
VRA over the period 2000 to 2001 with respect to the provision of power in 1998
and 1999.
Flat-Rolled Products
In December 1999, the Company announced that its flat-rolled products business
unit expects to accelerate its product mix shift toward higher value added
product lines such as heat-treat, beverage can lid and tab stock, automotive and
other niche businesses, and away from beverage can body stock. The initial steps
of this process should be completed by early 2000, at which point the Company
will assess related issues such as employment levels at the Trentwood facility.
Although the shift in product mix is expected to have a favorable impact on the
Company's results and financial position over the long term, it is possible that
such a product mix shift may result in certain non-recurring charges that would
have an adverse impact on the Company's near term results.
RESULTS OF OPERATIONS
1999 AS COMPARED TO 1998
Summary - The Company reported a net loss of $54.1 million, or $.68 of basic
loss per common share, for 1999 compared to net income of $.6 million, or $.01
of basic income per common share, for 1998. Net sales in 1999 totaled $2,044.3
million compared to $2,256.4 million in 1998.
Net loss for 1999 included a non-cash pre-tax charge of $19.1 million, or $.16
per share, to reduce the carrying value of KACC's Micromill assets, pre-tax
charges of $32.8 million, or $.27 per common share, to reflect mark-to-market
adjustments on certain primary aluminum hedging transactions and non-cash
pre-tax charges of $53.2 million, or $.44 per common share, for asbestos-
related claims. The 1999 charges were offset by a pre-tax gain on involuntary
conversion at Gramercy facility of $85.0 million, or $.69 per share, a pre-tax
gain of $50.5 million, or $.42 per common share, on the sale of the Company's
50% interests in AKW and a non-cash tax benefit of $4.0 million, or $.05 per
share, resulting from the resolution of certain tax matters. Net income for 1998
included approximately $60.0 million, $.50 per common share, of pre-tax
incremental expense and the earnings impact of lost volume associated with the
strike by members of the USWA (more fully discussed above), a non-cash pre-tax
charge of $45.0 million, $.38 per common share, to reduce the carrying value of
KACC's Micromill assets, (more fully discussed above) and a non-cash tax benefit
of $8.3 million, $.10 per common share, resulting from the resolution of certain
tax matters.
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Bauxite and Alumina - Third party net sales were down 16% in 1999 as compared to
1998 as a result of a 10% decline in third party average realized prices and a
7% decrease in third party alumina shipments. The decline in the average
realized prices in 1999 as compared to 1998 was primarily attributable to a
decrease in net gains from KACC hedging activities. The decrease in
year-over-year shipments was primarily the net effect of the Gramercy incident
after considering the 264,000 tons of alumina purchased by KACC from third
parties to fulfill third party sales contract.
Intersegment net sales for 1999 declined 5% as compared to 1998. The decline was
primarily due to a 6% decline in the intersegment average realized price, offset
in part by a 1% increase in intersegment shipments, resulting from potline
restarts at Valco and at the Company's Washington smelters. Intersegment net
sales include approximately 131,000 tons of alumina purchased from third-parties
and transferred to the primary aluminum business unit.
Segment operating income was down in 1999 as compared to 1998 primarily as a
result of the price and volume factors discussed above. Segment operating income
for 1999 was also adversely affected by the $5.0 million cost of insurance
deductibles and self-retention provisions related to the Gramercy incident and
was favorably impacted by the fact that depreciation on the Gramercy facility
was suspended in July 1999. Segment operating income for 1998 included the
adverse impact of approximately $11.0 million of incremental strike-related
costs.
Primary Aluminum - Third party net sales of primary aluminum were up 7% as
compared to 1998 as a result of a 12% increase in third party shipments offset
by a 6% decrease in the average realized third party sales prices. The increase
in shipments was primarily due to the favorable impact of Valco operating three
potlines in 1999 as compared to one potline in 1998. While average primary
aluminum market prices for 1999 were approximately the same as 1998, the Company
experienced a reduction in third party average realized prices as a result of a
decrease in net gains from KACC hedging activities.
Intersegment net sales for 1999 were up 3% as compared to 1998. Intersegment
shipments increased 5% due to the timing of shipments to the Company's
fabricated business units while intersegment average realized prices were down
2%.
Segment operating income for 1999 was down compared to 1998. The most
significant component of this decline was the reduction in the average realized
prices discussed above. Results for 1999 were also adversely impacted by costs
of approximately $1.3 million and $12.8 million for the fourth quarter and the
year, respectively, associated with preparing and restarting potlines at Valco
and the Washington smelters. The favorable impact of Valco operating at a higher
rate in 1999 (as compared to 1998) was substantially offset by the fact that
Valco earned mitigating compensation of approximately $29.0 million in 1998 for
two of its curtailed potlines. Segment operating income for 1998 included the
adverse impact of approximately $29.0 million of incremental strike-related
costs and the favorable impact of the previously mentioned compensation earned
by Valco as a result of the curtailment of two of its potlines.
Flat-Rolled Products - Net sales of flat-rolled products for 1999 declined by
19% compared to 1998 as a result of a 13% decline in average realized prices and
an 8% decline in product shipments. The decline in average realized prices
resulted primarily from a shift in product mix (from aerospace products, which
have a higher price and operating margin, to other products) and a reduction in
prices resulting from reduced demand for heat treat products. The reduction in
shipments was primarily due to reduced demand in 1999 for aerospace heat treat
products offset, in small part, by increased shipments of general engineered
products.
The decline in 1999 prices and shipments as compared to 1998 was responsible for
the decline in segment operating income for 1999. Segment operating income for
1998 included the adverse impact of approximately $16.0 million of incremental
strike-related costs.
Engineered Products - Net sales of engineered products for 1999 decreased 7%
compared to 1998 primarily due to an 8% decline in average realized prices.
Product shipments were essentially flat. The decline in the average sales
realized prices in 1999 was attributable to a change in product mix (higher
ground transportation products offset by lower aerospace shipments). While there
was a strong increase in 1999 in the demand for ground transportation products
it was offset by a reduced demand for aerospace products.
Segment operating income for 1999 decreased compared to 1998 as a result of the
factors discussed above as well as the reduced equity in earnings from AKW
(which partnership interests were sold in April 1999). Segment operating income
for 1998 included the adverse impact of approximately $4.0 million of
incremental strike-related costs.
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Eliminations - Eliminations of intersegment profits vary from period to period
depending on fluctuations in market prices as well as the amount and timing of
the affected segments' production and sales.
Corporate and Other - Corporate operating expenses represent corporate general
and administrative expenses which are not allocated to the Company's business
segments. Corporate operating expenses for 1999 were lower than 1998 primarily
due to reduced incentive compensation expense resulting from the decline in
operating results.
1998 AS COMPARED TO 1997
Summary - The Company reported net income of $.6 million, or $.01 basic income
per common share, for 1998 compared to net income of $48.0 million, or $.57 of
basic income per common share, for 1997. Net sales in 1998 totaled $2,256.4
million compared to $2,373.2 million in 1997.
Net income for 1998 included the effect of certain non-recurring items,
including approximately $60.0 million, $.50 per common share, of pre-tax
incremental expense and the earnings impact of lost volume associated with a
strike by members of the USWA (more fully discussed above), a pre-tax non-cash
charge of $45.0 million, $.38 per common share, to reduce the carrying value of
the Company's Micromill assets and a non-cash tax benefit of $8.3 million, $.10
per common share, resulting from the resolution of certain tax matters. Net
income for 1997 included the effect of two essentially offsetting non-recurring
items: a $19.7 million pre-tax restructuring charge and a non-cash tax benefit
of approximately $12.5 million related to the settlement of certain tax matters.
Bauxite and Alumina - Third party net sales of alumina were up 16% in 1998 as
compared to 1997 primarily due to a 17% increase in third party shipments. The
increase in 1998 third party shipments (and offsetting decrease in 1998
intersegment shipments) resulted from reduced shipments to Valco, due to the
production curtailment more fully discussed above and to a lesser extent, the
fourth quarter strike-related curtailment of three potlines at the Company's
Washington smelters. The average realized price for third party alumina sales
was down only slightly as the allocated net gains from the Company's hedging
activities substantially offset the decline in market prices related to the
Company's primary aluminum-linked customer sales contracts. In addition to being
impacted by the reduced shipments to Valco and the Washington smelters as
discussed above, intersegment sales were adversely affected by a substantial
market-related decline in intersegment average sales prices.
Segment operating income was essentially unchanged, excluding the impact of the
approximate $11.0 million of incremental strike-related costs. The adverse
impact of reduced intersegment realized prices was essentially offset by
improved operating performance resulting from higher production as well as lower
energy costs.
Primary Aluminum - 1998 third party net sales of primary aluminum were down 25%
as compared to 1997 primarily as a result of a 20% reduction in shipments,
caused by the 1998 potline curtailments at Valco and the Washington smelters. A
5% reduction in average realized third party sales prices between 1998 and 1997
(reflecting lower market prices offset, in part, by allocated net gains from
KACC's hedging activities), also adversely impacted third party net sales.
Intersegment net sales were down approximately 15% between 1998 and 1997. While
intersegment shipments were essentially unchanged from the prior year, average
realized prices dropped by 14% reflecting lower market prices for primary
aluminum.
Segment operating income in 1998 was down significantly from 1997. The operating
income impact of the Valco potline curtailments was partially mitigated by the
compensation from the VRA for two of the three curtailed potlines. In addition
to the impact of the one uncompensated potline curtailment at Valco, 1998
results were also negatively affected by the impact of the potline curtailments
at the Company's Washington smelters, reduced average realized prices (primarily
on intersegment sales), and an adverse strike-related impact of approximately
$29.0 million.
Flat-Rolled Products - Net sales of flat-rolled products decreased by 4% during
1998 as compared to 1997 as a 5% reduction in product shipments was modestly
offset by the price impact of changes in product mix. The mix of product
shipments in 1998 reflects a higher demand for heat treat products, primarily in
the first half of the year, offset by reduced can sheet shipments and an
increased level of tolling, all as compared to 1997.
Segment operating income increased significantly in 1998 primarily as a result
of the increased demand for heat treat products in the first half of 1998 and
improved operating efficiencies. Segment results for 1998 were particularly
strong in light of the unfavorable strike-related impact of approximately $16.0
million. Segment results for 1997 included a non-cash charge recorded in the
second quarter of 1997 in connection with restructuring activities.
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Engineered Products - Net sales of engineered products were relatively flat year
to year. An 11% increase in product shipments was effectively offset by
market-related reductions in product prices as well as by the price impact of
changes in product mix. The increase in year-over-year shipments is in part due
to the impact of the Company's ownership of the Bellwood extrusion facility in
Richmond, Virginia, for all of 1998 versus only half of 1997. This was, in part,
offset by a decline in year-over-year sales, attributable to the AKW wheels
joint venture formation in May 1997 and reduced shipments caused by labor
difficulties at two major customers.
Segment operating income declined by approximately 6% in 1998 as compared to
1997, excluding the 1997 pre-tax net charge related to restructuring of
operations and approximately $4.0 million of adverse incremental strike-related
impact in 1998, as a result of the market impact of the previously mentioned
labor difficulties at two major customers and due to an overall softening in
demand, particularly in the second half of the year.
Eliminations - Eliminations of intersegment profit vary from period to period
depending on fluctuations in market prices as well as the amount and timing of
the affected segments' production and sales.
Corporate and Other - Corporate operating expenses represent corporate general
and administrative expenses which are not allocated to the Company's business
segments. Excluding the 1997 pre-tax charge associated with the Company's
restructuring of operations, corporate expenses were lower in 1998 than in 1997
primarily as a result of lower consulting and other costs associated with the
Company's ongoing profit improvement program and portfolio review initiatives.
LIQUIDITY AND CAPITAL RESOURCES
See Note 5 of Notes to Consolidated Financial Statements for a listing of the
Company's indebtedness and information concerning certain restrictive debt
covenants.
Operating Activities
In 1999, operating activities used $90.6 of cash. This amount compares with 1998
and 1997 when operating activities provided cash of $170.7 and $45.0 million,
respectively. The decrease in cash flows from operating activities between 1999
and 1998 was due primarily to the impact of 1999 results, excluding non-cash
charges, and an increased investment in working capital (excluding cash). The
increase in cash flows from operating activities between 1998 and 1997 was due
primarily to a reduced investment in working capital (excluding cash), the
receipt of $35.0 million of environmental insurance recoveries and the impact of
1998 results (excluding non-cash charges).
Investing Activities
Total consolidated capital expenditures were $68.4, $77.6, and $128.5 million in
1999, 1998, and 1997, respectively (of which $4.8, $7.2, and $6.6 million were
funded by the minority partners in certain foreign joint ventures). Except for
the purchase in 1999 of the remaining 45% interest in KLHP for approximately
$10.0 million, capital expenditures were made primarily to improve production
efficiency, reduce operating costs and expand capacity at existing facilities.
Total consolidated capital expenditures, excluding the expenditures to rebuild
the Gramercy, Louisiana facility which will be partially funded with insurance
proceeds (see " - Overview - Incident at Gramercy Facility" above,) are
currently expected to be between $80.0 and $115.0 million per year in each of
2000 through 2002 (of which approximately 10% is expected to be funded by the
Company's minority partners in certain foreign joint ventures). See " -
Financing Activities and Liquidity" below for a discussion of Gramercy related
capital spending. Management continues to evaluate numerous projects, all of
which would require substantial capital, both in the United States and overseas.
The level of capital expenditures may be adjusted from time to time depending on
the Company's price outlook for primary aluminum and other products, KACC's
ability to assure future cash flows through hedging or other means, the
Company's financial position and other factors.
Financing Activities and Liquidity
As of December 31, 1999, the Company's total consolidated indebtedness was
$972.8 million, including $10.4 million outstanding under KACC's credit
agreement, as amended, (the "Credit Agreement"). At February 29, 2000, KACC had
$212.6 million of unused availability remaining under the Credit Agreement after
allowing for $30.0 million of outstanding borrowings and $82.4 million for
outstanding letters of credit.
Under the Credit Agreement, KACC is able to borrow by means of revolving credit
advances and letters of credit (up to $125.0 million) an aggregate amount equal
to the lesser of $325.0 million or a borrowing base relating to eligible
accounts receivable
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and eligible inventory. The Credit Agreement, which matures in August 2001, is
guaranteed by the Company and by certain significant subsidiaries of KACC. The
Credit Agreement requires KACC to comply with certain financial covenants,
places significant restrictions on the Company and KACC, and is secured by a
substantial majority of the Company's and KACC's assets. The Credit Agreement
does not permit the Company, and significantly restricts KACC's ability, to pay
any dividends on their common stock. The indentures governing KACC's public debt
includes various restrictions on KACC and its subsidiaries and repurchase
obligations upon a Change of Control (as defined).
KACC's and the Company's near-term liquidity will be, as more fully discussed
below, affected by three significant items: the Gramercy incident, aluminum
hedging margin requirements and the amount of net payments for asbestos
liabilities.
As of December 31, 1999, the Company had recorded estimated recoveries for
clean-up, site preparation and business interruption costs incurred relating to
the Gramercy incident of approximately $55.0 million. As of December 31, 1999,
approximately $50.0 million of insurance recoveries had been received.
Additionally, through February 29, 2000, KACC had received approximately $25.0
million of additional insurance recoveries. During 2000, capital spending
related to rebuilding the Gramercy facility is expected to be approximately
$200.0 million. KACC believes that between 50% and 80% of such expenditures will
ultimately be funded by proceeds from KACC's insurance contracts. The remainder
of the Gramercy-related capital expenditures will be funded by KACC using
existing cash resources, funds from operations and/or borrowings under KACC's
Credit Agreement. The amount of capital expenditures to be funded by KACC will
depend on, among other things, the ultimate cost and timing of the rebuild and
negotiations with the insurance carriers. In addition, KACC will incur
continuing expenses and experience lost profits subsequent to 1999 as a result
of the Gramercy incident which amounts (based on current primary aluminum prices
and available facts and circumstances) are expected to total another $100.0
million, which amount is expected to be largely offset by insurance recoveries.
KACC continues to work with the insurance carriers to maximize the amount of
recoveries and to minimize, to the extent possible, the period of time between
when KACC expends funds and when it is reimbursed. KACC will likely have to fund
an average of 30 - 60 days of property damage and business interruption
activity, unless some other arrangement is agreed with the insurance carriers,
and such amounts will be significant. The Company believes it has sufficient
financial resources to fund the construction and business interruption costs on
an interim basis. However, no assurances can be given in this regard. If
insurance recoveries were to be delayed or if there were other significant uses
of KACC's existing Credit Agreement capacity, delays in the rebuilding of the
Gramercy refinery could occur and could have a material adverse impact on the
Company's and KACC's liquidity and operating results.
Hedging activities could also have an adverse impact on KACC's near-term
liquidity. At December 31, 1999, KACC had made margin advances of $38.0 million
and had posted letters of credit totaling $40.0 million in lieu of making margin
advances. Increases in primary aluminum prices subsequent to December 31, 1999,
could result in KACC having to make additional margin advances or post
additional letters of credit and such amounts could be significant. KACC's
exposure to margin advances is expected to improve throughout 2000 as its year
2000 positions, which have a lower average maximum contract price than KACC's
2001 positions, expire. KACC is considering various financing and hedging
strategies to limit its exposure to further margin advances in the event of
aluminum price increases. However, no assurance can be given that KACC will be
successful in this regard.
KACC's estimated annual cash payments, prior to insurance recoveries, for
asbestos-related costs will be approximately $75.0 million to $85.0 million for
each of the years 2000 through 2002. The Company believes that KACC will recover
a substantial portion of these payments from insurance. Preliminary agreements
have been reached with certain insurance carriers under which it expects to
collect a substantial portion of its 2000 asbestos-related payments. However,
delays in receiving these or future insurance repayments would have an adverse
impact on KACC's liquidity.
While no assurance can be given that existing cash sources will be sufficient to
meet the Company's short-term liquidity requirements, management believes that
the Company's existing cash resources, together with cash flows from operations
and borrowings under the Credit Agreement, will be sufficient to satisfy its
working capital and capital expenditure requirements for the next year.
KACC's ability to make payments on and to refinance its debt on a long-term
basis depends on its ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors beyond KACC's control. KACC will need to refinance
all or a substantial portion of its debt on or before its maturity. No assurance
can be given that KACC will be able to refinance its debt on acceptable terms.
However, with respect to long-term
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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liquidity, management believes that operating cash flow, together with the
ability to obtain both short and long-term financing, should provide sufficient
funds to meet KACC's and the Company's working capital and capital expenditure
requirements.
Capital Structure
MAXXAM Inc. ("MAXXAM") and one of its wholly owned subsidiaries collectively own
approximately 63% of the Company's Common Stock, with the remaining
approximately 37% of the Company's Common Stock being publicly held. Certain of
the shares of the Company's Common Stock beneficially owned by MAXXAM are
subject to certain pledge agreements. See Note 8 of Notes to Consolidated
Financial Statements for a further description of the pledge agreements.
The Company has an effective "shelf" registration statement covering the
offering from time to time of up to $150.0 million of equity securities. Any
such offering will only be made by means of a prospectus. The Company also has
an effective "shelf" registration statement covering the offering of up to
10,000,000 shares of the Company's Common Stock that are owned by MAXXAM. The
Company will not receive any of the net proceeds from any transaction initiated
by MAXXAM pursuant to this registration statement.
In January 2000, the Company increased the number of its authorized shares of
Common Stock to 125,000,000 from 100,000,000 to improve the Company's
flexibility to issue Common Stock under its employee benefit plans, under an
existing shelf registration statement, and in connection with other
transactions.
Commitments and Contingencies
The Company and KACC are subject to a number of environmental laws, to fines or
penalties assessed for alleged breaches of the environmental laws, and to claims
and litigation based upon such laws. KACC currently is subject to a number of
claims under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments Act of 1986
("CERCLA") and, along with certain other entities, has been named as a
potentially responsible party for remedial costs at certain third-party sites
listed on the National Priorities List under CERCLA. Based on the Company's
evaluation of these and other environmental matters, the Company has established
environmental accruals of $48.9 million at December 31, 1999. However, the
Company believes that it is reasonably possible that changes in various factors
could cause costs associated with these environmental matters to exceed current
accruals by amounts that could range, in the aggregate, up to an estimated $30.0
million.
KACC is also a defendant in a number of lawsuits, some of which involve claims
of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with KACC or exposure to products
containing asbestos produced or sold by KACC. The lawsuits generally relate to
products KACC has not sold for at least 20 years. Based on past experience and
reasonably anticipated future activity, the Company has established a $387.8
million accrual at December 31, 1999, for estimated asbestos-related costs for
claims filed and estimated to be filed through 2009, before consideration of
insurance recoveries. However, the Company believes that substantial recoveries
from insurance carriers are probable. The Company reached this conclusion based
on prior insurance-related recoveries in respect of asbestos-related claims,
existing insurance policies and the advice of outside counsel with respect to
applicable insurance coverage law relating to the terms and conditions of these
policies. Accordingly, the Company has recorded an estimated aggregate insurance
recovery of $315.5 million (determined on the same basis as the asbestos-related
cost accrual) at December 31, 1999. Although the Company has settled
asbestos-related coverage matters with certain of its insurance carriers, other
carriers have not yet agreed to settlements. The timing and amount of future
recoveries from these carriers will depend on the pace of claims review and
processing by such carriers and on the resolution of any disputes regarding
coverage under such policies that may arise.
While uncertainties are inherent in the final outcome of these matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred and insurance recoveries that ultimately may be received, management
currently believes that the resolution of these uncertainties and the incurrence
of related costs, net of any related insurance recoveries, should not have a
material adverse effect on the Company's consolidated financial position,
results of operations, or liquidity.
In connection with the USWA strike and subsequent lock-out by KACC, certain
allegations of unfair labor practices ("ULPs") have been filed with the National
Labor Relations Board ("NLRB")by the USWA. KACC responded to all such
allegations and believes that they are without merit. In July 1999, the Oakland,
California, regional office of the NLRB dismissed all material charges filed
against KACC. In September 1999, the union filed an appeal of this ruling with
the NLRB general counsel's office
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in Washington, D.C. If the original decision were to be reversed, the matter
would be referred to an administrative law judge for a hearing whose outcome
would be subject to an additional appeal either by the USWA or KACC. This
process could take months or years. There can be no certainty that the original
NLRB decision will be upheld. If these proceedings eventually resulted in a
definitive ruling against KACC, it could be obligated to provide back pay to
USWA members at the five plants and such amount could be significant. However,
while uncertainties are inherent in the final outcome of such matters, the
Company believes that the resolution of the alleged ULPs should not result in a
material adverse effect on the Company's consolidated financial position,
results of operations, or liquidity.
See Note 10 of Notes to Consolidated Financial Statements for a more detailed
discussion of these contingencies and the factors affecting management's
beliefs. See also "Overview."
OTHER MATTERS
Year 2000 Readiness Disclosure
Although the Company did experience some minor inconveniences in connection with
the year 2000 date change, such inconveniences did not have any material adverse
impacts on the Company's results of operations or financial condition.
The Company had a company-wide program which coordinated the year 2000 efforts
of its individual business units and tracked their progress. Each of the
Company's business units developed year 2000 plans specifically tailored to its
individual situation. A wide range of solutions were implemented, including
modifying existing systems and, in limited cases where it was cost effective,
purchasing new systems. Total spending related to these projects, which began in
1997 and continued through 1999, was $8.3 million. System modification costs
were expensed as incurred. Costs associated with new systems were capitalized
and will be amortized over the life of the system.
Income Tax Matters
The Company's net deferred income tax assets as of December 31, 1999, were
$437.4 million, net of valuation allowances of $125.6 million. The Company
believes a long-term view of profitability is appropriate and has concluded that
these net deferred income tax assets will more likely than not be realized. See
Note 6 of Notes to Consolidated Financial Statements for a discussion of these
and other income tax matters.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This section contains forward-looking statements that involve risk and
uncertainties. Actual results could differ materially from those projected in
these forward-looking statements.
The Company's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree upon the volume and mix of all products sold. As discussed
more fully in Notes 1 and 1011 of Notes to Consolidated Financial Statements, KACC
utilizes hedging transactions to lock-in a specified price or range of prices
for certain products which it sells or consumes and to mitigate KACC's exposure
to changes in foreign currency exchange rates. The following sets forth the
impact on future earnings of adverse market changes related to KACC's hedging
positions with respect to commodity and foreign exchange contracts described
more fully in Note 1011 of Notes to Consolidated Financial Statements. The impact
of market changes on energy derivative activities is generally not significant.
Alumina and Primary Aluminum
Alumina and primary aluminum production in excess of internal requirements is
sold in domestic and international markets, exposing the Company to commodity
price opportunities and risks. KACC's hedging transactions are intended to
provide price risk management in respect of the net exposure of earnings
resulting from (i) anticipated sales of alumina, primary aluminum and fabricated
aluminum products, less (ii) expected purchases of certain items, such as
aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with the
price of primary aluminum. On average, before consideration of hedging
activities, any fixed price contracts with fabricated aluminum products
customers, variations in production and shipment levels, and timing issues
related to price changes the Company estimates that each $.01 increase
(decrease) in the market price per price-equivalent pound of primary aluminum
increases (decreases) the Company's annual pre-
taxpre-tax earnings by approximately
$15$15.0 million.
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As of December 31, 1999, approximately 65% and 45% of KACC's net hedgeable
volume with respect to 2000 and 2001, respectively, is subject to a minimum and
maximum contract price. Based on the average December 31, 19981999 London Metal Exchange
("LME") cash price for primary aluminum of approximately 56 cents$.71 per pound, the
Company estimates that it would realize approximately $100
million ofa net aggregate pre-tax benefitsreduction of
operating income of approximately $70.0 million from its hedging positions and
fixed price customer contracts during 19992000 and 2000.2001. The Company also estimates that
a hypothetical 10 cent
decrease$.10 increase from the above stated year-end 1998December 1999 price level would
result in an additional net aggregate pre-tax benefitsreduction of operating income of
approximately $150$130.0 million being realized during 19992000 and 20002001 related to
KACC's hedging positions and fixed price customer contracts. Approximately 40%
of the total reductions in operating income would occur in the first half of
2000. Both amounts are versus what the Company's results would have been without
the derivative commodity contracts and fixed price customer contracts discussed
above. Conversely, the Company estimates that a hypothetical 10 cent increase$.10 decrease from
the above stated year-end 1998December 1999 price level would result in a netan aggregate reduction to pre-tax
earningsincrease in operating income of approximately $20$30.0 million being realized
during 19992000 and 20002001 related to KACC's hedging positions and fixed price
customer contracts. It should be noted, however, that, since the hedging
positions and fixed price customer contracts lock-in a specified price or range
orof prices, any increase or decrease in earnings attributable to KACC's hedging
positions or fixed price customer contracts would be significantly offset by a
decrease or increase in the value of the hedged transactions.
As stated in Note 11 of Notes to the Consolidated Financial Statements, KACC has
certain hedging positions which do not qualify for treatment as a "hedge" under
current accounting guidelines and thus must be marked-to-market each period.
Fluctuations in forward market prices for primary aluminum would likely result
in additional earnings volatility as a result of these positions. The Company
estimates that a hypothetical $.10 increase in spot market prices from the
December 31, 1999, LME cash price of $.74 per pound would, if the forward market
were in a "contango" position (i.e., where future prices exceed spot prices),
result in additional aggregate mark-to-market charges of between $20.0 - $30.0
million during 2000 and 2001. Conversely, the Company estimates that a
hypothetical $.10 decrease in year-end 1999 spot market prices would result in
aggregate mark-to-market income of between $20.0 - $30.0 million during 2000
and 2001. For purposes of this computation, the Company assumed that the forward
market would be essentially "flat" (i.e., future prices would approximate the
current forward market price).
The foregoing estimated earnings impact on 20002001 excludes the possible effect on
pre-tax income of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which must be
adopted by the Company as of January 1, 2000. The foregoing estimate of2001.
In addition to having an impact on the Company's earnings, a hypothetical
10 cent-per-pound increase$.10-per-pound change in primary aluminum prices on KACC's hedging positionswould also impact the Company's
cash flows and fixed price customer
contracts excludes the cash impact ofliquidity through changes in possible margin depositadvance
requirements. The Company estimatesAt December 31, 1999, KACC had made margin advances of $38.0
million and had posted letters of credit totaling $40.0 million in lieu of
paying margin advances. Increases in primary aluminum prices subsequent to
December 31, 1999, could result in KACC having to make additional margin
advances or post additional letters of credit and such amounts could be
significant. If primary aluminum prices increased by $.10 per pound (from the
year-end 1999 price) by March 31, 2000 and the forward curve were as described
above, it is estimated that KACC could be required to make additional margin
advances in the range of $75 to $100 million. On the other hand, a hypothetical
$.10 decrease in primary aluminum prices by March 31, 2000, using the same
forward curve assumptions stated above, would be expected to result in KACC
receiving a substantial majority of its previous margin advances. KACC's
cash exposure
related to margin deposit requirements on suchadvances is expected to improve throughout 2000 as its year
2000 positions, if such
a hypothetical price increase were to occur, would notwhich have a material adverse impact onlower average maximum contract price than KACC's
2001 positions, expire. KACC is considering various financing and hedging
strategies to limit its exposure to further margin advances in the Company's current liquidity or
financial position.event of
aluminum price increases. However, no assurance can be given that KACC will be
successful in this regard.
Foreign Currency
KACC enters into forward exchange contracts to hedge material cash commitments
for foreign currencies. KACC's primary foreign exchange exposure is related to
KACC's Australian Dollar (A$) commitments in respect of activities associated
with its 28.3%-
owned-owned affiliate, Queensland Alumina Limited. The Company
estimates that, before consideration of any hedging activities, a US $0.01
increase (decrease) in the value of the A$ results in an approximate $1-2$1- $2
million (decrease) increase in the Company's annual pre-tax earnings.
At December 31, 1998,1999, the Company held derivative foreign currency contracts
hedging approximately 75%82% and 50%27% of its A$ currency commitments for 19992000 and
2000,2001, respectively. The Company estimates that a hypothetical 10% reduction in
the A$ exchange rate would result in the Company recognizing a net aggregate
pre-tax cost of approximately $10-15$3 - $10 million during 19992000
29
33
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
- --------------------------------------------------------------------------------
and 20002001 related to KACC's foreign currency hedging positions. This cost is
versus what the Company's results would have been without the Company's
derivative foreign currency contracts. It should be noted, however, that, since
the hedging positions lock-inlock- in specified rates, any increase or decrease in
earnings attributable to currency hedging instruments would be offset by a
corresponding decrease or increase in the value of the hedged commitments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 29
PAGE
----
Report of Independent Public Accountants..........................................................................31
Consolidated Balance Sheets.......................................................................................32
Statements of Consolidated Income (Loss)..........................................................................33
Statements of Consolidated Cash Flows.............................................................................34
Notes to Consolidated Financial Statements........................................................................35
Quarterly Financial Data (Unaudited)..............................................................................58
Five-Year Financial Data..........................................................................................59
30
34
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- 57--------------------------------------------------------------------------------
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, 1999
and 1998, and the related statements of consolidated income (loss) and cash
flows for each of the Annual Reportthree years in the period ended December 31, 1999. These
financial statements are incorporated hereinthe responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 reference.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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
March 7, 2000
31
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------
(In millions of dollars, except share amounts) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 21.2 $ 98.3
Receivables:
Trade, less allowance for doubtful receivables of $5.9 in 1999 and $6.2 in 1998 154.1 170.1
Other 106.9 112.6
Inventories 546.1 543.5
Prepaid expenses and other current assets 145.6 105.5
---------- ----------
Total current assets 973.9 1,030.0
Investments in and advances to unconsolidated affiliates 96.9 128.3
Property, plant, and equipment - net 1,053.7 1,108.7
Deferred income taxes 440.0 377.9
Other assets 634.3 346.0
---------- ----------
Total $ 3,198.8 $ 2,990.9
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 231.7 $ 173.3
Accrued interest 37.7 37.3
Accrued salaries, wages, and related expenses 62.1 73.8
Accrued postretirement medical benefit obligation - current portion 51.5 48.2
Other accrued liabilities 168.8 148.3
Payable to affiliates 85.8 77.1
Long-term debt - current portion .3 .4
---------- ----------
Total current liabilities 637.9 558.4
Long-term liabilities 727.1 532.9
Accrued postretirement medical benefit obligation 678.3 694.3
Long-term debt 972.5 962.6
Minority interests 117.7 123.5
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01, authorized 125,000,000 shares; issued and
outstanding, 79,405,333 and 79,153,543 in 1999 and 1998 .8 .8
Additional capital 536.8 535.4
Accumulated deficit (471.1) (417.0)
Accumulated other comprehensive income - additional minimum pension liability (1.2) -
---------- ----------
Total stockholders' equity 65.3 119.2
---------- ----------
Total $ 3,198.8 $ 2,990.9
========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
32
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------
(In millions of dollars, except share amounts) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $ 2,044.3 $ 2,256.4 $ 2,373.2
---------- ---------- ----------
Costs and expenses:
Cost of products sold 1,859.2 1,906.2 1,951.2
Depreciation and amortization 89.5 99.1 102.5
Selling, administrative, research and development, and general 105.4 115.5 131.8
Non-cash impairment of Micromill assets/restructuring of operations 19.1 45.0 19.7
---------- ---------- ----------
Total costs and expenses 2,073.2 2,165.8 2,205.2
---------- ---------- ----------
Operating income (loss) (28.9) 90.6 168.0
Other income (expense):
Interest expense (110.1) (110.0) (110.7)
Gain on involuntary conversion at Gramercy facility 85.0 - -
Other - net (35.9) 3.5 3.0
---------- ---------- ----------
Income (loss) before income taxes and minority interests (89.9) (15.9) 60.3
Benefit (provision) for income taxes 32.7 16.4 (8.8)
Minority interests 3.1 .1 (3.5)
---------- ---------- ----------
Net income (loss) (54.1) .6 48.0
Dividends on preferred stock - - (5.5)
---------- ---------- ----------
Net income (loss) available to common shareholders $ (54.1) $ .6 $ 42.5
========== ========== ==========
Earnings (loss) per share:
Basic $ (.68) $ .01 $ .57
========== ========== ==========
Diluted $ (.68) $ .01 $ .57
========== ========== ==========
Weighted average shares outstanding (000):
Basic 79,336 79,115 74,221
========== ========== ==========
Diluted 79,336 79,156 74,382
========== ========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
33
37
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------
(In millions of dollars) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (54.1) $ .6 $ 48.0
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Depreciation and amortization (including deferred financing costs of $4.3, $3.9,
and $6.1) 93.8 103.0 108.6
Non-cash impairment of Micromill assets/restructuring of operations 19.1 45.0 19.7
Gain on involuntary conversion at Gramercy facility (85.0) -- --
Gain on sale of interest in AKW joint venture (50.5) -- --
Non-cash benefit for income taxes -- (8.3) (12.5)
Equity in (income) loss of unconsolidated affiliates, net of distributions (4.9) .1 7.8
Minority interests (3.1) (.1) 3.5
Decrease (increase) decrease in receivables 21.7 61.5 (92.1)
(Increase) decrease in inventories (2.6) 24.8 (9.3)
(Increase) decrease in prepaid expenses and other current assets (66.9) 30.1 (10.1)
Increase (decrease) in accounts payable and accrued interest 58.8 (3.2) (11.5)
Increase (decrease) in payable to affiliates and other accrued liabilities 19.6 (45.3) (23.9)
Decrease in accrued and deferred income taxes (55.2) (26.2) (17.4)
Increase (decrease) in net long-term assets and liabilities 15.7 (23.9) 28.6
Other 3.0 12.6 5.6
--------- -------- ---------
Net cash (used) provided by operating activities (90.6) 170.7 45.0
--------- -------- ---------
Cash flows from investing activities:
Proceeds from sale of interest in AKW joint venture 70.4 -- --
Additions to property, plant, and equipment (68.4) (77.6) (128.5)
Other 1.1 3.2 19.9
--------- -------- ---------
Net cash provided (used) by investing activities 3.1 (74.4) (108.6)
--------- -------- ---------
Cash flows from financing activities:
Borrowings under credit agreement, net 10.4 -- --
Borrowings of long-term debt -- -- 19.0
Repayments of long-term debt (.6) (8.9) (8.8)
Capital stock issued 1.4 .1 .4
Decrease (increase) in restricted cash, net .8 4.3 (5.3)
Incurrence of financing costs -- (.6) (.9)
Preferred stock dividends paid -- -- (4.2)
Redemption of minority interests' preference stock (1.6) (8.7) (2.1)
--------- -------- ---------
Net cash provided (used) by financing activities 10.4 (13.8) (1.9)
--------- -------- ---------
Net (decrease) increase in Cash and cash equivalents during the year (77.1) 82.5 (65.5)
Cash and cash equivalents at beginning of year 98.3 15.8 81.3
--------- -------- ---------
Cash and cash equivalents at end of year $ 21.2 $ 98.3 $ 15.8
========= ======== =========
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 105.4 $ 106.3 $ 102.7
Income taxes paid 24.1 16.8 24.4
Tax allocation payments to MAXXAM Inc. -- -- 11.8
The accompanying notes to consolidated financial statements are an integral
part of these statements.
34
38
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(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. The
Company is a subsidiary of MAXXAM Inc. ("MAXXAM") and conducts its operations
through its wholly-owned subsidiary, Kaiser Aluminum & Chemical Corporation
("KACC"). KACC operates in all principal aspects of the aluminum industry-the
mining of bauxite (the major aluminum bearing ore), the refining of bauxite into
alumina (the intermediate material), the production of primary aluminum, and the
manufacture of fabricated and semi-fabricated aluminum products. Kaiser's
production levels of alumina, before consideration of the Gramercy incident (see
Note 2), and primary aluminum exceed its internal processing needs, which allows
it to be a major seller of alumina and primary aluminum to domestic and
international third parties (see Note 12).
The preparation of financial statements in accordance with generally accepted
accounting principles requires the use of estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities known to exist as of the date the financial statements are
published, and the reported amounts of revenues and expenses during the
reporting period. Uncertainties, with respect to such estimates and assumptions,
are inherent in the preparation of the Company's consolidated financial
statements; accordingly, it is possible that the actual results could differ
from these estimates and assumptions, which could have a material effect on the
reported amounts of the Company's consolidated financial position and results of
operation.
Investments in 50%-or-less-owned entities are accounted for primarily by the
equity method. Intercompany balances and transactions are eliminated.
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 value. 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,
---------------------------
1999 1998
- --------------------------------------------------------------------------------------
Finished fabricated products $ 118.5 $ 112.4
Primary aluminum and work in process 189.4 205.6
Bauxite and alumina 124.1 109.5
Operating supplies and repair and maintenance parts 114.1 116.0
----------- ----------
$ 546.1 $ 543.5
=========== ==========
DEPRECIATION
Depreciation is computed principally by the straight-line method at rates based
on the estimated useful lives of the various classes of assets. The principal
estimated useful lives of land improvements, buildings, and machinery and
equipment are 8 to 25 years, 15 to 45 years, and 10 to 22 years, respectively.
STOCK-BASED COMPENSATION
The Company applies the intrinsic value method to account for a stock-based
compensation plan whereby compensation cost is recognized only to the extent
that the quoted market price of the stock at the measurement date exceeds the
amount an employee
35
39
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
must pay to acquire the stock. No compensation cost has been recognized for this
plan as the exercise price of the stock options granted in 1999, 1998 and 1997
were at or above the market price (see Note 7).
OTHER INCOME (EXPENSE)
Other expense in 1999, 1998, and 1997, includes $53.2, $12.7, and $8.8, of
pre-tax charges related principally to establishing additional litigation
reserves for asbestos claims net of estimated aggregate insurance recoveries
pertaining to operations which were discontinued prior to the acquisition of the
Company by MAXXAM in 1988. Other expense in 1999 also includes $32.8 of pre-tax
charges to reflect mark-to-market adjustments on certain primary aluminum
hedging transactions and a net pre-tax gain of $50.5 on the sale of the
Company's 50% interest in AKW L.P. (see Note 3). Other income in 1998 includes
$12.0 attributable to insurance recoveries related to certain incurred
environmental costs (see Note 10).
DEFERRED FINANCING COSTS
Costs incurred to obtain debt financing are deferred and amortized over the
estimated term of the related borrowing.
FOREIGN CURRENCY
The Company uses the United States dollar as the functional currency for its
foreign operations.
DERIVATIVE FINANCIAL INSTRUMENTS
Hedging transactions using derivative financial instruments are primarily
designed to mitigate KACC's exposure to changes in prices for certain of the
products which KACC sells and consumes and, to a lesser extent, to mitigate
KACC's exposure to changes in foreign currency exchange rates. KACC does not
utilize derivative financial instruments for trading or other speculative
purposes. KACC's derivative activities are initiated within guidelines
established by management and approved by KACC's and the Company's boards of
directors. Hedging transactions are executed centrally on behalf of all of
KACC's business segments to minimize transaction costs, monitor consolidated net
exposures and allow for increased responsiveness to changes in market factors.
Most of KACC's hedging activities involve the use of option contracts (which
establish a maximum and/or minimum amount to be paid or received) and forward
sales contracts (which effectively fix or lock-in the amount KACC will pay or
receive). Option contracts typically require the payment of an up-front premium
in return for the right to receive the amount (if any) by which the price at the
settlement date exceeds the strike price. Any interim fluctuations in prices
prior to the settlement date are deferred until the settlement date of the
underlying hedged transaction, at which point they are reflected in net sales or
cost of sales (as applicable) together with the related premium cost. Forward
sales contracts do not require an up-front payment and are settled by the
receipt or payment of the amount by which the price at the settlement date
varies from the contract price. No accounting recognition is accorded to interim
fluctuations in prices of forward sales contracts.
KACC has established margin accounts and credit limits with certain
counterparties related to open forward sales and option contracts. When
unrealized gains or losses are in excess of such credit limits, KACC is entitled
to receive advances from the counterparties on open positions or is required to
make margin advances to counterparties, as the case may be. At December 31,
1999, KACC had made margin advances of $38.0 and had posted letters of credit
totaling $40.0 in lieu of paying margin advances. At December 31, 1998, KACC had
received $9.9 of margin advances. Increases in primary aluminum prices
subsequent to December 31, 1999, could result in KACC having to make additional
margin advances or post additional letters of credit and such amounts could be
significant. Management considers credit risk related to possible failure of the
counterparties to perform their obligations pursuant to the derivative contracts
to be minimal.
Deferred gains or losses as of December 31, 1999, are included in Prepaid
expenses and other current assets and Other accrued liabilities (see Note 11).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of its outstanding indebtedness to be
$970.5 and $950.0 at December 31, 1999 and 1998, respectively, based on quoted
market prices for KACC's 9-7/8% Senior Notes due 2002 (the "9-7/8% Notes"),
12-3/4% Senior Subordinated Notes due 2003 (the "12-3/4% Notes"), and 10-7/8%
Senior Notes due 2006 (the "10-7/8% Notes"), and the discounted
36
40
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
future cash flows for all other indebtedness, using the current rate for debt of
similar maturities and terms. The Company believes that the carrying amount of
other financial instruments is a reasonable estimate of their fair value, unless
otherwise noted.
EARNINGS PER SHARE
Basic - Earnings per share is computed by deducting preferred stock dividends
from net income (loss) in order to determine net income (loss) available to
common shareholders. This amount is then divided by the weighted average number
of common shares outstanding during the period, including the weighted average
impact of the shares of common stock issued during the year from the date(s) of
issuance.
Diluted - The impact of outstanding stock options was excluded from the
computation of Diluted loss per share for the year ended December 31, 1999, as
its effect would have been antidilutive. Diluted earnings per share for the
years ended December 31, 1998 and 1997, include the dilutive effect of
outstanding stock options (41,000 and 161,000 shares, respectively).
LABOR RELATED COSTS
The Company is currently operating five of its U.S. facilities with salaried
employees and other workers as a result of the September 30, 1998, strike by the
United Steelworkers of America ("USWA") and the subsequent "lock-out" by the
Company in January 1999. However, the Company has continued to accrue certain
benefits (such as pension and other postretirement benefit costs/liabilities),
for the USWA members during the period of the strike and subsequent lock-out.
For purposes of computing the benefit-related costs and liabilities to be
reflected in the accompanying consolidated financial statements for the year
ended December 31, 1999, the Company has based its accruals on the terms of the
previously existing (expired) USWA contract. Any differences between the amounts
accrued and the amounts ultimately agreed to during the collective bargaining
process will be reflected in future results during the term of any new contract.
All incremental operating costs incurred as a result of the USWA strike and
subsequent lockout are being expensed as incurred. During 1998, such costs were
substantial, totaling approximately $50.0. The Company's 1998 results also
reflect reduced profitability of approximately $10.0 resulting from the
strike-related curtailment of three potlines (representing approximately 70,000
tons* of annual capacity) at the Company's Mead and Tacoma, Washington, smelters
and certain other shipment delays experienced at the other affected facilities
at the outset of the USWA strike. During 1999, strike related costs were
virtually eliminated except for the restart costs of approximately $12.8
associated with restarting potlines at the Company's smelters and the impact of
reduced volume.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standard Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize
all derivative instruments as assets or liabilities in the balance sheet and to
measure those instruments at fair value. Under SFAS No. 133, the Company will be
required to "mark-to-market" its hedging positions at each period-end in advance
of recording the physical transactions to which the hedges relate. Changes in
the fair value of the Company's open hedging positions will be reflected as an
increase or reduction in stockholders' equity through comprehensive income. The
impact of the changes in fair value of the Company's hedging positions will
reverse out of comprehensive income (net of any fluctuations in other "open"
positions) and will be reflected in traditional net income when the subsequent
physical transactions occur. Currently, the dollar amount of the Company's
comprehensive income adjustments is not significant so there is not a
significant difference between "traditional" net income and comprehensive
income. However, differences between comprehensive income and traditional net
income may become significant in future periods as SFAS No. 133 will result in
fluctuations in comprehensive income and stockholders' equity in periods of
price volatility, despite the fact that the Company's cash flow and earnings
will be "fixed" to the extent hedged. This result is contrary to the intent of
the Company's hedging program, which is to "lock-in" a price (or range of
prices) for products sold/used so that earnings and cash flows are subject to
reduced risk of volatility.
- -------------------------
*All references to tons in this report refer to metric tons of
2,204.6 pounds.
37
41
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
Adoption of SFAS No. 133 was initially required on or before January 1, 2000.
However, in June 1999, the FASB issued SFAS No. 137 which delayed the required
implementation date of SFAS No. 133 to no later than January 1, 2001. The
Company is currently evaluating how and when to implement SFAS No. 133.
2. INCIDENT AT GRAMERCY FACILITY
On July 5, 1999, KACC's Gramercy, Louisiana alumina refinery was extensively
damaged by an explosion in the digestion area of the plant. Twenty-four
employees were injured in the incident, several of them severely. As a result of
the incident, alumina production at the facility was completely curtailed.
Production at the plant is currently expected to remain completely curtailed
until the third quarter of 2000 when KACC expects to begin partial production.
Based on current estimates, full production is expected to be achieved during
the first quarter of 2001 or shortly thereafter. KACC has received the
regulatory permit required to operate the plant once the facility is ready to
resume production.
The cause of the incident is under investigation by KACC and governmental
agencies. In January 2000, the U.S. Mine Safety and Health Administration
("MSHA") issued 21 citations in connection with its investigation of the
incident. The citations allege, among other things, that certain aspects of the
plant's operations were unsafe and that such mode of operation contributed to
the explosion. To date, no monetary penalty has been proposed by MSHA. Although
the Company expects that a fine will be levied, the Company cannot predict the
amount of any such fine(s). It is possible that other civil or criminal fines or
penalties could be levied against KACC. KACC has previously announced that it
disagrees with the substance of the citations and has challenged them. However,
as more fully explained below, based on what is known to date and discussions
with the Company's advisors, the Company believes that the financial
impact of this incident (in excess of insurance deductibles and self-retention
provisions) will be largely offset by insurance coverage. Deductibles and
self-retention provisions under the insurance coverage for the incident total
$5.0, which amounts have been charged to Cost of products sold in 1999.
KACC has significant amounts of insurance coverage related to the Gramercy
incident. KACC's insurance coverage has five separate components: property
damage, clean-up and site preparation, business interruption, liability and
workers' compensation. The insurance coverage components are discussed below.
Property Damage. KACC's insurance policies provide that KACC will be reimbursed
for the costs of repairing or rebuilding the damaged portion of the facility
using new materials of like kind and quality with no deduction for depreciation.
Based on discussions with the insurance carriers and their representatives and
third party engineering reports, KACC recorded a pretax gain of $85.0,
representing the difference between the minimum expected property damage
reimbursement amount and the net carrying value of the damaged property of
$15.0. The receivable attributable to the minimum expected property damage
reimbursement has been classified as a long-term item in Other assets, despite
the fact that substantially all such amounts are expected to be spent during
2000, as such proceeds will be invested in property, plant and equipment. The
overall impact of recognizing the gain will be a significant increase in
stockholders' equity and an increase in depreciation expense in future years
once production is restored.
Clean-up and Site Preparation. The Gramercy facility has incurred incremental
costs for clean up and other activities during 1999 and will continue to incur
such costs in 2000. These clean-up and site preparation activities have been
offset by accruals of approximately $14.0 for estimated insurance recoveries.
Business Interruption. KACC's insurance policies provide for the reimbursement
of specified continuing expenses incurred during the interruption period plus
lost profits (or less expected losses) plus other expenses incurred as a result
of the incident. Operations at the Gramercy facility and a sister facility in
Jamaica, which supplies bauxite to Gramercy, will continue to incur operating
expenses until production at the Gramercy facility is restored. KACC will also
incur increased costs as a result of agreements to supply certain of Gramercy's
major customers with alumina, despite the fact that KACC had declared force
majeure with respect to the contracts shortly after the incident. KACC is
purchasing alumina from third parties, in excess of the amounts of alumina
available from other KACC-owned facilities, to supply these customers' needs as
well as to meet intersegment requirements. In consideration of the foregoing
items, KACC recorded expected business interruption insurance recoveries
totaling $19.0 and $41.0 in the quarter and year ended December 31, 1999, as a
reduction of Cost of products sold, which amounts substantially offset actual
expenses incurred during these periods. Such business interruption insurance
amounts represent
38
42
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
estimates of KACC's business interruption coverage based on discussions with the
insurance carriers and their representatives and are therefore subject to
change.
Since production has been completely curtailed at the Gramercy facility, KACC
has, for the time being, suspended depreciation of the facility. Depreciation
expense for the first six months of 1999 was approximately $6.0.
Liability. The incident has also resulted in thirty-six class action lawsuits
being filed against KACC alleging, among other things, property damage and
personal injury. In addition, a claim for alleged business interruption losses
has been made by a neighboring business. The aggregate amount of damages sought
in the lawsuits and other claims cannot be determined at this time; however,
KACC does not currently believe the damages will exceed the amount of coverage
under its liability policies.
Workers' Compensation. Claims relating to all of the injured employees are
expected to be covered under KACC's workers' compensation or liability policies.
However, the aggregate amount of workers' compensation claims cannot be
determined at this time and it is possible that such claims could exceed KACC's
coverage limitations. While it is presently impossible to determine the
aggregate amount of claims that may be incurred, or whether they will exceed
KACC's coverage limitations, KACC currently believes that any amount in excess
of the coverage limitations will not have a material effect on the Company's
consolidated financial position or liquidity. However, it is possible that as
additional facts become available, additional charges may be required and such
charges could be material to the period in which they are recorded.
Timing of Insurance Recoveries. As of December 31, 1999, the Company had
recorded estimated recoveries for clean-up, site preparation and business
interruption costs incurred of approximately $55.0. As of December 31, 1999,
approximately $50.0 of insurance recoveries had been received. Additionally
through February 29, 2000, KACC had received approximately $25.0 of additional
insurance recoveries. KACC continues to work with the insurance carriers to
maximize the amount of recoveries and to minimize, to the extent possible, the
period of time between when KACC expends funds and when it is reimbursed.
However, KACC will likely have to fund an average of 30 - 60 days of property
damage and business interruption activity, unless some other arrangement is
agreed with the insurance carriers, and such amounts will be significant. The
Company believes it has sufficient financial resources to fund the construction
and business interruption costs on an interim basis. However, no assurances can
be given in this regard. If insurance recoveries were to be delayed or if there
were to be other significant uses of KACC's existing Credit Agreement capacity,
delays in the rebuilding of the Gramercy refinery could occur and could have a
material adverse impact on the Company's and KACC's liquidity and operating
results.
3. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Summary of 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), Kaiser Jamaica Bauxite Company
(49.0% owned), and AKW L.P ("AKW") (50% owned). The equity in income (loss)
before income taxes of such operations is treated as a reduction (increase) in
cost of products sold. At December 31, 1999 and 1998, KACC's net receivables
from these affiliates were not material. On April 1, 1999, KACC sold its 50%
interest in AKW to its partner for $70.4, which resulted in the Company
recognizing a net pre-tax gain of $50.5 (included in Other income/expense). The
Company's equity in income of AKW was $2.5, $7.8, and $4.8 for the years ended
December 31, 1999, 1998, and 1997, respectively.
39
43
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,
--------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------
Current assets $ 370.4 $ 356.0
Long-term assets (primarily property, plant, and equipment, net) 344.1 393.9
---------- ----------
Total assets $ 714.5 $ 749.9
========== ==========
Current liabilities $ 120.4 $ 92.2
Long-term liabilities (primarily long-term debt) 368.3 396.6
Stockholders' equity 225.8 261.1
---------- ----------
Total liabilities and stockholders' equity $ 714.5 $ 749.9
========== ==========
SUMMARY OF COMBINED OPERATIONS
Year Ended December 31,
-----------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Net sales $ 594.9 $ 659.2 $ 644.1
Costs and expenses (582.9) (651.7) (637.8)
Benefit (provision) for income taxes .8 (2.7) (8.2)
------- ------- -------
Net income (loss) $ 12.8 $ 4.8 $ (1.9)
======= ======= =======
Company's equity in income $ 4.9 $ 5.4 $ 2.9
======= ======= =======
Dividends received $ - $ 5.5 $ 10.7
======= ======= =======
The Company's equity in income differs from the summary net income (loss) due to
varying percentage ownerships in the entities and equity method accounting
adjustments. At December 31, 1999, KACC's investment in its unconsolidated
affiliates exceeded its equity in their net assets by approximately $9.2.
Amortization of the excess investment totaling $9.9, $10.0, and $11.4 is
included in Depreciation and amortization for the years ended December 31, 1999,
1998, and 1997, respectively.
The Company and its affiliates have interrelated operations. KACC provides some
of its affiliates with services such as financing, management, and engineering.
Significant activities with affiliates include the acquisition and processing of
bauxite, alumina, and primary aluminum. Purchases from these affiliates were
$152.9, $235.1, and $245.2, in the years ended December 31, 1999, 1998, and
1997, respectively.
40
44
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
4. PROPERTY, PLANT, AND EQUIPMENT
The major classes of property, plant, and equipment are as follows:
December 31,
--------------------------
1999 1998
- ---------------------------------------------------------------------------------
Land and improvements $ 166.1 $ 164.1
Buildings 230.0 229.5
Machinery and equipment 1,519.7 1,549.5
Construction in progress 67.7 43.8
--------- ---------
1,983.5 1,986.9
Accumulated depreciation (929.8) (878.2)
--------- ---------
Property, plant, and equipment, net $ 1,053.7 $ 1,108.7
========= =========
In the latter part of 1998, the Company decided to seek a strategic partner for
the further development and deployment of KACC's Micromill(TM) technology. This
change in strategic course was based on management's conclusion that additional
time and investment would be required to achieve a commercial success. Given the
Company's other strategic priorities, the Company believed that introducing
added commercial and financial resources was the appropriate course of action
for capturing the maximum long-term value. A number of third parties were
contacted regarding joint ventures or other arrangements. In September 1999,
based on negotiations with these third parties, KACC concluded that a sale of
the Micromill assets and technology was more likely than a partnership. KACC
ultimately signed an agreement to sell the Micromill assets and technology in
January 2000 for a nominal payment at closing and future payments based on
subsequent performance and profitability of the Micromill technology. As a
result of the changes in strategic course in 1999 and 1998, the carrying value
of the Micromill assets was reduced by recording impairment charges of $19.1 and
$45.0, respectively.
5. LONG-TERM DEBT
Long-term debt and its maturity schedule are as follows:
2005 December 31,
-----------------
and 1999 1998
2000 2001 2002 2003 2004 After Total Total
- ----------------------------------------------------------------------------------------------------------------------------
Credit Agreement $ 10.4 $ 10.4 -
9-7/8% Senior Notes due 2002, net $ 224.6 224.6 $ 224.4
10-7/8% Senior Notes due 2006, net $ 225.6 225.6 225.7
12-3/4% Senior Subordinated Notes due 2003 $ 400.0 400.0 400.0
Alpart CARIFA Loans - (fixed and variable rates)
due 2007, 2008 60.0 60.0 60.0
Other borrowings (fixed and variable rates) $ .3 .3 .3 .3 $ .2 50.8 52.2 52.9
------ ------- ------- ------- ------- ------- ------- -------
Total $ .3 $ 10.7 $ 224.9 $ 400.3 $ .2 $ 336.4 972.8 963.0
====== ======= ======= ======= ======= =======
Less current portion .3 .4
------- -------
Long-term debt $ 972.5 $ 962.6
======= =======
41
45
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
In February 1994, the Company and KACC entered into a credit agreement, as
amended, (the "Credit Agreement") which provides a $325.0 secured, revolving
line of credit through August 2001. KACC is able to borrow under the facility by
means of revolving credit advances and letters of credit (up to $125.0) in an
aggregate amount equal to the lesser of $325.0 or a borrowing base relating to
eligible accounts receivable and eligible inventory. As of February 29, 2000,
$212.6 (of which $42.6 could have been used for letters of credit) was available
to KACC under the Credit Agreement. The Credit Agreement is unconditionally
guaranteed by the Company and by certain significant subsidiaries of KACC.
Interest on any outstanding balances will bear a premium (which varies based on
the results of a financial test) over either a base rate or LIBOR, at KACC's
option.
DEBT COVENANTS AND RESTRICTIONS
The Credit Agreement requires KACC to comply with certain financial covenants
and places restrictions on the Company's and KACC's ability to, among other
things, incur debt and liens, make investments, pay dividends, undertake
transactions with affiliates, make capital expenditures, and enter into
unrelated lines of business. The Credit Agreement is secured by, among other
things, (i) mortgages on KACC's major domestic plants (excluding KACC's Gramercy
alumina plant); (ii) subject to certain exceptions, liens on the accounts
receivable, inventory, equipment, domestic patents and trademarks, and
substantially all other personal property of KACC and certain of its
subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser; and (iv)
pledges of all of the stock of a number of KACC's wholly owned domestic
subsidiaries, pledges of a portion of the stock of certain foreign subsidiaries,
and pledges of a portion of the stock of certain partially owned foreign
affiliates.
The obligations of KACC with respect to its 9-7/8% Notes, its 10-7/8% Notes and
its 12-3/4% Notes are guaranteed, jointly and severally, by certain subsidiaries
of KACC. The indentures governing the 9-7/8% Notes, the 10-7/8% Notes and the
12-3/4% Notes (collectively, the "Indentures") restrict, among other things,
KACC's ability to incur debt, undertake transactions with affiliates, and pay
dividends. Further, the Indentures provide that KACC must offer to purchase the
9-7/8% Notes, the 10-7/8% Notes and the 12-3/4% Notes, respectively, upon the
occurrence of a Change of Control (as defined therein), and the Credit Agreement
provides that the occurrence of a Change in Control (as defined therein) shall
constitute an Event of Default thereunder.
The Credit Agreement does not permit the Company, and significantly restricts
KACC's ability, to pay dividends on their common stock.
In December 1991, Alumina Partners of Jamaica ("Alpart") entered into a loan
agreement with the Caribbean Basin Projects Financing Authority ("CARIFA").
Alpart's obligations under the loan agreement are secured by two letters of
credit aggregating $64.2. KACC is a party to one of the two letters of credit in
the amount of $41.7 in respect of its ownership interest in Alpart. Alpart has
also agreed to indemnify bondholders of CARIFA for certain tax payments that
could result from events, as defined, that adversely affect the tax treatment of
the interest income on the bonds.
RESTRICTED NET ASSETS OF SUBSIDIARIES
Certain debt instruments restrict the ability of KACC to transfer assets, make
loans and advances, and pay dividends to the Company. The restricted net assets
of KACC totaled $15.7 and $124.4 at December 31, 1999 and 1998, respectively.
CAPITALIZED INTEREST
Interest capitalized in 1999, 1998, and 1997, was $3.4, $3.0, and $6.6,
respectively.
42
46
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
6. INCOME TAXES
Income (loss) before income taxes and minority interests by geographic area is
as follows:
Year Ended December 31,
-------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Domestic $ (81.8) $ (93.6) $ (112.6)
Foreign (8.1) 77.7 172.9
--------- ---------- ---------
Total $ (89.9) $ (15.9) $ 60.3
========= ========== =========
Income taxes are classified as either domestic or foreign, based on whether
payment is made or due to the United States or a foreign country. Certain income
classified as foreign is also subject to domestic income taxes.
The benefit (provision) for income taxes on income (loss) before income taxes
and minority interests consists of:
Federal Foreign State Total
- ----------------------------------------------------------------------------------------------
1999 Current $ (.5) $ (23.1) $ (.3) $ (23.9)
Deferred 43.8 7.1 5.7 56.6
----------- ----------- ---------- ---------
Total $ 43.3 $ (16.0) $ 5.4 $ 32.7
=========== =========== ========== =========
1998 Current $ (1.8) $ (16.5) $ (.2) $ (18.5)
Deferred 44.4 (12.5) 3.0 34.9
----------- ----------- ---------- ---------
Total $ 42.6 $ (29.0) $ 2.8 $ 16.4
=========== =========== ========== =========
1997 Current $ (2.0) $ (28.7) $ (.2) $ (30.9)
Deferred 30.5 (7.0) (1.4) 22.1
----------- ----------- ---------- ---------
Total $ 28.5 $ (35.7) $ (1.6) $ (8.8)
=========== =========== ========== =========
A reconciliation between the benefit (provision) for income taxes and the amount
computed by applying the federal statutory income tax rate to income (loss)
before income taxes and minority interests is as follows:
Year Ended December 31,
-----------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Amount of federal income tax benefit (provision) based on the statutory rate $ 31.2 $ 5.6 $ (21.1)
Revision of prior years' tax estimates and other changes in valuation allowances 1.1 8.3 12.5
Percentage depletion 2.8 3.2 4.2
Foreign taxes, net of federal tax benefit (3.2) (1.9) (3.1)
Other .8 1.2 (1.3)
------- ------- -------
Benefit (provision) for income taxes $ 32.7 $ 16.4 $ (8.8)
======= ======= =======
43
47
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
The components of the Company's net deferred income tax assets are as follows:
December 31,
-----------------------------
1999 1998
- ----------------------------------------------------------------------------------------
Deferred income tax assets:
Postretirement benefits other than pensions $ 274.7 $ 279.4
Loss and credit carryforwards 119.3 92.0
Other liabilities 146.3 146.4
Other 193.9 132.8
Valuation allowances (125.6) (107.7)
----------- ----------
Total deferred income tax assets-net 608.6 542.9
----------- ----------
Deferred income tax liabilities:
Property, plant, and equipment (101.6) (109.9)
Other (69.6) (54.8)
----------- ----------
Total deferred income tax liabilities (171.2) (164.7)
----------- ----------
Net deferred income tax assets $ 437.4 $ 378.2
=========== ==========
The principal component of the Company's net deferred income tax assets is the
tax benefit, net of certain valuation allowances, associated with the accrued
liability for postretirement benefits other than pensions. The future tax
deductions with respect to the turnaround of this accrual will occur over a
30-to-40-year period. If such deductions create or increase a net operating
loss, the Company has the ability to carry forward such loss for 20 taxable
years. For these reasons, the Company believes that a long-term view of
profitability is appropriate and has concluded that this net deferred income tax
asset will more likely than not be realized.
A substantial portion of the valuation allowances provided by the Company
relates to loss and credit carryforwards. To determine the proper amount of
valuation allowances with respect to these carryforwards, the Company evaluated
all appropriate factors, including any limitations concerning their use and the
year the carryforwards expire, as well as the levels of taxable income necessary
for utilization. With regard to future levels of income, the Company believes,
based on the cyclical nature of its business, its history of operating earnings,
and its expectations for future years, that it will more likely than not
generate sufficient taxable income to realize the benefit attributable to the
loss and credit carryforwards for which valuation allowances were not provided.
As of December 31, 1999 and 1998, $39.1 and $46.2, respectively, of the net
deferred income tax assets listed above are included in the Consolidated Balance
Sheets in the caption entitled Prepaid expenses and other current assets.
Certain other portions of the deferred income tax liabilities listed above are
included in the Consolidated Balance Sheets in the captions entitled Other
accrued liabilities and Long-term liabilities.
The Company and its domestic subsidiaries file consolidated federal income tax
returns. During the period from October 28, 1988, through June 30, 1993, the
Company and its domestic subsidiaries were included in the consolidated federal
income tax returns of MAXXAM. The tax allocation agreements of the Company and
KACC with MAXXAM terminated pursuant to their terms, effective for taxable
periods beginning after June 30, 1993. During 1997, MAXXAM reached a settlement
with the Internal Revenue Service regarding all remaining years where the
Company and its subsidiaries were included in the MAXXAM consolidated federal
income tax returns. As a result of this settlement, KACC paid $11.8 to MAXXAM
during 1997, in respect of its liabilities pursuant to its tax allocation
agreement with MAXXAM. Payments or refunds for periods prior to July 1, 1993
related to other jurisdictions could still be required pursuant to the Company's
and KACC's respective tax allocation agreements with MAXXAM. In accordance with
the Credit Agreement, any such payments to MAXXAM by KACC would require lender
approval, except in certain specific circumstances.
44
48
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
At December 31, 1999, the Company had certain tax attributes available to offset
regular federal income tax requirements, subject to certain limitations,
including net operating loss and general business credit carryforwards of $146.1
and $2.5, respectively, which expire periodically through 2019 and 2011,
respectively, foreign tax credit ("FTC") carryforwards of $33.7, which expire
periodically through 2004, and alternative minimum tax ("AMT") credit
carryforwards of $24.0, which have an indefinite life. The Company also has AMT
net operating loss and FTC carryforwards of $106.7 and $66.9, respectively,
available, subject to certain limitations, to offset future alternative minimum
taxable income, which expire periodically through 2019 and 2004, respectively.
7. EMPLOYEE BENEFIT AND INCENTIVE PLANS
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Retirement plans are non-contributory for salaried and hourly employees and
generally provide for benefits based on a formula which considers length of
service and earnings during years of service. The Company's funding policies
meet or exceed all regulatory requirements.
The Company and its subsidiaries provide postretirement health care and life
insurance benefits to eligible retired employees and their dependents.
Substantially all employees may become eligible for those benefits if they reach
retirement age while still working for the Company or its subsidiaries. The
Company has not funded the liability for these benefits which are expected to be
paid out of cash generated by operations. The Company reserves the right,
subject to applicable collective bargaining agreements, to amend or terminate
these benefits.
Assumptions used to value obligations at year-end and to determine the net
periodic benefit cost in the subsequent year are:
Pension Benefits Medical/Life Benefits
-------------------------------- -------------------------------
1999 1998 1997 1999 1998 1997
-------------------------------- -------------------------------
Weighted-average assumptions as of December 31,
Discount rate 7.75% 7.00% 7.25% 7.75% 7.00% 7.25%
Expected return on plan assets 9.50% 9.50% 9.50% - - -
Rate of compensation increase 4.00% 5.00% 5.00% 4.00% 4.00% 5.00%
In 1999, annual assumed rates of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) for non-HMO participants are 6.5%
and 7.5% for HMO at all ages. The assumed rates of increase are assumed to
decline gradually to 5.0% in 2002 for non-HMO participants and in 2004 for HMO
participants and remain at that level thereafter.
45
49
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
The following table presents the funded status of the Company's pension and
other postretirement benefit plans as of December 31, 1999 and 1998, and the
corresponding amounts that are included in the Company's Consolidated Balance
Sheets:
Pension Benefits Medical/Life Benefits
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- ------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 872.5 $ 873.0 $ 616.8 $ 544.5
Service cost 14.6 14.2 5.2 4.2
Interest cost 59.7 59.7 41.5 37.5
Currency exchange rate change (5.7) (.4) - -
Curtailments, settlements and amendments .4 (4.6) - 4.0
Actuarial (gain) loss (44.5) 15.2 .1 72.0
Benefits paid (91.0) (84.6) (48.2) (45.4)
------------- ------------- ------------- ------------
Benefit obligation at end of year 806.0 872.5 615.4 616.8
------------- ------------- ------------- ------------
Change in Plan Assets:
FMV of plan assets at beginning of year 801.8 756.9 - -
Actual return on assets 133.0 106.8 - -
Settlements - (5.5) - -
Employer contributions 14.0 28.2 48.2 45.4
Benefits paid (91.0) (84.6) (48.2) (45.4)
------------- ------------- ------------- ------------
FMV of plan assets at end of year 857.8 801.8 - -
------------- ------------- ------------- ------------
Benefit obligations in excess of (less than) plan assets (51.8) 70.7 615.4 616.8
Unrecognized net actuarial gain 131.9 23.8 56.7 55.9
Unrecognized prior service costs (15.2) (18.5) 57.7 69.8
Adjustment required to recognize minimum liability 1.2 - - -
Intangible asset and other 2.6 4.3 - -
Accrued benefit liability ------------- ------------- ------------- ------------
$ 68.7 $ 80.3 $ 729.8 $ 742.5
============= ============= ============= ============
The aggregate fair value of plan assets and accumulated benefit obligation for
pension plans with plan assets in excess of accumulated benefit obligations were
$778.1 and $679.0, respectively, as of December 31, 1999, and $293.0 and $280.7,
respectively, as of December 31, 1998.
Pension Benefits Medical/Life Benefits
-------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
--------- ---------- --------- --------- --------- ---------
Components of Net Periodic Benefit Costs:
Service cost $ 14.6 $ 14.2 $ 13.4 $ 5.2 $ 4.2 $ 6.1
Interest cost 59.7 59.7 61.6 41.5 37.5 44.8
Expected return on assets (72.9) (69.4) (61.8) - - -
Amortization of prior service cost 3.3 3.2 3.4 (12.1) (12.4) (12.4)
Recognized net actuarial (gain) loss .7 1.4 2.6 - (7.1) (.9)
--------- ---------- --------- --------- --------- ---------
Net periodic benefit cost 5.4 9.1 19.2 34.6 22.2 37.6
Curtailments, settlements, etc. .4 3.2 3.7 - - -
--------- ---------- --------- --------- --------- ---------
Adjusted net periodic benefit costs $ 5.8 $ 12.3 $ 22.9 $ 34.6 $ 22.2 $ 37.6
========= ========== ========= ========= ========= =========
46
50
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1% Increase 1% Decrease
------------- -------------
Increase (decrease) to total of service and interest cost $ 6.3 $ (4.6)
Increase (decrease) to the postretirement benefit obligation $ 62.9 $ (44.0)
POSTEMPLOYMENT BENEFITS
The Company provides certain benefits to former or inactive employees after
employment but before retirement.
INCENTIVE PLANS
The Company has an unfunded incentive compensation program, which provides
incentive compensation based on performance against annual plans and over
rolling three-year periods. In addition, the Company has a "nonqualified" stock
option plan and KACC has a defined contribution plan for salaried employees. The
Company's expense for all of these plans was $6.0, $7.5, and $8.3 for the years
ended December 31, 1999, 1998, and 1997, respectively.
Up to 8,000,000 shares of the Company's Common Stock were reserved for issuance
under its stock incentive compensation plans. At December 31, 1999, 2,192,713
shares of Common Stock remained available for issuance under those plans. Stock
options granted pursuant to the Company's nonqualified stock option program are
granted at or above the prevailing market price, generally vest at a rate of
20-33% per year, and have a five or ten year term. Information concerning
nonqualified stock option plan activity is shown below. The weighted average
price per share for each year is shown parenthetically.
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Outstanding at beginning of year ($9.98, $10.45, and $10.33) 3,049,122 819,752 890,395
Granted ($11.15, $9.79 and $10.06) 1,218,068 2,263,170 15,092
Exercised ($7.25, $7.25, and $8.33) (7,920) (10,640) (48,410)
Expired or forfeited ($11.02, $9.60, and $10.12) (20,060) (23,160) (37,325)
--------- --------- -------
Outstanding at end of year ($10.24, $9.98, and $10.45) 4,239,210 3,049,122 819,752
========= ========= =======
Exercisable at end of year ($10.17, $10.09, and $10.53) 1,763,852 1,261,262 601,115
========= ========= =======
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation ("SFAS No. 123"), the Company is
required to calculate pro forma compensation cost for all stock options granted
subsequent to December 31, 1994. For SFAS No. 123 purposes, the fair value of
the 1999, 1998, and 1997 stock option grants were estimated using a
Black-Scholes option pricing model. The pro forma after-tax effect of the
estimated fair value of the grants would be to increase the net loss in 1999 by
$1.8 and reduce net income in 1998 and 1997 by $1.5 and $.1, respectively.
47
51
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
8. STOCKHOLDERS' EQUITY, COMPREHENSIVE INCOME AND MINORITY INTERESTS
Changes in stockholders' equity and comprehensive income were:
Accumulated
Accu- Other
Preferred Common Additional mulated Comprehensive
Stock Stock Capital Deficit Income Total
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ .4 $ .7 $ 531.1 $ (460.1) $ (2.8) $ 69.3
Net income 48.0 48.0
Minimum pension liability adjustment,
net of tax 2.8 2.8
---------
Comprehensive income 50.8
Common stock issued upon redemption
and conversion of preferred stock (.4) .1 1.7 1.4
Stock options exercised .4 .4
Dividends on preferred stock (5.5) (5.5)
Incentive plan accretion .6 .6
--------- --------- ---------- --------- ------------- ---------
BALANCE, DECEMBER 31, 1997 - .8 533.8 (417.6) - 117.0
Net income/Comprehensive income .6 .6
Stock options exercised .1 .1
Incentive plan accretion 1.5 1.5
--------- --------- ---------- --------- ------------- ---------
BALANCE, DECEMBER 31, 1998 - .8 535.4 (417.0) - 119.2
Net income (loss)/Comprehensive income (54.1) (54.1)
Minimum pension liability adjustment,
net of tax (1.2) (1.2)
---------
Comprehensive income (55.3)
Stock options exercised .1 .1
Incentive plan accretion 1.3 1.3
--------- --------- ---------- --------- ------------- ---------
BALANCE, DECEMBER 31, 1999 $ - $ .8 $ 536.8 $ (471.1) $ (1.2) $ 65.3
========= ========= ========== ========= ============= =========
Changes in minority interest were:
1999 1998 1997
-------------------------- -------------------------- --------------------------
Redeemable Redeemable Redeemable
Preference Preference Preference
Stock Other Stock Other Stock Other
- ---------------------------------------------------------------------------------------------------------------------------
Beginning of period balance $ 20.1 $ 103.4 $ 27.7 $ 100.0 $ 27.5 $ 94.2
Redeemable preference stock
Accretion 1.0 1.1 2.3
Stock redemption (1.6) (8.7) (2.1)
Minority interests (5.2) 3.4 5.8
------------- --------- ------------- ---------- ------------- ---------
End of period balance $ 19.5 $ 98.2 $ 20.1 $ 103.4 $ 27.7 $ 100.0
============= ========= ============= ========== ============= =========
COMMON STOCK
In January 2000, the Company increased the number of authorized shares of Common
Stock to 125,000,000 from 100,000,000.
48
52
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
REDEEMABLE PREFERENCE STOCK
In 1985, KACC issued its Cumulative (1985 Series A) Preference Stock and its
Cumulative (1985 Series B) Preference Stock (together, the "Redeemable
Preference Stock") each of which has a par value of $1 per share and a
liquidation and redemption value of $50 per share plus accrued dividends, if
any. No additional Redeemable Preference Stock is expected to be issued. Holders
of the Redeemable Preference Stock are entitled to an annual cash dividend of $5
per share, or an amount based on a formula tied to KACC's pre-tax income from
aluminum operations, when and as declared by the Board of Directors.
The carrying values of the Redeemable Preference Stock are increased each year
to recognize accretion between the fair value (at which the Redeemable
Preference Stock was originally issued) and the redemption value. Changes in
Redeemable Preference Stock are shown below.
1999 1998 1997
- ------------------------------------------------------------------------------------
Shares:
Beginning of year 421,575 595,053 634,684
Redeemed (31,322) (173,478) (39,631)
------- ------- -------
End of year 390,253 421,575 595,053
======= ======= =======
Redemption fund agreements require KACC to make annual payments by March 31 of
the subsequent year based on a formula tied to consolidated net income until the
redemption funds are sufficient to redeem all of the Redeemable Preference
Stock. On an annual basis, the minimum payment is $4.3 and the maximum payment
is $7.3. At December 31, 1999, the balance in the redemption fund was $12.5
(included in Other Assets). KACC also has certain additional repurchase
requirements which are, among other things, based upon profitability tests.
The Redeemable Preference Stock is entitled to the same voting rights as KACC
common stock and to certain additional voting rights under certain
circumstances, including the right to elect, along with other KACC preference
stockholders, two directors whenever accrued dividends have not been paid on two
annual dividend payment dates or when accrued dividends in an amount equivalent
to six full quarterly dividends are in arrears. The Redeemable Preference Stock
restricts the ability of KACC to redeem or pay dividends on its common stock if
KACC is in default on any dividends payable on Redeemable Preference Stock.
PREFERENCE STOCK
KACC has four series of $100 par value Cumulative Convertible Preference Stock
("$100 Preference Stock") with annual dividend requirements of between 41/8% and
4 3/4%. KACC has the option to redeem the $100 Preference Stock at par value
plus accrued dividends. KACC does not intend to issue any additional shares of
the $100 Preference Stock.
The $100 Preference Stock can be exchanged for per share cash amounts between
$69 - $80. KACC records the $100 Preference Stock at their exchange amounts for
financial statement presentation and the Company includes such amounts in
minority interests. At December 31, 1999 and 1998, outstanding shares of $100
Preference Stock were 19,538 and 19,963, respectively.
PREFERRED STOCK
PRIDES Convertible - During August 1997, the remaining 8,673,850 outstanding
shares of PRIDES were converted into 7,227,848 shares of Common Stock pursuant
to the terms of the PRIDES Certificate of Designations. Further in accordance
with the PRIDES Certificate of Designations, no dividends were paid or payable
for the period June 30, 1997, to, but not including, the date of conversion.
However, in accordance with generally accepted accounting principles, the $1.3
of accrued dividends attributable to the period June 30, 1997, to, but not
including, the conversion date were treated as an increase in Additional capital
at the date of conversion and were reflected as a reduction of Net income
available to common shareholders.
PLEDGED SHARES
From time to time MAXXAM or certain of its subsidiaries which own the Company's
Common Stock may use such stock as collateral under various financing
arrangements. At December 31, 1999, 27,938,250 shares of the Company's Common
Stock beneficially owned by MAXXAM Group Holdings Inc. ("MGHI"), a wholly owned
subsidiary of MAXXAM, were pledged as
49
53
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
security for $130.0 principal amount of 12% Senior Secured Notes due 2003 issued
in December 1996 by MGHI. An additional 8,915,000 shares of the Company's Common
Stock were pledged by MAXXAM under a separate agreement under which $18.5 had
been borrowed by MAXXAM at December 31, 1999. In addition to the foregoing,
MAXXAM has agreed to secure each $1.0 of borrowings with 400,000 shares of the
Company's Common Stock under the terms of another $25.0 credit facility ($2.5
outstanding at December 31, 1999).
9. RESTRUCTURING OF OPERATIONS
During the second quarter of 1997, the Company recorded a $19.7 restructuring
charge to reflect actions taken and plans initiated to achieve reduced
production costs, decreased corporate selling, general and administrative
expenses, and enhanced product mix. The significant components of the
restructuring charge were: (i) a net loss of approximately $1.4 as a result of
the contribution of certain net assets of KACC's Erie, Pennsylvania, fabrication
plant in connection with the formation of AKW and the subsequent decision to
close the remainder of the Erie plant in order to consolidate its forging
operations into two other facilities; (ii) a charge of $15.6 associated with
asset dispositions regarding product rationalization and geographical
optimization; and (iii) a charge of approximately $2.7 for benefit and other
costs associated with the consolidation or elimination of certain corporate and
other staff functions.
10. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
KACC has a variety of financial commitments, including purchase agreements,
tolling arrangements, forward foreign exchange and forward sales contracts (see
Note 11), letters of credit, and guarantees. Such purchase agreements and
tolling arrangements include long-term agreements for the purchase and tolling
of bauxite into alumina in Australia by QAL. These obligations expire in 2008.
Under the agreements, KACC is unconditionally obligated to pay its proportional
share of debt, operating costs, and certain other costs of QAL. KACC's share of
the aggregate minimum amount of required future principal payments at December
31, 1999, is $103.6 which matures as follows: $11.3 in 2000, $14.1 in 2001,
$43.0 in 2002, and $35.2 in 2003. KACC's share of payments, including operating
costs and certain other expenses under the agreements, has ranged between $92.0
- - $100.0 over the past three years. KACC also has agreements to supply alumina
to and to purchase aluminum from Anglesey.
Minimum rental commitments under operating leases at December 31, 1999, are as
follows: years ending December 31, 2000 - $36.0; 2001 - $33.6; 2002 - $29.3;
2003 - $26.2; 2004 - $24.7; thereafter - $88.7. The future minimum rentals
receivable under noncancelable subleases was $82.3 at December 31, 1999.
Rental expenses were $41.1, $34.5, and $30.4, for the years ended December 31,
1999, 1998, and 1997, respectively.
ENVIRONMENTAL CONTINGENCIES
The Company and KACC are subject to a number of environmental laws, to fines or
penalties assessed for alleged breaches of the environmental laws, and to claims
and litigation based upon such laws. KACC currently is subject to a number of
claims under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments Reauthorization
Act of 1986 ("CERCLA"), and, along with certain other entities, has been named
as a potentially responsible party for remedial costs at certain third-party
sites listed on the National Priorities List under CERCLA.
Based on the Company's evaluation of these and other environmental matters, the
Company has established environmental accruals, primarily related to potential
solid waste disposal and soil and groundwater remediation matters. The following
table presents the changes in such accruals, which are primarily included in
Long-term liabilities, for the years ended December 31, 1999, 1998, and 1997:
50
54
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------
Balance at beginning of period $ 50.7 $ 29.7 $ 33.3
Additional accruals 1.6 24.5 2.0
Less expenditures (3.4) (3.5) (5.6)
------ ------ ------
Balance at end of period $ 48.9 $ 50.7 $ 29.7
====== ====== ======
These environmental accruals represent the Company's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and the Company's
assessment of the likely remediation action to be taken. The Company expects
that these remediation actions will be taken over the next several years and
estimates that annual expenditures to be charged to these environmental accruals
will be approximately $3.0 to $9.0 for the years 2000 through 2004 and an
aggregate of approximately $23.0 thereafter.
As additional facts are developed and definitive remediation plans and necessary
regulatory approvals for implementation of remediation are established or
alternative technologies are developed, changes in these and other factors may
result in actual costs exceeding the current environmental accruals. The Company
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $30.0. As the resolution of these matters
is subject to further regulatory review and approval, no specific assurance can
be given as to when the factors upon which a substantial portion of this
estimate is based can be expected to be resolved. However, the Company is
currently working to resolve certain of these matters.
The Company believes that KACC has insurance coverage available to recover
certain incurred and future environmental costs and is pursuing claims in this
regard. During December 1998, KACC received recoveries totaling approximately
$35.0 from certain of its insurers related to current and future claims. Based
on the Company's analysis, a total of $12.0 of such recoveries was allocable to
previously accrued (expensed) items and, therefore, was reflected in earnings
during 1998. The remaining recoveries were offset against increases in the total
amount of environmental reserves. No assurances can be given that the Company
will be successful in other attempts to recover incurred or future costs from
other insurers or that the amount of recoveries received will ultimately be
adequate to cover costs incurred.
While uncertainties are inherent in the final outcome of these environmental
matters, and it is presently impossible to determine the actual costs that
ultimately may be incurred, management currently believes that the resolution of
such uncertainties should not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.
ASBESTOS CONTINGENCIES
KACC is a defendant in a number of lawsuits, some of which involve claims of
multiple persons, in which the plaintiffs allege that certain of their injuries
were caused by, among other things, exposure to asbestos during, and as a result
of, their employment or association with KACC or exposure to products containing
asbestos produced or sold by KACC. The lawsuits generally relate to products
KACC has not sold for at least 20 years.
The following table presents the changes in number of such claims pending for
the years ended December 31, 1999, 1998, and 1997.
1999 1998 1997
- -------------------------------------------------------------------------------------------
Number of claims at beginning of period 86,400 77,400 71,100
Claims received 29,300 22,900 15,600
Claims settled or dismissed (15,700) (13,900) (9,300)
------ ------ ------
Number of claims at end of period 100,000 86,400 77,400
======= ====== ======
51
55
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
The foregoing claims and settlement figures as of December 31, 1999, do not
reflect the fact that KACC has reached agreements under which it expects to
settle approximately 31,900 of the pending asbestos-related claims over an
extended period.
The Company maintains a liability for estimated asbestos-related costs for
claims filed to date and an estimate of claims to be filed over a 10 year period
(i.e., through 2009). The Company's estimate is based on the Company's view, at
each balance sheet date, of the current and anticipated number of
asbestos-related claims, the timing and amounts of asbestos-related payments,
the status of ongoing litigation and settlement initiatives, and the advice of
Wharton Levin Ehrmantraut Klein & Nash, P.A., with respect to the current state
of the law related to asbestos claims. However, there are inherent uncertainties
involved in estimating asbestos- related costs and the Company's actual costs
could exceed the Company's estimates due to changes in facts and circumstances
after the date of each estimate. Further, while the Company does not presently
believe there is a reasonable basis for estimating asbestos-related costs beyond
2009 and, accordingly, no accrual has been recorded for any costs which may be
incurred beyond 2009, the Company expects that such costs may continue beyond
2009, and that such costs could be substantial. As of December 31, 1999, an
estimated asbestos-related cost accrual of $387.8, before consideration of
insurance recoveries, has been reflected in the accompanying financial
statements primarily in Long-term liabilities. The Company estimates that annual
future cash payments for asbestos-related costs will range from approximately
$75.0 to $85.0 in the years 2000 to 2002, approximately $35.0 to $55.0 for each
of the years 2003 and 2004, and an aggregate of approximately $58.0 thereafter.
The Company believes that KACC has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Although the Company has
settled asbestos-related coverage matters with certain of its insurance
carriers, other carriers have not yet agreed to settlements. KACC has reached
preliminary agreements with certain insurance carriers under which it expects to
collect a substantial portion of its 2000 asbestos-related payments. The timing
and amount of future recoveries from these and other insurance carriers will
depend on the pace of claims review and processing by such carriers and on the
resolution of any disputes regarding coverage under such policies. The Company
believes that substantial recoveries from the insurance carriers are probable.
The Company reached this conclusion after considering its prior
insurance-related recoveries in respect of asbestos- related claims, existing
insurance policies, and the advice of Heller Ehrman White & McAuliffe LLP with
respect to applicable insurance coverage law relating to the terms and
conditions of those policies. Accordingly, an estimated aggregate insurance
recovery of $315.5, determined on the same basis as the asbestos-related cost
accrual, is recorded primarily in Other assets at December 31, 1999. However, no
assurances can be given that KACC will be able to project similar recovery
percentages for future asbestos-related claims or that the amounts related to
future asbestos-related claims will not exceed KACC's aggregate insurance
coverage.
Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative developments, and costs incurred
in order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from the
Company's underlying assumptions. This process resulted in the Company
reflecting charges of $53.2, $12.7, and $8.8 (included in Other income(expense))
in the years ended December 31, 1999, 1998, and 1997, respectively, for
asbestos-related claims, net of expected insurance recoveries, based on recent
cost and other trends experienced by KACC and other companies. While
uncertainties are inherent in the final outcome of these asbestos matters and it
is presently impossible to determine the actual costs that ultimately may be
incurred and insurance recoveries that will be received, management currently
believes that, based on the factors discussed in the preceding paragraphs, the
resolution of asbestos-related uncertainties and the incurrence of
asbestos-related costs net of related insurance recoveries should not have a
material adverse effect on the Company's consolidated financial position or
liquidity. However, as the Company's estimates are periodically re- evaluated,
additional charges may be necessary and such charges could be material to the
results of the period in which they are recorded.
LABOR MATTERS
In connection with the USWA strike and subsequent lock-out by KACC, certain
allegations of unfair labor practices ("ULPs") were filed with the National
Labor Relations Board ("NLRB") by the USWA. As previously disclosed, KACC
responded to all such allegations and believed that they were without merit. In
July 1999, the Oakland, California, regional office of the NLRB dismissed all
material charges filed against KACC. In September 1999, the union filed an
appeal of this ruling with the NLRB general counsel's office in Washington, D.C.
If the original decision were to be reversed, the matter would be referred to an
administrative law judge for a hearing whose outcome would be subject to an
additional appeal either by the USWA or KACC.
52
56
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
This process could take months or years. If these proceedings eventually
resulted in a definitive ruling against KACC, it could be obligated to provide
back pay to USWA members at the five plants and such amount could be
significant. However, while uncertainties are inherent in the final outcome of
such matters, the Company believes that the resolution of the alleged ULPs
should not result in a material adverse effect on the Company's consolidated
financial position, results of operations, or liquidity.
OTHER CONTINGENCIES
The Company or KACC is involved in various other claims, lawsuits, and other
proceedings relating to a wide variety of matters. While uncertainties are
inherent in the final outcome of such matters, and it is presently impossible to
determine the actual costs that ultimately may be incurred, management currently
believes that the resolution of such uncertainties and the incurrence of such
costs should not have a material adverse effect on the Company's consolidated
financial position, results of operations, or liquidity.
11. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
At December 31, 1999, the net unrealized loss on KACC's position in aluminum
forward sales and option contracts (excluding the impact of those contracts
discussed below which have been marked to market), energy forward purchase and
option contracts, and forward foreign exchange contracts, was approximately
$73.9 (based on comparisons to applicable year-end published market prices). As
KACC's hedging activities are generally designed to lock-in a specified price or
range of prices, gains or losses on the derivative contracts utilized in these
hedging activities will be offset by losses or gains, respectively, on the
transactions being hedged.
ALUMINA AND ALUMINUM
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. Primary
aluminum prices have historically been subject to significant cyclical price
fluctuations. Alumina prices as well as fabricated aluminum product prices
(which vary considerably among products) are significantly influenced by changes
in the price of primary aluminum but generally lag behind primary aluminum price
changes by up to three months. Since 1993, the Average Midwest United States
transaction price for primary aluminum has ranged from approximately $.50 to
$1.00 per pound.
From time to time in the ordinary course of business, KACC enters into hedging
transactions to provide price risk management in respect of the net exposure of
earnings and cash flows resulting from (i) anticipated sales of alumina, primary
aluminum and fabricated aluminum products, less (ii) expected purchases of
certain items, such as aluminum scrap, rolling ingot, and bauxite, whose prices
fluctuate with the price of primary aluminum. Forward sales contracts are used
by KACC to effectively fix the price that KACC will receive for its shipments.
KACC also uses option contracts (i) to establish a minimum price for its product
shipments, (ii) to establish a "collar" or range of prices for KACC's
anticipated sales, and/or (iii) to permit KACC to realize possible upside price
movements. As of December 31, 1999, KACC had entered into option contracts that
established a price range for 341,000 and 317,000 tons of primary aluminum with
respect to 2000 and 2001, respectively.
Additionally, through December 31, 1999, KACC had also entered a series of
transactions with a counterparty that will provide KACC with a premium over the
forward market prices at the date of the transaction for 2,000 tons of primary
aluminum per month during the period January 2000 through June 2001. KACC also
contracted with the counterparty to receive certain fixed prices (also above the
forward market prices at the date of the transaction) on 4,000 tons of primary
aluminum per month over a three year period commencing October 2001, unless
market prices during certain periods decline below a stipulated "floor" price,
in which case the fixed price sales portion of the transactions terminate. The
price at which the October 2001 and after transactions terminate is well below
current market prices. While the Company believes that the October 2001 and
after transactions are consistent with its stated hedging objectives, these
positions do not qualify for treatment as a "hedge" under current accounting
guidelines. Accordingly, these positions will be "marked-to-market" each period.
For the year ended December 31, 1999, the Company recorded mark-to-market
pre-tax charges of $32.8 in Other income (expense) associated with the
transactions described in this paragraph.
As of December 31, 1999, KACC had sold forward virtually all of the alumina
available to it in excess of its projected internal smelting requirements for
2000 and 2001 at prices indexed to future prices of primary aluminum.
53
57
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
ENERGY
KACC is exposed to energy price risk from fluctuating prices for fuel oil and
diesel oil consumed in the production process. KACC from time to time in the
ordinary course of business enters into hedging transactions with major
suppliers of energy and energy related financial instruments. As of December 31,
1999, KACC held a combination of fixed price purchase and option contracts for
an average of 232,000 barrels per month of fuel oil for 2000.
FOREIGN CURRENCY
KACC enters into forward exchange contracts to hedge material cash commitments
to foreign subsidiaries or affiliates. At December 31, 1999, KACC had net
forward foreign exchange contracts totaling approximately $88.5 for the purchase
of 133.0 Australian dollars from January 2000 through May 2001, in respect of
its Australian dollar denominated commitments from January 2000 through May
2001. In addition, KACC has entered into an option contract to purchase 42.0
Australian dollars for the period from January 2000 through June 2001.
12. SEGMENT AND GEOGRAPHICAL AREA INFORMATION
The Company's operations are located in many foreign countries, including
Australia, Canada, Ghana, Jamaica, and the United Kingdom. Foreign operations in
general may be more vulnerable than domestic operations due to a variety of
political and other risks. Sales and transfers among geographic areas are made
on a basis intended to reflect the market value of products.
The Company's operations are organized and managed by product type. The Company
operates in four segments of the aluminum industry: Alumina and bauxite, Primary
aluminum, Flat-rolled products and Engineered products. The Alumina and bauxite
business unit's principal products are smelter grade alumina and chemical grade
alumina hydrate, a value-added product, for which the Company receives a premium
over smelter grade market prices. The Primary aluminum business unit produces
commodity grade products as well as value-added products such as rod and billet,
for which the Company receives a premium over normal commodity market prices.
The Flat-rolled products group sells to the beverage container and specialty
coil markets as well as value-added products such as heat treat aluminum sheet
and plate which are used in the aerospace and general engineering markets. The
Engineered products business unit serves a wide range of industrial segments
including the automotive, distribution, aerospace and general engineering
markets.
The Company uses a portion of its bauxite, alumina and primary aluminum
production for additional processing at its downstream facilities. Transfers
between business units are made at estimated market prices. The accounting
policies of the segments are the same as those described in Note 1. Business
unit results are evaluated internally by management before any allocation of
corporate overhead and without any charge for income taxes or interest expense.
54
58
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
Financial information by operating segment at December 31, 1999, 1998, and 1997
is as follows:
Year Ended December 31,
----------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------
Net Sales:
Bauxite and Alumina:
Net sales to unaffiliated customers $ 397.9 (1) $ 472.7 $ 411.7
Intersegment sales 129.0 (1) 135.8 201.7
--------- ---------- ----------
526.9 608.5 613.4
--------- ---------- ----------
Primary Aluminum:
Net sales to unaffiliated customers 439.1 409.8 543.4
Intersegment sales 240.6 233.5 273.8
--------- ---------- ----------
679.7 643.3 817.2
--------- ---------- ----------
Flat-Rolled Products 576.2 714.6 743.3
Engineered Products 542.6 581.3 581.0
Minority interests 88.5 78.0 93.8
Eliminations (369.6) (369.3) (475.5)
--------- ---------- ----------
$ 2,044.3 $ 2,256.4 $ 2,373.2
========= ========== ==========
Equity in income (loss) of unconsolidated affiliates:
Bauxite and Alumina $ 3.4 $ (3.2) $ (7.0)
Primary Aluminum (1.0) 1.2 5.1
Engineered Products 2.5 7.8 4.8
Corporate and Other - (.4) -
--------- ---------- ----------
$ 4.9 $ 5.4 $ 2.9
========= ========== ==========
Operating income (loss):
Bauxite and Alumina $ (6.0)(2) $ 42.0 (6) $ 54.2
Primary Aluminum 8.0 (3) 49.9 (6) 148.3
Flat-Rolled Products 17.1 70.8 (6) 28.2 (7)
Engineered Products 38.6 47.5 (6) 42.3 (7)
Micromill (30.7)(4) (63.4)(4) (24.5)
Eliminations 6.9 8.9 (5.9)
Corporate and Other (62.8) (65.1) (74.6)(7)
--------- ---------- ----------
$ (28.9) $ 90.6 $ 168.0
========= ========== ==========
Depreciation and amortization:
Bauxite and Alumina $ 29.7 (5) $ 36.4 $ 39.4
Primary Aluminum 27.8 29.9 30.4
Flat-Rolled Products 16.2 16.1 16.0
Engineered Products 10.7 10.8 11.2
Micromill 2.3 3.6 3.2
Corporate and Other 2.8 2.3 2.3
--------- ---------- ----------
$ 89.5 $ 99.1 $ 102.5
========= ========== ==========
Capital expenditures:
Bauxite and Alumina $ 30.4 $ 26.9 $ 27.8
Primary Aluminum 12.8 20.7 42.6
Flat-Rolled Products 16.6 20.4 16.8
Engineered Products 7.8 8.4 31.2
Micromill - .2 8.3
Corporate and Other .8 1.0 1.8
--------- ---------- ----------
$ 68.4 $ 77.6 $ 128.5
========= ========== ==========
(1) Net sales for 1999 include approximately 264 tons of alumina purchased from
third parties and resold to certain unaffiliated customers of the Gramercy
facility and 131 tons of alumina purchased from third parties and resold to
the Company's primary business unit.
55
59
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
(2) Operating income (loss) for 1999 included estimated business interruption
insurance recoveries of $41.0.
(3) Operating income (loss) for 1999 included potline preparation and restart
costs of $12.8.
(4) Operating income (loss) for 1999 and 1998 included impairment charges of
$19.1 and $45.0, respectively.
(5) Depreciation was suspended for the Gramercy facility for the last six
months of 1999 as a result of the July 5, 1999, incident. Depreciation
expense for the Gramercy facility for the six months ended June 30, 1999,
was approximately $6.0.
(6) Operating income (loss) for 1998 for the Bauxite and alumina, Primary
aluminum, Flat-rolled products and Engineered products segments included
unfavorable strike-related impacts of approximately $11.0, $29.0, $16.0,
and $4.0, respectively.
(7) Operating income (loss) for 1997 included pre-tax charge of $2.6, $12.5 and
$4.6 related to the restructuring of operations for the Flat-rolled
products, Engineered products and Corporate segments, respectively.
December 31,
-------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------
Investments in and advances to unconsolidated affiliates:
Bauxite and Alumina $ 71.6 $ 76.8
Primary Aluminum 25.3 27.6
Engineered Products - 23.9
------------- -------------
$ 96.9 $ 128.3
============= =============
Segment assets:
Bauxite and Alumina $ 777.7 $ 669.0
Primary Aluminum 560.8 580.8
Flat-Rolled Products 423.2 431.2
Engineered Products 253.1 294.5
Micromill 3.0 25.3
Corporate and Other 1,181.0 990.1
------------- -------------
$ 3,198.8 $ 2,990.9
============= =============
Geographical information for net sales, based on country of origin, and
long-lived assets follows:
Year Ended December 31,
---------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------
Net sales to unaffiliated customers:
United States $ 1,401.8 $ 1,698.0 $ 1,720.3
Jamaica 233.1 237.0 204.6
Ghana 153.2 89.8 234.2
Other Foreign 256.2 231.6 214.1
------------ ------------- ------------
$ 2,044.3 $ 2,256.4 $ 2,373.2
============ ============= ============
December 31,
-----------------------------
1999 1998
- -----------------------------------------------------------------------
Long-lived assets: (1)
United States $ 688.1 $ 757.9
Jamaica 288.2 289.2
Ghana 84.1 90.2
Other Foreign 90.2 99.7
------------- ------------
$ 1,150.6 $ 1,237.0
============= ============
(1) Long-lived assets include Property, plant, and equipment, net, and
Investments in and advances to unconsolidated affiliates.
56
60
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
The aggregate foreign currency gain included in determining net income was
immaterial for the years ended December 31, 1999, 1998, and 1997.
No single customer accounted for sales in excess of 10% of total revenue in
1999, 1998, and 1997.
Export sales were less than 10% of total revenue during the years ended December
31, 1999, 1998, and 1997.
57
61
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
- -------------------------------------------------------------------------------
Quarter Ended
-------------------------------------------------------
(In millions of dollars, except share amounts) March 31, June 30, September 30, December 31,
- -----------------------------------------------------------------------------------------------------------
1999
Net sales $ 479.4 $ 525.0 $ 520.3 $ 519.6
Operating income (loss) (33.0) .7 (12.1) 15.5
Net income (loss) (38.2) (15.7)(1) (39.2)(2) 39.0(3)
Earnings (loss) per share:
Basic/Diluted (.48) (.20) (.49)(2) .49
Common stock market price:
High 6 7/8 10 1/8 9 3/4 8 1/4
Low 4 3/4 5 6 5/8 6
1998
Net sales $ 597.0 $ 614.8 $ 541.6 $ 503.0
Operating income (loss) 44.8 55.3 30.8 (40.3)
Net income (loss) 12.0 16.7 10.8(4) (38.9)(5)
Earnings per share:
Basic/Diluted .15 .21 .14 (.49)(5)
Common stock market price:
High 11 11 5/8 9 5/8 7 3/4
Low 8 1/8 8 7/8 5 5/8 4 5/8
1997
Net sales $ 547.4 $ 597.1 $ 634.1 $ 594.6
Operating income 31.3 35.3 54.5 46.9
Net income 2.6 13.7(6) 17.5(3) 14.2
Earnings per share:
Basic/Diluted .01 .16 .22 .18
Common stock market price:
High 13 5/8 12 1/4 16 14 7/8
Low 10 7/8 10 1/8 11 5/8 8 3/8
(1) Includes three essentially offsetting items, a pre-tax gain of $50.5 on the
sale of the Company's interests in AKW, a non-cash pre-tax charge of $38.0
for asbestos-related claims and a pre-tax charge of $13.5 to reflect a
mark-to-market adjustment on certain primary aluminum hedging transactions.
(2) Includes a non-cash pre-tax charge of $19.1 to reduce the carrying
value of the Company's Micromill assets, a non-cash pre-tax charge of $15.2
for asbestos-related claims and a pre-tax charge of $5.9 to reflect a
mark-to-market adjustment on certain primary aluminum hedging transactions.
Excluding these items, basic loss per share would have been approximately
$.16.
(3) Includes a pre-tax gain of $85.0 on involuntary conversion at Gramercy
facility, which amount represents the difference between the minimum
expected property damage reimbursement amount for the Gramercy alumina
refinery and the net carrying value of the damaged property.
(4) Includes two essentially offsetting non-recurring items, a favorable $8.3
non-cash tax provision benefit resulting from the resolution of certain
matters and an approximate $10.0 unfavorable gross profit impact of
preparing for a strike by employees represented by the USWA at five
locations.
(5) Includes an unfavorable pre-tax strike-related gross profit impact of
approximately $50.0, and a non-cash pre-tax charge of $45.0 related to
impairment of the Company's Micromill assets. Excluding these items, basic
earnings per share would have been approximately $.29.
(6) Includes a $19.7 pre-tax charge for restructuring of operations, an
offsetting after-tax benefit of $12.5 related to the settlement of certain
tax matters and a $5.8 pre-tax charge for litigation matters.
58
62
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
FIVE-YEAR FINANCIAL DATA
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
--------------------------------------------------
(In millions of dollars) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 21.2 $ 98.3 $ 15.8 $ 81.3 $ 21.9
Receivables 261.0 282.7 340.2 252.4 308.6
Inventories 546.1 543.5 568.3 562.2 525.7
Prepaid expenses and other current assets 145.6 105.5 121.3 127.8 76.6
-------- -------- -------- -------- --------
Total current assets 973.9 1,030.0 1,045.6 1,023.7 932.8
Investments in and advances to unconsolidated affiliates 96.9 128.3 148.6 168.4 178.2
Property, plant, and equipment - net 1,053.7 1,108.7 1,171.8 1,168.7 1,109.6
Deferred income taxes 440.0 377.9 330.6 264.5 269.1
Other assets 634.3 346.0 317.3 308.7 323.5
-------- -------- -------- -------- --------
Total $3,198.8 $2,990.9 $3,013.9 $2,934.0 $2,813.2
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accruals $ 500.3 $ 432.7 $ 457.3 $ 453.4 $ 451.2
Accrued postretirement medical benefit obligation -
current portion 51.5 48.2 45.3 50.1 46.8
Payable to affiliates 85.8 77.1 82.7 97.0 94.2
Long-term debt - current portion .3 .4 8.8 8.9 8.9
-------- -------- -------- -------- --------
Total current liabilities 637.9 558.4 594.1 609.4 601.1
Long-term liabilities 727.1 532.9 491.9 458.1 548.5
Accrued postretirement medical benefit obligation 678.3 694.3 720.3 722.5 734.0
Long-term debt 972.5 962.6 962.9 953.0 749.2
Minority interests 117.7 123.5 127.7 121.7 122.7
Stockholders' equity:
Preferred stock - - - .4 .4
Common stock .8 .8 .8 .7 .7
Additional capital 536.8 535.4 533.8 531.1 530.3
Retained earnings (accumulated deficit) (471.1) (417.0) (417.6) (460.1) (459.9)
Accumulated other comprehensive income -
additional minimum pension
liability (1.2) - - (2.8) (13.8)
-------- -------- -------- -------- --------
Total stockholders' equity 65.3 119.2 117.0 69.3 57.7
-------- -------- -------- -------- --------
Total $3,198.8 $2,990.9 $3,013.9 $2,934.0 $2,813.2
======== ======== ======== ======== ========
Debt-to-capital ratio(1) 81.2 76.9 77.8 81.2 78.1
(1) Total of long-term debt - current portion and long-term debt (collectively
"total debt") as a ratio of total debt, deferred income tax liabilities,
minority interests, and stockholders' equity.
59
63
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
FIVE-YEAR FINANCIAL DATA
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
- ------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------
(In millions of dollars, except share amounts) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Net sales $2,044.3 $2,256.4 $2,373.2 $2,190.5 $2,237.8
-------- -------- -------- -------- --------
Costs and expenses:
Cost of products sold 1,859.2 1,906.2 1,951.2 1,857.5 1,787.0
Depreciation and amortization 89.5 99.1 102.5 107.6 105.7
Selling, administrative, research and development, and
general 105.4 115.5 131.8 127.6 134.5
Impairment of Micromill(TM) assets/restructuring of
operations 19.1 45.0 19.7 -- --
-------- -------- -------- -------- --------
Total costs and expenses 2,073.2 2,165.8 2,205.2 2,092.7 2,027.2
-------- -------- -------- -------- --------
Operating income (loss) (2) (28.9) 90.6 168.0 97.8 210.6
Other income (expense):
Interest expense (110.1) (110.0) (110.7) (93.4) (93.9)
Gain on involuntary conversion at Gramercy facility 85.0 -- -- -- --
Other - net (1) (35.9) 3.5 3.0 (2.7) (14.1)
-------- -------- -------- -------- --------
Income (loss) before income taxes, minority interests (89.9) (15.9) 60.3 1.7 102.6
Benefit (provision) for income taxes 32.7 16.4 (8.8) 9.3 (37.2)
Minority interests 3.1 .1 (3.5) (2.8) (5.1)
-------- -------- -------- -------- --------
Net income (loss) (54.1) .6 48.0 8.2 60.3
Preferred stock dividends -- -- (5.5) (8.4) (17.6)
-------- -------- -------- -------- --------
Net income (loss) available to common shareholders (54.1) $ .6 $ 42.5 $ (.2) $ 42.7
======== ======== ======== ======== ========
Earnings (loss) per share:
Basic/Diluted $ (.68) $ .01 $ .57 $ .00 $ .69
Weighted average shares outstanding (000):
Basic 79,336 79,115 74,221 71,644 62,000
Diluted 79,336 79,156 74,382 71,644 62,264
(1) 1999 includes a gain of $50.5 on the sale of the Company's interests in
AKW, non-cash charges of $53.2 for asbestos-related claims and charges of
$32.8 to reflect mark-to-market adjustments on certain primary aluminum
hedging transactions.
(2) 1998 includes an adverse strike-related impact of approximately $60.0.
60
64
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Information required under PART III (Items 10, 11, 12, and 13) has been omitted
from this Report since the Company intends to file with the Securities and
Exchange Commission, not later than 120 days after the close of its fiscal year,
a definitive proxy statement pursuant to Regulation 14A which involves the
election of directors, and such information is incorporated by reference from
such definitive proxy statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
1.Index to Financial Statements --------------------
The Consolidated Financial Statements of the Company,
the Notes to Consolidated Financial Statements, the
Report of Independent Public Accountants, Quarterly
Financial Data, and Five-Year Financial Data are
included on pages 29 - 59 of the Annual Report.
2. Financial Statement Schedules
Page
----------------------------------
Report of Independent Public Accountants 17
Schedule I - Condensed Balance Sheets - Parent
Company,
Condensed Statements of Income -
Parent Company,
Condensed Statements of Cash Flows
- Parent Company, and
Notes to Condensed Financial
Statements - Parent Company 18-21
All other schedules are inapplicable or the required
information is included in the Consolidated Financial
Statements or the Notes thereto.
3. Exhibits
--------
Reference is made to the Index of Exhibits immediately
preceding the exhibits hereto (beginning on page 23)
1. Financial Statements....................................................................Page
Report of Independent Public Accountants.......................................................31
Consolidated Balance Sheets....................................................................32
Statements of Consolidated Income (Loss).......................................................33
Statements of Consolidated Cash Flows..........................................................34
Notes to Consolidated Financial Statements.....................................................35
Quarterly Financial Data (Unaudited)...........................................................58
Five-Year Financial Data.......................................................................59
2. Financial Statement Schedules...........................................................Page
Report of Independent Public Accountants..................................................63
Schedule I - Condensed Balance Sheets - Parent Company,
Condensed Statements of Income - Parent Company,
Condensed Statements of Cash Flows - Parent Company, and
Notes to Condensed Financial Statements - Parent Company.............64-67
All other schedules are inapplicable or the required information
is included in the Consolidated Financial Statements or the Notes
thereto.
3. Exhibits
Reference is made to the Index of Exhibits immediately preceding
the exhibits hereto (beginning on page 69), which index is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
No Report on Form 8-K was filed by the Company during the last quarter
of the period covered by this Report.
61
65
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
(c) EXHIBITS
Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 23)69), which index is incorporated herein by
reference.
62
66
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with auditing standards generally accepted auditing
standards,in the
United States, the financial statements included in Kaiser Aluminum Corporation
and Subsidiary Companies' annual report to shareholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated February 28, 1999.March 7,
2000. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule I listed in the index at Item
14(a)2. above is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not a required part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in our audit of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 28, 1999March 7, 2000
63
67
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
SCHEDULE I
CONDENSED BALANCE SHEETS - PARENT COMPANY
(In millions of dollars, except share amounts)
December 31,
--------------------------------------------------------
1999 1998
1997
-------------- ------------------------ ----------
ASSETS
Investment in KACC $ 1,978.2 $ 1,913.3
$ 1,802.8
-------------- ------------------------ ----------
Total $ 1,978.2 $ 1,913.3
$ 1,802.8
============== ======================== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ --- $ 3.2--
Intercompany note payable to KACC, including accrued interest 1,912.9 1,794.1 1,682.6
Stockholders' equity:
Common stock, par value $.01, authorized 100,000,000125,000,000 shares; issued and
outstanding 79,405,333 and 79,153,543 in 1999 and 78,980,881 in 1998
and 1997 .8 .8
Additional capital 536.8 535.4 533.8
Accumulated deficit (471.1) (417.0)
(417.6)
-------------- --------------Accumulated other comprehensive income - additional minimum pension liability (1.2) --
---------- ----------
Total stockholders' equity 65.3 119.2
117.0
-------------- ------------------------ ----------
Total $ 1,978.2 $ 1,913.3
$ 1,802.8
============== ======================== ==========
The accompanying notes to condensed financial statements are
an integral part of these statements.
64
68
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
SCHEDULE I
CONDENSED STATEMENTS OF INCOME (LOSS) - PARENT COMPANY
(In millions of dollars)
December 31,
------------------------------------------
1999 1998 1997
1996
-------------- -------------- ------------------------ ---------- ----------
Equity in income of KACC $ 65.1 $ 112.5 $ 154.2 $ 108.7
Administrative and general expense (.3) (.4) (1.7)
(2.2)
Interest expense (118.9) (111.5) (104.5)
(98.3)
-------------- -------------- ------------------------ ---------- ----------
Net income (loss) $ (54.1) $ .6 $ 48.0
$ 8.2
============== ============== ======================== ========== ==========
The accompanying notes to condensed financial statements are an
integral part of these statements.
65
69
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
SCHEDULE I
CONDENSED STATEMENTS OF CASH FLOWS - PARENT COMPANY
(In millions of dollars)
December 31,
----------------------------------------------------------------------------------------
1999 1998 1997
1996
-------------- -------------- ------------------------ ---------- ----------
Cash flows from operating activities:
Net income (loss) $ (54.1) $ .6 $ 48.0 $ 8.2
Adjustments to reconcile net income to net cash used for operating activities:
Equity in income of KACC (65.1) (112.5) (154.2) (108.7)
Accrued interest on intercompany note payable to KACC 118.9 111.5 104.5 98.3
Accrued taxes paid -- (3.3) (1.8)
(2.7)
-------------- -------------- ------------------------ ---------- ----------
Net cash used forby operating activities (.3) (3.7) (3.5)
(4.9)
-------------- -------------- ------------------------ ---------- ----------
Cash flows from investing activities:
Investment in KACC (.1) (.1) (.3)
(.1)
-------------- -------------- ------------------------ ---------- ----------
Net cash used forby investing activities (.1) (.1) (.3)
(.1)
-------------- -------------- ------------------------ ---------- ----------
Cash flows from financing activities:
Dividends paid --- -- (4.2) (10.5)
Capital stock issued .1 .1 .4 .1
Payments from KACC on intercompany note receivable --- -- 4.2 10.5
Tax allocation payments from KACC -- 3.3 1.8 2.7
Operating cost advances from KACC .4.3 4 1.6
2.0
-------------- -------------- ------------------------ ---------- ----------
Net cash provided by financing activities .4 3.8 3.8
4.8
-------------- -------------- ------------------------ ---------- ----------
Net (decrease) increase in cash and cash equivalents during the year - - (.2)-- -- --
Cash and cash equivalents at beginning of year - - .2
-------------- -------------- ---------------- -- --
---------- ---------- ----------
Cash and cash equivalents at end of year $ --- $ --- $ -
============== ============== ==============--
========== ========== ==========
Supplemental disclosure of non-cash investing activities:
Non-cash (decrease) increase in investment in KACC $ (.1) $ (1.7) $ 4.4 $ -
The accompanying notes to condensed financial statements are an
integral part of these statements.
66
70
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
SCHEDULE I
NOTES TO CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY
1. BASIS OF PRESENTATION
Kaiser Aluminum Corporation (the " Company") is a holding company and conducts
its operations through its wholly owned subsidiary, Kaiser Aluminum & Chemical
Corporation ("KACC"), which is reported herein using the equity method of
accounting. The accompanying parent company condensed financial statements of
the Company should be read in conjunction with the 19981999 consolidated financial
statements of Kaiser Aluminum Corporation and Subsidiary Companies ("Kaiser").
Certain reclassifications of prior-year information were made to conform to the
current presentation.
2. INTERCOMPANY NOTE PAYABLE
The Intercompany Note to KACC, as amended, provides for a fixed interest rate of
6-5/65/8%. No interest orInterest and 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.schedule starting December 31, 2000. However, as the Company
has both the ability and intent to amend the payment terms so that no amounts
come due during 2000, a portion of the Intercompany Note has not been reflected
as a current maturity.
3. RESTRICTED NET ASSETS
The investment in KACC is substantially unavailable to the Company pursuant to
the terms of certain debt instruments. The obligations of KACC in respect of the
credit facilities under the Credit Agreement are guaranteed by the Company and
substantially by allcertain significant subsidiaries of KACC. See Note 5 of Notes to Kaiser's
Consolidated Financial Statements.
67
71
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KAISER ALUMINUM CORPORATION
Date: March 30, 199910, 2000 By George T. Haymaker, Jr.
George T. Haymaker, Jr.
Chairman of the Board
andRaymond J. Milchovich
----------------------------------------
Raymond J. Milchovich
President, Chief Executive Officer,
Chief Operating Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 30, 1999 George T. Haymaker, Jr.
George T. Haymaker, Jr.
Chairman of the Board
and10, 2000
Raymond J. Milchovich
----------------------------------------
Raymond J. Milchovich.
President, Chief Executive Officer,
Chief Operating Officer and Director
(Principal Executive Officer)
Date: March 30, 199910, 2000
John T. La Duc
----------------------------------------
John T. La Duc
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 30, 199910, 2000
Daniel D. Maddox
----------------------------------------
Daniel D. Maddox
Vice President and Controller
(Principal Accounting Officer)
Date: March 30, 199910, 2000 George T. Haymaker, Jr.
----------------------------------------
George T. Haymaker, Jr.
Chairman of the Board
Date: March 10, 2000
Robert J. Cruikshank
----------------------------------------
Robert J. Cruikshank
Director
Date: March 30, 199910, 2000
Charles E. Hurwitz
----------------------------------------
Charles E. Hurwitz
Director
Date: March 30, 199910, 2000
Ezra G. Levin
----------------------------------------
Ezra G. Levin
Director
Date: March 30, 1999 Robert Marcus
Robert Marcus10, 2000
James D. Woods
----------------------------------------
James D. Woods
Director
Date: March 30, 1999 Robert J. Petris
Robert J. Petris
Director68
72
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
INDEX OF EXHIBITS
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of Kaiser
Aluminum Corporation (the "Company" or "KAC"), dated
February 21,1991 (incorporated by reference to Exhibit
3.1 to Amendment No. 2 to the Registration Statement on
Form S-1, dated June 11, 1991, filed by KAC,
Registration No. 33-37895).
3.2 Certificate of Retirement of KAC, dated October 24,
1995 (incorporated by reference to Exhibit 3.2 to the
Report on Form 10-K for the period ended December 31,
1995, filed by KAC, File No. 1-9447).
3.3 Certificate of Retirement of Kaiser Aluminum
Corporation, dated February 12, 1998 (incorporated by
reference to Exhibit 3.3 to the Report on From 10-K for
the period ended December 31, 1997, filed by KAC, File
No. 1-9447).
3.4 Amended and Restated By-Laws of Kaiser Aluminum
Corporation, dated October 1, 1997 (incorporated by
reference to Exhibit 3.3 to the Report on Form 10-Q for
the quarterly period ended September 30, 1997, filed by
KAC, File No. 1-9447).
4.1 Indenture, dated as of February 1, 1993, among Kaiser
Aluminum & Chemical Corporation ("KACC"), as Issuer,
Kaiser Alumina Australia Corporation, Alpart Jamaica
Inc., and Kaiser Jamaica Corporation, 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 Form 10-K for the period ended December 31,
1992, filed by KACC, File No. 1-3605).
4.2 First Supplemental Indenture, dated as of May 1, 1993,
to the Indenture, dated as of February 1, 1993
(incorporated by reference to Exhibit 4.2 to the Report
on Form 10-Q for the quarterly period ended June 30,
1993, filed by KACC, File No. 1-3605).
4.3 Second Supplemental Indenture, dated as of February 1,
1996, to the Indenture, dated as of February 1, 1993
(incorporated by reference to Exhibit 4.3 to the Report
on Form 10-K for the period ended December 31, 1995,
filed by KAC, File No. 1-9447).
4.4 Third Supplemental Indenture, dated as of July 15,
1997, to the Indenture, dated as of February 1, 1993
(incorporated by reference to Exhibit 4.1 to the report
on Form 10-Q for the quarterly period ended June 30,
1997, filed by KAC, File No. 1-9447).
4.5 Indenture, dated as of February 17, 1994, among KACC,
as Issuer, Kaiser Alumina Australia Corporation, Alpart
Jamaica Inc., Kaiser Jamaica Corporation, and Kaiser
Finance Corporation, as Subsidiary Guarantors, and
First Trust National Association, as Trustee, regarding
KACC's 9-7/
Exhibit
Number Description
------ -----------
*3.1 Restated Certificate of Incorporation of Kaiser Aluminum Corporation
(the "Company" or "KAC"), dated February 18, 2000.
3.2 Certificate of Retirement of KAC, dated October 24, 1995
(incorporated by reference to Exhibit 3.2 to the Report on Form 10-K
for the period ended December 31, 1995, filed by KAC, File No.
1-9447).
3.3 Certificate of Retirement of Kaiser Aluminum Corporation, dated
February 12, 1998 (incorporated by reference to Exhibit 3.3 to the
Report on From 10-K for the period ended December 31, 1997, filed by
KAC, File No. 1-9447).
3.4 Certificate of Elimination of KAC, dated July 1, 1998 (incorporated
by reference to Exhibit 3.4 to the Report on Form 10-Q for the
quarterly period ended June 30, 1999, filed by KAC, File No. 1-9447).
*3.5 Certificate of Amendment of the Restated Certificate of Incorporation
of Kaiser Aluminum Corporation, dated January 10, 2000.
3.6 Amended and Restated By-Laws of Kaiser Aluminum Corporation, dated
October 1, 1997 (incorporated by reference to Exhibit 3.3 to the
Report on Form 10-Q for the quarterly period ended September 30,
1997, filed by KAC, File No. 1-9447).
4.1 Indenture, dated as of February 1, 1993, among Kaiser Aluminum &
Chemical Corporation ("KACC"), as Issuer, Kaiser Alumina Australia
Corporation, Alpart Jamaica Inc., and Kaiser Jamaica Corporation, 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 Form 10-K for the period
ended December 31, 1992, filed by KACC, File No. 1-3605).
4.2 First Supplemental Indenture, dated as of May 1, 1993, to the
Indenture, dated as of February 1, 1993 (incorporated by reference to
Exhibit 4.2 to the Report on Form 10-Q for the quarterly period ended
June 30, 1993, filed by KACC, File No. 1-3605).
4.3 Second Supplemental Indenture, dated as of February 1, 1996, to the
Indenture, dated as of February 1, 1993 (incorporated by reference to
Exhibit 4.3 to the Report on Form 10-K for the period ended December
31, 1995, filed by KAC, File No. 1-9447).
4.4 Third Supplemental Indenture, dated as of July 15, 1997, to the
Indenture, dated as of February 1, 1993 (incorporated by reference to
Exhibit 4.1 to the Report on Form 10-Q for the quarterly period ended
June 30, 1997, filed by KAC, File No. 1-9447).
4.5 Fourth Supplemental Indenture, dated as of March 31, 1999, to the
Indenture, dated as of February 1, 1993, (incorporated by reference
to Exhibit 4.1 to the Report on Form 10-Q for the quarterly period
ended March 31, 1999, filed by KAC, File No. 1-9447).
4.6 Indenture, dated as of February 17, 1994, among KACC, as Issuer,
Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser
Jamaica Corporation, and Kaiser Finance Corporation, as Subsidiary
Guarantors, and First Trust National Association, as Trustee,
regarding KACC's 97/8% Senior Notes Due 2002 (incorporated by
reference to Exhibit 4.3 to the Report on Form 10-K for the period
ended December 31, 1993, filed by KAC, File No. 1-9447).
4.6 First Supplemental Indenture, dated as of February 1,
1996, to the Indenture, dated as of February 17, 1994
(incorporated by reference to Exhibit 4.5 to the Report
on Form 10-K for the period ended December 31, 1995,
filed by KAC, File No. 1-9447).
4.7 Second Supplemental Indenture, dated as of July 15,
1997, to the Indenture, dated as of February 17, 1994
(incorporated by reference to Exhibit 4.2 to the report
on Form 10-Q for the quarterly period ended June 30,
1997, filed by KAC, File No. 1-9447).
4.8 Indenture, dated as of October 23, 1996, among KACC, as
Issuer, Kaiser Alumina Australia Corporation, Alpart
Jamaica Inc., Kaiser Jamaica Corporation, Kaiser
Finance Corporation, Kaiser Micromill Holdings, LLC,
Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill
Holdings, LLC and Kaiser Texas Sierra Micromills, LLC,
as Subsidiary Guarantors, and First Trust National
Association, as Trustee, regarding KACC's 10-7/8%
Series B Senior Notes Due 2006 (incorporated by
reference to Exhibit 4.2 to the Report on Form 10-Q for
the quarterly period ended September 30, 1996, filed by
KAC, File No. 1-9447).
4.9 First Supplemental Indenture, dated as of July 15,
1997, to the Indenture, dated as of October 23, 1996
(incorporated by reference to Exhibit 4.3 to the Report
on Form 10-Q for the quarterly period ended June 30,
1997, filed by KAC, File No. 1-9447).
4.10 Indenture, dated as of December 23, 1996, among KACC,
as Issuer, Kaiser Alumina Australia Corporation, Alpart
Jamaica Inc., Kaiser Jamaica Corporation, Kaiser
Finance Corporation, Kaiser Micromill Holdings, LLC,
Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill
Holdings, LLC, and Kaiser Texas Sierra Micromills, LLC,
as Subsidiary Guarantors, and First Trust National
Association, as Trustee, regarding KACC's 10 7/8%
Series D Senior Notes due 2006 (incorporated by
reference to Exhibit 4.4 to the Registration Statement
on Form S-4, dated January 2, 1997, filed by KACC,
Registration No. 333-19143).
4.11 First Supplemental Indenture, dated as of July 15,
1997, to the Indenture, dated as of December 23, 1996
(incorporated by reference to Exhibit 4.4 to the Report
on Form 10-Q for the quarterly period ended June 30,
1997, filed by KAC, File No. 1-9447).
4.12 Credit Agreement, dated as of February 15, 1994, among
KAC, KACC, the financial institutions a party thereto,
and BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.4 to the Report
on Form 10-K for the period ended December 31, 1993,
69
73
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
Exhibit
Number Description
------ -----------
4.7 First Supplemental Indenture, dated as of February 1, 1996, to the
Indenture, dated as of February 17, 1994 (incorporated by reference
to Exhibit 4.5 to the Report on Form 10-K for the period ended
December 31, 1995, filed by KAC, File No. 1-9447).
4.8 Second Supplemental Indenture, dated as of July 15, 1997, to the
Indenture, dated as of February 17, 1994 (incorporated by reference
to Exhibit 4.2 to the Report on Form 10-Q for the quarterly period
ended June 30, 1997, filed by KAC, File No. 1-9447).
4.9 Third Supplemental Indenture, dated as of March 31, 1999, to the
Indenture, dated as of February 17, 1994 (incorporated by reference
to Exhibit 4.2 to the Report on Form 10-Q for the quarterly period
ended March 31, 1999, filed by KAC, File No. 1-9447).
4.10 Indenture, dated as of October 23, 1996, among KACC, as Issuer,
Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser
Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill
Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill
Holdings, LLC and Kaiser Texas Sierra Micromills, LLC, as Subsidiary
Guarantors, and First Trust National Association, as Trustee,
regarding KACC's 107/8% Series B Senior Notes Due 2006 (incorporated
by reference to Exhibit 4.2 to the Report on Form 10-Q for the
quarterly period ended September 30, 1996, filed by KAC, File No.
1-9447).
4.11 First Supplemental Indenture, dated as of July 15, 1997, to the
Indenture, dated as of October 23, 1996 (incorporated by reference to
Exhibit 4.3 to the Report on Form 10-Q for the quarterly period ended
June 30, 1997, filed by KAC, File No. 1-9447).
4.12 Second Supplemental Indenture, dated as of March 31, 1999, to the
Indenture, dated as of October 23, 1996 (incorporated by reference to
Exhibit 4.3 to the Report on Form 10-Q for the quarterly period ended
March 31, 1999, filed by KAC, File No. 1-9447).
4.13 Indenture, dated as of December 23, 1996, among KACC, as Issuer,
Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser
Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill
Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill
Holdings, LLC, and Kaiser Texas Sierra Micromills, LLC, as Subsidiary
Guarantors, and First Trust National Association, as Trustee,
regarding KACC's 10 7/8% Series D Senior Notes due 2006 (incorporated
by reference to Exhibit 4.4 to the Registration Statement on Form
S-4, dated January 2, 1997, filed by KACC, Registration No.
333-19143).
4.14 First Supplemental Indenture, dated as of July 15, 1997, to the
Indenture, dated as of December 23, 1996 (incorporated by reference
to Exhibit 4.4 to the Report on Form 10-Q for the quarterly period
ended June 30, 1997, filed by KAC, File No. 1-9447).
4.15 Second Supplemental Indenture, dated as of March 31, 1999, to the
Indenture, dated as of December 23, 1996 (incorporated by reference
to Exhibit 4.4 to the Report on Form 10-Q for the quarterly period
ended March 31, 1999, filed by KAC, File No. 1-9447).
4.16 Credit Agreement, dated as of February 15, 1994, among KAC, KACC, the
financial institutions a party thereto, and BankAmerica Business
Credit, Inc., as Agent (incorporated by reference to Exhibit 4.4 to
the Report on Form 10-K for the period ended December 31, 1993, filed
by KAC, File No. 1-9447).
4.17 First Amendment to Credit Agreement, dated as of July 21, 1994,
amending the Credit Agreement, dated as of February 15, 1994, among
KAC, KACC, the financial institutions party thereto, and BankAmerica
Business Credit, Inc., as Agent (incorporated by reference to Exhibit
4.1 to the Report on Form 10-Q for the quarterly period ended June
30, 1994, filed by KAC, File No. 1-9447).
4.14 Second Amendment to Credit Agreement, dated as of March
10, 1995, amending the Credit Agreement, dated as of
February 15, 1994, as amended, among KAC, KACC, the
financial institutions party thereto, and BankAmerica
Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.6 to the Report on Form 10-K for
the period ended December 31, 1994, filed by KAC, File
No. 1-9447).
4.15 Third Amendment to Credit Agreement, dated as of July
20, 1995, amending the Credit Agreement, dated as of
February 15, 1994, as amended, among KAC, KACC, the
financial institutions a party thereto, and BankAmerica
Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.1 to the Report on Form 10-Q for
the quarterly period ended June 30, 1995, filed by KAC,
File No. 1-9447).
4.16 Fourth Amendment to Credit Agreement, dated as of
October 17, 1995, amending the Credit Agreement, dated
as of February 15, 1994, as amended, among KAC, KACC,
the financial institutions a party thereto, and
BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.1 to the Report
on Form 10-Q for the quarterly period ended September
30, 1995, filed by KAC, File No. 1-9447).
4.17 Fifth Amendment to Credit Agreement, dated as of
December 11, 1995, amending the Credit Agreement, dated
as of February 15, 1994, as amended, among KAC, KACC,
the financial institutions a party thereto, and
BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.11 to the
Report on Form 10-K for the period ended December 31,
1995, filed by KAC, File No. 1-9447).
70
74
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
Exhibit
Number Description
------ -----------
4.18 Second Amendment to Credit Agreement, dated as of March 10, 1995,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among KAC, KACC, the financial institutions party thereto,
and BankAmerica Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.6 to the Report on Form 10-K for the period
ended December 31, 1994, filed by KAC, File No. 1-9447).
4.19 Third Amendment to Credit Agreement, dated as of July 20, 1995,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among KAC, KACC, the financial institutions a party thereto,
and BankAmerica Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.1 to the Report on Form 10-Q for the quarterly
period ended June 30, 1995, filed by KAC, File No. 1-9447).
4.20 Fourth Amendment to Credit Agreement, dated as of October 17, 1995,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among KAC, KACC, the financial institutions a party thereto,
and BankAmerica Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.1 to the Report on Form 10-Q for the quarterly
period ended September 30, 1995, filed by KAC, File No. 1-9447).
4.21 Fifth Amendment to Credit Agreement, dated as of December 11, 1995,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among KAC, KACC, the financial institutions a party thereto,
and BankAmerica Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.11 to the Report on Form 10-K for the period
ended December 31, 1995, filed by KAC, File No. 1-9447).
4.22 Sixth Amendment to Credit Agreement, dated as of October 1, 1996,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among KAC, KACC, the financial institutions a party thereto,
and BankAmerica Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.1 to the Report on Form 10-Q for the quarterly
period ended September 30, 1996, filed by KAC, File No. 1-9447).
4.19 Seventh Amendment to Credit Agreement, dated as of
December 17, 1996, amending the Credit Agreement, dated
as of February 15, 1994, as amended, among KAC, KACC,
the financial institutions a party thereto, and
BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.18 to the
Registration Statement on Form S-4, dated January 2,
1997, filed by KACC, Registration No. 333-19143).
4.20 Eighth Amendment to Credit Agreement, dated as of
February 24, 1997, amending the Credit Agreement, dated
as of February 15, 1994, as amended, among KACC,
Kaiser, the financial institutions a party thereto, and
BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.16 to the
Report on Form 10-K for the period ended December 31,
1996, filed by KAC, File No. 1-9447).
4.21 Ninth Amendment to Credit Agreement, dated as of April
21, 1997, amending the Credit Agreement, dated as of
February 15, 1994, as amended, among KACC, KAC, the
financial institutions a party thereto, and BankAmerica
Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.5 to the Report on From 10-Q for
the quarterly period ended June 30, 1997, filed by KAC,
File No. 1-9447).
4.22 Tenth amendment to Credit Agreement, dated as of June
25, 1997, amending the Credit Agreement, dated as of
February 15, 1994, as amended, among KACC, KAC, the
financial institutions a party thereto, and BankAmerica
Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.6 to the Report on Form 10-Q for
the quarterly period ended June 30, 1997, filed by KAC, File No. 1-9447).
4.23 Seventh Amendment to Credit Agreement, dated as of December 17, 1996,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among KAC, KACC, the financial institutions a party thereto,
and BankAmerica Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.18 to the Registration Statement on Form S-4,
dated January 2, 1997, filed by KACC, Registration No. 333-19143).
4.24 Eighth Amendment to Credit Agreement, dated as of February 24, 1997,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among KACC, Kaiser, the financial institutions a party
thereto, and BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.16 to the Report on Form 10-K
for the period ended December 31, 1996, filed by KAC, File No.
1-9447).
4.25 Ninth Amendment to Credit Agreement, dated as of April 21, 1997,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among KACC, KAC, the financial institutions a party thereto,
and BankAmerica Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.5 to the Report on From 10-Q for the quarterly
period ended June 30, 1997, filed by KAC, File No. 1-9447).
4.26 Tenth amendment to Credit Agreement, dated as of June 25, 1997,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among KACC, KAC, the financial institutions a party thereto,
and BankAmerica Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.6 to the Report on Form 10-Q for the quarterly
period ended June 30, 1997, filed by KAC, File No. 1-9447).
4.27 Eleventh Amendment to Credit Agreement, dated as of October 20, 1997,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among KACC, KAC, the financial institutions a party thereto,
and BankAmerica Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.7 to the Report on Form 10-Q for the quarterly
period ended September 30, 1997, filed by KAC, File No. 1-9447).
4.24
71
75
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
Exhibit
Number Description
------ -----------
4.28 Twelfth Amendment to Credit Agreement, dated as of January 13, 1998,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among KACC, KAC, the financial institutions a party thereto,
and BankAmerica Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.24 to the Report on Form 10-K for the period
ended December 31, 1997, filed by KAC, File No. 1-9447).
4.29 Thirteenth Amendment to Credit Agreement, dated as of July 20, 1998,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among KACC, KAC, the financial institutions party thereto,
and BankAmerica Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4 to the Report on Form 10-Q for the quarterly
period ended June 30, 1998, filed by KAC, File No. 1-9447).
4.30 Fourteenth Amendment to Credit Agreement, dated as of December 11,
1998, amending the Credit Agreement, dated as of February 15, 1994,
as amended, among KACC, KAC, the financial institutions party
thereto, and BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.26 to the Report on Form 10-K
for the period ended December 31,
1997, filed by KAC, File No. 1-9447).
4.25 Thirteenth Amendment to Credit Agreement, dated as of
July 20, 1998, amending the Credit Agreement, dated as
of February 15, 1994, as amended, among KACC, KAC, the
financial institutions party thereto, and BankAmerica
Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4 to the report on Form 10-Q for
the quarterly period ended June 30, 1998, filed by KAC, File No.
1-9447).
*4.26 Fourteenth Amendment to Credit Agreement, dated as of
December 11, 1998, amending the Credit Agreement, dated
as of February 15, 1994, as amended, among KACC, KAC,
the financial institutions party thereto, and
BankAmerica Business Credit, Inc., as Agent.
*4.27 Fifteenth Amendment to Credit Agreement, dated as of
February 23, 1999, amending the Credit Agreement, dated
as of February 15, 1994, as amended, among KACC, KAC,
the financial institutions party thereto, and
BankAmerica Business Credit, Inc., as Agent.
*4.28 Sixteenth Amendment to Credit Agreement, dated as of
March 26, 1999, amending the Credit Agreement, dated as
of February 15, 1994, as amended, among KACC, KAC, the
financial institutions party thereto, and BankAmerica
Business Credit, Inc., as Agent.
4.29 Intercompany Note between KAC and KACC (incorporated by
reference to Exhibit 10.11 to the Report on Form 10-K
for the period ended December 31, 1996, filed by MAXXAM
Inc. ("MAXXAM"), File No. 1-3924).
4.30 Confirmation of Amendment of Non-Negotiable
Intercompany Note, dated as of October 6, 1993, between
KAC and KACC (incorporated by reference to Exhibit
10.12 to the Report on Form 10-K for the period ended
December 31, 1996, filed by MAXXAM, File No. 1-3924).
4.31 Fifteenth Amendment to Credit Agreement, dated as of February 23,
1999, amending the Credit Agreement, dated as of February 15, 1994,
as amended, among KACC, KAC, the financial institutions party
thereto, and BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.27 to the Report on Form 10-K
for the period ended December 31, 1998, filed by KAC, File No.,
1-9447.)
4.32 Sixteenth Amendment to Credit Agreement, dated as of March 26, 1999,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among KACC, KAC, the financial institutions party thereto,
and BankAmerica Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.28 to the Report on Form 10-K for the period
ended December 31, 1998, filed by KAC, File No. 1-9447).
4.33 Seventeenth Amendment to Credit Agreement, dated as of September 24,
1999, amending the Credit Agreement, dated as of February 15, 1994,
as amended, among KACC, KAC, the financial institutions party
thereto, and Bank of America, N.A. (successor to BankAmerica Business
Credit, Inc.), as Agent (incorporated by reference to Exhibit 4.1 to
the Report on Form 10-Q for the quarterly period ended September 30,
1999, filed by KAC, File No. 1-9447).
*4.34 Eighteenth Amendment to Credit Agreement, dated as of February 11,
2000, amending the Credit Agreement, dated as of February 15, 1994,
as amended, among KACC, KAC, the financial institutions party
thereto, and Bank of America, N.A. (successor to BankAmerica Business
Credit, Inc.), as Agent.
*4.35 Limited Waiver Regarding Repayment of CARIFA Bonds, dated February
17, 2000, among KAC, KACC, the financial institutions party thereto
and Bank of America, N.A., as Agent.
4.36 Intercompany Note between KAC and KACC (incorporated by reference to
Exhibit 10.11 to the Report on Form 10-K for the period ended
December 31, 1996, filed by MAXXAM Inc. ("MAXXAM"), File No. 1-3924).
4.37 Confirmation of Amendment of Non-Negotiable Intercompany Note, dated
as of October 6, 1993, between KAC and KACC (incorporated by
reference to Exhibit 10.12 to the Report on Form 10-K for the period
ended December 31, 1996, filed by MAXXAM, File No. 1-3924).
4.38 Senior Subordinated Intercompany Note between KAC and KACC dated
February 15, 1994 (incorporated by reference to Exhibit 4.22 to the
Report on Form 10-K for the period ended December 31, 1993, filed by
KAC, File No. 1-9447).
4.39 Senior Subordinated Intercompany Note between KAC and KACC dated
March 17, 1994 (incorporated by reference to Exhibit 4.23 to the
Report on Form 10-K for the period ended December 31, 1993, filed by
KAC, File No. 1-9447).
4.32 Senior Subordinated Intercompany Note between KAC and
KACC dated March 17, 1994 (incorporated by reference to
Exhibit 4.23 to the Report on Form 10-K for the period
ended December 31, 1993, filed by KAC, File No. 1-
9447).
KAC 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 KAC and its subsidiaries on
a consolidated basis. KAC agrees and undertakes to
furnish a copy of any such instrument to the Securities
and Exchange Commission upon its request.
10.1 Form of indemnification agreement with officers and
directors (incorporated by reference to Exhibit (10)(b)
to the Registration Statement of KAC on Form S-4, File
No. 33-12836).
10.2 Tax Allocation Agreement, dated as of December 21,
1989, between MAXXAM and KACC (incorporated by
reference to Exhibit 10.21 to Amendment No. 6 to the
Registration Statement on Form S-1, dated December 14,
1989, filed by KACC, Registration No. 33-30645).
10.3 Tax Allocation Agreement, dated as of February 26,
1991, between KAC and MAXXAM (incorporated by reference
to Exhibit 10.23 to Amendment No. 2 to the Registration
Statement on Form S-1, dated June 11, 1991, filed by
KAC, Registration No. 33-37895).
10.4 Tax Allocation Agreement, dated as of June 30, 1993,
between KACC and KAC (incorporated by reference to
Exhibit 10.3 to the Report on Form 10-Q for the
quarterly period ended June 30, 1993, filed by KACC,
File No. 1-3605).
Executive Compensation Plans and Arrangements
[Exhibits 10.5
72
76
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
Exhibit
Number Description
------ -----------
KAC 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 KAC and its subsidiaries
on a consolidated basis. KAC agrees and undertakes to furnish a copy
of any such instrument to the Securities and Exchange Commission upon
its request.
10.1 Form of indemnification agreement with officers and directors
(incorporated by reference to Exhibit (10)(b) to the Registration
Statement of KAC on Form S-4, File No. 33-12836).
10.2 Tax Allocation Agreement, dated as of December 21, 1989, between
MAXXAM and KACC (incorporated by reference to Exhibit 10.21 to
Amendment No. 6 to the Registration Statement on Form S-1, dated
December 14, 1989, filed by KACC, Registration No. 33-30645).
10.3 Tax Allocation Agreement, dated as of February 26, 1991, between KAC
and MAXXAM (incorporated by reference to Exhibit 10.23 to Amendment
No. 2 to the Registration Statement on Form S-1, dated June 11, 1991,
filed by KAC, Registration No. 33-37895).
10.4 Tax Allocation Agreement, dated as of June 30, 1993, between KACC and
KAC (incorporated by reference to Exhibit 10.3 to the Report on Form
10-Q for the quarterly period ended June 30, 1993, filed by KACC,
File No. 1-3605).
Executive Compensation Plans and Arrangements
[Exhibits 10.5 - 10.30, inclusive]
10.5 KACC's Bonus Plan (incorporated by reference to Exhibit 10.25 to
Amendment No. 6 to the Registration Statement on Form S-1, dated
December 14, 1989, filed by KACC, Registration No. 33-30645).
10.6 Kaiser 1993 Omnibus Stock Incentive Plan (incorporated by reference
to Exhibit 10.1 to the Report on Form 10-Q for the quarterly period
ended June 30, 1993, filed by KACC, File No. 1-3605).
10.7 Kaiser 1995 Employee Incentive Compensation Program (incorporated by
reference to Exhibit 10.1 to the Report on Form 10-Q for the
quarterly period ended March 31, 1995, filed by KAC, File No.
1-9447).
10.8 Kaiser 1995 Executive Incentive Compensation Program (incorporated by
reference to Exhibit 99 to the Proxy Statement, dated April 26, 1995,
filed by KAC, File No. 1-9447).
10.9 Kaiser 1997 Omnibus Stock Incentive Plan (incorporated by reference
to Appendix A to the Proxy Statement, dated April 29, 1997, filed by
KAC, File No. 1-9447).
10.10 Employment Agreement, dated April 1, 1993, among KAC, KACC, and
George T. Haymaker, Jr. (incorporated by reference to Exhibit 10.2 to
the Report on Form 10-Q for the quarterly period ended March 31,
1993, filed by KAC, File No. 1-9447).
10.11 First Amendment to Employment Agreement by and between KACC, KAC and
George T. Haymaker, Jr. (incorporated by reference to Exhibit 10 to
the Report on Form 10-Q for the quarterly period ended June 30, 1996,
filed by KAC, File No. 1-9447).
10.12 Second Amendment to Employment Agreement, dated as of December 10,
1997, by and between KAC, KACC, and George T. Haymaker, Jr.
(incorporated by reference to Exhibit 10.12 to the Report on Form
10-K for the period ended December 31, 1997, filed by KAC, File No.
1-9447).
10.13
73
77
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
Exhibit
Number Description
------ -----------
*10.13 Director and Non-Executive Chairman Agreement, dated January 1, 2000,
among KAC, KACC and George T. Haymaker, Jr.
10.14 Letter Agreement, dated January 1995, between KAC and Charles E.
Hurwitz, granting Mr. Hurwitz stock options under the Kaiser 1993
Omnibus Stock Incentive Plan (incorporated by reference to Exhibit
10.17 to the Report on Form 10-K for the period ended December 31,
1994, filed by KAC, File No. 1-9447).
10.15 Employment Agreement between KACC and Raymond J. Milchovich made
effective for the period from January 1, 1998, to December 31, 2002
(incorporated by reference to Exhibit 10.3 to the Report on Form 10-Q
for the quarterly period ended September 30, 1998, filed by KAC, File
No. 1-9447).
10.16 Employment Agreement, dated as of June 1, 1999, between KACC and
Raymond J. Milchovich (incorporated by reference to Exhibit 10.1 to
the Report on Form 10-Q for the quarterly period ended June 30, 1999,
filed by KAC, File No. 1-9447).
10.17 Time-Based Stock Option Grant Pursuant to the Kaiser 1997 Omnibus
Stock Incentive Plan to Raymond J. Milchovich, effective July 2, 1998
(incorporated by reference to Exhibit 10.4 to the Report on Form 10-Q
for the quarterly period ended September 30, 1998, filed by KAC, File
No. 1-9447).
10.18 Restated Promissory Note, dated June 14, 1999, from Raymond J.
Milchovich to KACC (incorporated by reference to Exhibit 10.2 to the
Report on Form 10-Q for the quarterly period ended June 30, 1999,
filed by KAC, File No. 1-9447).
10-19 Employment Agreement between KACC and John T. La Duc made effective
for the period from January 1, 1998, to December 31, 2002
(incorporated by reference to Exhibit 10.5 to the Report on From 10-Q
for the quarterly period ended September 30, 1998, filed by KAC, File
No. 1-9447).
10.20 Time-Based Stock Option Grant Pursuant to the Kaiser 1997 Omnibus
Stock Incentive Plan to John T. La Duc, effective July 10, 1998
(incorporated by reference to Exhibit 10.6 to the Report on Form 10-Q
for the quarterly period ended September 30, 1998, filed by KAC, File
No. 1-9447).
10.21 Time-Based Stock Option Grant Pursuant to the Kaiser 1997 Omnibus
Stock Incentive Plan to George T. Haymaker, Jr., effective January 1,
1998 (incorporated by reference to Exhibit 10.18 to the Report on
Form 10-K for the period ended December 31, 1998, filed by KAC, File
No. 1-9447).
10.22 Performance-Accelerated Stock Option Grant Pursuant to the Kaiser
1997 Omnibus Stock Incentive Plan to George T. Haymaker, Jr.,
effective January 1, 1998 (incorporated by reference to Exhibit 10.19
to the Report on Form 10-K for the period ended December 31, 1998,
filed by KAC, File No. 1-9447).
10.23 Letter Agreement, dated July 27, 1998, between KACC and John H.
Walker (incorporated by reference to Exhibit 10.20 to the Report on
Form 10-K for the period ended December 31, 1998, filed by KAC, File
No. 1-9447).
10.24 Executive Employment Agreement, effective December 1, 1999, between
MAXXAM and J. Kent Friedman (incorporated by reference to Exhibit
10.52 to the Report on Form 10-K for the period ended December 31,
1999, filed by MAXXAM, File No. 1-3924).
10.25 Employment Agreement made and entered into as of September 1, 1996,
by and between KACC and Jack A. Hockema (incorporated by reference to
Exhibit 10 to the Report on Form 10-Q for the quarterly period ended
September 30, 1996, filed by KAC, File No. 1-9447).
10.14 Employment Agreement between KACC and Raymond J.
Milchovich made effective for the period from January
1, 1998, to December 31, 2002 (incorporated by
reference to Exhibit 10.3 to the Report on Form 10-Q
for the quarterly period ended September 30, 1998,
filed by KAC, File No. 1-9447).
10.15 Time-Based Stock Option Grant Pursuant to the Kaiser
1997 Omnibus Stock Incentive Plan to Raymond J.
Milchovich, effective July 2, 1998 (incorporated by
reference to Exhibit 10.4 to the Report on Form 10-Q
for the quarterly period ended September 30, 1998,
filed by KAC, File No. 1-9447).
10.16 Employment Agreement between KACC and John T. La Duc
made effective for the period from January 1, 1998, to
December 31, 2002 (incorporated by reference to Exhibit
10.5 to the Report on From 10-Q for the quarterly
period ended September 30, 1998, filed by KAC, File No.
1-9447).
10.17 Time-Based Stock Option Grant Pursuant to the Kaiser
1997 Omnibus Stock Incentive Plan to John T. La Duc,
effective July 10, 1998 (incorporated by reference to
Exhibit 10.6 to the Report on Form 10-Q for the
quarterly period ended September 30, 1998, filed by
KAC, File No. 1-9447).
*10.18 Time-Based Stock Option Grant Pursuant to the Kaiser
1997 Omnibus Stock Incentive Plan to George T.
Haymaker, Jr., effective January 1, 1998.
*10.19 Performance-Accelerated Stock Option Grant Pursuant to
the Kaiser 1997 Omnibus Stock Incentive Plan to George
T. Haymaker, Jr., effective January 1, 1998.
*10.20 Letter Agreement, dated July 27, 1998, between KACC and
John H. Walker.
*10.21 Description of Kaiser Severance Protection and Change
of Control Benefits Program.
10.22 Form of letter agreement with persons granted stock
options under the Kaiser 1993 Omnibus Stock Incentive
Plan to acquire shares of KAC Common Stock
(incorporated by reference to Exhibit 10.18 to the
Report on Form 10-K for the period ended December 31,
1994, filed by KAC, File No. 1-9447).
10.23 Form of Deferred Fee Agreement between KAC, KACC, and
directors of KAC and KACC (incorporated by reference to
Exhibit 10 to the Report on Form 10-Q for the quarterly
period ended March 31, 1998, filed by KAC, File No. 1-
9447).
*13 The portions of KAC's Annual Report to shareholders for
the year ended December 31, 1998, which are
incorporated by reference into this Report.
*21 Significant Subsidiaries of KAC.
*23.1 Consent of Independent Public Accountants.
*23.2 Consent of Wharton Levin Ehrmantraut Klein & Nash, P.A.
*23.3 Consent of Heller Ehrman White & McAuliffe.
74
78
KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES
- -------------------------------------------------------------------------------
Exhibit
Number Description
------ -----------
*10.26 Letter Agreement, dated April 15, 1999, amending the Employment
Agreement made and entered into as of September 1, 1996, by and
between KACC and Jack A. Hockema.
*10.27 Description of compensation arrangements among KACC, KAC, and Jack A.
Hockema.
10.28 Description of Kaiser Severance Protection and Change of Control
Benefits Program (incorporated by reference to Exhibit 10.21 to the
Report on Form 10-K for the period ended December 31, 1998, filed by
KAC, File No. 1-9447).
10.29 Form of letter agreement with persons granted stock options under the
Kaiser 1993 Omnibus Stock Incentive Plan to acquire shares of KAC
Common Stock (incorporated by reference to Exhibit 10.18 to the
Report on Form 10-K for the period ended December 31, 1994, filed by
KAC, File No. 1-9447).
10.30 Form of Deferred Fee Agreement between KAC, KACC, and directors of
KAC and KACC (incorporated by reference to Exhibit 10 to the Report
on Form 10-Q for the quarterly period ended March 31, 1998, filed by
KAC, File No. 1-9447).
*21 Significant Subsidiaries of KAC.
*23.1 Consent of Independent Public Accountants.
*23.2 Consent of Wharton Levin Ehrmantraut Klein & Nash, P.A.
*23.3 Consent of Heller Ehrman White & McAuliffe LLP.
*27 Financial Data Schedule.
------------------
- ---------------------
* Filed herewith
Exhibit 21
SUBSIDIARIES
Listed below are the principal subsidiaries of Kaiser Aluminum
Corporation, the jurisdiction of their incorporation or
organization, and the names under which such subsidiaries do
business. Certain subsidiaries are omitted which, considered in
the aggregate as a single subsidiary, would not constitute a
significant subsidiary.
Place of
Incorporation
Name or Organization
Alpart Jamaica Inc. Delaware
Alumina Partners of Jamaica (partnership) Delaware
Anglesey Aluminium Limited United Kingdom
Kaiser Alumina Australia Corporation Delaware
Kaiser Aluminium International, Inc. Delaware
Kaiser Aluminum & Chemical Corporation Delaware
Kaiser Aluminum & Chemical of Canada Limited Ontario
Kaiser Bauxite Company Nevada
Kaiser Bellwood Corporation Delaware
Kaiser Finance Corporation Delaware
Kaiser Jamaica Bauxite Company (partnership) Jamaica
Kaiser Jamaica Corporation Delaware
Queensland Alumina Limited Queensland
Volta Aluminium Company Limited Ghana
Principal California South Carolina
---------- --------------
Domestic Los Angeles (City Greenwood
of Commerce) Engineered Products
Operations Engineered Greenwood
Products Engineered Products
and Oxnard Machine Shop
Administrative Engineered Tennessee
Products ---------
Offices Pleasanton Jackson
(Partial List) R&D at the Center Engineered Products
for Technology, Texas
Administrative -----
Offices Houston
Kaiser Aluminum
Louisiana Corporation
--------- Headquarters
Baton Rouge Sherman
Alumina Business Engineered Products
Unit Offices Virginia
Gramercy --------
Alumina Richmond
Michigan Engineered Products
-------- Washington
Detroit ----------
(Southfield) Mead
Automotive Primary Aluminum,
Product Northwest Engineering
Development and Center
Sales Richland
Ohio Engineered Products
---- Tacoma
Canton* Primary Aluminum
Engineered Trentwood
Products Flat-Rolled Products
Cuyahoga Falls
(50%)*
Engineered
Products
Newark
Engineered
Products
Oklahoma
--------
Tulsa
Engineered
Products
Pennsylvania
------------
Erie (50%)*
Engineered
Products
* In separate announcements in early 1999, the Company said it
had signed agreements to sell its interests in the assets located
at Canton, Cuyahoga Falls, and Erie.
-----------------------------------------------------------------
Principal Australia Jamaica
--------- -------
Worldwide Queensland Alumina Alumina Partners of
Limited (28.3%) Jamaica (65%)
Operations Alumina Bauxite, Alumina
(Partial List) Canada Kaiser Jamaica Bauxite
------ Company (49%)
Kaiser Aluminum & Bauxite
Chemical of Wales, United Kingdom
Canada Limited ---------------------
(100%) Anglesey Aluminium
Engineered Limited (49%)
Products Primary Aluminum
Ghana
-----
Volta Aluminium
Company Limited
(90%)
Primary Aluminum
75