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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, 19961998
          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

  8.25% PRIDES, Convertible Preferred Stock,        New York Stock Exchange
  $.05 par
               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    No     
                        ---      -------

          Indicate by check mark if disclosure of delinquent filers
          pursuant to Item 405 of Regulation S-K is not contained herein,
          and will not be contained, to the best of registrant's knowledge,
          in definitive proxy or information statements incorporated by
          reference in Part III of this Form 10-K or any amendment to this
          Form 10-K.  ___

          As of March 14, 1997,23, 1999, there were 71,651,34979,153,543 shares of the Common
          Stock of the registrant outstanding.  Based upon the New York
          Stock Exchange closing pricesprice on March 14, 1997,23, 1999, the aggregate
          market value of the registrant's Common Stock and
8.255% PRIDES held by non-affiliatesnon-
          affiliates was $368.8$143.7 million.

          Certain portionportions of the registrant's annual report to
          shareholders for the fiscal year ended December 31, 1996,1998, 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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                                         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 23-2623 - 28
          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  77057-301077057
                                             (713) 267-3777






                                         (i)   3



KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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                                  TABLE OF CONTENTS
                                                                       
Page ---- PART I.......................................................................... 1 ITEM 1. BUSINESS...................................................... 1 ITEM 2. PROPERTIES.................................................... 11 ITEM 3. LEGAL PROCEEDINGS............................................. 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 15 PART II......................................................................... 15 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................ 15 ITEM 6. SELECTED FINANCIAL DATA....................................... 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 15 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................ 15 PART III........................................................................ 15 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 15 ITEM 11. EXECUTIVE COMPENSATION........................................ 15 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................................. 15 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 15 PART IV......................................................................... 16 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................... 16 SCHEDULE I .............................................................. 17 SIGNATURES .............................................................. 22 INDEX OF EXHIBITS............................................................... 23 EXHIBIT 21 SUBSIDIARIES.................................................. 27
Page ---- 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 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY 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) 4 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- 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 - Industry Overview;Strategic Initiatives," "Business" - The Company - Profit Enhancement and Cost Reduction Initiative," "ProductionBusiness Operations," "-Competition," "-Research- Competition," " - Research and Development," "-Business Development," and "Environmental- Environmental Matters," and " - Factors Affecting Future Performance," Item 3. "Legal Proceedings"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 19961998 Annual Report to Shareholders (see Items 6 through 8 of this Report) identify other factors that could cause such differences. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-lookingforward- looking statements. INDUSTRY OVERVIEW Primary aluminum is produced by the refining of bauxite into alumina and the reduction of alumina into primary aluminum. Approximately two pounds of bauxite are required to produce one pound of alumina, and approximately two pounds of alumina are required to produce one pound of primary aluminum. Aluminum's valuable physical properties include its light weight, corrosion resistance, thermal and electrical conductivity, and high tensile strength. Demand The packaging, transportation and construction industries are the principal consumers of aluminum in the United States, Japan, Germany, France, Italy, and the United Kingdom. In the packaging industry, which accounted for an estimated 21% of aluminum consumption in 1996 in the previously referenced countries, aluminum's recyclability and weight advantages have enabled it to gain market share from steel and glass, primarily in the beverage container area. Nearly all beer cans and soft drink cans manufactured for the United States market are made of aluminum.General Kaiser Aluminum Corporation ("KAC" or the(the "Company") believes that growth, a Delaware corporation organized in the packaging area is likely to continue through the 1990s due to general population increase and to further penetration of the beverage container market in emerging markets. The Company believes that growth in demand for can sheet in the United States will follow the growth in population, offset, in part, by the effects of the use of lighter gauge aluminum for can sheet and by plastic container production. In the transportation industry, which accounted for an estimated 30% of aluminum consumption in the United States, Japan, Germany, France, Italy and the United Kingdom in 1996, automotive manufacturers use aluminum instead of steel, ductile iron, or copper for an increasing number of components, including radiators, wheels, suspension components, and engines, in order to meet more stringent environmental, safety, and fuel efficiency standards. The Company believes that sales of aluminum to the transportation industry have considerable growth potential due to projected increases in the use of aluminum in automobiles. In addition, the Company believes that consumption of aluminum in the construction industry will follow the cyclical growth pattern of that industry, and will benefit from higher growth in Asian and Latin American economies. Supply As of year-end 1996, estimated world aluminum capacity from 179 smelting facilities was approximately 22.9 million tons* per year. World production of primary aluminum for 1996 increased approximately 4.5% compared to 1995. Net exports of aluminum from the former Sino Soviet bloc increased approximately 200% from 1990 levels to an estimated 1.9 million tons per year as - ----------- * All references to tons in this Report refer to metric tons of 2,204.6 pounds. 1 5 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - ------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) of year-end 1996. In addition, one smelter continued to increase production following its start-up in 1995, and a number of producers restarted idled capacity in late 1995 and early 1996. These exports, as well as new and restared capacity, contributed to an increase in London Metal Exchange ("LME") stocks of primary aluminum which peaked in October 1996 at 970,000 tons. At the end of 1996, LME stocks of primary aluminum had declined 18,725 tons from this peak level to 951,275 tons. See "Industry Trends." Based upon information currently available, the Company believes that moderate additions will be made during 1997-1999 to world alumina and primary aluminum production capacity. The increases in alumina capacity during 1997-1999 are expected to come from one new refinery, which began operations in 1996, and incremental expansions of existing refineries. In addition, the Company believes that there is currently an estimated 1.6 million tons of unutilized world smelting capacity. The increases in world primary aluminum capacity during 1997-1999 are expected to come from two new smelters which may begin operations in 1997, two relocated smelters that are expected to resume operations in 1998, and the remainder principally from incremental expansions of existing smelters. Industry Trends Primary aluminum prices have historically been subject to significant cyclical price fluctuations. During the first half of 1996, the average Midwest United States transaction price ("AMT Price") for primary aluminum remained relatively stable in the $.75 per pound range. However, during the second half of the year the AMT Price fell, reaching a low of $.65 per pound for October 1996, before recovering late in the year. During 1996, the AMT Price for primary aluminum was approximately $.72 per pound, compared to $.86, $.72 and $.54 per pound in 1995, 1994 and 1993, respectively. The AMT Price for primary aluminum for the week ended March 14, 1997, was approximately $.81 per pound. The significant improvement in prices during 1994 and 1995 resulted from strong growth in Western world consumption of aluminum and the curtailment of production in response to lower prices in prior periods by many producers worldwide. In 1995, production of primary aluminum increased and consumption of aluminum continued to grow, but at a much lower rate than in 1994. In general, the overall aluminum market was strongest in the first half of 1995. By the second half of 1995, orders and shipments for certain products had softened and the rate of decline in LME inventories had leveled off. By the end of 1995, some small increases in LME inventories occurred, and prices of aluminum weakened from first-half levels. This trend continued throughout most of 1996. Net reported primary aluminum inventories increased by approximately 62,000 tons in 1996 based upon reports of the LME and the International Primary Aluminium Institute ("IPAI"), following substantial declines of 764,000 and 1,153,000 tons in 1994 and 1995, respectively. However, since year-end 1996, LME stocks of primary aluminum have continued to decline from their October 1996 peak level. Increased production of primary aluminum due to restarts of certain previously idled capacity, the continued increase in production of a smelter in South Africa following its start-up in 1995, and the continued high level of exports from the Commonwealth of Independent States ("CIS") contributed to increased supplies of primary aluminum to the Western world in 1996. While the economies of the major aluminum consuming regions - the United States, Japan, Western Europe, and Asia - are, in the aggregate, performing relatively well, the Company believes that the reduction of aluminum inventories by customers, as prices have continued to decline, has mitigated the growth in primary aluminum demand that normally accompanies growth in economic and industrial activity. Western world demand for alumina, and the price of alumina, declined in 1994 in response to the curtailment of Western world smelter production of primary aluminum, partially offset by increased usage of Western world alumina by smelters in the CIS and in the People's Republic of China ("PRC"). Increased Western world production of primary aluminum, as well as continued imports of Western world alumina by the CIS and the PRC, during 1995 resulted in higher demand for Western world alumina and significantly stronger alumina pricing. In 1996, however, the alumina market softened, primarily as a result of increased alumina production and decreased alumina exports to the CIS and the PRC, resulting in lower alumina prices. However, increases in primary aluminum production as well as reductions in alumina production during the second half of 1996 resulted in stronger alumina pricing in late 1996. United States shipments of domestic fabricated aluminum products in 1995 were approximately at 1994 levels, although in 1995 demand for can sheet in the United States softened relative to 1994. United States shipments of domestic fabricated aluminum 2 6 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) products in 1996 are estimated to be approximately at 1995 levels, although in 1996 demand for can sheet in the United States softened relative to 1995. THE COMPANY General The Company1987, 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 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)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 1996,1998, KACC produced approximately 2,838,000 tons2,964,000 tons* of alumina, of which approximately 73%76% was sold to third parties, and produced approximately 473,200387,000 tons of primary aluminum, of which approximately 75%68% was sold to third parties. KACC is also a major domestic supplier of fabricated aluminum products. In 1996,1998, KACC shipped approximately 327,100405,000 tons of fabricated aluminum products to third parties, which accounted for approximately 5% of the total tonnage of United States domestic shipments. A majorityThe 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 products are soldaluminum operations: ----------- * All references to distributors or used by customers as componentstons in the manufacture and assemblythis Report refer to metric tons of finished end-use products.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
Note 1011 of the Notes to Consolidated Financial Statements contained in the Company's 19961998 Annual Report to Shareholders (the "Annual Report") is incorporated herein by reference. The following table sets forth total shipments and intracompany transfersLabor Matters Substantially all of KACC's hourly workforce at the Gramercy, Louisiana, alumina primaryrefinery, Mead and Tacoma, Washington, aluminum smelters, Trentwood, Washington, rolling mill, and fabricatedNewark, 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 operations:
Year Ended December 31, ------------------------------------ 1996 1995 1994 ------- ------- ------- (in thousands of tons) ALUMINA: Shipments to Third Parties 2,073.7 2,040.1 2,086.7 Intracompany Transfers 912.4 800.6 820.9 PRIMARY ALUMINUM: Shipments to Third Parties 355.6 271.7 224.0 Intracompany Transfers 128.3 217.4 225.1 FABRICATED ALUMINUM PRODUCTS: Shipments to Third Parties 327.1 368.2 399.0
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. 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 eliminated or substantially reduced 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. See Note 1 of Notes to Consolidated Financial Statements "- Labor Related Costs," and Note 9 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, - 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 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"), a joint venture that designs, manufactures 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. See Notes 3 and 4 of Notes to Consolidated Financial Statements in the Annual Report. The portfolio analysis process also resulted in the Company's fourth quarter 1998 decision to seek a strategic partner for further development 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. Another area of emphasis has been a continuing focus on managing the Company's legacy liabilities. One element of this process has been actively pursuing claims in respect of insurance coverage for certain incurred and future environmental costs. During the fourth quarter of 1998, KACC received recoveries totaling approximately $35.0 million related to current and future claims against certain 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 costs from other insurers or that the amount of any recoveries received will ultimately be adequate to cover costs incurred. See Note 9 of Notes to Consolidated Financial Statements in the Annual Report. In early 1999, the Company's program to focus its efforts 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. 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. Primary aluminum prices have historically been subject to significant cyclical price fluctuations. Alumina prices, as well as fabricated aluminum product prices (which vary considerably among products), are significantly influenced by changes in the price of primary aluminum and generally lag behind primary aluminum prices for periods of up to three months.prices. From time to time in the ordinary course of business KACC enters into hedging transactions to provide price risk management in respect of its net 3 7 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) exposure resulting from (i) anticipated sales of alumina, primary aluminum, and fabricated aluminum products, less (ii) expected purchases of certain items, such as aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with the price of primary aluminum. Forward sales contracts are used by KACC to effectively lock-in or fix the effective price that KACC will receive for its shipments.sales. KACC also uses option contracts (i) to establish a minimum price for its product shipments,sales, (ii) to establish a "collar" or range of priceprices for its anticipated sales, and/or (iii) to permit KACC to realize possible upside price movements. See Notes"Management's Discussion and Analysis of Financial Condition and Results of Operations - Market-related Factors" and Note 1 - "Derivative Financial Instruments" and 9Note 10 of the Notes to Consolidated Financial Statements in the Annual Report. Profit Enhancement and Cost Reduction Initiative In October 1996,Business Operations KACC established a goal of achieving significant cost reduction and profit improvements by the end of 1997, with the full effect planned to be realized in 1998 and beyond, measured against 1996 results. To achieve this goal KACC plans reductions in production costs, decreases in corporate general and administrative expenses, and enhancements to product mix and volume throughput. There can be no assurance that the initiative will result in the desired cost reductions and other profit improvements. Production Operations The Company's operations are conductedconducts its business through KACC's decentralizedfour main business units, each of which compete throughout the aluminum industry. o The alumina business unit, which mines bauxite and obtains additional bauxite tonnage under long-term contracts, produced approximately 7% of total produced alumina in 1996 as reported by the IPAI. During 1996, KACC's third party shipments of bauxite represented approximately 25% of bauxite mined. In addition, KACC's third party shipments of alumina represented approximately 73% of alumina produced. KACC's share of total world alumina capacity as reported by the IPAI was approximately 6% in 1996. o The primary aluminum products business unit operates two wholly-owned domestic smelters and two foreign smelters in which KACC holds significant ownership interests. During 1996, KACC's third party shipments of primary aluminum represented approximately 75% of its primary aluminum production. KACC's share of total world primary aluminum capacity as reported by the IPAI was approximately 2% in 1996. o Fabricated aluminum products are manufactured by two business unitsis discussed below. - flat-rolled products and engineered products. The products include heat-treated products, body, lid, and tab stock for beverage containers, sheet and plate products, screw machine stock, redraw rod, forging stock, truck wheels and hubs, air bag canisters, engine manifolds, and other castings, forgings and extruded products, which are manufactured at plants located in principal marketing areas of the United States and Canada. The aluminum utilized in KACC's fabricated products operations is comprised of primary aluminum, obtained both internally and from third parties, and scrap metal purchased from third parties. 4 8 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) Alumina Business Unit The following table lists KACC's bauxite mining and alumina refining facilities as of December 31, 1996:1998:
Annual Production Total Capacity Annual Company Available to Production Activity Facility Location Ownership the Company Capacity - ----------------- ------------ ---------- -------------------------- -------------- -------------- ---------------- ------------------------------ (tons) (tons) Bauxite Mining KJBC(1) Jamaica 49%49.0% 4,500,000 4,500,000 Alpart(2) Jamaica 65%65.0% 2,275,000 3,500,000 ------------ --------------------------- -------------- 6,775,000 8,000,000 ============ =========================== ============== Alumina Refining Gramercy Louisiana 100%100.0% 1,050,000 1,050,000 Alpart Jamaica 65%65.0% 942,500 1,450,000 QAL Australia 28.3% 973,500 3,440,000 ------------ ------------- 2,966,000 5,940,000 ============ =============1,032,950 3,650,000 -------------- -------------- 3,025,450 6,150,000 ============== ==============
- -------------------------- (1) Although KACC owns 49% of Kaiser Jamaica Bauxite Company ("KJBC"), it has the right to receive all of such entity'sKJBC'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 KACC is the world's second largest seller of smelter-grade alumina to third parties. 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, the Government of Jamaica granted KACC a mining lease for the mining of bauxite sufficient to supply KACC's then-existing Louisiana alumina refineries at their annual capacities of 1,656,000 tons per year until January 31, 2020. Alumina from the Gramercy plant is sold to third parties. The Gramercy, Louisiana, 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 Analysis of Financial Condition and Results of Operations - Labor Matters" in the Annual Report. In February 1999 KACC, through a subsidiary, purchased its partner's 45% interest in Kaiser LaRoche Hydrate Partners, a partnership which markets chemical-grade alumina manufactured by KACC's Gramercy facility. These products are sold at a premium price over smelter-grade alumina, and this acquisition will permit KACC to expand its market position in this business in North America. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Strategic Initiatives" in the Annual Report. Alpart holds bauxite reserves and owns a 1,450,000 tonston per year alumina plant located in Jamaica. KACC owns a 65% interest in Alpart, and Hydro AluminumAluminium 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 government of Jamaica, reached an agreement to form a joint venture bauxite mining operation to 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 expected to commence operations during the second half of 1999. KACC owns a 28.3% interest in Queensland Alumina Limited ("QAL"), which owns the largest and one of the most efficientcompetitive alumina refineries in the world, located in Queensland, Australia. QAL refines bauxite into alumina, essentially on a cost basis, for the account of its stockholders under long-term tolling contracts. The stockholders, including KACC, purchase bauxite from another QAL stockholder under long-term supply contracts. KACC has contracted with QAL to take approximately 792,000 tons per year of capacity or pay standby charges. KACC is unconditionally obligated to pay amounts calculated to service its share ($94.497.6 million at December 31, 1996)1998) of certain debt of QAL, as well as other QAL costs and expenses, including bauxite shipping costs. KACC's principal customers for bauxite and alumina consist of other aluminum producers that purchase bauxite and reduction-grade alumina, trading intermediaries who resell raw materials to end-users, and users of chemical-grade alumina. All of KACC's third-party sales of bauxite in 1996 were made to two customers, the largest of which accounted for approximately 79% of such sales. KACC also sold alumina in 1998 to 15approximately 20 customers, the largest and top five of which accounted for approximately 21%19% and 79%67% of such sales, respectively. See "-Competition." The Company believes that among alumina producers KACC is the world's second largest sellerAll of aluminaKACC's third-party sales of bauxite in 1998 were made to third parties. KACC's strategy is to sell a substantial portionone customer, which represents approximately 6% of thetotal bauxite and alumina available to it in excess of its internal refining and smelting requirements under multi-year sales contracts. See also "-Sensitivity to Prices and Hedging Programs." 5 9 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIESthird party revenues. - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) Primary Aluminum ProductsBusiness Unit The following table lists KACC's primary aluminum smelting facilities as of December 31, 1996:1998:
Annual Rated Total 19961998 Capacity Annual Average Company Available to Rated Operating Location Facility Ownership the Company Capacity Rate - ---------------------- ---------- ------------- ---------------- ----------- ----------- (tons) (tons)--------------- -------------- -------------- -------------- -------------- -------------- Domestic Washington Mead 100% 200,000 200,000 106%103% (1) Washington Tacoma 100% 73,000 73,000 100% ----------- ----------94% -------------- -------------- Subtotal 273,000 273,000 ----------- ------------------------ -------------- International Ghana Valco 90% 180,000 200,000 68%25% Wales, United Kingdom Anglesey 49% 55,000 112,000 118% ----------- ----------66,150 135,000 100% -------------- -------------- Subtotal 235,000 312,000 ----------- ----------246,150 335,000 -------------- -------------- Total 508,000 585,000 =========== ==========519,150 608,000 ============== ==============
--------------- (1) In 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 average 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 owns two smelterssold 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 at Meadin Pleasanton, California; Houston, Texas; and Tacoma Washington, whereand Spokane, Washington. A majority of the business unit's sales are based upon long-term relationships with metal merchants and end-users. 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 is processed intoto 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.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. Approximately 53%64% of Mead's 19961998 production was used at KACC's Trentwood, fabricating facilityWashington, rolling mill, and the balance was sold to third parties. 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 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 also commenced the modernizationmodernized and expansion ofexpanded the carbon baking furnace at its Mead smelter at an estimated cost of approximately $52.0$55.3 million. The project is expected to lower costs, enhancehas improved the reliability of the carbon baking operations, increased productivity, enhanced safety, and improveimproved the environmental performance of the facility, and is expected to befacility. The first stage of this project, the construction of a new $40.0 million 90,000 ton per year furnace, was completed in late 1998. Electric power represents an important production cost for KACC at its aluminum smelters. In 1995, KACC successfully restructured electric power purchase agreements for its facilities1997. The remaining modernization work was completed in 1998 and early 1999. A portion of this project was financed with the Pacific Northwest, which resultednet proceeds (approximately $18.6 million) of 7.6% Solid Waste Disposal Revenue Bonds due 2027 issued in significantly lower electric power costs in 1996 forMarch 1997 by the Mead and Tacoma, Washington, smelters compared to 1995 electric power costs. KACC expects to continue to benefit from these savings in electric power costs at these facilities in 1997 and beyond. However, a numberIndustrial Development Corporation of lawsuits challenging the restructuring have been filed and the effect, if any, of such lawsuits on KACC's power purchase and transmission arrangements is not known at this time.Spokane County, Washington. Foreign Smelters KACC manages, and owns a 90% interest in, the Volta Aluminium Company Limited ("Valco") aluminum smelter in Ghana. The Valco smelter uses pre-bake technology and processes alumina supplied by KACC and the other participant into primary aluminum under long-term tolling contracts which provide for proportionate payments by the participants. KACC's share of the primary aluminum is sold to third parties. Power forDuring most of 1998, the Valco smelter is supplied under an agreement which expires in 2017. The agreement indexes two-thirdsoperated only one of the priceits five potlines, as compared to 1997, when Valco operated four potlines. Each of the contract quantity of power to the market priceValco's potlines produces approximately 40,000 tons of primary aluminum. The agreement also provides for a reviewaluminum per year. Valco received compensation (in the form of energy credits to be utilized over the last half of 1998 and adjustment ofduring 1999) from the base power rate and the price index every five years. The most recent review was completed in April 1994 for the 1994-1998 period. The Volta River Authority ("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 of the curtailment of such lines. 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 allocatedannounced that it expects to Valco sufficient electric poweroperate three lines during 1999. The decision to operate at 80%that level was based on the power allocation that Valco has received from the VRA as well as consideration of market 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 annual rated capacity through December 31, 1997.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. 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. Electric Power Electric power represents an important production cost for the AngleseyKACC at its aluminum smelter is supplied under an agreement which expiressmelters. For a discussion of this subject, see "Factors Affecting Future Performance - Electric Power" in 2001. KACC has developed and installed proprietary retrofit and control technology in all of its smelters, as well as at third party locations. This technologythis Report. - which includes the redesign of the cathodes and anodes that conduct electricity through reduction cells, improved feed systems that add alumina to the cells, and a computerized system that controls energy flow in the cells - has 6 10 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) significantly contributed to increased and more efficient production of primary aluminum and enhances KACC's ability to compete more effectively with the industry's newer smelters. KACC is actively engaged in efforts to license this technology and sell technical and managerial assistance to other producers worldwide, and may participate in joint ventures or similar business partnerships which employ KACC's technical and managerial knowledge. See "-Research and Development." KACC's principal primary aluminum customers consist of large trading intermediaries and metal brokers, who resell primary aluminum to fabricated product manufacturers, and large and small international aluminum fabricators. In 1996, KACC sold its primary aluminum production not utilized for internal purposes to approximately 45 customers, the largest and top five of which accounted for approximately 16% and 54% of such sales, respectively. See "- Competition." Marketing and sales efforts are conducted by a small staff located at the business unit's headquarters in Pleasanton, California, and by senior executives of KACC who participate in the structuring of major sales transactions. A majority of the business unit's sales are based upon long-term relationships with metal merchants and end-users. Fabricated Aluminum Products KACC manufactures and markets fabricated aluminum products for the 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. KACC's fabricated products compete with those of numerous domestic and foreign producers and with products made of steel, copper, glass, plastic, and other materials. Product quality, price, and availability are the principal competitive factors in the market for fabricated aluminum products. KACC has focused its fabricated products operations on selected products in which KACC has production expertise, high-quality capability, and geographic and other competitive advantages. Flat-Rolled Products -Business Unit ---------------------------------- The flat-rolled products business unit the largest of KACC's fabricated products businesses, operates the Trentwood, sheet and plate mill at Spokane, Washington. In addition, KACC broke ground on its first commercial Micromill(TM) facility, near Reno, Nevada. The Micromill(TM) process is a proprietary, compact, high-speed process for continuous casting andWashington, rolling of a thin-strip aluminum sheet from molten metal. KACC expects the Nevada facility to be in a start-up mode in the first half of 1997, and anticipates beginning limited customer shipments from the facility by the second half of 1997. See "-Research and Development."mill. The Trentwood facility is KACC's largest fabricating plant and accounted for approximately 63%58% of KACC's 19961998 fabricated aluminum products shipments. The business unit supplies the aerospace and general engineering markets (producing heat-treatheat 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 "- Employees and Labor Matters" in this Report, and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Labor Matters" in the Annual Report. KACC continues to implement changes toenhance the process and product mix of its Trentwood rolling mill in an effort to maximize its profitability and maintain full utilization of the facility. In 1998, KACC has approved an expansion of its heat-treat capacitycontinued to approximately 60,000 tons from approximately 45,000 tons, which will enable KACCimplement a plan to increaseimprove the range of its heat-treat products, including wide heat-treated sheet for the aerospace market, enhance the quality of its heat-treated products, and improve Trentwood's operating efficiency. The project is estimated to cost approximately $45.0 millionreliability and to takeexpand the annual production capacity of heat treat flat-rolled products at the Trentwood facility by approximately two yearsone-third over 1996 levels. Approximately $8.0 million remains to complete.be spent to implement the plan. Global sales of KACC's heat-treatheat treat products have increased significantly over the last several years and 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. In 1998, the business unit shipped products to approximately 141 customers in the aerospace, transportation, and industrial ("ATI") markets, most of which are experiencing growthwere distributors who sell to a variety of industrial end-users. The top five customers in demand.the ATI markets for flat-rolled products accounted for approximately 18% of the business unit's revenue. KACC's flat-rolled products are also sold to beverage container manufacturers located in the western United States and in the Asian Pacific Rim countries where the Trentwood plant's location provides KACC with a transportation advantage. Quality of products for the beverage container industry, service, and timeliness of delivery are the primary bases on which KACC competes. KACC has made significant capital expenditures at Trentwood during the past several years in rolling technology and process control to improve the metal integrity, shape and gauge control of its products. The Company believes that such improvements have enhanced the quality of KACC's products for the beverage container industry and the capacity and efficiency of KACC's manufacturing operations, and that KACC is one of the highest quality producers of aluminum beverage can stock in the world. In 1996,1998, the business unit shipped products tohad approximately 150 customers in the aerospace, transportation, and industrial ("ATI") markets, most of which were distributors who sell to a variety of industrial end-users. The top five customers in the ATI 7 11 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) markets for flat-rolled products accounted for approximately 15% of the business unit's revenue. In 1996, the flat-rolled products business unit had 4221 domestic and foreign can stock customers.customers, supplying approximately 41 can plants worldwide. The largest and top five of such customers accounted for approximately 18%12% and 35%, respectively, of the business unit's revenue. See "-Competition.""- Competition" in this Report. The marketing staff for the flat-rolled products business unit is located at the Trentwood facility and in Pleasanton, California. Sales are made directly to end-useend- use customers and distributors from eight sales offices located throughout the United States. International customers are served byfour sales offices in the United States, from a sales office in England, and Japan 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 Operations - Strategic Initiatives" and Note 3 of Notes to Consolidated Financial Statements in the Annual Report. - Engineered Products -Business Unit --------------------------------- The engineered products business unit is headquartered in Detroit, Michigan, and operates soft-alloy and hard-alloy extrusion facilities in Los Angeles, California; Santa Fe Springs, California; Sherman, Texas; and London, Ontario, Canada; a cathodic protection business located in Tulsa, Oklahoma, that also extrudes both aluminum and magnesium; rod and barengineered component (forgings) facilities in Newark, Ohio,the United States and Jackson, Tennessee, which produce screw machine stock, redraw rod, forging stock, and billet; and a facility in Richland, Washington, which produces seamless tubing in both hard and soft alloys for the automotive, other transportation, export, recreation, agriculture, and other industrial markets. Each of the soft-alloy extrusion facilities has fabricating capabilities and provides finishing services.Canada. Major markets for extruded products are in the transportation industry, to which the business unit provides extruded shapes for automobiles, trucks, trailers, cabs, and shipping containers, and in the distribution, durable goods, defense, building and construction, ordnance and electrical markets. The sales and engineering office in Detroit, Michigan, works with car makers and other customers, the Center for Technology (see "- Research and Development"), and plant personnel to create new automotive component designs and improve existing products. The engineered products business unit also operates forging facilities at Erie, Pennsylvania; Oxnard, California; and Greenwood, South Carolina; a machine shop at Greenwood, South Carolina; and a casting facility in Canton, Ohio, and is one of the largest producers of aluminum forgings in the United States and is a major supplier of high-qualitysupplies forged parts to customers in the automotive, commercial vehicle and ordnance markets. The high strength-to-weight properties of forged and cast aluminum make it particularly well-suited for automotive applications. The business unit's castingunit 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. The Richmond, Virginia, facility manufactures aluminum engine manifoldswas acquired in mid-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. 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 "- Labor Matters" in this Report, and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Labor Matters" in the Annual Report. A facility located in Richland, Washington, produces seamless tubing in both hard and soft alloys for the automobile,automotive, other transportation, export, recreation, agriculture, and other industrial markets. The business unit also operates a cathodic protection business located in Tulsa, Oklahoma, that extrudes both aluminum and magnesium. 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 its casting operations in Canton, Ohio. In 1997 KACC and Accuride Corporation formed AKW L.P. to design, manufacture and sell heavy-duty aluminum truck wheels. In January 1999, KACC signed a letter of intent to sell its 50% interest in AKW to its partner, which would result 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. See "Management's Discussion and marine markets.Analysis of Financial Condition and Results of Operations - Strategic Initiatives" and Note 12 of Notes to Consolidated Financial Statements in the Annual Report. In 1996,1998, the engineered products business unit had 993approximately 445 customers, the largest and top five of which accounted for approximately 13%5% and 31%18%, respectively, of the business unit's revenue. See "- Competition."Competition" in this Report. Sales are made directly from plants, as well as marketing locations acrosselsewhere in the United States. In September 1996, KACC entered into a letter of intent with Accuride Corporation ("Accuride"), a business unit of Phelps Dodge Corporation, to form a joint-venture to design, manufacture and market aluminum wheels for the commercial ground transportation industry. The formation of the joint venture, subject to various conditions including third-party consents, is expected to occur in the second quarter of 1997. Competition Aluminum competes in many markets with steel, copper, glass, plastic, and other materials. In recent years, plastic containers have increased and glass containers have decreased their respective shares of the soft drink sector of the beverage container market. In the United States, beverage container materials, including aluminum, face increased competition from plastics as increased polyethylene terephthalate ("PET") container capacity is brought on line by plastics manufacturers. Within the aluminum business, KACC competes with both domestic and foreign producers of bauxite, alumina and primary aluminum, and with domestic and foreign fabricators. Many of KACC's competitors have greater financial resources than KACC. KACC's principal competitors in the sale of alumina include Alcoa Alumina & Chemicals L.L.C., Billiton Marketing and Trading BV, and Alcan Aluminium Limited. KACC competes with most aluminum producers in the sale of primary aluminum. Primary aluminum and, to some degree, alumina are commodities with generally standard qualities, and competition in the sale of these commodities is based primarily upon price, quality and availability. Aluminum competes in many markets with steel, copper, glass, plastic, and other materials. In the United States, beverage container materials, including aluminum, face increased competition from plastics as increased polyethylene terephthalate ("PET") container capacity is brought on line by plastics manufacturers. KACC also competes with a wide range ofnumerous 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 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 - - the Center for Technology ("CFT")CFT in Pleasanton, California, and the Primary Aluminum Products Division TechnologyNorthwest Engineering Center ("DTC") adjacent to the Mead smelter in Spokane, Washington. Net expenditures for company-sponsoredCompany-sponsored research and development activities were $13.7 million in 1998, $19.7 million in 1997, and $20.5 million in 1996, $18.5 million in 1995, and $16.7 million in 1994.1996. KACC's research staff totaled 15652 at December 31, 1996.1998. KACC estimates that research and development net expenditures will be approximately $21.6in the range of $10 million to $15 million in 1997.1999. CFT performs research and development across a range of aluminum process and product technologies to support KACC's business units and new business opportunities. It also selectively offers technical servicesIn 1998 patents were issued to third parties. Significant efforts are directedKACC 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 product and process technologythe Micromill facility near Reno, Nevada, for the aircraft, automotive andproduction of can sheet markets and aluminum reduction cell models which are applied to improving cell designs and operating conditions. DTCother sheet products. The Northwest Engineering Center maintains specialized laboratories and a miniature carbon plant where experiments with new anode and cathode technology are performed. DTCThe 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. The largest and most notable single project being developed at CFT and the Reno, Nevada, facility is a unique Micromill(TM) casting facility for the production of can sheet from molten metal using a continuous cast process. The capital and conversion costs of the Company's Micromill(TM) facilities are expected to be significantly lower than conventional rolling mills. The use of a Micromill(TM) facility is also expected to result in lower transportation costs due to the ability to strategically locate a Micromill(TM) facility in close proximity to a manufacturing facility. Micromill(TM) facilities are expected to be particularly well suited to take advantage of the rapid growth in demand for can sheet expected in emerging markets in Asia and Latin America where there is limited indigenous supply. KACC believes that Micromill(TM) facilities should also be capable of manufacturing other sheet products at relatively low capital and operating costs. The Micromill(TM) facility technology is based on a proprietary thin-strip, high-speed, continuous-belt casting technique linked directly to hot and cold rolling mills. The major advantage of the process is that the sheet is continuously manufactured from molten metal, unlike the conventional process in which the metal is first cast into large, solid ingots and subsequently rolled into sheet through a series of highly capital-intensive steps. The first Micromill(TM) facility, which was constructed in Nevada during 1996 as a demonstration and production facility, achieved operational start-up in the fourth quarter of 1996. KACC expects that the Nevada Micromill(TM) facility will be in a start-up mode for the first half of 1997 and will be able to commence limited shipments to customers in the second half of 1997. If KACC is successful in proving and commercializing its Micromill(TM) technology, Micromill(TM) facilities could represent an important source of future growth. There can be no assurance that KACC will be able to successfully develop and commercialize the technology for use at full-scale facilities. KACC is currently financing the capital cost of the construction of the Nevada Micromill(TM) facility, estimated to be approximately $70.0 million, from available general corporate resources. 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 Jamaica, Sweden, Germany, Russia, India, Australia, Korea, New Zealand, Ghana, United Arab Emirates, and the United Kingdom. KACC has technical services contracts with smelters in Wales, Africa, Europe, the Middle East, and India. KACC's revenue from technology sales and technical assistance to third parties was $3.6 million in 1996, $5.7 million in 1995, and $10.0 million in 1994. Business Development KACC is actively pursuing opportunities to grow in targeted areas of its portfolio, by internal investment and by acquisition, both domestically and internationally. KACC is pursuing opportunities to increase its participation in emerging markets by using its technical expertise and capital to form joint ventures or acquire equity in aluminum-related facilities infourteen foreign countries where it can apply its proprietary technology. KACC has created Kaiser Aluminum International to identify growth opportunities in targeted emerging markets and develop the needed country competence to complement KACC's product and process competence in capitalizing on such opportunities. KACC has focused its efforts on countries that are expected to be important suppliers of aluminum and/or large customers for aluminum and alumina, including Venezuela - where the Company is the Qualified Operator in one of five consortia seeking to participate in the privatization of Venezuela's aluminum industry - the PRC, technology has been installed by KACC at various third party locations throughout the world and is an integral part of KACC's initiatives for participating in new and existing smelting facilities. See "-Research and Development." 9 13 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) In 1995, Kaiser Yellow River Investment Limited ("KYRIL"), a subsidiary of the Company, entered into a Joint Venture Agreement and related agreements (the "Joint Venture Agreements") with the Lanzhou Aluminum Smelters ("LAS") of the China National Nonferrous Metals Industry Corporation relating to the formation and operation of Yellow River Aluminum Industry Company Limited, a Sino-foreign joint equity enterprise organized under PRC law (the "Joint Venture"). KYRIL contributed $9.0 million to the capital of the Joint Venture in July 1995. The parties to the Joint Venture are currently engaged in discussions concerning the future of the Joint Venture. Governmental approval in the PRC will be necessary in order to implement any arrangements agreed to by the parties, and there can be no assurance such approvals will be obtained. At a meeting of the Board of Directors of the Joint Venture held on January 16, 1997, LAS reported that negotiations had begun with an investor which might be interested in buying KYRIL's interest in the Joint Venture. In light of such report, the directors adopted a resolution that, among other things, (i) contained an agreement to continue until June 30, 1997, discussions concerning the future of the Joint Venture, (ii) provided that KYRIL granted to LAS the right to seek a buyer to purchase KYRIL's equity interest in the Joint Venture, and (iii) provided that if a buyer to purchase KYRIL's equity interest in the Joint Venture was not found by June 30, 1997, the Joint Venture would be terminated and dissolved. KACC, through its engineered products business unit, entered into contracts to form two small joint ventures in the PRC. KACC indirectly acquired equity interests of approximately 45% and 49%, respectively, in these two companies which will manufacture aluminum extrusions, in exchange for the contribution to those companies of certain used equipment, technology, services and cash. The majority equity interests in the two companies are owned by affiliates of Guizhou Guang Da Construction Company.countries. Employees During 1996,1998, KACC employed an average of 9,567approximately 9,200 persons, compared with an average of 9,546 employeesapproximately 9,600 persons in 1995,1997 and 9,744 employees in 1994.1996. At December 31, 1996,1998, KACC employed approximately 8,900 persons; this number does not include persons employed temporarily during the USWA labor dispute at the five facilities subject to the labor dispute. In 1998, Alpart entered into a new three-year labor agreement with workers at its refinery in Jamaica, and Valco entered into a new three-year labor agreement with workers at its smelter in Ghana. Each agreement includes productivity improvements. 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 Contingencies and Asbestos Contingencies" in this Report. 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- looking statements in this Report are not guarantees of future performance and involve significant risks and uncertainties. Actual results may vary materially from those in such forward- looking statements as a result of 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. 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 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 work force was 9,509, including a domestic work force of 5,925, of whom 3,974 were paid at an hourly rate. Most hourly paid domestic employees are covered by collective bargaining agreements with various labor unions. Approximately 75% of such employees are covered by a master agreement (the "Labor Contract") with the United Steelworkers of America ("USWA") which expires September 30, 1998. The Labor Contract covers KACC's plants in Spokane (Trentwood and Mead) and Tacoma, Washington; Gramercy, Louisiana; and Newark, Ohio. The Labor Contract provides for base wages at all covered plants. In addition, workers covered by the Labor Contract may receive quarterly or more frequent bonus payments based on various indices of profitability, productivity, efficiency, and other aspects of specific plant or departmental performance,hedging strategies. 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 certain cases, the price of alumina or primary aluminum. Pursuantaluminum and generally lag behind primary aluminum prices. Since 1993, the Average Midwest United States transaction price (the "AMT Price") for primary aluminum has ranged from approximately $.50 to $1.00 per pound. During 1998, the Labor Contract, base wage rates were raised effective January 2, 1995, were raised again effective November 6, 1995,AMT Price per pound of primary aluminum declined during the year, beginning the year in the $.70 to $.75 range and will be raised an additional amount effective November 3, 1997,ending the year in the low $.60 range. Subsequent to 1998, the AMT Price continued to decline, and an amountat February 26, 1999, the AMT Price was approximately $.58 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 its net exposure resulting from (i) anticipated sales of alumina, primary aluminum, and fabricated aluminum products, less (ii) expected purchases of certain items, such as aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with the price of primary aluminum. No assurance can be given that KACC's hedging program will adequately reduce KACC's exposure to the risk of fluctuating primary aluminum prices. 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, KACC enters into hedging transactions with major suppliers of energy and energy related financial instruments. KACC also enters into foreign exchange contracts to hedge material cash commitments to foreign subsidiaries and affiliates. No assurance can be given that KACC's hedging program will adequately reduce KACC's exposure to the risk from fluctuating prices for fuel oil, natural gas, and foreign currencies. Note 10 of Notes to Consolidated Financial Statements in the Annual Report is incorporated herein by reference. See also "Quantitative and Qualitative Disclosures about Market Risk" in this Report, and Note 1 "- Derivative Financial Instruments" of Notes to Consolidated Financial Statements in the Annual Report. - Leverage -------- The Company's ratio of consolidated indebtedness to consolidated net worth is greater than the comparable ratio of most of its North American competitors, who generally 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, and general economic conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financing Activities and Liquidity" in the Annual Report. - Electric Power -------------- The process of converting alumina into aluminum requires significant amounts of electric power, and the cost of livingelectric power is an important production cost for KACC at its aluminum smelters. A portion of the electric power used at the Mead and Tacoma, Washington, smelters, as well as the rolling mill at Trentwood, Washington, is purchased from the Bonneville Power Administration (the "BPA") under contracts which expire in September 2001, and a portion of such electric power is purchased from other suppliers. KACC has long-term arrangements, expiring in 2015, with the BPA for the transmission of electric power by the BPA 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 believes that adequate electric power will be available at that time, from the BPA and other suppliers, for the operation of its facilities in Washington. The electric power supplied to the Valco smelter in Ghana is produced by hydroelectric generators, and the delivery of electric power to the smelter is subject to interruption from time to time because of drought and other factors beyond the control of Valco. Such power is supplied under an agreement with the VRA which expires in 2017. The agreement 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. Such a review is now underway together with discussions concerning the reliability of the long-term supply of power. Electric power for the Anglesey smelter in Wales is supplied under an agreement which expires in 2001. KACC is working to address these power supply and power price issues; however, there can be no assurance that electric power at affordable prices will be available in the future for these smelters. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Valco Operating Level" in the Annual Report. - Labor Matters ------------- The material under the previous master agreement willheading "Labor Matters" at page 2 of this Report is incorporated herein 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 phased into baserequired to make locked-out employees whole for back wages duringfrom the termdate of the Labor Contract. Inlock-out in January 1999. While uncertainties are inherent in the second quarterfinal outcome of 1995, KACC acquired up to $2,000such matters, the Company believes that the resolution of preference stock heldthe alleged ULPs should not result in a stock plan formaterial adverse impact on the benefitCompany's consolidated financial position, results of certain employees covered by the Labor Contractoperations, or liquidity. - Environmental Contingencies and in the first half of 1998 will acquire up to an additional $4,000 of such preference stock held in such plan for the benefit of substantially the same employees. In addition, a profitability test was satisfied and, therefore, KACC acquired during 1996 up to an additional $1,000 of such preference stock held in such plan for the benefit of substantially the same employees. KACC made comparable acquisitions of preference stock held for the benefit of certain salaried employees. The contract covering Alpart's employees expired in April 1996, and contract negotiations are ongoing. Management considers KACC's employee relations to be satisfactory. Environmental MattersAsbestos Contingencies ------------------------------------------------------ The Company and KACC are subject to a wide variety of international, federal, state and local environmental laws and regulations (the "Environmental Laws"). The Environmental Laws regulate, among other things, air and water emissions and discharges; the generation, storage, treatment, transportation, and disposal of solid and hazardous waste; the release of hazardous or toxic substances, pollutants and contaminants into the environment; and, in certain instances, the environmental condition of industrial property prior to transfer or sale. In addition, the Company and KACC are subject to various federal, state, and local workplace health and safety laws and regulations ("Health Laws"). 10 14 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) From time to time, KACC is subject, with respect to its current and former operations, to fines or penalties assessed for alleged breaches of the Environmental and Health Laws and to claims and litigation brought by federal, state or local agencies and by private parties seeking remedial or other enforcement action under the Environmental and Health Laws or damages related to alleged injuries to health or to the environment, including claims with respect to certain waste disposal sites and the remediation of sites presently or formerly operated by KACC. See "Legal Proceedings." KACC currently is subject to a number ofcertain lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). KACC, along with certain other entities, has been named as a Potentially Responsible Party ("PRP") for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA and, in certain instances, may be exposed to joint and several liability for those costs or damages to natural resources. KACC's Mead, Washington, facility has been listed on the National Priorities List under CERCLA. By letter dated June 18, 1996, theThe Washington State Department of Ecology has advised KACC that there are several options for remediation at the Mead facility that would be acceptable to the Department. KACC expects that one of these remedial options will be agreed upon and incorporated into a Consent Decree in 1997.Decree. In addition, in connection with certain of its asset sales, KACC has agreed to indemnify the purchasers with respect to certain liabilities (and associated expenses) resulting from acts or omissions arising prior to such dispositions, including environmental liabilities. 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, 1996,1998, the balance of such accruals, which are primarily included in Long-term liabilities, was $33.3$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's assessment of the likely remediation to be performed. The Company expects remediation to occur over the next several years and estimates that annual expenditures to be charged to these environmental accruals will be approximately $3.0 million to $9.0$8.0 million per year for the years 19971999 through 20012003 and an aggregate of approximately $6.0$29.0 million thereafter. Cash expenditures of $8.8 million in 1996, $4.5 million in 1995, and $3.6 million in 1994 were charged to previously established accruals relating to environmental costs. Approximately $9.3 million is expected to be charged to such accruals in 1997. 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 itCash expenditures of $3.5 million in 1998, $5.6 million in 1997, and $8.8 million in 1996 were charged to previously established accruals relating to environmental costs. Approximately $4.5 million is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $24.0 million and that, subject to further regulatory review and approval, the factors upon which a substantial portion of this estimate is based are expected to be resolved overcharged 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 next twelve months.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 outcome 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. In additionKACC 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 cash expenditures chargedasbestos during, and as a result of, their employment or association with KACC or exposure to environmental accruals, environmental capital spending was $18.4 million in 1996, $9.2 million in 1995, and $11.9 million in 1994. Annual operating costsproducts containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for pollution control, not including corporate overhead or depreciation, were approximately $30.1 million in 1996, $26.0 million in 1995, and $23.1 million in 1994. Legislative, regulatory and economic uncertainties make it difficult to project future spending for these purposes. However, the Company currently anticipates that in the 1997-1998 period, environmental capital spending will be within the range of approximately $6.0 million to $16.0 million per year, and operating costs for pollution control will be within the range of $30.0 million to $31.0 million per year.at least 20 years. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - EnvironmentalCommitments and Contingencies" in the Annual Report. The portion of Note 89 of the Notes to Consolidated Financial Statements in the Annual Report under the headingheadings "Environmental Contingencies" 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 expectations 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 foreign countries, including Australia, Canada, Ghana, Jamaica, and the United Kingdom. Foreign operations, 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 conducts operations directly or through joint ventures continue to be satisfactory, there can be no assurance as to the future influence of the foregoing factors. 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 "Business - The Company - ProductionItem 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 are generally in good condition and suitable for their intended uses, subject to changing environmental requirements. Although KACC's domestic aluminum smelters and alumina facility were initially designed early in KACC's history, they have been modified frequently over the years to incorporate technological advances in order to improve 11 15 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 2. PROPERTIES (CONTINUED) efficiency, increase capacity, and achieve energy savings. The Company believes that KACC's domestic 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(TM))Micromill). See "Management's Discussion and AnalysisNote 5 of Notes to Consolidated Financial Condition and Results of Operations - Financing Activities and Liquidity"Statements in the Annual Report. 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 above,in this Report for cautionary information with respect to such forward-looking statements. Aberdeen Pesticide Dumps Site Matter The Aberdeen Pesticide Dumps Site, listed on the Superfund National Priorities List, is composed of five separate sites around the town of Aberdeen, North Carolina (collectively, the "Sites"). The Sites are of concern to the United States Environmental Protection Agency (the "EPA") because of their past use as either pesticide formulation facilities or pesticide disposal areas from approximately the mid-1930's through the late-1980's. The United States originally filed a cost recovery complaint (as amended, the "Complaint") in the United States District Court for the Middle District of North Carolina, Rockingham Division, No. C-89-231-R, which, as amended, includes KACC and a number of other defendants. The Complaint seeks reimbursement for past and future response costs and a determination of liability of the defendants under Section 107 of CERCLA. In 1993 and 1994, the EPA issued unilateral Administrative Orders under Section 106(a) of CERCLA ordering the respondents, including KACC, to perform the soil remedial design and remedial action and groundwater remediation for three of the Sites. In addition to KACC, a number of other companies are also named as respondents. KACC has entered into interim PRP Participation Agreements with certain of the respondents (the "Group") to participate jointly in responding to the Administrative Orders, to share costs incurred on an interim basis, and to seek to reach a final allocation of costs through agreement or to allow such final allocation and determination of liability to be made by the United States District Court. In March 1997, certain members of the Group, including KACC, entered into a Settlement Agreement and Participation Agreement which allocates one hundred percent of all costs incurred or to be incurred for work at each of the five Sites. Negotiations with the United States Department of Justice ("DOJ") and the EPA concerning an acceptable consent decree to resolve the outstanding litigation in whole or in part commenced during the first quarter of 1997. Based on current estimates of future costs, the Company believes that its aggregate financial exposure at these Sites is less than $2.0 million. United States of America v. Kaiser Aluminum & Chemical Corporation In February 1989, a civil action was filed by the DOJ at the request of the EPA against KACC in the United States District Court for the Eastern District of Washington, Case No. C-89-106-CLQ. The complaint alleged that emissions from certain stacks at KACC's Trentwood facility in Spokane, Washington, intermittently violated the opacity standard contained in the Washington State Implementation Plan ("SIP"), approved by the EPA under the federal Clean Air Act. KACC and the EPA, without adjudication of any issue of fact or law, and without any admission of the violations alleged in the underlying complaint, have entered into a Consent Decree, which was approved by a Consent Order entered by the United States District Court for the Eastern District of Washington in January 1996. As approved, the Consent Decree settles the underlying disputes and requires KACC to (i) pay a $.5 million civil penalty (which penalty has been paid), (ii) complete a program of plant improvements and operational changes that began in 1990 at its Trentwood facility, including the installation of an emission control system to capture particulate emissions from certain furnaces, and (iii) achieve and maintain furnace compliance with the opacity standard in the Washington SIP. KACC anticipates that capital expenditures for the environmental upgrade of the furnace operation at its Trentwood facility, including the improvements and changes required by the Consent Decree, will be approximately $20.0 million. 12 16 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS (CONTINUED) Catellus Development Corporation v. Kaiser Aluminum & Chemical Corporation and James L. Ferry & Son Inc. In January 1991, the City of Richmond, et al. (the "Plaintiffs") filed a Second Amended Complaint for Damages and Declaratory Relief against the United States, Catellus Development Corporation ("Catellus") and other defendants (collectively, the "Defendants") alleging, among other things, that the Defendants caused or allowed hazardous substances, pollutants, contaminants, debris and other solid wastes to be discharged, deposited, disposed of or released on certain property located in Richmond, California (the "Property"), formerly owned by Catellus and leased to KACC for the purpose of shipbuilding activities conducted by KACC on behalf of the United States during World War II. The Plaintiffs sought recovery of response costs and natural resource damages under CERCLA. Certain of the Plaintiffs alleged that they had incurred or expected to incur costs and damages of approximately $49.0 million. Catellus subsequently filed a third party complaint (the "Third Party Complaint") against KACC in the United States District Court for the Northern District of California, Case No. C-89-2935 DLJ. Thereafter, the Plaintiffs filed a separate complaint against KACC, Case No. C-92-4176. The Plaintiffs settled their CERCLA and tort claims against the United States for $3.5 million plus thirty-five percent (35%) of future response costs. The trial involving this case commenced in March 1995. During the trial, Plaintiffs settled their claims against Catellus in exchange for payment of approximately $3.3 million. On December 7, 1995, the United States District Court issued a final judgment on those claims concluding that KACC is liable for various costs and interest, aggregating approximately $2.2 million, fifty percent (50%) of future costs of cleaning up certain parts of the Property, and certain fees and costs associated specifically with the claim by Catellus against KACC. KACC paid the City of Richmond $1.8 million in partial satisfaction of this judgment. In January 1996, Catellus filed a notice of appeal with respect to its indemnity judgment against KACC. KACC has since filed a notice of cross appeal as to the Court's decision adjudicating that KACC is obligated to indemnify Catellus. On July 8, 1996, the Court issued an order awarding Plaintiffs nominal costs, which amount has been paid. The order also awarded Catellus de minimis costs. Catellus has filed a notice of appeal. On August 12, 1996, the Court issued an order granting the Catellus motion for attorneys' fees in the amount of approximately $.9 million. KACC and Catellus have filed notices of appeal with respect to the attorneys' fees award. Waste Inc. Superfund Site On December 8, 1995, the EPA issued a unilateral Administrative Order for Remedial Design and Remedial Action under CERCLA to KACC and thirty-one other respondents for remedial design and action at the Waste Inc. Superfund Site at Michigan City, Indiana. This site was operated as a landfill from 1965 to 1982. KACC is alleged to have arranged for the disposal of waste from its formerly-owned plant at Wanatah, Indiana, during the period from 1964 to 1972. In May 1996, KACC entered into a Participation Agreement with thirteen of the respondents to perform the work required under the Administrative Order, under which KACC will pay 2.79% of the cost of remedial design and work at the Site. Based on current cost estimates, KACC believes that its financial exposure for remedial design and remedial action at this site is less than $.5 million. Hammons v. Alcan Aluminum Corp. et al On March 5, 1996, a class action complaint was filed against the Company, Alcan Aluminum Corp., Aluminum Company of America, Alumax, Inc, Reynolds Metal Company, and the Aluminum Association in the Superior Court of California for the County of Los Angeles, Case No. BC145612. The complaint claimsalleging that the defendants conspired, in violation of the California Cartwright Act (Bus. & Prof. Code ss.16720Section 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 seekssought 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 estimatesestimated damages sustained by the class to be $4.4 billion during the year 1994, before trebling. Plaintiff's counsel has estimated damages to be $4.4 billion per year for each of the two years the MOU was active, which when trebled equals $26.4 billion. On April 2, 1996, the case was removed to the United States District Court for the Central District of California. On July 11, 1996, the United States District Court granted summary judgment in favor of the Company and other defendants and dismissed the complaint as to all defendants. On July 18, 1996, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit. 13 17 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS (CONTINUED) Matheson et al v. Kaiser Aluminum Corporation et al On March 19, 1996, a lawsuit was filed against MAXXAM,December 11, 1997, the Company, andUnited States Court of Appeals for the Company's directors challenging and seeking to enjoin a proposed recapitalizationNinth Circuit affirmed the decision of the Company (the "Proposed Recapitalization") andDistrict Court. On December 23, 1997, the April 10, 1996, special stockholders meeting atplaintiff filed a petition for rehearing en banc, which was denied May 4, 1998. On August 12, 1998, the Proposed Recapitalization was to be considered. The suit, which is entitled Matheson et al. v. Kaiser Aluminum Corporation et al. (No. 14900) and wasplaintiff filed ina petition with the DelawareSupreme Court of Chancery, alleges, among other things, breachesthe United States for a writ of fiduciary duties by certain defendants and that the Proposed Recapitalization violates Delaware law and the certificatecertiorari, which petition was denied on October 19, 1998. The plaintiff subsequently requested reconsideration of designations for the Company's 8.255% PRIDES, Convertible Preferred Stock (the "PRIDES"). On April 8, 1996, the Delaware Court of Chancery issued a ruling which preliminarily enjoined the Company from implementing the Proposed Recapitalization. On April 19, 1996, the Delaware Supreme Court granted the Company's motion to consider, on an expedited basis, the Company's appeal of the preliminary injunction and on May 1, 1996, the Company's stockholders approved the Proposed Recapitalizationits petition which was not implemented at that time due to the pending appeal. On August 29, 1996, the Delaware Supreme Court upheld the preliminary injunction and remanded the case to the Court of Chancery. On September 24, 1996, the plaintiffs filed a motion to make permanent the temporary injunction issued on April 8, 1996. On September 27, 1996, the Board of Directors of the Company adopted a resolution abandoning the Proposed Recapitalization. On October 2, 1996, the Company filed a motion in the Delaware Court of Chancery to dismiss the shareholder litigation relating to the Proposed Recapitalization on the ground of mootness and filed a response to plaintiffs' motion for entry of a permanent injunction. Thereafter, plaintiffs' attorneys filed their fee application, and briefing was submitted by both sides on whether a permanent injunction was needed, and the amount of the fee to which plaintiffs' attorneys were entitled. On March 18, 1997, plaintiffs withdrew their motion for a permanent injunction, leaving their fee application as the only issue for the Court of Chancery to consider. After oral argument on March 25, 1997, the Court of Chancery awarded plaintiffs' attorneys fees and expenses in the total amount of $.8 million. It is anticipated that the Court of Chancery will sign an order, approved as to form by all parties, awarding such fees, dissolving the preliminary injunction, and dismissing plaintiffs' case with prejudice. The decision to abandon the Proposed Recapitalization does not preclude a recapitalization from being proposed to the stockholders of the Company in the future.also denied. 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 1520 years. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - AsbestosCommitments and Contingencies" in the Annual Report. The portion of Note 89 of the Notes to Consolidated Financial Statements in the Annual Report under the heading "Asbestos Contingencies" is incorporated herein by reference. DOJ Proceedings On August 24, 1994,Labor Matters In connection with the DOJ issued Civil Investigative Demand No. 11356USWA strike and subsequent lock-out by KACC, certain allegations of unfair labor practices ("CID No. 11356"ULPs") requesting informationhave 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 Company regarding (i) its production, capacity to produce, and sales of primary aluminum from January 1, 1991, to the date of the response; (ii) any actual or contemplated reductionlock-out in its productionJanuary 1999. While uncertainties are inherent in the final outcome of primary aluminum during that period; and (iii) any communications with others regarding any actual, contemplated, possible or desired reductions in primary aluminum production bysuch matters, the Company or any of its competitors during that period. The Company's management believes that the resolution of the alleged ULPs should not result in a material adverse impact on the Company's actions have at all times been appropriate, and the Company has submitted documents and interrogatory answers to the DOJ responding to CID No. 11356. On March 27, 1995, the DOJ issued Civil Investigative Demand No. 12503 ("CID No. 12503"), as partconsolidated financial position, results of an industry-wide investigation, requesting information from KACC regarding (i) any actualoperations, or contemplated changes in its method of pricing can sheet from January 1, 1994, through March 31, 1995, (ii) the percentage of aluminum scrap and primary aluminum ingot used by KACC to produce can sheet and the manner in which KACC's cost of acquiring aluminum scrap is factored into its can sheet prices, and (iii) any communications with others regarding any actual or contemplated changes in its method of pricing can sheet from January 1, 1994, through March 31, 1995. Management believes that KACC's actions have at all times been appropriate, and KACC has submitted documents and interrogatory answers to the DOJ responding to CID No. 12503. KACC was informed in November 1996 that the DOJ has officially closed its investigation and has returned the documents submitted by KACC. 14 18 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS (CONTINUED)liquidity. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders of the Company during the fourth quarter of 1996.1998. 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". The number of record holders of the Company's Common Stock at March 14, 1997,23, 1999, was 160.337. Page 4857 of the Annual Report, and the information in Note 45 of the Notes to Consolidated Financial Statements under the heading "Loan Covenants and Restrictions" at pages 29-30page 39 of the Annual Report, are incorporated herein by reference. The Company has not paid any dividends on its Common Stock during the two most recent fiscal years. The Credit Agreement (Exhibits 4.84.12 through 4.164.28 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 4.74.11 to this Report) 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 4.164.28 to this Report, Note 45 of the Notes to Consolidated Financial Statements at pages 29-30 ofin the Annual Report, and the information under the headings "Financing Activities and Liquidity" and "Capital Structure" at pages 17-1825 - 26 of the Annual Report, are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the Company is incorporated herein by reference to the table at page 31 of this Report, to the table at page 12pages 18 - 19 of the Annual Report,to Note 1 of the Notes to Consolidated Financial Statements at pages 25-27 ofin the Annual Report, and to pages 46-4758 - 59 of the Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pages 12-2018 - 28 of the Annual Report are incorporated herein by reference. 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. As discussed more fully in Notes 1 and 10 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 10 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 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- tax earnings by approximately $15 million. Based on the December 31, 1998 London Metal Exchange cash price for primary aluminum of approximately 56 cents per pound, the Company estimates that it would realize approximately $100 million of net aggregate pre-tax benefits from its hedging positions and fixed price customer contracts during 1999 and 2000. The Company also estimates that a hypothetical 10 cent decrease from the above stated year-end 1998 price level would result in additional net aggregate pre-tax benefits of approximately $150 million being realized during 1999 and 2000 related to KACC's hedging positions and fixed price customer contracts. 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 from the above stated year-end 1998 price would result in a net aggregate reduction to pre-tax earnings of approximately $20 million being realized during 1999 and 2000 related to KACC's hedging positions and fixed price customer contracts. It should be noted, however, that, since the hedging positions and fixed price customer contracts lock-in a specified price or range or prices, any increase or decrease in earnings attributable to KACC's hedging positions or fixed price customer contracts would be significantly offset by a decrease or increase in the value of the hedged transactions. The foregoing estimated earnings impact on 2000 excludes the possible effect on pre-tax income of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which must be adopted by the Company as of January 1, 2000. The foregoing estimate of a hypothetical 10 cent-per-pound increase in primary aluminum prices on KACC's hedging positions and fixed price customer contracts excludes the cash impact of possible margin deposit requirements. The Company estimates that KACC's cash exposure related to margin deposit requirements on such positions, if such a hypothetical price increase were to occur, would not have a material adverse impact on the Company's current liquidity or financial position. Foreign Currency KACC enters into forward exchange contracts to hedge material cash commitments for foreign currencies. KACC's primary foreign exchange exposure is related to KACC's Australian Dollar (A$) commitments in respect of activities associated with its 28.3%- owned 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 $1-2 million (decrease) increase in the Company's annual pre-tax earnings. At December 31, 1998, the Company held derivative foreign currency contracts hedging approximately 75% and 50% of its A$ currency commitments for 1999 and 2000, 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 million during 1999 and 2000 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-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 21-45 and page 4829 - 57 of the Annual Report are incorporated herein by reference. 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. 15 19 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------------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. 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 QuarterlyFive-Year Financial Data are included on pages 21-45 and 4829 - 59 of the Annual Report. 2. Financial Statement Schedules.............................Page ----------------------------- ----Schedules Page ---------------------------------- Report of Independent Public Accountants...................17Accountants 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 ...........................18-2118-21 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), which index is incorporated herein by reference. (b) REPORTS ON FORM 8-K Three ReportsNo Report on Form 8-K werewas filed by the Company during the last quarter of the period covered by this Report. One Report on Form 8-K, dated October 2, 1996, stated that the Board of Directors of the Company had adopted a resolution abandoning a proposed recapitalization of the Company, and contained information concerning an action entitled Matheson et al. v. Kaiser Aluminum Corporation et al. One Report on Form 8-K, dated October 10, 1996, stated that on October 7, 1996, KACC announced in a press release that it proposes to make a Rule 144A offering of $175 million principal amount of senior notes due 2006. One Report on Form 8-K, dated October 23, 1996, stated that on October 17, 1996, KACC announced in a press release that it had priced its Rule 144A offering of $175 million principal amount of 10 7/8% Senior Notes due 2006 at 99.5% of their principal amount to yield 10.96% to maturity. (c) EXHIBITS Reference is made to the Index of Exhibits immediately preceding the exhibits hereto (beginning on page 23), which index is incorporated herein by reference. 16 20 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited in accordance with generally accepted auditing standards, the financial statements included in Kaiser Aluminum Corporation and subsidiaries'Subsidiary Companies' annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 14, 1997.28, 1999. 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 14, 1997 17 21 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------------28, 1999 SCHEDULE I CONDENSED BALANCE SHEETS - PARENT COMPANY (In millions of dollars, except share amounts)
December 31, -------------------- 1996 1995 -------- -------------------------------------- 1998 1997 -------------- -------------- ASSETS Current assets: Cash and cash equivalents $ $ .2 Note receivable from KACC 8.6 10.7 -------- -------- Total current assets 8.6 10.9 Note receivable from KACC 8.6 Investment in KACC 1,641.2 1,521.3 -------- --------$ 1,913.3 $ 1,802.8 -------------- -------------- Total $1,649.8 $1,540.8 ======== ========$ 1,913.3 $ 1,802.8 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $ 2.4- $ 3.33.2 Intercompany note payable to KACC, including accrued interest 1,578.1 1,479.81,794.1 1,682.6 Stockholders' equity: PRIDES Convertible, par value $.05, issued and outstanding, 8,673,850 .4 .4 Common stock, par value $.01, authorized 100,000,000 shares:shares; issued and outstanding 71,646,78979,153,543 and 71,638,51478,980,881 in 19961998 and 1995 .7 .71997 .8 .8 Additional capital 531.1 530.3535.4 533.8 Accumulated deficit (460.1) (459.9) Additional minimum pension liability (2.8) (13.8) -------- --------(417.0) (417.6) -------------- -------------- Total stockholders' equity 69.3 57.7 -------- --------119.2 117.0 -------------- -------------- Total $1,649.8 $1,540.8 ======== ========$ 1,913.3 $ 1,802.8 ============== ==============
The accompanying notes to condensed financial statements are an integral part of these statements. 18 22 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- SCHEDULE I CONDENSED STATEMENTS OF INCOME - PARENT COMPANY (In millions of dollars)
December 31, -----------------------------1998 1997 1996 1995 1994 ------- ------- --------------------- -------------- -------------- Equity in income (loss) of KACC $ 108.7112.5 $ 152.8154.2 $ (20.4)108.7 Administrative and general expensesexpense (.4) (1.7) (2.2) (.4) (.3) Interest expense (111.5) (104.5) (98.3) (92.1) (86.1) ------- ------- --------------------- -------------- -------------- Net income (loss)$ .6 $ 48.0 $ 8.2 $ 60.3 $(106.8) ======= ======= ===================== ============== ==============
The accompanying notes to condensed financial statements are an integral part of these statements. 19 23 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- SCHEDULE I CONDENSED STATEMENTS OF CASH FLOWS - PARENT COMPANY (In millions of dollars)
December 31, --------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- --------------------- -------------- -------------- Cash flows from operating activities: Net income (loss)$ .6 $ 48.0 $ 8.2 $ 60.3 $(106.8) Adjustments to reconcile net income (loss) to net cash provided by (used for)used for operating activities: Equity in (income) lossincome of KACC (112.5) (154.2) (108.7) (152.8) 20.4 Accrued interest on intercompany note payable to KACC 111.5 104.5 98.3 92.1 86.1 Increase (decrease) in current liabilities (.9) .2 .3 ------- ------- -------Accrued taxes paid (3.3) (1.8) (2.7) -------------- -------------- -------------- Net cash used for operating activities (3.1) (.2) ------- ------- -------(3.7) (3.5) (4.9) -------------- -------------- -------------- Cash flows from investing activities: Investment in KACC (.1) (1.2) (66.9) ------- ------- -------(.3) (.1) -------------- -------------- -------------- Net cash used for investing activities (.1) (1.2) (66.9) ------- ------- -------(.3) (.1) -------------- -------------- -------------- Cash flows from financing activities: Dividends paid - (4.2) (10.5) (20.8) (14.8) Capital stock issued .1 1.2 100.1 Intercompany.4 .1 Payments from KACC on intercompany note issued byreceivable - 4.2 10.5 Tax allocation payments from KACC - net 13.4 15.5 (13.2) ------- ------- -------3.3 1.8 2.7 Operating cost advances from KACC .4 1.6 2.0 -------------- -------------- -------------- Net cash (used for) provided by financing activities 3.0 (4.1) 72.1 ------- ------- -------3.8 3.8 4.8 -------------- -------------- -------------- Net (decrease) increase in cash and cash equivalents during the year - - (.2) (5.5) 5.2 Cash and cash equivalents at beginning of year - - .2 5.7 .5 ------- ------- --------------------- -------------- -------------- Cash and cash equivalents at end of year $ - $ .2- $ 5.7 ======= ======= =======- ============== ============== ============== Supplemental disclosure of non-cash investing activities: Non-cash (decrease) increase in investment in KACC $ 9.9(1.7) $ 4.4 $ -
The accompanying notes to condensed financial statements are an integral part of these statements. 20 24 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- SCHEDULE I NOTES TO CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY 1. BASIS OF PRESENTATION Kaiser Aluminum Corporation (the "Company"" 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 19961998 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 5/6-5/8%. No interest or principal payments are due until December 31, 2000, after which interest and principal will be payable over a 15-year term pursuant to a predetermined schedule. 3. RESTRICTED NET ASSETS The investment in KACC is substantially unavailable to 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 all significant subsidiaries of KACC. See Note 45 of the Notes to Kaiser's Consolidated Financial Statements. 21 25 KAISER ALUMINUM CORPORATION AND SUBSIDIARY 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 27, 199730, 1999 By George T. Haymaker, Jr. ------------------------------------------ George T. Haymaker, Jr. Chairman of the Board President, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 27, 199730, 1999 George T. Haymaker, Jr. ----------------------------------------- George T. Haymaker, Jr. Chairman of the Board President, and Chief Executive Officer (Principal Executive Officer) Date: March 27, 199730, 1999 John T. La Duc ------------------------------------------ John T. La Duc Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: March 27, 1997 Arthur S. Donaldson ------------------------------------------ Arthur S. Donaldson30, 1999 Daniel D. Maddox Daniel D. Maddox Vice President and Controller (Principal Accounting Officer) Date: March 27, 199730, 1999 Robert J. Cruikshank ------------------------------------------ Robert J. Cruikshank Director Date: March 27, 199730, 1999 Charles E. Hurwitz ------------------------------------------ Charles E. Hurwitz Director Date: March 27, 199730, 1999 Ezra G. Levin ------------------------------------------ Ezra G. Levin Director Date: March 27, 199730, 1999 Robert Marcus ------------------------------------------ Robert Marcus Director Date: March 27, 199730, 1999 Robert J. Petris ------------------------------------------ Robert J. Petris Director 22 26 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- INDEX OF EXHIBITS
Exhibit Number Description - ------ ----------- 3.1 Restated Certificate of Incorporation of Kaiser Aluminum Corporation (the "Company" or "KAC"), dated February 21, 1991Exhibit 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 9-7/8% 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). *3.3 Amended and Restated By-laws of KAC, dated February 3, 1997. 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 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). 4.5 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). 4.6 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% 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). 4.7 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 the Company's 10 7/8% Series C 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). 4.8 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, filed by KAC, File No. 1-9447).
4.13 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). 4.18 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 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 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). 4.25 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, 27 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------------
Exhibit Number Description - ------ ----------- 4.9 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). 4.10 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). 4.11 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). 4.12 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). 4.13 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). 4.14 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). 4.15 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). *4.16 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. 4.17 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). 4.18 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). 4.19 Certificate of Designations of 8.255% PRIDES, Convertible Preferred Stock of KAC, dated February 17, 1994 (incorporated by reference to Exhibit 4.21 to the Report on Form 10-K for the period ended December 31, 1993, filed by KAC, File No. 1-9447). 4.201999, 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 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).
24 28 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES4.32 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 - --------------------------------------------------------------------------------
Exhibit Number Description - ------ ----------- 4.21 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 10.2110.23, 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). 10.3 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). 10.5 Agreement, dated as of June 30, 1993, between KAC and MAXXAM (incorporated by reference to Exhibit 10.2 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 10.6 - 10.16, inclusive] 10.6 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). 10.7 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 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). 10.9 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).
25 29 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------------
Exhibit Number Description - ------ ----------- 10.12 Promissory Note, dated February 1, 1989, by Anthony R. Pierno and Beverly J. Pierno to MAXXAM (incorporated by reference to Exhibit 10.30 to Form 10-K for the period ended December 31, 1988, filed by MAXXAM, File No. 1-3924). 10.13 Promissory Note, dated July 19, 1990, by Anthony R. Pierno to MAXXAM (incorporated by reference to Exhibit 10.31 to Form 10-K for the period ended December 31, 1990, filed by MAXXAM, File No. 1-3924). 10.14 Promissory Note, dated July 20, 1993, between MAXXAM and Byron L. Wade (incorporated by reference to Exhibit 10.59 to Form 10-K for the period ended December 31, 1993, filed by MAXXAM, File No. 1-3924). 10.15 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). 10.16 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). *11 Computation of Earnings Per Common and Common Equivalent Share *13 The portions of KAC's Annual Report to shareholders for the year ended December 31, 1996, 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 Thelen, Marrin, Johnson & Bridges LLP.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 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). 10.14 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. *27 Financial Data Schedule.
- ---------------------------- * Filed herewith 26 30 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- 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 Finance Corporation ............................ Delaware Kaiser Jamaica Bauxite Company (partnership)........... Jamaica Kaiser Jamaica Corporation............................. Delaware Queensland Alumina Limited............................. Queensland Volta Aluminium Company Limited........................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
27 31 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- Principal California South Carolina ---------- -------------- Domestic California Pennsylvania Operations Los Angeles (City Greenwood of Commerce) Erie (Partial List) Engineered Products Engineered Products Los Angeles (Santa Fe Springs) South Carolina Engineered Products Fabricating Greenwood Oxnard Engineered Products Engineered Products Greenwood Pleasanton Engineered Products Operations Engineered Greenwood Products Engineered Products and Oxnard Machine Shop R&D at the Center for Technology, Tennessee Administrative Engineered Tennessee Products --------- Offices Pleasanton Jackson (Partial List) R&D at the Center Engineered Products for Technology, Texas Administrative ----- Offices Jackson Florida Engineered Products Mulberry Texas Sodium Silicofluoride, Potassium Silicofluoride Houston Louisiana 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 Environmental Offices Engineered Products Gramercy Washington Alumina Mead Michigan Primary Aluminum, Detroit (Southfield) Division Technology Center Automotive Product Development and Sales Richland Ohio Engineered Products Canton Tacoma Engineered Products Primary Aluminum Newark Trentwood Engineered Products Flat-Rolled Products Oklahoma Tulsa Engineered Products - ------------------------------------------------------------------------------------------- Worldwide Australia Japan Operations Queensland Alumina Limited (28.3% owned) Furukawa Kaiser Forged Products Company (Partial List) Alumina (47.5%) Canada Sales Office Kaiser Aluminum & Chemical of Canada Limited Russia (100%) Kaiser Aluminium Russia, Inc. (100%) Engineered Products International Business Development Ghana Wales, United Kingdom ----- --------------------- Volta Aluminium Company Limited (90%) Anglesey Aluminium Limited (49%) Primary Aluminum Primary Aluminum Jamaica Alumina Partners of Jamaica (65%) Bauxite, Alumina Kaiser Jamaica Bauxite Company (49%) Bauxite,
28Alumina (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