=================================================================
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, 1997
Commission file number 1-3605
KAISER ALUMINUM & CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-0928288
(State of Incorporation) (I.R.S. Employer
Identification No.)
6177 SUNOL BOULEVARD, PLEASANTON, CALIFORNIA 94566-7769
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(510)
462-1122
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Cumulative Convertible
Preference Stock
(par value $100)
4 1/8% Series None
4 3/4% (1957 Series) None
4 3/4% (1959 Series) None
4 3/4% (1966 Series) None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Cumulative (1985 Series A) Preference Stock
Cumulative (1985 Series B) Preference Stock
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 17, 1998, there were 46,171,365 shares of the common
stock of the registrant outstanding, all of which were owned by
Kaiser Aluminum Corporation, the parent corporation of the
registrant. As of March 17, 1998, non-affiliates of the
registrant held 513,977 shares of Cumulative (1985 Series A)
Preference Stock and 59,889 shares of Cumulative (1985 Series B)
Preference Stock of the registrant. The aggregate value of such
Cumulative (1985 Series A) Preference Stock and Cumulative (1985
Series B) Preference Stock, based upon the redemption price for
such stock, is $28.7 million.
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 & Chemical 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 50 - 54 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 & Chemical Corporation
6177 Sunol Boulevard
Pleasanton, California 94566-7769
TABLE OF CONTENTS
Page
----
PART I 1
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 10
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
PART II 12
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 12
ITEM 6. SELECTED FINANCIAL DATA 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 48
PART III 48
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
48
ITEM 11. EXECUTIVE COMPENSATION 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
48
PART IV 48
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 48
SIGNATURES 49
INDEX OF EXHIBITS 50
EXHIBIT 21 SUBSIDIARIES 55
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains statements which
constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These
statements appear in a number of places in this Report (see, for
example, Item 1. "Business - Profit Improvement Program," " -
Business Development in Strategic Areas," " - Production
Operations," " - Competition," " - Research and Development," and
" - Environmental Matters," and Item 3. "Legal Proceedings").
Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates,"
"will," "should," "plans" or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or
by discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties, and
that actual results may vary materially from those in the
forward-looking statements as a result of various factors. These
factors include the effectiveness of management's strategies and
decisions, general economic and business conditions, developments
in technology, new or modified statutory or regulatory
requirements and changing prices and market conditions. Other
sections of this Report identify other factors that could cause
such differences. No assurance can be given that these are all
of the factors that could cause actual results to vary materially
from the forward-looking statements.
General
Kaiser Aluminum & Chemical Corporation (the "Company"), a
Delaware corporation organized in 1940, is a direct subsidiary of
Kaiser Aluminum Corporation ("Kaiser") and is an indirect
subsidiary of MAXXAM Inc. ("MAXXAM"). Kaiser owns all of the
Company's Common Stock; and MAXXAM and one of its wholly-owned
subsidiaries together own approximately 63% of Kaiser's Common
Stock, with the remaining approximately 37% publicly held. The
Company operates in all principal aspects of the aluminum
industry - the mining of bauxite, the refining of bauxite into
alumina, the production of primary aluminum from alumina, and the
manufacture of fabricated (including semi-fabricated) aluminum
products. In addition to the production utilized by the Company
in its operations, the Company sells significant amounts of
alumina and primary aluminum in domestic and international
markets. In 1997, the Company produced approximately 2,945,000
tons* of alumina, of which approximately 66% was sold to third
parties, and produced approximately 493,000 tons of primary
aluminum, of which approximately 67% was sold to third parties.
The Company is also a major domestic supplier of fabricated
aluminum products. In 1997, the Company shipped approximately
400,000 tons of fabricated aluminum products to third parties,
which accounted for approximately 5% of total United States
domestic shipments. Note 12 of the Notes to Consolidated
Financial Statements is incorporated herein by reference.
The Company's operations are conducted through the Company's
business units which compete throughout the aluminum industry.
The following table sets forth total shipments and intracompany
transfers of the Company's alumina, primary aluminum, and
fabricated aluminum operations:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1996 1995
----------------------------------------------
(in thousands of tons)
<S> <C> <C> <C>
ALUMINA:
Shipments to Third Parties 1,929.8 2,073.7 2,040.1
Intracompany Transfers 968.0 912.4 800.6
PRIMARY ALUMINUM:
Shipments to Third Parties 327.9 355.6 271.7
Intracompany Transfers 164.2 128.3 217.4
FABRICATED ALUMINUM PRODUCTS:
Shipments to Third Parties 400.0 327.1 368.2
</TABLE>
* All references to tons in this Report refer to metric tons of
2,204.6 pounds.
ITEM 1. BUSINESS (CONTINUED)
Profit Improvement Program
In October 1996, the Company established a goal of achieving $120
million per year 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. At the end of 1997, the Company had
achieved approximately half of the desired profit improvement.
This program is being effected through 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. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Recent Events and Developments" and Note
4 of the Notes to Consolidated Financial Statements.
Business Development in Strategic Areas
The Company's strategic objectives include both improving the
financial performance of its existing facilities (see "-Profit
Improvement Program") and implementing modifications to its
existing portfolio of businesses and assets in an effort to focus
its business activities in areas which hold the best potential
for improving the Company's financial performance. The Company
is actively pursuing opportunities to increase its participation
in businesses and assets in targeted areas of its portfolio
consistent with its strategic objectives, by internal investment
and by acquisition, both domestically and internationally, by
using its technical expertise and capital to form joint ventures
or to acquire equity in aluminum-related facilities. Recent
examples of such activities include the formation with Accuride
Corporation of a joint venture to design, manufacture and market
heavy duty aluminum wheels for the commercial transportation
industry, and the acquisition of an aluminum extrusion plant in
Richmond, Virginia, from Reynolds Metals Company, in the second
quarter of 1997. See "-Production Operations."
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 its 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 the price
of primary aluminum and generally lag behind primary aluminum
prices for periods of up to three months. From time to time in
the ordinary course of business the Company enters into hedging
transactions to provide price risk management in respect of its
net exposure resulting from (i) anticipated sales of alumina,
primary aluminum, and fabricated aluminum products, less (ii)
expected purchases of certain items, such as aluminum scrap,
rolling ingot, and bauxite, whose prices fluctuate with the price
of primary aluminum. Forward sales contracts are used by the
Company to effectively lock-in or fix the price that the Company
will receive for its shipments. The Company also uses option
contracts (i) to establish a minimum price for its product
shipments, (ii) to establish a "collar" or range of prices for
its anticipated sales, and/or (iii) to permit the Company to
realize possible upside price movements. See Notes 1 and 11 of
the Notes to Consolidated Financial Statements.
ITEM 1. BUSINESS (CONTINUED)
Production Operations
- Alumina
-------
The following table lists the Company's bauxite mining and
alumina refining facilities as of December 31, 1997:
<TABLE>
<CAPTION>
Annual
Production Total
Capacity Annual
Company Available to Production
Activity Facility Location Ownership the Company Capacity
---------- -------------- -------------- -------------- ---------------- --------------
(tons) (tons)
<S> <C> <C> <C> <C> <C>
Bauxite Mining KJBC(1) Jamaica 49% 4,500,000 4,500,000
Alpart(2) Jamaica 65% 2,275,000 3,500,000
-------------- --------------
6,775,000 8,000,000
============== ==============
Alumina Refining Gramercy Louisiana 100% 1,050,000 1,050,000
Alpart Jamaica 65% 942,500 1,450,000
QAL Australia 28.3% 973,500 3,440,000
-------------- --------------
2,966,000 5,940,000
============== ==============
</TABLE>
-------------
(1) Although the Company owns 49% of Kaiser Jamaica Bauxite
Company ("KJBC"), it has the right to receive all of KJBC's
output.
(2) Alumina Partners of Jamaica ("Alpart") bauxite is refined
into alumina at the Alpart refinery.
Bauxite mined in Jamaica by KJBC is refined into alumina at the
Company's plant at Gramercy, Louisiana, or is sold to third
parties. In 1979, the Government of Jamaica granted the Company a
mining lease for the mining of bauxite sufficient to supply the
Company's then-existing Louisiana alumina refineries at their
annual capacities of 1,656,000 tons per year until January 31,
2020. Alumina from the Gramercy plant is sold to third parties.
Alpart holds bauxite reserves and owns a 1,450,000 ton per year
alumina plant located in Jamaica. The Company owns a 65%
interest in Alpart, and Hydro Aluminium a.s ("Hydro") owns the
remaining 35% interest. The Company has management
responsibility for the facility on a fee basis. The Company and
Hydro have agreed to be responsible for their proportionate
shares of Alpart's costs and expenses. 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 June 1997, Alpart and JAMALCO, a joint venture between
affiliates of Aluminum Company of America and the government of
Jamaica, jointly announced that they had signed a non-binding
letter of intent agreeing to consolidate their bauxite mining
operations in Jamaica, with the objective of optimizing operating
and capital costs. The transaction is subject to various
conditions, including the negotiation of definitive agreements,
third party consents, and board approvals. No assurance can be
given that the conditions will be satisfied or that the
transaction will be consummated.
ITEM 1. BUSINESS (CONTINUED)
The Company owns a 28.3% interest in Queensland Alumina Limited
("QAL"), which owns the largest and one of the most competitive
alumina refineries in the world, located in Queensland,
Australia. QAL refines bauxite into alumina, essentially on a
cost basis, for the account of its stockholders under long-term
tolling contracts. The stockholders, including the Company,
purchase bauxite from another QAL stockholder under long-term
supply contracts. The Company has contracted with QAL to take
approximately 792,000 tons per year of capacity or pay standby
charges. The Company is unconditionally obligated to pay amounts
calculated to service its share ($97.6 million at December 31,
1997) of certain debt of QAL, as well as other QAL costs and
expenses, including bauxite shipping costs.
The Company'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 the Company's third-party sales of bauxite in 1997 were made
to two customers, the largest of which accounted for
approximately 91% of such sales. The Company also sold alumina
in 1997 to 29 customers, the largest and top five of which
accounted for approximately 24% and 85% of such sales,
respectively. See "- Competition." The Company believes that
among alumina producers it is the world's second largest seller
of smelter grade alumina to third parties. The Company'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 "- Sensitivity to Prices and Hedging
Programs."
- Primary Aluminum Products
-------------------------
The following table lists the Company's primary aluminum smelting
facilities as of December 31, 1997:
<TABLE>
<CAPTION>
Total 1997
Annual Average
Company Rated Operating
Location Facility Ownership the Company Capacity Rate
-------------------- ------------- ------------- ------------- ------------- -------------
(tons) (tons)
<S> <C> <C> <C> <C> <C>
Domestic
Washington Mead 100% 200,000 200,000 108%
Washington Tacoma 100% 73,000 73,000 103%
------------- -------------
- -
Subtotal 273,000 273,000
------------- -------------
International
Ghana Valco 90% 180,000 200,000 76%
Wales, United Kingdom Anglesey 49% 55,000 112,000 118%
------------- -------------
Subtotal 235,000 312,000
------------- -------------
Total 508,000 585,000
============= =============
</TABLE>
The Mead facility uses pre-bake technology and produces primary
aluminum. Approximately 64% of Mead's 1997 production was used
at the Company's Trentwood, Washington, 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 Company is modernizing and expanding the carbon baking
furnace at its Mead smelter at an estimated cost of approximately
$54.5 million. The project will improve the reliability of the
carbon baking operations, increase productivity, enhance safety,
and improve the environmental performance of the facility. The
first stage of this project, the construction of a new $40.0
million 90,000 ton per year furnace, has been completed and is in
operation. The remaining modernization work is expected to be
completed in late 1998, when an existing furnace will be rebuilt.
A portion of this project was financed with the net proceeds
(approximately $18.6 million) of 7.6% Solid Waste Disposal
Revenue Bonds due 2027 issued in March 1997 by the Industrial
Development Corporation of Spokane County, Washington.
Electric power represents an important production cost for the
Company at its aluminum smelters. In 1995, the Company
successfully restructured electric power purchase agreements for
its facilities in the Pacific Northwest, which resulted in
significantly lower electric power costs in 1996 for the Mead and
Tacoma, Washington, smelters compared to 1995 electric power
costs. The Company continued to benefit from savings in electric
power costs at those facilities in 1997 and expects to continue
to benefit from such savings in future years.
The Company 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 the Company and the other participant into primary
aluminum under tolling contracts which provide for proportionate
payments by the participants. The Company's share of the primary
aluminum is sold to third parties. Power for the Valco smelter
is supplied under an agreement with the Volta River Authority
(the "VRA") which expires in 2017. The agreement indexes
two-thirds of the price of the contract quantity of power to the
market price of primary aluminum. The agreement also provides
for a review and adjustment of the base power rate and the price
index every five years. The most recent review was completed in
April 1994 for the 1994-1998 period.
Effective January 1, 1998, the VRA reduced the allocation of
electric power to the Valco smelter. Kaiser announced that, due
to the reduced power allocation, Valco expected to operate three
potlines in 1998 compared to the four potlines which were
operated throughout 1997. During February 1998, Valco and the
VRA reached an agreement whereby Valco agreed to receive
compensation in lieu of the power necessary to operate one of its
three remaining operating potlines. Compensation under the
agreement is expected to substantially offset the financial
impact of the curtailment of that potline. As a result of the
curtailment, Valco said that it expected to operate two of its
five potlines after February 25, 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Recent Events and Developments."
The Company 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. The
Company supplies 49% of Anglesey's alumina requirements and
purchases 49% of Anglesey's aluminum output. The Company sells
its share of Anglesey's output to third parties. Power for the
Anglesey aluminum smelter is supplied under an agreement which
expires in 2001.
The Company has developed and installed proprietary retrofit and
control technology in all of its smelters, as well as at third
party locations. This technology - which includes the redesign
of the cathodes, anodes and bus that conduct electricity through
reduction cells, improved feed systems that add alumina to the
cells, and a computerized process control and energy management
system - has significantly contributed to increased and more
efficient production of primary aluminum and enhanced the
Company's ability to compete more effectively with the industry's
newer smelters. The Company is actively engaged in efforts to
license this technology and sell technical and managerial
assistance to other producers worldwide, and may participate in
joint ventures or similar business partnerships which employ the
Company's technical and managerial knowledge. See "-Research and
Development."
During October 1997, a joint decision was made by a subsidiary of
the Company and its joint venture partner to terminate and
dissolve the Sino-foreign aluminum joint venture formed in 1995.
In January 1998, the Company's subsidiary reached an agreement to
sell its interests in the venture to its partner. The terms of
the agreement are subject to certain governmental approvals by
officials of the People's Republic of China.
ITEM 1. BUSINESS (CONTINUED)
The Company's principal primary aluminum customers consist of
large trading intermediaries and metal brokers, who resell
primary aluminum to fabricated product manufacturers, and large
and small international aluminum fabricators. In 1997, the
Company sold its primary aluminum production not utilized for
internal purposes to approximately 52 customers, the largest and
top five of which accounted for approximately 13% and 47% of such
sales, respectively. See "- Competition." Marketing and sales
efforts are conducted by personnel located in Pleasanton,
California, Houston, Texas, and Tacoma and Spokane, Washington.
A majority of the business unit's sales are based upon long-term
relationships with metal merchants and end-users.
- Fabricated Aluminum Products
----------------------------
The Company 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. The Company'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. The Company has focused its fabricated
products operations on selected products in which it has
production expertise, high-quality capability, and geographic and
other competitive advantages.
Fabricated aluminum products are manufactured by two business
units - 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 the Company's fabricated products operations
is comprised of primary aluminum, obtained both internally and
from third parties, and scrap metal purchased from third parties.
Flat-Rolled Products - The flat-rolled products business unit
operates the Trentwood, Washington, rolling mill and the
Micromill(TM) facility, near Reno, Nevada. The Trentwood
facility accounted for approximately 62% of the Company's 1997
fabricated aluminum products shipments. The business unit
supplies the aerospace and general engineering markets (producing
heat-treat products), the beverage container market (producing
body, lid, and tab stock), and the specialty coil markets
(producing automotive brazing sheet, wheel, and tread products),
both directly and through distributors.
The Company continues to enhance the process and product mix of
its Trentwood rolling mill in an effort to maximize its
profitability and maintain full utilization of the facility. The
Company is implementing a plan to expand its annual production
capacity of heat-treated flat-rolled products at the Trentwood
facility by approximately one-third over 1996 levels, most of
which was achieved in 1997. Implementation of the plan also will
enable the Company to improve the reliability of its heat-treated
operations, enhance the quality of its heat-treat products, and
improve Trentwood's operating efficiency. The project is
estimated to cost approximately $22.0 million and is expected to
be completed in late 1998. Global sales of the Company's heat-
treat products have increased significantly over the last
several years and are made primarily to the aerospace and general
engineering markets, which have been experiencing growth in
demand. In 1997, the business unit shipped products to
approximately 141 customers in the aerospace, transportation, and
industrial ("ATI") markets, most of which were distributors who
sell to a variety of industrial end-users. The top five
customers in the ATI markets for flat-rolled products accounted
for approximately 17% of the business unit's revenue.
The Company'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 the Company with a transportation advantage.
Quality of products for the beverage container industry, service,
and timeliness of delivery are the primary bases on which the
Company competes. In recent years the Company has made
significant capital expenditures at Trentwood 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 its products
for the beverage container industry and the capacity and
efficiency of its manufacturing operations. The Company believes
that it is one of the highest quality producers of aluminum
beverage can stock in the world. In 1997, the business unit had
37 domestic and foreign can stock customers. The largest and top
five of such customers accounted for approximately 15% and 27%,
respectively, of the business unit's revenue. See "-
Competition." The marketing staff for the business unit is
located at the Trentwood facility and in Pleasanton, California.
Sales are made directly to end-use customers and distributors
from four sales offices in the United States, from sales offices
in England and Japan, and by independent sales agents in Europe,
Asia and Latin America.
The first Micromill(TM) facility, constructed in 1996 as a
demonstration and production facility, was in a start-up mode
during 1997. Micromill(TM) technology is based on a proprietary
thin-strip, high-speed, continuous-belt casting technique linked
directly to hot and cold rolling mills. Assuming the successful
implementation and commercialization of the Micromill(TM)
technology, the capital and conversion costs of Micromill(TM)
facilities are expected to be significantly lower than
conventional rolling mills. The Company is continuing its
efforts to implement the Micromill(TM) technology on a full-scale
basis. The facility is currently shipping qualification
quantities of product to various customers. However, the
Micromill(TM) 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.
Engineered Products - The engineered products business unit
maintains its headquarters and a sales and engineering office in
Southfield, Michigan, which works with car makers and other
customers, the Company's Center for Technology ("CFT," see
"-Research and Development"), and plant personnel to create new
automotive component designs and to improve existing products.
The business unit operates soft-alloy and hard-alloy extrusion
facilities and engineered component (forging and casting)
facilities in the United States and in Canada. Soft-alloy
extrusion facilities are located in Los Angeles, California;
Santa Fe Springs, 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, acquired in mid-1997
by Kaiser Bellwood Corporation, a wholly-owned subsidiary of the
Company, increased the Company's extruded products capacity and
enhanced its existing extrusion business due to that facility's
ability to manufacture seamless tubing and large circular
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,
which produce screw machine stock, redraw rod, forging stock, and
billet. A facility located in Richland, Washington, produces
seamless tubing in both hard and soft alloys for the automotive,
other transportation, export, recreation, agriculture, and other
industrial markets. The business unit also operates a cathodic
protection business located in Tulsa, Oklahoma, that extrudes
both aluminum and magnesium. 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 engineered products business unit operates forging facilities
at Oxnard, California, and Greenwood, South Carolina; a machine
shop at Greenwood, South Carolina; and a casting facility in
Canton, Ohio; and participates in a joint venture with Accuride
Corporation, located in Erie, Pennsylvania, and Cuyahoga Falls,
Ohio, that designs, manufactures and markets aluminum wheels for
the commercial transportation industry. The business unit is one
of the largest producers of aluminum forgings in the United
States and is a major supplier of high-quality forged parts to
customers in the automotive, commercial vehicle and ordnance
markets. The high strength-to-weight properties of forged and
cast aluminum make it particularly well-suited for automotive
applications. The business unit's casting facility manufactures
aluminum engine manifolds for the automobile, truck and marine
markets.
In 1997, the engineered products business unit had 641 customers,
the largest and top five of which accounted for approximately 8%
and 18%, respectively, of the business unit's revenue. See "-
Competition." Sales are made directly from plants, as well as
marketing locations elsewhere in the United States.
ITEM 1. BUSINESS (CONTINUED)
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, the Company competes with both
domestic and foreign producers of bauxite, alumina and primary
aluminum, and with domestic and foreign fabricators. Many of the
Company's competitors have greater financial resources than the
Company. The Company's principal competitors in the sale of
alumina include Alcoa Alumina & Chemicals L.L.C., Billiton
Marketing and Trading BV, and Alcan Aluminium Limited. The
Company 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. The Company also competes with a wide range of
domestic and international fabricators in the sale of fabricated
aluminum products. Competition in the sale of fabricated
products is based upon quality, availability, price and service,
including delivery performance. The Company concentrates its
fabricating operations on selected products in which 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 its customers, including
intermediaries, would not have a material adverse effect on its
financial condition or results of operations.
Research and Development
The Company conducts research and development activities
principally at two facilities - CFT in Pleasanton, California,
and the Northwest Engineering Center adjacent to the Mead smelter
in Washington. Net expenditures for company-sponsored research
and development activities were $19.7 million in 1997, $20.5
million in 1996, and $18.5 million in 1995. The Company's
research staff totaled 133 at December 31, 1997. The Company
estimates that research and development net expenditures will be
approximately $11.6 million in 1998.
CFT performs research and development across a range of aluminum
process and product technologies to support the Company's
business units and new business opportunities. It also
selectively offers technical services to third parties.
Significant efforts are directed at product and process
technology for the aircraft, automotive, and can sheet markets,
and aluminum reduction cell models which are applied to improving
cell designs and operating conditions. The Northwest Engineering
Center maintains specialized laboratories and a miniature carbon
plant where experiments with new anode and cathode technology are
performed. The Northwest Engineering Center supports the
Company's primary aluminum smelters, and concentrates on the
development of cost-effective technical innovations such as
equipment and process improvements.
CFT and the Reno, Nevada, facility are continuing their efforts
to implement the Micromill(TM) technology for the production of can
sheet and other sheet products. See "-Production Operations -
Fabricated Aluminum Products - Flat-Rolled Products."
The Company licenses its technology and sells technical and
managerial assistance to other producers worldwide. The
Company'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, Bahrain, Venezuela, Brazil,
and the United Kingdom. The Company has technical services
contracts with smelters in Wales, Africa, Europe, the Middle
East, and India.
ITEM 1. BUSINESS (CONTINUED)
Employees
During 1997, the Company employed an average of 9,553 persons,
compared with an average of 9,567 employees in 1996, and 9,546
employees in 1995. At December 31, 1997, the Company's work
force was 9,597, including a domestic work force of 6,081, of
whom 4,118 were paid at an hourly rate. Most hourly paid
domestic employees are covered by collective bargaining
agreements with various labor unions. Approximately 72% of such
employees are covered by a master agreement (the "Labor
Contract") with the United Steelworkers of America which expires
September 30, 1998. The Labor Contract covers the Company's
plants in Spokane (Trentwood and Mead) and Tacoma, Washington;
Gramercy, Louisiana; and Newark, Ohio. The Company anticipates
that the Labor Contract will be renegotiated during 1998.
The Labor Contract provides for base wages at all covered plants.
In addition, workers covered by the Labor Contract may receive
quarterly or more frequent bonus payments based on various
indices of profitability, productivity, efficiency, and other
aspects of specific plant or departmental performance, as well
as, in certain cases, the price of alumina or primary aluminum.
Pursuant to the Labor Contract, base wage rates were raised
effective November 3, 1997, and an amount in respect of the cost
of living adjustment under the previous master agreement has been
phased into base wages. In the first half of 1998, the Company
will acquire up to $4,000 per employee (80 shares) of preference
stock held in a stock plan for the benefit of certain employees
covered by the Labor Contract. The Company will make comparable
acquisitions of preference stock held for the benefit of certain
salaried employees.
Management considers the Company's employee relations to be
satisfactory.
Environmental Matters
The Company is subject to a wide variety of international,
federal, state and local environmental laws and regulations (the
"Environmental Laws"). The Environmental Laws regulate, among
other things, air and water emissions and discharges; the
generation, storage, treatment, transportation, and disposal of
solid and hazardous waste; the release of hazardous or toxic
substances, pollutants and contaminants into the environment;
and, in certain instances, the environmental condition of
industrial property prior to transfer or sale. In addition, the
Company is subject to various federal, state, and local workplace
health and safety laws and regulations ("Health Laws").
From time to time, the Company is subject, with respect to its
current and former operations, to fines or penalties assessed for
alleged breaches of the Environmental and Health Laws and to
claims and litigation brought by federal, state or local agencies
and by private parties seeking remedial or other enforcement
action under the Environmental and Health Laws or damages related
to alleged injuries to health or to the environment, including
claims with respect to certain waste disposal sites and the
remediation of sites presently or formerly operated by the
Company. The Company currently is subject to certain lawsuits
under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986 ("CERCLA"). See "Legal Proceedings."
The Company, 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. The Company's Mead, Washington, facility has been
listed on the National Priorities List under CERCLA. The
Washington State Department of Ecology has advised the Company
that there are several options for remediation at the Mead
facility that would be acceptable to the Department. The Company
expects that one of these remedial options will be agreed upon
and incorporated into a Consent Decree. In addition, in
connection with certain of its asset sales, the Company 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.
ITEM 1. BUSINESS (CONTINUED)
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, 1997,
the balance of such accruals, which are primarily included in
Long-term liabilities, was $29.7 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 $8.0 million per year for the years 1998 through
2002 and an aggregate of approximately $8.0 million thereafter.
Cash expenditures of $5.6 million in 1997, $8.8 million in 1996,
and $4.5 million in 1995 were charged to previously established
accruals relating to environmental costs. Approximately $5.1
million is expected to be charged to such accruals in 1998.
As additional facts are developed and definitive remediation
plans and necessary regulatory approvals for implementation of
remediation are established or alternative technologies are
developed, changes in these and other factors may result in
actual costs exceeding the current environmental accruals. The
Company believes that it is reasonably possible that costs
associated with these environmental matters may exceed current
accruals by amounts that could range, in the aggregate, up to an
estimated $18.0 million. While uncertainties are inherent in the
final outcome of these environmental matters, and it is presently
impossible to determine the actual costs that ultimately may be
incurred, 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 addition to cash expenditures
charged to environmental accruals, environmental capital spending
was $6.8 million in 1997, $18.4 million in 1996, and $9.2 million
in 1995. Annual operating costs for pollution control, not
including corporate overhead or depreciation, were approximately
$27.5 million in 1997, $30.1 million in 1996, and $26.0 million
in 1995. Legislative, regulatory and economic uncertainties make
it difficult to project future spending for these purposes.
However, the Company currently anticipates that in the 1998-1999
period, environmental capital spending will be within the range
of approximately $5.0 million to $7.0 million per year, and
operating costs for pollution control will be approximately $35.0
million per year.
The Company 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 the Company or exposure to
products containing asbestos produced or sold by the Company.
The lawsuits generally relate to products the Company has not
manufactured for at least 20 years. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Environmental and Asbestos Contingencies."
The portion of Note 10 of the Notes to Consolidated Financial
Statements under the headings "Environmental Contingencies" and
"Asbestos Contingencies" is incorporated herein by reference.
ITEM 2. PROPERTIES
The locations and general character of the principal plants,
mines, and other materially important physical properties
relating to the Company's operations are described in "Business -
The Company - Production Operations" and those descriptions are
incorporated herein by reference. The Company owns in fee or
leases all the real estate and facilities used in connection with
its business. Plants and equipment and other facilities are
generally in good condition and suitable for their intended uses,
subject to changing environmental requirements. Although the
Company's domestic aluminum smelters and alumina facility were
initially designed early in the Company's history, they have been
modified frequently over the years to incorporate technological
advances in order to improve efficiency, increase capacity, and
achieve energy savings. The Company believes that its plants are
cost competitive on an international basis.
The Company'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 the Company's major
domestic plants (other than the Gramercy alumina refinery and
Nevada Micromill(TM)). See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Financing
Activities and Liquidity" and Note 5 of the Notes to Consolidated
Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. See Item 1, above, 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 EPA issued unilateral Administrative Orders
under Section 106(a) of CERCLA ordering the respondents,
including the Company, to perform the soil remedial design and
remedial action and groundwater remediation for three of the
Sites. In March 1997, nine of the corporate respondents,
including the Company, entered into a Settlement Agreement and
Participation Agreement which allocates one hundred percent of
all costs incurred or to be incurred at each of the Sites.
Thereafter, the nine respondents entered into a Partial Consent
Decree with the United States Department of Justice (the "DOJ")
and the EPA regarding the work to be performed by the respondents
and their responsibility for past and future response costs
incurred by the United States. This Partial Consent Decree was
lodged with the United States District Court in December 1997.
Based on current estimates of future costs, the Company believes
that its aggregate financial exposure at these Sites is less that
$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 the Company in the United States
District Court alleging that emissions from certain stacks at the
Company's Trentwood facility in Spokane, Washington,
intermittently violated the opacity standard contained in the
Washington State Implementation Plan ("SIP"), approved by the EPA
under the federal Clean Air Act. The Company 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 the
Company 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. The Company has completed the
installation of the emission control system. If the relevant
furnaces continue to show compliance through July 15, 1998, the
Company intends to request termination of the Consent Decree.
Hammons v. Alcan Aluminum Corp. et al
On March 5, 1996, a class action complaint was filed against
Kaiser, 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, alleging that the defendants conspired, in violation of
the California Cartwright Act (Bus. & Prof. Code Section 16720 &
16750), in conjunction with a Memorandum of Understanding ("MOU")
entered into in 1994 by representatives of Australia, Canada, the
European Union, Norway, the Russian Federation and the United
States, to restrict the production of primary aluminum resulting
in rises in prices for primary aluminum and aluminum products.
The complaint seeks certification of a class consisting of
persons who at any time between January 1, 1994, and the date of
the complaint purchased aluminum or aluminum products
manufactured by one or more of the defendants and estimates
damages sustained by the class to be $4.4 billion during the year
1994, before trebling. Plaintiff's counsel has estimated damages
to be $4.4 billion per year for each of the two years the MOU was
active, which when trebled equals $26.4 billion. 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
Court granted summary judgment in favor of Kaiser 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. On
December 11, 1997, the United States Court of Appeals for the
Ninth Circuit affirmed the decision of the District Court. On
December 23, 1997, the plaintiff filed a petition for rehearing
en banc.
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
Asbestos-related Litigation
The Company 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 the Company or exposure to
products containing asbestos produced or sold by the Company.
The lawsuits generally relate to products the Company has not
manufactured for at least 20 years. Subsequent to December 31,
1997, the Company reached agreements settling approximately
25,000 of the pending asbestos-related claims. Also, subsequent
to year-end 1997, the Company reached agreements on asbestos-
related coverage matters with two insurance carriers under
which the Company collected a total of approximately $17.5 million.
For additional information, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Environmental and Asbestos Contingencies." The portion of Note
10 of the Notes to Consolidated Financial Statements under the
heading "Asbestos Contingencies" is incorporated herein by
reference.
Other Matters
Various other lawsuits and claims are pending against the
Company. 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 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for the Company's
common stock, which is held solely by Kaiser. The information in
Note 5 of the Notes to Consolidated Financial Statements under
the heading "Loan Covenants and Restrictions" at pages 28 - 29 of
this Report, is incorporated herein by reference. The Company
has not paid any dividends on its common stock during the two
most recent fiscal years.
The Indentures and the Credit Agreement (Exhibits 4.1 through
4.24 to this Report) contain restrictions on the ability of the
Company to pay dividends on or make distributions on account of
the Company's common stock and 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
4.24 to this Report, Note 5 of the Notes to Consolidated
Financial Statements at pages 28 - 29 of this Report, and the
information under the heading "Financing Activities and
Liquidity" at page 17 of this 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 1 of this Report, to the table at
page 13 of this Report, to the discussion under the heading
"Results of Operations" at pages 15 - 16 of this Report, to Note
1 of the Notes to Consolidated Financial Statements at pages 24 -
25 of this Report, and to pages 45 - 46 of this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company operates in two business segments: bauxite and
alumina, and aluminum processing. As an integrated aluminum
producer, the Company uses a portion of its bauxite, alumina, and
primary aluminum production for additional processing at certain
of its facilities. Intracompany shipments and sales are excluded
from the information set forth in the table below. The table
below provides selected operational and financial information on
a consolidated basis with respect to the Company for the years
ended December 31, 1997, 1996, and 1995. The following should be
read in conjunction with the Company's consolidated financial
statements and the notes thereto, contained elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
(In millions of dollars, except shipments and prices) 1997 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shipments: (000 tons) (1)
Alumina 1,929.8 2,073.7 2,040.1
Aluminum products:
Primary aluminum 327.9 355.6 271.7
Fabricated aluminum products 400.0 327.1 368.2
-------------- -------------- --------------
Total aluminum products 727.9 682.7 639.9
============== ============== ==============
Average realized sales price:
Alumina (per ton) $ 198 $ 195 $ 208
Primary aluminum (per pound) .75 .69 .81
Net sales:
Bauxite and alumina:
Alumina $ 382.1 $ 404.1 $ 424.8
Other (2)(3) 106.5 103.9 89.4
-------------- -------------- --------------
Total bauxite and alumina 488.6 508.0 514.2
-------------- -------------- --------------
Aluminum processing:
Primary aluminum 543.4 538.3 488.0
Fabricated aluminum products 1,324.3 1,130.4 1,218.6
Other (3) 16.9 13.8 17.0
-------------- -------------- --------------
Total aluminum processing 1,884.6 1,682.5 1,723.6
-------------- -------------- --------------
Total net sales $ 2,373.2 $ 2,190.5 $ 2,237.8
============== ============== ==============
Operating income (loss):
Bauxite and alumina $ 20.0 $ 1.1 $ 54.0
Aluminum processing (4) 222.6 156.5 238.9
Corporate (4) (72.7) (57.5) (81.8)
-------------- -------------- --------------
Total operating income $ 169.9 $ 100.1 $ 211.1
============== ============== ==============
Net income $ 52.1 $ 13.2 $ 65.3
============== ============== ==============
Capital expenditures $ 128.5 $ 161.5 $ 88.4
============== ============== ==============
</TABLE>
(1) All references to tons refer to metric tons of 2,204.6
pounds.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority
interests in consolidated subsidiaries.
(4) Includes pre-tax charges of $15.1 for the Aluminum
processing segment and $4.6 for the Corporate segment
recorded in the quarter ended June 30, 1997, related to
restructuring of operations.
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements
appear in a number of places in this section (see "Overview,"
"Recent Events and Developments," "Results of Operations,"
"Liquidity and Capital Resources" and "Other Matters"). 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. No
assurance can be given that these are all of the factors that
could cause actual results to vary materially from the forward-
looking statements.
OVERVIEW
The Company's operating results are sensitive to changes in
prices of alumina, primary aluminum, and fabricated aluminum
products, and also depend to a significant degree on the volume
and mix of all products sold and on the Company's hedging
strategies. Primary aluminum prices have historically been
subject to significant cyclical price fluctuations. See Notes 1
and 11 of the Notes to Consolidated Financial Statements for a
discussion of the Company's hedging activities.
During the first eleven months of 1997, the Average Midwest
United States transaction price ("AMT Price") for primary
aluminum remained relatively stable generally in the $.75 - $.80
per pound range. During December of 1997, the AMT Price fell to
the $.70 - $.75 per pound range. However, the average 1997 AMT
Price compared favorably to the average 1996 AMT Price which
remained fairly stable generally in the $.70 - $.75 range through
June and then declined during the second half of the year,
reaching a low of approximately $.65 per pound for October 1996,
before recovering late in the year. The AMT Price for 1995 was
generally in the $.80 - $.90 per pound range. For the week ended
February 20, 1998, the AMT Price was $.70 per pound.
RECENT EVENTS AND DEVELOPMENTS
The Company has previously disclosed that it 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. Management believes that recent operating
performance has been at a rate which indicates that approximately
half of the desired profit improvement was achieved at year-end
1997 and that the remainder should be achieved in the second half
of 1998. However, there are inherent uncertainties regarding
operating factors and economic and other external forces (such as
the Valco power situation discussed below), many of which are
outside management's direct control, and, as such, no assurances
can be given that the desired benefit of profit improvements will
be achieved.
In addition to working to improve the performance of the
Company's existing assets, the Company has expended significant
efforts on analyzing its current asset portfolio with the intent
of focusing its efforts and capital in sectors of the industry
that are considered most attractive. The initial steps of this
process resulted in the Company recording a $19.7 million pre-tax
restructuring charge during June 1997 related to the closing and
rationalization of certain businesses and facilities.
Additionally, this process led to the Company's acquisition of
the Bellwood aluminum extrusion plant in Richmond, Virginia. See
Notes 3 and 4 of the Notes to Consolidated Financial Statements.
As discussed more fully in Note 10 of the Notes to Consolidated
Financial Statements, at December 31, 1997, there were
approximately 77,400 claims pending against the Company
pertaining to asbestos-related matters and the Company had
accrued approximately $158.8 million related to the litigation
and settlement of these claims and estimated future claims.
Subsequent to December 31, 1997, the Company reached agreements
settling approximately 25,000 of the pending asbestos-related
claims. Also, subsequent to year-end 1997, the Company reached
agreements on asbestos related coverage matters with two
insurance carriers under which the Company will collect a total
of approximately $17.5 million during the first quarter of 1998.
The insurance recoveries will reduce the approximately $134.0
million of asbestos related receivable accrued at December 31,
1997. As the amounts related to the claim settlements and
insurance recoveries were consistent with the Company's year-end
1997 accrual assumptions, these events are not expected to have a
material impact on the Company's financial position, results of
operations or liquidity.
The Company has previously disclosed that the Volta River
Authority ("VRA") would partially reduce its electric power
allocation to the Company's 90%-owned Volta Aluminium Company
Limited ("Valco") smelter facility in Ghana in January 1998 and
that Valco expected to operate approximately three potlines at
the facility in 1998 as compared to the four potlines operated
throughout 1997. During February 1998, Valco and the VRA reached
an agreement whereby Valco agreed to receive compensation in lieu
of the power necessary to run one of the three remaining
operating potlines, effective February 25, 1998. Compensation
under the agreement is expected to substantially offset the
financial impact of the curtailment. As previously disclosed
Valco has notified the VRA that it believes it has contractual
rights to sufficient energy to run four and one-half potlines in
1998 and Valco continues to seek compensation from the VRA with
respect to the January 1998, reduction of its power allocation.
Valco and the VRA also are in continuing discussions concerning
other matters, including steps that might be taken to reduce the
likelihood of such power curtailments beyond 1998. No assurances
can be given, however, as to the success of these discussions,
the possibility of requests by the VRA for additional
curtailments, or the operating level of Valco for the remainder
of 1998 or beyond. Valco intends to pursue its legal rights in
respect of reduced power allocation and compensation in respect
of such reductions.
RESULTS OF OPERATIONS
1997 AS COMPARED TO 1996
Summary - The Company reported net income of $52.1 million for
1997 compared to net income of $13.2 million, for 1996. Net sales
in 1997 totaled $2,373.2 million compared to $2,190.5 million in
1996.
Net income for 1997 includes the effect of certain non-recurring
items, including a $19.7 million pre-tax restructuring charge
(discussed above), an approximate $12.5 million non-cash tax
benefit related to settlement of certain tax matters, and a $5.8
million pre-tax charge related to additional litigation reserves.
Bauxite and Alumina - Net segment sales decreased by 4% in 1997
as a 7% decline in alumina shipments more than offset a 2%
increase in average realized alumina prices. Shipment volumes
were down as compared to 1996 as a result of the timing of
shipments and a slight increase in internal transfers. Segment
operating income improved substantially from 1996 to 1997 despite
the reduced level of shipments and certain increased costs, in
part resulting from a slowdown at the Company's 49%-owned Kaiser
Jamaican Bauxite Company, prior to the signing of a new labor
contract in December 1997, primarily due to lower overall
operating costs.
Aluminum Processing - Net sales of primary aluminum in 1997
approximated 1996 net sales figures as a 10% increase in average
realized prices offset an 8% decrease in primary aluminum
shipments. Net sales of fabricated aluminum products for 1997
were up 17% as compared to 1996 as a 22% increase in shipments
more than offset a 4% decrease in average realized prices. The
increase in fabricated aluminum product shipments over 1996 was
primarily the result of the Company's June 1997 acquisition of an
extrusion facility in Richmond, Virginia, and to a lesser extent
the result of increased international shipments of can sheet and
increased shipments of heat-treated products.
The aluminum processing segment's operating income improved
substantially in 1997 as a result of the increases in average
realized prices for primary aluminum and shipments of fabricated
aluminum product cited above. Additionally, reduced power, raw
material and supply costs and improved operating efficiencies
also contributed to the improvement in segment operating income.
Included in the segment's operating income for the quarter and
year ended December 31, 1997, was approximately $2.8 million and
$10.3 million of operating income realized during the periods,
related to the settlement of certain energy service contract
issues. Operating income for the year ended December 31, 1997,
also included a $15.1 million second quarter pre-tax charge
resulting from the restructuring of operations.
Corporate - Corporate operating expenses represent corporate
general and administrative expenses which are not allocated to
the Company's business segments. Operating results for 1997
included a second quarter pre-tax charge of approximately $4.6
million associated with the Company's restructuring of
operations. Corporate operating expenses for the year ended
December 31, 1997, also include consulting and other costs
associated with the Company's ongoing profit improvement program
and portfolio review initiatives.
1996 AS COMPARED TO 1995
Summary - For the year ended December 31, 1996, the Company's net
income was $13.2 million, compared to net income of $65.3
million, in 1995. Net sales for 1996 were $2,190.5 million,
compared to $2,237.8 million in 1995. Results for the year ended
December 31, 1996, included an after tax benefit of approximately
$17.0 million resulting from settlements of certain tax matters
in December 1996. Excluding the impact of these non-recurring
items, the Company would have reported a net loss for the year
ended December 31, 1996.
Results for the year ended December 31, 1996, reflected the
substantial reduction in market prices for primary aluminum more
fully discussed above. Alumina prices, which are significantly
influenced by changes in primary aluminum prices, also declined
from period to period. The decrease in product prices more than
offset the positive impact of increases in shipments in several
segments of the Company's business, as more fully discussed
below. Results for 1996 also included approximately $20.5
million in research and development expenses and other costs
related to the Company's new Micromill(TM) facility as well as
additional expenses related to other strategic initiatives.
Results for 1995 included approximately $17.0 million of first
quarter 1995 pre-tax expenses associated with an eight-day strike
at five major U.S. locations, a six-day strike at the Company's
65% owned Alumina Partners of Jamaica ("Alpart") bauxite mining
and alumina refinery in Jamaica, and a four-day disruption of
alumina production at Alpart caused by a boiler failure.
Bauxite and Alumina - Net segment sales for 1996 were basically
unchanged from 1995 as a nominal decline in the average realized
price of alumina was offset by a modest increase in alumina
shipments. The reduction in prices realized reflected the
substantial decline in primary aluminum prices experienced in
1996 discussed above.
Operating income for this segment of the Company's business
declined significantly from prior year periods as a result of
reduced gross margins from alumina sales resulting from the
previously discussed price declines and increased natural gas
costs at the Company's Gramercy, Louisiana, alumina refinery.
Operating income for the year ended December 31, 1996, was also
unfavorably impacted by high operating costs associated with
disruptions in the power supply at the Company's Alpart alumina
refinery during the first nine months of 1996, higher
manufacturing costs resulting from higher market prices for fuel
and caustic soda, and a temporary raw material quality problem
experienced at the Company's Gramercy facility during the second
quarter of 1996.
Aluminum Processing - An increase in primary aluminum shipments
in 1996 of 31% more than offset a 15% decline in the average
realized price for primary aluminum from period to period. The
increase in shipments during the year ended December 31, 1996,
was the result of increased shipments of primary aluminum to
third parties as a result of a decline in intracompany transfers.
Net sales of fabricated aluminum products were down 7% for the
year ended December 31, 1996, as compared to the prior year as a
result of a decrease in shipments (primarily related to can sheet
activities) resulting from reduced growth in demand and the
reduction of customer inventories. The impact of reduced product
shipments was to a limited degree offset by a 4% increase in the
average realized price from the sale of fabricated aluminum
products, resulting primarily from a shift in product mix to
higher value added products.
Operating income for the aluminum processing segment for 1996 was
also impacted by approximately $5.6 million of scheduled non-
recurring maintenance costs at the Company's Trentwood,
Washington, rolling mill facility in the fourth quarter of 1996,
offset by $11.5 million ($7.2 on an after-tax basis) of reduced
operating costs resulting from the non-cash settlement in
December 1996 of certain tax matters.
Corporate - A substantial portion of the 1996 reduction in
operating losses of the corporate segment as compared to 1995 was
due to reduced incentive compensation accruals resulting from the
decline in earnings from the prior year period. Reduced post
employment benefit plan and pension plan costs also contributed
to the 1996 reduction.
LIQUIDITY AND CAPITAL RESOURCES
See Note 5 of the Notes to Consolidated Financial Statements for
a listing of the Company's indebtedness and information
concerning certain restrictive debt covenants.
OPERATING ACTIVITIES
Cash provided by operating activities was $45.6, $22.9 and $119.5
million in 1997, 1996 and 1995, respectively. The improvement in
cash flows from operating activities between 1996 and 1997 was
primarily due to higher earnings resulting from increased product
prices and increased sales of fabricated products partially
offset by increased investment in working capital. The reduction
in cash generated by operating activities from 1995 to 1996 was
primarily due to lower earnings resulting from the reduction in
prices realized by the Company from the sale of primary aluminum
and alumina.
At December 31, 1997, the Company had working capital of $456.6
million, compared with working capital of $409.3 million at
December 31, 1996. The increase in working capital in 1997 was
due primarily to an increase in Receivables, offset by a
reduction in Cash and cash equivalents.
INVESTING ACTIVITIES
Total consolidated capital expenditures were $128.5, $161.5 and
$88.4 million in 1997, 1996 and 1995, respectively (of which
$6.6, $7.4, and $8.3 million were funded by the minority partners
in certain foreign joint ventures in 1997, 1996, and 1995,
respectively), and were made primarily to construct or acquire
new facilities, improve production efficiency, reduce operating
costs, and expand capacity at existing facilities. Total
consolidated capital expenditures are currently expected to be
between $75.0 and $125.0 million per annum in each of 1998
through 2000 (of which approximately 8% is expected to be funded
by the Company's minority partners in certain foreign joint
ventures).
A substantial portion of the increase in capital expenditures in
1996 over the 1995 level was attributable to the development and
construction of the Company's proprietary Micromill(TM)
technology for the production of can sheet and other sheet
products from molten metal. The first Micromill(TM) facility,
which was constructed in Nevada during 1996 as a demonstration
and production facility, remained in a start-up mode throughout
1997. During January of 1998, the facility commenced trial
product shipments to customers. The Company currently
anticipates that commercial deliveries from the facility will
commence during the first quarter of 1998. However, the
Micromill(TM) technology has not yet been fully implemented or
commercialized and there can be no assurances that full
implementation or commercialization will be successful.
During October 1997, a joint decision was made by a subsidiary of
the Company and its joint venture partner to terminate and
dissolve the Sino-foreign aluminum joint venture formed in 1995.
In January 1998, the Company's subsidiary reached an agreement to
sell its interests in the venture to its partner. The terms of
the agreement are subject to certain governmental approvals by
officials of the People's Republic of China. This transaction
will not have a material effect on the Company's results of
operations or financial position.
Management continues to evaluate numerous projects, all of which
would require substantial capital, both in the United States and
overseas.
FINANCING ACTIVITIES AND LIQUIDITY
Under the Credit Agreement, the Company is able to borrow by
means of revolving credit advances and letters of credit (up to
$125.0 million) an aggregate amount equal to the lesser of $325.0
million or a borrowing base relating to eligible accounts
receivable and eligible inventory. During January 1998, the
maturity of the Credit Agreement was extended from February 1999
to August 2001. The Credit Agreement is guaranteed by the
Company and by certain of its significant subsidiaries of the
Company. The Credit Agreement also requires the Company to
maintain certain financial covenants, places significant
restrictions on the Company and Kaiser and is secured by a
substantial majority of the Company's and Kaiser's assets. The
Company's public indebtedness also includes various restrictions
and a repurchase obligation upon a Change of Control. The Credit
Agreement does not permit the Company or Kaiser to pay any
dividends on their common stock.
See Notes 5 and 8 of the Notes to Consolidated Financial
Statements.
As of December 31, 1997, the Company's total consolidated
indebtedness was $971.7 million, no amounts were outstanding
under the revolving credit facility of the Credit Agreement, and
after allowances for $51.6 million of outstanding letters of
credit, $273.4 million of unused availability remained under the
Credit Agreement.
Management believes that the Company's existing cash resources,
together with cash flows from operations and borrowings under the
Credit Agreement, will be sufficient to satisfy its working
capital and capital expenditure requirements for the next year.
With respect to long-term liquidity, management believes that
operating cash flow, together with the ability to obtain both
short and long-term financing, should provide sufficient funds to
meet the Company's working capital and capital expenditure
requirements.
ENVIRONMENTAL AND ASBESTOS CONTINGENCIES
The Company is subject to a number of environmental laws, to
fines or penalties assessed for alleged breaches of the
environmental laws, and to claims and litigation based upon such
laws. The Company currently is subject to a number of lawsuits
and, along with certain other entities, has been named as a
potentially responsible party for remedial costs at certain
third-party sites listed on the National Priorities List under
CERCLA. Based on the Company's current evaluation of these and
other environmental matters, the Company has established
environmental accruals of $29.7 million at December 31, 1997.
However, the Company believes that it is reasonably possible that
changes in various factors could cause costs associated with
these environmental matters to exceed current accruals by amounts
that could range, in the aggregate, up to an estimated $18.0
million. The Company believes that it has insurance coverage
available to recover certain incurred and future environmental
costs and is actively pursuing claims in this regard. However,
no accruals have been made for any such insurance recoveries and
no assurances can be given that the Company will be successful in
its attempt to recover incurred or future costs.
The Company is also a defendant in a number of lawsuits, some of
which involve claims of multiple persons, in which the plaintiffs
allege that certain of their injuries were caused by, among other
things, exposure to asbestos during, and as a result of, their
employment or association with the Company or exposure to
products containing asbestos produced or sold by the Company. The
lawsuits generally relate to products the Company has not
manufactured for at least 20 years. Based on past experience and
reasonably anticipated future activity, the Company has
established a $158.8 million accrual for estimated asbestos-
related costs for claims filed and estimated to be filed through
2008, before consideration of insurance recoveries. The Company,
based on prior insurance related recoveries in respect of
asbestos-related claims, existing insurance policies and the
advice of outside counsel with respect to applicable insurance
coverage law relating to the terms and conditions of these
policies, believes that it has insurance coverage available to
recover a substantial portion of its asbestos-related costs and
that substantial insurance recoveries are probable. Accordingly,
the Company has recorded an estimated aggregate insurance
recovery of $134.0 million (determined on the same basis as the
asbestos-related cost accrual) at December 31, 1997. However,
claims for recovery from some of the Company's insurance carriers
are currently subject to pending litigation and other carriers
have raised certain defenses, which have resulted in delays in
recovering costs from the insurance carriers.
While uncertainties are inherent in the final outcome of these
matters and it is presently impossible to determine the actual
costs that ultimately may be incurred and insurance recoveries
that ultimately may be received, management currently believes
that the resolution of these uncertainties and the incurrence of
related costs, net of any related insurance recoveries, should
not have a material adverse effect on the Company's consolidated
financial position, results of operations, or liquidity.
See Note 10 of the Notes to Consolidated Financial Statements for
a more detailed discussion of these contingencies and the factors
affecting management's beliefs. See also "Recent Events and
Developments."
OTHER MATTERS
YEAR 2000
The Company utilizes software and related technologies throughout
its business that will be affected by the date change to the year
2000. An internal assessment has been undertaken to determine
the scope and the related costs to assure that the Company's
systems continue to function adequately to meet the Company's
needs and objectives. A detailed implementation plan is being
developed from these findings. Spending for related projects,
which began in 1997 and will likely continue through 1999, is
currently expected to total in the $10 million to $15 million
range. System modification costs will be expensed as incurred.
Costs associated with new systems will be capitalized and
amortized over the life of the product.
RECENT ASIAN ECONOMIC DOWNTURN
The Company has not experienced any significant direct financial,
operating or other difficulties to date as a result of the recent
Asian economic downturn. Further, no significant direct impact
is currently anticipated as direct sales to the region are
relatively limited and the Company has taken steps to assure the
creditworthiness of customers. No assurance can be given,
however, as to any possible indirect impact that the Asian
economic downturn may have on the volume of shipments and prices
on sales to customers outside the region.
RECENT ACCOUNTING PRONOUNCEMENTS
During June 1997, two new accounting standards were issued that
will affect future financial reporting. Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income
("SFAS No. 130"), requires the presentation of an additional
income measure (termed "comprehensive income"), which adjusts
traditional net income for certain items that previously were
only reflected as direct charges to equity (such as minimum
pension liabilities). Statement of Financial Accounting
Standards No. 131, Disclosures About Segments of an Enterprise
and Related Information ("SFAS No. 131"), requires that segment
reporting for public reporting purposes be conformed to the
segment reporting used by management for internal purposes. SFAS
No. 131 also adds a requirement for the presentation of certain
segment data on a quarterly basis starting in 1999. SFAS No. 130
and SFAS No. 131 must both be adopted in the Company's year-end
1998 reporting. Management is currently evaluating the impact of
these two standards on the Company's future financial reporting.
INCOME TAX MATTERS
The Company's net deferred income tax assets as of December 31,
1997, were $350.1 million, net of valuation allowances of $113.3
million. The Company believes a long-term view of profitability
is appropriate and has concluded that these net deferred income
tax assets will more likely than not be realized. See Note 6 of
the Notes to Consolidated Financial Statements for a discussion
of these and other income tax matters.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Public Accountants................. 20
Consolidated Balance Sheets.............................. 21
Statements of Consolidated Income........................ 22
Statements of Consolidated Cash Flows.................... 23
Notes to Consolidated Financial Statements............... 24
Five-Year Financial Data................................ 45
Quarterly Financial Data (Unaudited).................... 47
Financial statement schedules are inapplicable or the required
information is included in the Consolidated Financial Statements
or the Notes thereto.
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Kaiser Aluminum &
Chemical Corporation:
We have audited the accompanying consolidated balance sheets of Kaiser
Aluminum & Chemical Corporation (a Delaware corporation) and subsidiaries
as of December 31, 1997 and 1996, and the related statements of
consolidated income and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kaiser Aluminum &
Chemical Corporation and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
February 16, 1998
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
(In millions of dollars) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15.8 $ 81.3
Receivables:
Trade, less allowance for doubtful receivables of
$5.8 in 1997 and $4.7 in 1996 232.9 177.9
Other 112.4 77.7
Inventories 568.3 562.2
Prepaid expenses and other current assets 121.3 127.8
-------------- --------------
Total current assets 1,050.7 1,026.9
Investments in and advances to unconsolidated affiliates 148.6 168.4
Property, plant, and equipment - net 1,171.8 1,168.7
Deferred income taxes 329.0 263.3
Other assets 317.2 308.6
-------------- --------------
Total $ 3,017.3 $ 2,935.9
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 176.2 $ 189.3
Accrued interest 37.6 35.6
Accrued salaries, wages, and related expenses 97.9 95.4
Accrued postretirement medical benefit obligation -
current portion 45.3 50.1
Other accrued liabilities 145.9 132.8
Payable to affiliates 82.4 96.9
Long-term debt - current portion 8.8 8.9
Note payable to parent - current portion - 8.6
-------------- --------------
Total current liabilities 594.1 617.6
Long-term liabilities 492.0 458.1
Accrued postretirement medical benefit obligation 720.3 722.5
Long-term debt 962.9 953.0
Minority interests 98.4 92.5
Redeemable preference stock - aggregate liquidation value
of $27.8 in 1997 and $31.7 in 1996 27.7 27.5
Commitments and contingencies
Stockholders' equity:
Preference stock - cumulative and convertible, par
value $100, authorized 1,000,000 shares, issued
and outstanding, 20,543 and 21,630 in 1997 and
1996 1.6 1.7
Common stock, par value 33-1/3 cents, authorized
100,000,000 shares;
issued and outstanding, 46,171,365 15.4 15.4
Additional capital 1,939.8 1,829.8
Accumulated deficit (152.3) (201.3)
Additional minimum pension liability - (2.8)
Note receivable from parent (1,682.6) (1,578.1)
-------------- --------------
Total stockholders' equity 121.9 64.7
-------------- --------------
Total $ 3,017.3 $ 2,935.9
============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
(In millions of dollars) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 2,373.2 $ 2,190.5 $ 2,237.8
-------------- -------------- --------------
Costs and expenses:
Cost of products sold 1,962.6 1,869.1 1,798.4
Depreciation 91.1 96.0 94.3
Selling, administrative, research and development,
and general 129.9 125.3 134.0
Restructuring of operations 19.7 - -
-------------- -------------- --------------
Total costs and expenses 2,203.3 2,090.4 2,026.7
-------------- -------------- --------------
Operating income 169.9 100.1 211.1
Other income (expense):
Interest expense (110.7) (93.4) (93.9)
Other - net 2.8 (2.6) (14.1)
-------------- -------------- --------------
Income before income taxes and minority interests 62.0 4.1 103.1
(Provision) credit for income taxes (9.4) 8.4 (37.4)
Minority interests (.5) .7 (.4)
-------------- -------------- --------------
Net income $ 52.1 $ 13.2 $ 65.3
============== ============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
(In millions of dollars) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 52.1 $ 13.2 $ 65.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 91.1 96.0 94.3
Restructuring of operations 19.7 - -
Non-cash benefit for income taxes (12.5) - -
Amortization of excess investment over equity
in unconsolidated affiliates 11.4 11.6 11.4
Amortization of deferred financing costs and
net discount on long-term debt 6.1 5.6 5.4
Undistributed equity in (income) losses of
unconsolidated affiliates, net of
distributions 7.8 3.0 (19.2)
Minority interests .5 (.7) .4
(Increase) decrease in receivables (87.8) 50.2 (110.0)
Increase in inventories (9.3) (36.5) (57.7)
Decrease (increase) in prepaid expenses and
other assets 1.7 (39.4) 82.9
(Decrease) increase in accounts payable (13.1) 4.8 32.4
Increase (decrease) in accrued interest 2.0 3.6 (.6)
(Decrease) increase in payable to affiliates
and accrued liabilities (19.6) (62.8) 10.6
Decrease in accrued and deferred income taxes (16.8) (35.7) (7.2)
Other 12.3 10.0 11.5
-------------- -------------- --------------
Net cash provided by operating
activities 45.6 22.9 119.5
-------------- -------------- --------------
Cash flows from investing activities:
Additions to property, plant, and equipment (128.5) (161.5) (88.4)
Other 19.9 17.2 8.6
-------------- -------------- --------------
Net cash used for investing activities (108.6) (144.3) (79.8)
-------------- -------------- --------------
Cash flows from financing activities:
Borrowings (repayments) under revolving credit
facility, net - (13.1) 6.4
Borrowings of long-term debt 19.0 225.9 -
Repayments of long-term debt (8.8) (9.0) (11.8)
Net payments to parent (4.2) (10.7) (15.5)
Incurrence of financing costs (.9) (6.2) (.8)
Dividends paid (.6) (.7) (.7)
Capital contributions .3 .1 1.2
Redemption of preference stock (2.1) (5.3) (8.8)
Increase in restricted cash, net (5.2) - -
-------------- -------------- --------------
Net cash (used for) provided by
financing activities (2.5) 181.0 (30.0)
-------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents during
the year (65.5) 59.6 9.7
Cash and cash equivalents at beginning of year 81.3 21.7 12.0
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 15.8 $ 81.3 $ 21.7
============== ============== ==============
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 102.7 $ 84.2 $ 88.8
Income taxes paid 24.4 22.7 35.7
Tax allocation payments to Kaiser Aluminum Corporation 1.8 2.7 3.2
Tax allocation payments to MAXXAM Inc. 11.8 1.1 -
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the statements of Kaiser
Aluminum & Chemical Corporation (the "Company") and its
majority owned subsidiaries. The Company is a wholly owned subsidiary of
Kaiser Aluminum Corporation ("Kaiser") which is a
subsidiary of MAXXAM Inc. ("MAXXAM"). The Company operates in all
principal aspects of the aluminum industry - the mining of
bauxite (the major aluminum bearing ore), the refining of bauxite into
alumina (the intermediate material), the production of
primary aluminum, and the manufacture of fabricated and semi-fabricated
aluminum products. The Company's production levels of
alumina and primary aluminum exceed its internal processing needs, which
allows it to be a major seller of alumina and primary
aluminum to domestic and international third parties. (See Note 12).
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities known
to exist as of the date the financial statements are published, and the
reported amounts of revenues and expenses during the
reporting period. Uncertainties, with respect to such estimates and
assumptions, are inherent in the preparation of the Company's
consolidated financial statements; accordingly, it is possible that the
actual results could differ from these estimates and
assumptions, which could have a material effect on the reported amounts of
the Company's consolidated financial position and
results of operation.
Investments in 50%-or-less-owned entities are accounted for primarily by
the equity method. Intercompany balances and
transactions are eliminated.
Certain reclassifications of prior-year information were made to conform to
the current presentation.
CASH AND CASH EQUIVALENTS
The Company considers only those short-term, highly liquid investments with
original maturities of 90 days or less to be cash
equivalents.
INVENTORIES
Substantially all product inventories are stated at last-in, first-out
("LIFO") cost, not in excess of market value. Replacement
cost is not in excess of LIFO cost. Other inventories, principally
operating supplies and repair and maintenance parts, are stated
at the lower of average cost or market. Inventory costs consist of
material, labor, and manufacturing overhead, including
depreciation. Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Finished fabricated products $ 103.9 $ 113.5
Primary aluminum and work in process 226.6 200.3
Bauxite and alumina 108.4 110.2
Operating supplies and repair and maintenance parts 129.4 138.2
-------------- --------------
$ 568.3 $ 562.2
============== ==============
</TABLE>
DEPRECIATION
Depreciation is computed principally by the straight-line method at rates
based on the estimated useful lives of the various classes of assets. The
principal estimated useful lives of land improvements, buildings, and
machinery and equipment are 8 to 25 years, 15 to 45 years, and 10 to 22
years, respectively.
STOCK-BASED COMPENSATION
The Company applies the intrinsic value method to account for a Kaiser
stock-based compensation plan whereby compensation cost is recognized only
to the extent that the quoted market price of the Kaiser stock at the
measurement date exceeds the amount Company employees must pay to acquire
the stock. No compensation cost has been recognized for this plan as the
Kaiser stock options granted in 1997 were at the market price. No Kaiser
stock options were granted in 1996 or 1995. (See Note 7).
OTHER INCOME (EXPENSE)
Other expense in 1997, 1996, and 1995 includes $8.8, $3.1, and $17.8 of
pre-tax charges related principally to establishing additional: (i)
litigation reserves for asbestos claims, net of estimated aggregate
insurance recoveries, and (ii) environmental reserves for potential soil
and ground water remediation matters, each pertaining to operations which
were discontinued prior to the acquisition of the Company by MAXXAM in
1988.
DEFERRED FINANCING COSTS
Costs incurred to obtain debt financing are deferred and amortized over the
estimated term of the related borrowing. Such amortization is included in
interest expense.
FOREIGN CURRENCY
The Company uses the United States dollar as the functional currency for
its foreign operations.
DERIVATIVE FINANCIAL INSTRUMENTS
Hedging transactions using derivative financial instruments are primarily
designed to mitigate the Company's exposure to changes in prices for
certain of the products which the Company sells and consumes and, to a
lesser extent, to mitigate the Company's exposure to changes in foreign
currency exchange rates. The Company does not utilize derivative financial
instruments for trading or other speculative purposes. The Company's
derivative activities are initiated within guidelines established by
management and approved by the Company's and Kaiser's boards of directors.
Hedging transactions are executed centrally on behalf of all of the
Company's business segments to minimize transaction costs, monitor
consolidated net exposures and allow for increased responsiveness to
changes in market factors.
Most of the Company's hedging activities involve the use of option
contracts (which establish a maximum and/or minimum amount to be paid or
received) and forward sales contracts (which effectively fix or lock-in the
amount the Company will pay or receive). Option contracts typically
require the payment of an up-front premium in return for the right to
receive the amount (if any) by which the price at the settlement date
exceeds the strike price. Any interim fluctuations in prices prior to the
settlement date are deferred until the settlement date of the underlying
hedged transaction, at which point they are reflected in net sales or cost
of sales (as applicable) together with the related premium cost. Forward
sales contracts do not require an up-front payment and are settled by the
receipt or payment of the amount by which the price at the settlement date
varies from the contract price. No accounting recognition is accorded to
interim fluctuations in prices of forward sales contracts.
The Company has established margin accounts and credit limits with certain
counterparties related to open forward sales and option contracts. When
unrealized gains or losses are in excess of such credit limits, the Company
is entitled to receive advances from the counterparties on open positions
or is required to make margin deposits to counterparties, as the case may
be. At December 31, 1997, the Company had neither received nor made any
margin deposits. At December 31, 1996, the Company had received $13.0 of
margin advances from counterparties. Management considers credit risk
related to possible failure of the counterparties to perform their
obligations pursuant to the derivative contracts to be minimal.
Deferred gains or losses as of December 31, 1997, are included in Prepaid
expenses and other current assets and Other accrued liabilities. (See Note
11).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of its outstanding indebtedness to be
$1,020.0 and $1,007.0 at December 31, 1997, and 1996, respectively, based
on quoted market prices for the Company's 9-7/8% Senior Notes due 2002 (the
"9-7/8% Notes"), 12-3/4% Senior Subordinated Notes due 2003 (the "12-3/4%
Notes"), and 10-7/8% Senior Notes due 2006 (the "10-7/8% Notes"), and the
discounted future cash flows for all other indebtedness, using the current
rate for debt of similar maturities and terms. The Company believes that
the carrying amount of other financial instruments is a reasonable estimate
of their fair value, unless otherwise noted.
2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Summary combined financial information is provided below for unconsolidated
aluminum investments, most of which supply and process raw materials. The
investees are Queensland Alumina Limited ("QAL") (28.3% owned), Anglesey
Aluminium Limited ("Anglesey") (49.0% owned), and Kaiser Jamaica Bauxite
Company (49.0% owned). The equity in earnings (losses) before income taxes
of such operations is treated as a reduction (increase) in cost of products
sold. At December 31, 1997, and 1996, the Company's net receivables from
these affiliates were not material.
The summary combined financial information for the year ended December 31,
1997, also contains the balances and results of AKW L.P. (50% owned), an
aluminum wheels joint venture formed with a third party during May 1997.
(See Note 4).
SUMMARY OF COMBINED FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 393.0 $ 450.3
Long-term assets (primarily property, plant, and equipment,
net) 395.0 364.7
-------------- --------------
Total assets $ 788.0 $ 815.0
============== ==============
Current liabilities $ 117.1 $ 116.9
Long-term liabilities (primarily long-term debt) 400.8 386.7
Stockholders' equity 270.1 311.4
-------------- --------------
Total liabilities and stockholders' equity $ 788.0 $ 815.0
============== ==============
</TABLE>
SUMMARY OF COMBINED OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 644.1 $ 660.5 $ 685.9
Costs and expenses (637.8) (631.5) (618.7)
Provision for income taxes (8.2) (8.7) (18.7)
-------------- -------------- --------------
Net income (loss) $ (1.9) $ 20.3 $ 48.5
============== ============== ==============
Company's equity in income (loss) $ 2.9 $ 8.8 $ 19.2
============== ============== ==============
Dividends received $ 10.7 $ 11.8 $ -
============== ============== ==============
</TABLE>
The Company's equity in income (loss) differs from the summary net income
(loss) due to various percentage ownerships in the entities and equity
method accounting adjustments. At December 31, 1997, the Company's
investment in its unconsolidated affiliates exceeded its equity in their
net assets by approximately $28.8 which amount will be fully amortized over
the next three years.
The Company and its affiliates have interrelated operations. The Company
provides some of its affiliates with services such as financing,
management, and engineering. Significant activities with affiliates include
the acquisition and processing of bauxite, alumina, and primary aluminum.
Purchases from these affiliates were $245.2, $281.6, and $284.4 in the
years ended December 31, 1997, 1996, and 1995, respectively.
3. PROPERTY, PLANT, AND EQUIPMENT
The major classes of property, plant, and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 163.9 $ 157.5
Buildings 228.3 216.0
Machinery and equipment 1,529.1 1,441.1
Construction in progress 51.2 84.7
-------------- --------------
1,972.5 1,899.3
Accumulated depreciation (800.7) (730.6)
-------------- --------------
Property, plant, and equipment, net $ 1,171.8 $ 1,168.7
============== ==============
</TABLE>
During June 1997, Kaiser Bellwood Corporation, a newly formed, wholly owned
subsidiary of the Company, completed the acquisition of Reynolds Metals
Company's Richmond, Virginia, extrusion plant and its existing inventories
for a total purchase price of $41.6, consisting of cash payments of $38.4
and the assumption of approximately $3.2 of employee related and other
liabilities. Upon completion of the transaction, Kaiser Bellwood
Corporation became a subsidiary guarantor under the indentures in respect
of the 9-7/8% Notes, 10-7/8% Notes, and the 12-3/4% Notes. (See Note 5).
4. RESTRUCTURING OF OPERATIONS
The Company has previously disclosed that it set a goal of achieving
significant cost reductions and other profit improvements, measured against
1996 results, with the full effect planned to be realized in 1998 and
beyond. The initiative is based on the Company's conclusion that the level
of performance of its existing facilities and businesses would not achieve
the level of profits the Company considers satisfactory based upon historic
long-term average prices for primary aluminum and alumina. During the
second quarter of 1997, the Company recorded a $19.7 restructuring charge
to reflect actions taken and plans initiated to achieve the reduced
production costs, decreased corporate selling, general and administrative
expenses, and enhanced product mix intended to achieve this goal. The
significant components of the restructuring charge are enumerated below.
ERIE PLANT DISPOSITION
During the second quarter of 1997, the Company formed a joint venture with
a third party related to the assets and liabilities associated with the
wheel manufacturing operations at its Erie, Pennsylvania, fabrication
plant. Management subsequently decided to close the remainder of the Erie
plant in order to consolidate its aluminum forgings operations at two other
facilities for increased efficiency. As a result of the joint venture
formation and plant closure, the Company recognized a net pre-tax loss of
approximately $1.4.
OTHER ASSET DISPOSITIONS
As a part of the Company's profit enhancement and cost reduction
initiative, management made decisions regarding product rationalization and
geographical optimization, which led management to decide to dispose of
certain assets which had nominal operating contribution. These strategic
decisions resulted in the Company recognizing a pre-tax charge of
approximately $15.6 associated with such asset dispositions.
EMPLOYEE AND OTHER COSTS
As a part of the Company's profit enhancement and cost reduction
initiative, management concluded that certain corporate and other staff
functions could be consolidated or eliminated resulting in a second quarter
pre-tax charge of approximately $2.7 for the benefit and other costs.
5. LONG-TERM DEBT
Long-term debt and its maturity schedule are as follows:
<TABLE>
<CAPTION>
December 31,
2003 -----------------
and 1997 1996
1998 1999 2000 2001 2002 After Total Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Credit Agreement - -
9-7/8% Senior Notes due 2002, net $ 224.2 $ - $ 224.2 $ 224.0
10-7/8% Senior Notes due 2006, net 225.8 225.8 225.9
12-3/4% Senior Subordinated Notes due
2003 400.0 400.0 400.0
Alpart CARIFA Loans - (fixed and
variable rates)due 2007, 2008 60.0 60.0 60.0
Other borrowings (fixed and variable
rates) $ 8.8 $ .4 $ .3 $ .3 .3 51.6 61.7 52.0
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 8.8 $ .4 $ .3 $ .3 $ 224.5 $ 737.4 971.7 961.9
======== ======== ======== ======== ======== ========
Less current portion 8.8 8.9
-------- --------
Long-term debt $ 962.9 $ 953.0
======== ========
</TABLE>
CREDIT AGREEMENT
In February 1994, the Company and Kaiser entered into a credit agreement
(as amended, the "Credit Agreement") which provides a $325.0 five-year
secured, revolving line of credit. The Company is able to borrow under the
facility by means of revolving credit advances and letters of credit (up to
$125.0) in an aggregate amount equal to the lesser of $325.0 or a borrowing
base relating to eligible accounts receivable and eligible inventory. As
of December 31, 1997, $273.4 (of which $73.4 could have been used for
letters of credit) was available to the Company under the Credit Agreement.
The Credit Agreement is unconditionally guaranteed by Kaiser and by certain
significant subsidiaries of the Company. Interest on any outstanding
balances will bear a premium (which varies based on the results of a
financial test) over either a base rate or LIBOR, at the Company's option.
In January 1998, the term of the Credit Agreement was extended from
February 1999 to August 2001.
LOAN COVENANTS AND RESTRICTIONS
The Credit Agreement requires the Company to comply with certain financial
covenants and places restrictions on the Company's and Kaiser's ability to,
among other things, incur debt and liens, make investments, pay dividends,
undertake transactions with affiliates, make capital expenditures, and
enter into unrelated lines of business. The Credit Agreement is secured
by, among other things, (i) mortgages on the Company's major domestic
plants (excluding the Company's Gramercy alumina plant and Nevada
Micromill(TM) facility); (ii) subject to certain exceptions, liens on the
accounts receivable, inventory, equipment, domestic patents and trademarks,
and substantially all other personal property of the Company and certain of
its subsidiaries; (iii) a pledge of all the stock of the Company owned by
Kaiser; and (iv) pledges of all of the stock of a number of the Company's
wholly owned domestic subsidiaries, pledges of a portion of the stock of
certain foreign subsidiaries, and pledges of a portion of the stock of
certain partially owned foreign affiliates.
The obligations of the Company with respect to its 9-7/8% Notes, its
10-7/8% Notes and its 12-3/4% Notes are guaranteed, jointly and severally,
by certain subsidiaries of the Company. The indentures governing the
9-7/8% Notes, the 10-7/8% Notes and the 12-3/4% Notes (collectively, the
"Indentures") restrict, among other things, the Company's ability to incur
debt, undertake transactions with affiliates, and pay dividends. Further,
the Indentures provide that the Company must offer to purchase the 9-7/8%
Notes, the 10-7/8% Notes and the 12-3/4% Notes, respectively, upon the
occurrence of a Change of Control (as defined therein), and the Credit
Agreement provides that the occurrence of a Change in Control (as defined
therein) shall constitute an Event of Default thereunder.
Under the most restrictive of the covenants in the Credit Agreement,
neither the Company nor Kaiser currently is permitted to pay dividends on
its common stock.
In December 1991, Alpart entered into a loan agreement with the Caribbean
Basin Projects Financing Authority ("CARIFA"). Alpart's obligations under
the loan agreement are secured by a $64.2 letter of credit guaranteed by
the partners in Alpart (of which $22.5 is guaranteed by the Company's
minority partner in Alpart). Alpart has also agreed to indemnify
bondholders of CARIFA for certain tax payments that could result from
events, as defined, that adversely affect the tax treatment of the interest
income on the bonds.
RESTRICTED NET ASSETS OF SUBSIDIARIES
Certain debt instruments restrict the ability of the Company to transfer
assets, make loans and advances, and pay dividends to Kaiser. The
restricted net assets of the Company totaled $121.9 and $56.1 at December
31, 1997 and 1996, respectively.
CAPITALIZED INTEREST
Interest capitalized in 1997, 1996, and 1995 was $6.6, $4.9, and $2.8,
respectively.
6. INCOME TAXES
Income (loss) before income taxes and minority interests by geographic area
is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ (110.9) $ (43.4) $ (55.4)
Foreign 172.9 47.5 158.5
-------------- -------------- --------------
Total $ 62.0 $ 4.1 $ 103.1
============== ============== ==============
</TABLE>
Income taxes are classified as either domestic or foreign, based on whether
payment is made or due to the United States or a foreign country. Certain
income classified as foreign is also subject to domestic income taxes.
The (provision) credit for income taxes on income (loss) before income
taxes and minority interests consists of:
<TABLE>
<CAPTION>
Federal Foreign State Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 Current $ (2.0) $ (28.7) $ (.2) $ (30.9)
Deferred 30.0 (7.0) (1.5) 21.5
-------------- -------------- -------------- --------------
Total $ 28.0 $ (35.7) $ (1.7) $ (9.4)
============== ============== ============== ==============
1996 Current $ (1.6) $ (21.8) $ (.1) $ (23.5)
Deferred 7.7 7.6 16.6 31.9
-------------- -------------- -------------- --------------
Total $ 6.1 $ (14.2) $ 16.5 $ 8.4
============== ============== ============== ==============
1995 Current $ (4.3) $ (40.2) $ (.1) $ (44.6)
Deferred 15.0 (4.9) (2.9) 7.2
-------------- -------------- -------------- --------------
Total $ 10.7 $ (45.1) $ (3.0) $ (37.4)
============== ============== ============== ==============
</TABLE>
A reconciliation between the (provision) credit for income taxes and the
amount computed by applying the federal statutory income tax rate to income
before income taxes and minority interests is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount of federal income tax provision based on
the statutory rate $ (21.7) $ (1.4) $ (36.1)
Revision of prior years' tax estimates and other
changes in valuation allowances 12.5 10.0 1.5
Percentage depletion 4.2 3.9 4.2
Foreign taxes, net of federal tax benefit (3.1) (5.5) (5.4)
Other (1.3) 1.4 (1.6)
-------------- -------------- --------------
(Provision) credit for income taxes $ (9.4) $ 8.4 $ (37.4)
============== ============== ==============
</TABLE>
Included in revision of prior years' tax estimates and other changes in
valuation allowances for 1997 and 1996 shown above are $12.5 and $9.8
related to the resolution of certain income tax matters in the second
quarter of 1997 and fourth quarter of 1996, respectively.
The components of the Company's net deferred income tax assets are as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Postretirement benefits other than pensions $ 288.9 $ 290.5
Loss and credit carryforwards 98.8 134.3
Other liabilities 169.3 157.6
Other 100.9 86.3
Valuation allowances (113.3) (127.2)
-------------- --------------
Total deferred income tax assets-net 544.6 541.5
-------------- --------------
Deferred income tax liabilities:
Property, plant, and equipment (139.7) (160.9)
Other (54.8) (72.6)
-------------- --------------
Total deferred income tax liabilities (194.5) (233.5)
-------------- --------------
Net deferred income tax assets $ 350.1 $ 308.0
============== ==============
</TABLE>
The principal component of the Company's net deferred income tax assets is
the tax benefit, net of certain valuation allowances, associated with the
accrued liability for postretirement benefits other than pensions. The
future tax deductions with respect to the turnaround of this accrual will
occur over a 30-to-40-year period. If such deductions create or increase a
net operating loss in any year subsequent to 1997, the Company has the
ability to carry forward such loss for 20 taxable years. For these
reasons, the Company believes that a long-term view of profitability is
appropriate and has concluded that this net deferred income tax asset will
more likely than not be realized.
A substantial portion of the valuation allowances provided by the Company
relates to loss and credit carryforwards. To determine the proper amount
of valuation allowances with respect to these carryforwards, the Company
evaluated all appropriate factors, including any limitations concerning
their use and the year the carryforwards expire, as well as the levels of
taxable income necessary for utilization. With regard to future levels of
income, the Company believes, based on the cyclical nature of its business,
its history of operating earnings, and its expectations for future years,
that it will more likely than not generate sufficient taxable income to
realize the benefit attributable to the loss and credit carryforwards for
which valuation allowances were not provided.
As of December 31, 1997 and 1996, $53.7 and $69.7, respectively, of the net
deferred income tax assets listed above are included on the Consolidated
Balance Sheets in the caption entitled Prepaid expenses and other current
assets. Certain other portions of the deferred income tax liabilities
listed above are included on the Consolidated Balance Sheets in the
captions entitled Other accrued liabilities and Long-term liabilities.
The Company and its domestic subsidiaries (collectively, the "KACC
Subgroup") are members of the consolidated return group of which Kaiser is
the common parent corporation and are included in Kaiser's consolidated
federal income tax returns. During the period from October 28, 1988
through June 30, 1993, the KACC Subgroup was included in the consolidated
federal income tax returns of MAXXAM. During 1997, MAXXAM reached a
settlement with the Internal Revenue Service regarding all remaining years
where the KACC Subgroup was included in the MAXXAM consolidated federal
income tax returns. As a result of this settlement, the Company paid $11.8
to MAXXAM in respect of its liabilities pursuant to its tax allocation
agreement with MAXXAM. Payments or refunds for periods prior to July 1,
1993, related to other jurisdictions could still be required pursuant to
the Company's tax allocation agreement with MAXXAM. In accordance with the
Credit Agreement, any such payments to MAXXAM by the Company would require
lender approval, except in certain specific circumstances. The tax
allocation agreement of the Company with MAXXAM terminated pursuant to its
terms, effective for taxable periods beginning after June 30, 1993.
At December 31, 1997, the Company had certain tax attributes available to
offset regular federal income tax requirements, subject to certain
limitations, including net operating loss and general business credit
carryforwards of $33.2 and $10.4, respectively, which expire periodically
through 2011, foreign tax credit ("FTC") carryforwards of $49.2, which
expire periodically through 2002, and alternative minimum tax ("AMT")
credit carryforwards of $21.9, which have an indefinite life. The Company
also has AMT net operating loss and FTC carryforwards of $17.6 and $74.7,
respectively, available, subject to certain limitations, to offset future
alternative minimum taxable income, which expire periodically through 2011
and 2002, respectively.
7. EMPLOYEE BENEFIT AND INCENTIVE PLANS<PAGE>
RETIREMENT PLANS
Retirement plans are non-contributory for salaried and hourly employees and
generally provide for benefits based on a formula which considers length of
service and earnings during years of service. The Company's funding
policies meet or exceed all regulatory requirements.
The funded status of the employee pension benefit plans and the
corresponding amounts that are included in the Company's Consolidated
Balance Sheets are as follows:
<TABLE>
<CAPTION>
Plans with Accumulated
Benefits Exceeding
Assets(1)
December 31,
-----------------------------
1997 1996
- ----------------------------------------------------------- ------------- - --------------
<S> <C> <C>
Accumulated benefit obligation:
Vested employees $ 785.4 $ 737.7
Nonvested employees 41.2 38.5
------------- --------------
Accumulated benefit obligation 826.6 776.2
Additional amounts related to projected salary increases 46.4 40.0
------------- --------------
Projected benefit obligation 873.0 816.2
Plan assets (principally common stocks and fixed income
obligations) at fair value (756.9) (662.0)
------------- --------------
Plan assets less than projected benefit obligation 116.1 154.2
Unrecognized net gains (losses) .3 (13.6)
Unrecognized net obligations (.3) (.4)
Unrecognized prior-service cost (22.2) (26.9)
Adjustment required to recognize minimum liability 5.4 13.7
------------- --------------
Accrued pension obligation included in the Consolidated
Balance Sheets(principally in Long-term liabilities) $ 99.3 $ 127.0
============= ==============
</TABLE>
(1) Includes accrued pension obligations of approximately $6.3 and $.3 in
1997 and 1996, respectively, related to plans with assets exceeding
accumulated benefits.
As required by Statement of Financial Accounting Standards No. 87,
Employers' Accounting for Pensions, the Company recorded after-tax credits
to equity of $2.8 and $11.0 at December 31, 1997 and 1996, respectively, to
reduce the deficit of the minimum liability over the unrecognized net
obligation and prior-service cost. These amounts were recorded net of the
related income tax provision of $1.3 and $6.5 as of December 31, 1997 and
1996, respectively, which approximated the federal and state statutory
rates.
The components of net periodic pension cost are:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 13.4 $ 12.9 $ 10.0
Interest cost on projected benefit obligation 61.6 60.0 59.8
Return on assets:
Actual gain (129.9) (89.8) (112.2)
Deferred gain 68.1 34.8 64.6
Net amortization and deferral 6.0 5.5 4.2
-------------- -------------- --------------
Net periodic pension cost $ 19.2 $ 23.4 $ 26.4
============== ============== ==============
</TABLE>
Assumptions used to value obligations at year-end, and to determine the net
periodic pension cost in the subsequent year are:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.25% 7.75% 7.5%
Expected long-term rate of return on assets 9.5% 9.5% 9.5%
Rate of increase in compensation levels 5.0% 5.0% 5.0%
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and its subsidiaries provide postretirement health care and
life insurance benefits to eligible retired employees and their dependents.
Substantially all employees may become eligible for those benefits if they
reach retirement age while still working for the Company or its
subsidiaries. The Company has not funded the liability for these benefits,
which are expected to be paid out of cash generated by operations. The
Company reserves the right, subject to applicable collective bargaining
agreements, to amend or terminate these benefits.
The Company's accrued postretirement benefit obligation is composed of the
following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 446.7 $ 498.7
Active employees eligible for postretirement benefits 35.1 36.7
Active employees not eligible for postretirement
benefits 62.7 67.4
-------------- --------------
Accumulated postretirement benefit obligation 544.5 602.8
Unrecognized net gains 135.0 71.3
Unrecognized gains related to prior-service costs 86.1 98.5
-------------- --------------
Accrued postretirement benefit obligation $ 765.6 $ 772.6
============== ==============
</TABLE>
The components of net periodic postretirement benefit cost are:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 6.1 $ 3.8 $ 4.5
Interest cost 43.9 46.9 52.3
Amortization of prior service cost (12.4) (12.4) (8.9)
-------------- -------------- --------------
Net periodic postretirement benefit cost $ 37.6 $ 38.3 $ 47.9
============== ============== ==============
</TABLE>
In 1997 annual assumed rates of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) for non-HMO are 7.5% and 5.5%
for retirees under 65 and over 65, respectively, and 4.0% for HMO at all
ages. Non-HMO rates are assumed to decrease gradually to 5.35% in 2007 and
remain at that level thereafter. The health care cost trend rate has a
significant effect on the amounts reported. A one percentage point
increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 1997, by
approximately $53.0 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1997 by
approximately $6.0. The weighted average discount rate used to determine
the accumulated postretirement benefit obligation at December 31, 1997 and
1996, was 7.25% and 7.75%, respectively.
POSTEMPLOYMENT BENEFITS
The Company provides certain benefits to former or inactive employees after
employment but before retirement.
INCENTIVE PLANS
The Company has an unfunded incentive compensation program, which provides
incentive compensation based on performance against annual plans and over
rolling three-year periods. In addition, Kaiser has a "nonqualified" stock
option plan and the Company has a defined contribution plan for salaried
employees. The Company's expense for all of these plans was $8.3, $(2.1)
and $11.9 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The Company has a total of 5,500,000 shares of Kaiser Common Stock reserved
for grant under its incentive compensation programs. At December 31, 1997,
3,536,653 shares of Kaiser Common Stock remained available for grant after
consideration of the 3,000,000 share increase in available shares, approved
by shareholders in May 1997, and current year share grants and stock option
activity. Stock options granted pursuant to the Company's nonqualified
stock option program are granted at the prevailing market price, generally
vest at a rate of 20 - 33% per year, and have a ten year term. Information
concerning nonqualified stock option plan activity is shown below. The
weighted average price per share for each year is shown parenthetically.
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year ($10.33, $10.32
and $9.85) 890,395 926,085 1,119,680
Granted ($10.06) 15,092 - -
Exercised ($8.33, $8.99, and $7.32) (48,410) (8,275) (155,500)
Expired or forfeited ($10.12, $10.45, and $8.88) (37,325) (27,415) (38,095)
-------------- -------------- --------------
Outstanding at end of year ($10.45, $10.33, and
$10.32) 819,752 890,395 926,085
============== ============== ==============
Exercisable at end of year ($10.53, $10.47, and
$10.73) 601,115 436,195 211,755
============== ============== ==============
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation ("SFAS No. 123"), the Company is
required to calculate pro forma compensation cost for all stock options
granted subsequent to December 31, 1994. No stock options were granted
during 1995 and 1996. However, as shown in the table above, 15,092 options
were granted in 1997 which would be subject to the pro forma calculation
requirements. For SFAS No. 123 purposes, the fair value of the 1997 stock
option grant was estimated using the Black-Scholes option pricing model.
The estimated fair value of the 1997 stock options grants of $.1 would
result in increased pro forma compensation expense and therefore reduced
net income.
8. REDEEMABLE PREFERENCE STOCK
In 1985, the Company issued its Cumulative (1985 Series A) Preference Stock
and its Cumulative (1985 Series B) Preference Stock (together, the
"Redeemable Preference Stock") each of which has a par value of $1 per
share and a liquidation and redemption value of $50 per share plus accrued
dividends, if any. No additional Redeemable Preference Stock is expected
to be issued. Holders of the Redeemable Preference Stock are entitled to
an annual cash dividend of $5 per share, or an amount based on a formula
tied to the Company's pre-tax income from aluminum operations, when and as
declared by the Board of Directors.
The carrying values of the Redeemable Preference Stock are increased each
year to recognize accretion between the fair value (at which the Redeemable
Preference Stock was originally issued) and the redemption value. Changes
in Redeemable Preference Stock are shown below.
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares:
Beginning of year 634,684 737,363 912,167
Redeemed (39,631) (102,679) (174,804)
-------------- -------------- --------------
End of year 595,053 634,684 737,363
============== ============== ==============
</TABLE>
Redemption fund agreements require the Company to make annual payments by
March 31 of the subsequent year based on a formula tied to consolidated net
income until the redemption funds are sufficient to redeem all of the
Redeemable Preference Stock. On an annual basis, the minimum payment is
$4.3 and the maximum payment is $7.3. The Company also has certain
additional repurchase requirements which are, among other things, based
upon profitability tests.
The Redeemable Preference Stock is entitled to the same voting rights as
the Company common stock and to certain additional voting rights under
certain circumstances, including the right to elect, along with other
Company preference stockholders, two directors whenever accrued dividends
have not been paid on two annual dividend payment dates or when accrued
dividends in an amount equivalent to six full quarterly dividends are in
arrears. The Redeemable Preference Stock restricts the ability of the
Company to redeem or pay dividends on common stock if the Company is in
default on any dividends payable on Redeemable Preference Stock.
9. STOCKHOLDERS' EQUITY
Changes in stockholders' equity were:
<TABLE>
<CAPTION>
Additional Note
Minimum Receivable
Preference Common Additional Accumulated Pension From
Stock Stock Capital Deficit Liability Parent
- --------------------------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ 1.8 $ 15.4 $ 1,626.3 $ (271.5) $ (9.1) $ (1,387.7)
Net income 65.3
Interest on note receivable
from parent 92.1 (92.1)
Contribution for LTIP shares 1.4
Capital contribution 10.9
Conversions (1,222 preference
shares into cash) (.1)
Dividends (.8)
Redeemable preference stock
accretion (3.9)
Additional minimum pension
liability (4.7)
---------- ---------- -------------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 1.7 15.4 1,730.7 (210.9) (13.8) (1,479.8)
Net income 13.2
Interest on note receivable
from parent 98.3 (98.3)
Contribution for LTIP shares .7
Capital contribution .1
Dividends (.5)
Redeemable preference stock
accretion (3.1)
Reduction of minimum pension
liability 11.0
---------- ---------- -------------- ------------ ------------ -----------
BALANCE, DECEMBER 31, 1996 1.7 15.4 1,829.8 (201.3) (2.8) (1,578.1)
Net income 52.1
Interest on note receivable
from parent 104.5 (104.5)
Contribution for LTIP shares .6
Capital contributions 4.9
Conversions (.1)
Dividends (.7)
Redeemable preference stock
accretion (2.4)
Reduction of minimum pension
liability 2.8
---------- ---------- -------------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 $ 1.6 $ 15.4 $ 1,939.8 $ (152.3) $ - $ (1,682.6)
========== ========== ============== ============ ============ ============
</TABLE>
PREFERENCE STOCK
The Company has four series of $100 par value Cumulative Convertible
Preference Stock ("$100 Preference Stock") with annual dividend
requirements of between 4-1/8% and 4-3/4%. The Company has the option to
redeem the $100 Preference Stock at par value plus accrued dividends. The
Company does not intend to issue any additional shares of the $100
Preference Stock.
The $100 Preference Stock can be exchanged for per share cash amounts
between $69 - $80. The Company records the $100 Preference Stock at their
exchange amounts for financial statement presentation and the Company
includes such amounts in minority interests. At December 31, 1997, and
1996, outstanding shares of $100 Preference Stock were 20,543 and 21,630,
respectively.
KAISER PREFERRED STOCK
PRIDES Convertible--During 1994, Kaiser issued 8,855,550 shares of Kaiser's
8.255% PRIDES Convertible Preferred Stock ("PRIDES") and received net
proceeds of approximately $100.1. Kaiser used such net proceeds to make
non-interest bearing loans to the Company in the aggregate principal amount
of $33.2 (the aggregate dividends scheduled to accrue on the shares of
PRIDES from the issuance date until December 31, 1997, the date on which
the outstanding PRIDES were to be mandatorily converted into shares of
Kaiser's Common Stock), evidenced by intercompany notes, and used the
balance of such net proceeds to make capital contributions to the Company
in the aggregate amount of $66.9.
During August 1997, the remaining 8,673,850 outstanding shares of PRIDES
were converted into 7,227,848 shares of Kaiser Common Stock pursuant to the
terms of the PRIDES Certificate of Designations. The remaining balance of
the intercompany note of $4.4 associated with dividend payments that Kaiser
did not have to make due to the early conversion has been reflected as a
capital contribution.
NOTE RECEIVABLE FROM PARENT
The Note receivable from parent bears interest at a fixed rate of 6-5/8%
per annum. No interest or principal payments are due until December 21,
2000, after which interest and principal will be payable on a 15-year term
pursuant to a predetermined schedule. Accrued interest is accounted for as
additional contribution capital.
10. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has a variety of financial commitments, including purchase
agreements, tolling arrangements, forward foreign exchange and forward
sales contracts (see Note 11), letters of credit, and guarantees. Such
purchase agreements and tolling arrangements include long-term agreements
for the purchase and tolling of bauxite into alumina in Australia by QAL.
These obligations expire in 2008. Under the agreements, the Company is
unconditionally obligated to pay its proportional share of debt, operating
costs, and certain other costs of QAL. The aggregate minimum amount of
required future principal payments at December 31, 1997, is $97.6, of which
approximately $12.0 is due in each of 2000 and 2001 with the balance being
due thereafter. The Company's share of payments, including operating costs
and certain other expenses under the agreements, has ranged between $100.0
- - $120.0 over the past three years. The Company also has agreements to
supply alumina to and to purchase aluminum from Anglesey.
Minimum rental commitments under operating leases at December 31, 1997, are
as follows: years ending December 31, 1998 - $26.5; 1999 - $32.0; 2000 -
$28.8; 2001 - $28.1; 2002 - $26.4; thereafter - $134.3. The future minimum
rentals receivable under noncancelable subleases was $62.5 at December 31,
1997.<PAGE>
Rental expenses were $30.4, $29.6, and $29.0, for the years ended December
31, 1997, 1996, and 1995, respectively.
ENVIRONMENTAL CONTINGENCIES
The Company is subject to a number of environmental laws, to fines or
penalties assessed for alleged breaches of the environmental laws, and to
claims and litigation based upon such laws. The Company currently is
subject to a number of lawsuits under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended by the
Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along
with certain other entities, has been named as a potentially responsible
party for remedial costs at certain third-party sites listed on the
National Priorities List under CERCLA.
Based on the Company's evaluation of these and other environmental matters,
the Company has established environmental accruals, primarily related to
potential solid waste disposal and soil and groundwater remediation
matters. The following table presents the changes in such accruals, which
are primarily included in Long-term liabilities, for the years ended
December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $33.3 $ 38.9 $ 40.1
Additional amounts 2.0 3.2 3.3
Less expenditures (5.6) (8.8) (4.5)
-------------- -------------- --------------
Balance at end of period $ 29.7 $ 33.3 $ 38.9
============== ============== ==============
</TABLE>
These environmental accruals represent the Company's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and the
Company's assessment of the likely remediation action to be taken. The
Company expects that these remediation actions will be taken over the next
several years and estimates that annual expenditures to be charged to these
environmental accruals will be approximately $3.0 to $8.0 for the years
1998 through 2002 and an aggregate of approximately $8.0 thereafter.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are
established or alternative technologies are developed, changes in these and
other factors may result in actual costs exceeding the current
environmental accruals. The Company believes that it is reasonably
possible that costs associated with these environmental matters may exceed
current accruals by amounts that could range, in the aggregate, up to an
estimated $18.0. As the resolution of these matters is subject to further
regulatory review and approval, no specific assurance can be given as to
when the factors upon which a substantial portion of this estimate is based
can be expected to be resolved. However, the Company is currently working
to resolve certain of these matters.
The Company believes that it has insurance coverage available to recover
certain incurred and future environmental costs and is actively pursuing
claims in this regard. However, no accruals have been made for any such
insurance recoveries and no assurances can be given that the Company will
be successful in its attempt to recover incurred or future costs.
While uncertainties are inherent in the final outcome of these
environmental matters, and it is presently impossible to determine the
actual costs that ultimately may be incurred, management currently believes
that the resolution of such uncertainties should not have a material
adverse effect on the Company's consolidated financial position, results of
operations, or liquidity.
ASBESTOS CONTINGENCIES
The Company 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 the
Company or exposure to products containing asbestos produced or sold by the
Company. The lawsuits generally relate to products the Company has not
manufactured for at least 20 years.
The following table presents the changes in number of such claims pending
for the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of claims at beginning of period 71,100 59,700 25,200
Claims received 15,600 21,100 41,700
Claims settled or dismissed (9,300) (9,700) (7,200)
-------------- -------------- --------------
Number of claims at end of period 77,400 71,100 59,700
============== ============== ==============
</TABLE>
Based on past experience and reasonably anticipated future activity, the
Company has established an accrual for estimated asbestos-related costs for
claims filed and estimated to be filed through 2008. There are inherent
uncertainties involved in estimating asbestos-related costs, and the
Company's actual costs could exceed these estimates. The Company's accrual
was calculated based on the current and anticipated number of asbestos-
related claims, the prior timing and amounts of asbestos-related payments,
and the advice of Wharton Levin Ehrmantraut Klein & Nash, P.A. with respect
to the current state of the law related to asbestos claims. Accordingly,
an estimated asbestos-related cost accrual of $158.8, before consideration
of insurance recoveries, is included primarily in Long-term liabilities at
December 31, 1997. While the Company does not presently believe there is a
reasonable basis for estimating such costs beyond 2008 and, accordingly, no
accrual has been recorded for such costs which may be incurred beyond 2008,
there is a reasonable possibility that such costs may continue beyond 2008,
and such costs may be substantial. The Company estimates that annual
future cash payments in connection with such litigation will be
approximately $13.0 to $20.0 for each of the years 1998 through 2002, and
an aggregate of approximately $80.0 thereafter.
The Company believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Claims for recovery from
some of its insurance carriers are currently subject to pending litigation
and other carriers have raised certain defenses, which have resulted in
delays in recovering costs from the insurance carriers. The timing and
amount of ultimate recoveries from these insurance carriers are dependent
upon the resolution of these disputes. The Company believes, based on
prior insurance-related recoveries in respect of asbestos-related claims,
existing insurance policies, and the advice of Thelen, Marrin, Johnson &
Bridges LLP with respect to applicable insurance coverage law relating to
the terms and conditions of those policies, that substantial recoveries
from the insurance carriers are probable. Accordingly, an estimated
aggregate insurance recovery of $134.0, determined on the same basis as the
asbestos-related cost accrual, is recorded primarily in Other assets at
December 31, 1997.
Subsequent to December 31, 1997, KACC reached agreements settling
approximately 25,000 of the pending asbestos-related claims. Also,
subsequent to year-end 1997, the Company reached agreements on asbestos
related coverage matters with two insurance carriers under which the
Company will collect a total of approximately $17.5 during the first
quarter of 1998. The insurance recoveries will reduce the approximately
$134.0 of asbestos related receivable accrued at December 31, 1997. As the
amounts related to the claim settlements and insurance recoveries were
consistent with the Company's year-end 1997 accrual assumptions, these
events are not expected to have a material impact on the Company's
financial position, results of operations or liquidity.
Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative progress, and costs
incurred in order to ascertain whether an adjustment to the existing
accruals should be made to the extent that historical experience may differ
significantly from the Company's underlying assumptions. While
uncertainties are inherent in the final outcome of these asbestos matters
and it is presently impossible to determine the actual costs that
ultimately may be incurred and insurance recoveries that will be received,
management currently believes that, based on the factors discussed in the
preceding paragraphs, the resolution of asbestos-related uncertainties and
the incurrence of asbestos-related costs net of related insurance
recoveries should not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.
OTHER CONTINGENCIES
The Company is involved in various other claims, lawsuits, and other
proceedings relating to a wide variety of matters. While uncertainties are
inherent in the final outcome of such matters, and it is presently
impossible to determine the actual costs that ultimately may be incurred,
management currently believes that the resolution of such uncertainties and
the incurrence of such costs should not have a material adverse effect on
the Company's consolidated financial position, results of operations, or
liquidity.
11. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
At December 31, 1997, the net unrealized loss on the Company's position in
aluminum forward sales and option contracts, (based on an average price of
$1,643 per ton ($.75 per pound) of primary aluminum), natural gas and fuel
oil forward purchase and option contracts, and forward foreign exchange
contracts, was approximately $21.0. Any gains or losses on the derivative
contracts utilized in the Company's hedging activities are offset by losses
or gains, respectively, on the transactions being hedged.
ALUMINA AND ALUMINUM
The Company's earnings are sensitive to changes in the prices of alumina,
primary aluminum and fabricated aluminum products, and also depend to a
significant degree upon the volume and mix of all products sold. Primary
aluminum prices have historically been subject to significant cyclical
price fluctuations. Alumina prices as well as fabricated aluminum product
prices (which vary considerably among products) are significantly
influenced by changes in the price of primary aluminum but generally lag
behind primary aluminum price changes by up to three months. Since 1993,
the Average Midwest United States transaction price for primary aluminum
has ranged from approximately $.50 to $1.00 per pound.
From time to time in the ordinary course of business, the Company enters
into hedging transactions to provide price risk management in respect of
the net exposure of earnings resulting from (i) anticipated sales of
alumina, primary aluminum and fabricated aluminum products, less (ii)
expected purchases of certain items, such as aluminum scrap, rolling ingot,
and bauxite, whose prices fluctuate with the price of primary aluminum.
Forward sales contracts are used by the Company to effectively fix the
price that the Company will receive for its shipments. The Company also
uses option contracts (i) to establish a minimum price for its product
shipments, (ii) to establish a "collar" or range of price for its
anticipated sales, and/or (iii) to permit the Company to realize possible
upside price movements. As of December 31, 1997, the Company had sold
forward, at fixed prices, approximately 109,850 and 24,000 tons of primary
aluminum with respect to 1998 and 1999, respectively. The Company had also
purchased put options to establish a minimum price for approximately 52,000
tons with respect to 1998 and as of December 31, 1997, had entered into
option contracts that established a price range for an additional 243,600
and 124,500 tons with respect to 1998 and 1999, respectively.
Additionally, at December 31, 1997, the Company also held fixed price
purchase contracts for 134,850 tons of primary aluminum with respect to
1998.
As of December 31, 1997, the Company had sold forward virtually all of the
alumina available to it in excess of its projected internal smelting
requirements for 1998 and 1999 at prices indexed to future prices of
primary aluminum.
ENERGY
The Company is exposed to energy price risk from fluctuating prices for
fuel oil and natural gas consumed in the production process. Accordingly,
the Company from time to time in the ordinary course of business enters
into hedging transactions with major suppliers of energy and energy related
financial instruments. As of December 31, 1997, the Company had a
combination of fixed price purchase and option contracts for the purchase
of approximately 41,000 MMBtu of natural gas per day during 1998. At
December 31, 1997, the Company also held a combination of fixed price
purchase and option contracts for an average of 232,000 and 25,000 barrels
of fuel oil per month for 1998 and 1999, respectively.
FOREIGN CURRENCY
The Company enters into forward exchange contracts to hedge material cash
commitments to foreign subsidiaries or affiliates. At December 31, 1997,
the Company had net forward foreign exchange contracts totaling
approximately $136.6 for the purchase of 180.0 Australian dollars from
January 1998 through February 1999, in respect of its commitments for 1998
and 1999 expenditures denominated in Australian dollars.
12. SEGMENT AND GEOGRAPHICAL AREA INFORMATION
The Company's operations are located in many foreign countries, including
Australia, Canada, Ghana, Jamaica, and the United Kingdom. Foreign
operations in general may be more vulnerable than domestic operations due
to a variety of political and other risks. Sales and transfers among
geographic areas are made on a basis intended to reflect the market value
of products.
The aggregate foreign currency gain included in determining net income was
immaterial for the years ended December 31, 1997, 1996, and 1995.
No single customer accounted for sales in excess of 10% of total revenue in
1997, 1996 or 1995.
Export sales were less than 10% of total revenue during the years ended
December 31, 1997, 1996 and 1995.
Geographical area information relative to operations is summarized as
follows:
<TABLE>
<CAPTION>
Year Ended Other
December 31, Domestic Caribbean Africa Foreign Eliminations Total
- -------------------------------------------------------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers 1997 $ 1,720.3 $ 204.6 $ 234.2 $ 214.1 $ 2,373.2
1996 1,610.0 201.8 198.3 180.4 2,190.5
1995 1,589.5 191.7 239.4 217.2 2,237.8
Sales and transfers among 1997 $ 121.7 $ 197.3 $ (319.0)
geographic areas 1996 116.9 206.0 (322.9)
1995 79.6 191.5 (271.1)
Equity in income (losses) of 1997 $ 4.8 $ (1.9) $ 2.9
unconsolidated affiliates 1996 .3 8.5 8.8
1995 (.2) 19.4 19.2
Operating income 1997 $ 20.8 $ 11.6 $ 72.2 $ 65.3 $ 169.9
1996 6.7 1.6 27.8 64.0 100.1
1995 32.5 9.8 83.5 85.3 211.1
Investment in and advances to 1997 $ 15.8 $ 23.9 $ 108.9 $ 148.6
unconsolidated affiliates 1996 .5 25.3 142.6 168.4
Identifiable assets 1997 $ 2,278.3 $ 391.2 $ 179.6 $ 168.2 $ 3,017.3
1996 2,138.6 391.2 194.7 211.4 2,935.9
</TABLE>
Financial information by industry segment at December 31, 1997 and 1996,
and for the years ended December 31, 1997, 1996, and 1995, is as follows:
<TABLE>
<CAPTION>
Year Ended Bauxite & Aluminum
December 31, Alumina Processing Corporate Total
- -------------------------------------------------------------------------------- ----------------
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers 1997 $ 483.3 $ 1,889.9 $ 2,373.2
1996 508.0 1,682.5 2,190.5
1995 514.2 1,723.6 2,237.8
Intersegment sales 1997 $ 193.2 $ 193.2
1996 181.6 181.6
1995 159.7 159.7
Equity in income (losses) of 1997 $ (7.0) $ 9.9 $ - $ 2.9
unconsolidated affiliates 1996 1.7 6.7 .4 8.8
1995 3.6 15.8 (.2) 19.2
Operating income (loss) 1997 $ 20.0 $ 222.6 $ (72.7) $ 169.9
1996 1.1 156.5 (57.5) 100.1
1995 54.0 238.9 (81.8) 211.1
Depreciation 1997 $ 29.3 $ 58.7 $ 3.1 $ 91.1
1996 31.2 61.7 3.1 96.0
1995 31.1 60.4 2.8 94.3
Capital expenditures 1997 $ 27.8 $ 99.0 $ 1.7 $ 128.5
1996 29.9 126.9 4.7 161.5
1995 27.3 53.0 8.1 88.4
Investment in and advances to 1997 $ 88.6 $ 59.5 $ .5 $ 148.6
unconsolidated affiliates 1996 121.3 46.6 .5 168.4
Identifiable assets 1997 $ 735.9 $ 1,510.9 $ 770.5 $ 3,017.3
1996 784.6 1,408.5 742.8 2,935.9
</TABLE>
13. SUBSIDIARY GUARANTORS
Kaiser Alumina Australia Corporation ("KAAC"), Kaiser Finance Corporation
("KFC"), Kaiser Jamaica Corporation ("KJC"), Alpart Jamaica Inc. ("AJI")
and Kaiser Micromill Holding, LLC, Kaiser Sierra Micromills, LLC, Kaiser
Texas Micromill Holdings, LLC, and Kaiser Texas Sierra Micromills, LLC
(collectively referred to as the "Micromill Subsidiaries") are domestic
wholly owned (direct or indirect) subsidiaries of the Company that have
provided subordinated guarantees of the 9-7/8% Notes, the 10-7/8% Notes and
the 12-3/4% Notes (the "Notes") (see Note 5). KAAC and KJC and AJI are
direct subsidiaries, which serve as holding companies for the Company's
investments in QAL and Alpart, respectively. KFC is a wholly owned
subsidiary of KAAC, whose principal business is making loans to the Company
and its subsidiaries. The Micromill Subsidiaries are domestic wholly owned
(direct or indirect) subsidiaries of the Company which were formed to hold
(directly or indirectly) certain of the Company's interests in the Reno,
Nevada and certain possible future Micromill(TM) facilities and related
projects, if any.
Additionally, in June 1997, Kaiser Bellwood Corporation ("KBC"), a wholly
owned subsidiary formed to acquire an extrusion plant located in Richmond,
Virginia from Reynolds Metals Company, also became a subsidiary guarantor
of the Notes pursuant to the indentures to the Notes. KAAC, KFC, KJC, AJI,
the Micromill Subsidiaries and KBC are hereinafter collectively referred to
as the "Subsidiary Guarantors."
Summary combined financial information for the Subsidiary Guarantors as of
December 31, 1997 and 1996 is shown below. Such summary combined financial
information only includes the balances and results of KBC from July 1,
1997, the date of acquisition.
Summary of Combined Financial Position
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets $ 131.1 $ 116.9
Due from the Company 793.4 740.0
Investments in and advances to unconsolidated affiliates 64.7 95.9
Property, plant, and equipment - net 355.7 321.6
Other assets 29.2 30.1
-------------- --------------
Total $ 1,374.1 $ 1,304.5
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 146.8 $ 286.3
Due to the Company 423.6 308.2
Other long-term liabilities 86.2 38.8
Long-term debt - net of current maturity 60.0 60.0
Minority interests 79.6 76.8
Stockholders' equity 577.9 534.4
-------------- --------------
Total $ 1,374.1 $ 1,304.5
============== ==============
</TABLE>
Summary of Combined Operations
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 495.1 $ 430.5 $ 401.4
Costs and expenses 452.2 413.8 366.7
-------------- -------------- --------------
Operating income 42.9 16.7 34.7
Other income (expense):
Interest and other income (expense) 49.4 (28.0) 37.2
Interest expense (18.5) (23.2) (29.9)
-------------- -------------- --------------
Income (loss) before income taxes, and minority
interests 73.8 (34.5) 42.0
(Provision) credit for income taxes (43.8) 6.5 (14.8)
Minority interests 5.8 5.8 5.5
-------------- -------------- --------------
Net income (loss) $ 35.8 $ (22.2) $ 32.7
============== ============== ==============
</TABLE>
Notes to Summary of Combined Financial Information for the Subsidiary
Guarantors
Income Taxes - The Subsidiary Guarantors, excluding the Micromill
Subsidiaries, are all members of the KACC Subgroup (see Note 6). The
(provision) credit for income taxes reflected in the Summary of Combined
Operations for these entities was computed as if each of these entities
filed tax returns on a separate company basis. No (provision) credit for
income taxes has been reflected for the Micromill Subsidiaries for the 1997
or 1996 pre-tax net losses of approximately $24.5 and $20.5, as the
entities are not subject to income tax. However, taxable income or loss of
the Micromill Subsidiaries is included in the taxable income of the
Company. Included in Other assets and Other long-term liabilities at
December 31, 1997, are $26.8 and $61.8 of deferred income tax assets and
liabilities, respectively.
Receivables and Payables -- At December 31, 1997, receivables from and
payables to the Company reflected in the Summary of Combined Financial
Position include $747.9 and $229.8 of interest bearing loans, respectively.
The similar amounts at December 31, 1996 were $718.2 and $280.4.
Inventory Valuation -- Inventories are stated at first-in, first-out (FIFO)
cost, not in excess of market.
Investments -- At December 31, 1997, KAAC held a 28.3% interest in QAL.
This investment is accounted for by the equity method. The equity in QAL's
loss before income taxes of $7.0 and $1.7 in 1997 and 1996, respectively,
is reflected in the Summary of Combined Operations in other income
(expense).
Foreign Currency -- The functional currency of the Subsidiary Guarantors is
the United States Dollar, and accordingly, translation gains (losses)
included in net income (loss) in the Summary of Combined Operations were
$44.1, $(24.6), and $14.1 for the years ended December 31, 1997, 1996, and
1995, respectively.
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
FIVE-YEAR FINANCIAL DATA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
(In millions of dollars) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15.8 $ 81.3 $ 21.7 $ 12.0 $ 14.2
Receivables 345.3 255.6 310.2 200.5 236.0
Inventories 568.3 562.2 525.7 468.0 426.9
Prepaid expenses and other current
assets 121.3 127.8 76.6 158.0 60.7
-------------- -------------- -------------- -------------- --------------
Total current assets 1,050.7 1,026.9 934.2 838.5 737.8
Investments in and advances to
unconsolidated affiliates 148.6 168.4 178.2 169.7 183.2
Property, plant, and equipment - net 1,171.8 1,168.7 1,109.6 1,133.2 1,163.7
Deferred income taxes 329.0 263.3 268.8 271.0 210.3
Other assets 317.2 308.6 323.5 281.2 233.2
-------------- -------------- -------------- -------------- --------------
Total $ 3,017.3 $ 2,935.9 $ 2,814.3 $ 2,693.6 $ 2,528.2
============== ============== ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accruals $ 457.6 $ 453.1 $ 448.0 $ 434.1 $ 339.6
Accrued postretirement medical
benefit obligation - current 45.3 50.1 46.8 47.0 47.6
Payable to affiliates 82.4 96.9 95.3 85.2 62.4
Long-term debt - current portion 8.8 8.9 8.9 11.5 8.7
Notes payable to parent - current
portion - 8.6 10.7 21.2 12.6
-------------- -------------- -------------- -------------- --------------
Total current liabilities 594.1 617.6 609.7 599.0 470.9
Long-term liabilities 492.0 458.1 548.5 495.5 501.7
Accrued postretirement medical benefit
obligation 720.3 722.5 734.0 734.9 713.1
Long-term debt 962.9 953.0 749.2 751.1 720.2
Notes payable to parent - - 8.6 23.5 18.9
Minority interests 98.4 92.5 91.4 85.4 69.7
Redeemable preference stock 27.7 27.5 29.6 29.0 33.6
Stockholders' equity (deficit):
Preference stock 1.6 1.7 1.7 1.8 1.8
Common stock 15.4 15.4 15.4 15.4 15.4
Additional capital 1,939.8 1,829.8 1,730.7 1,626.3 1,471.2
Retained earnings (accumulated
deficit) (152.3) (201.3) (210.9) (271.5) (165.2)
Additional minimum pension
liability - (2.8) (13.8) (9.1) (21.6)
Less: Note receivable from parent (1,682.6) (1,578.1) (1,479.8) (1,387.7) (1,301.5)
-------------- -------------- -------------- -------------- --------------
Total stockholders' equity
(deficit) 121.9 64.7 43.3 (24.8) .1
-------------- -------------- -------------- -------------- --------------
Total $ 3,017.3 $ 2,935.9 $ 2,814.3 $ 2,693.6 $ 2,528.2
============== ============== ============== ============== ==============
</TABLE>
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
FIVE-YEAR FINANCIAL DATA
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
(In millions of dollars) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 2,373.2 $ 2,190.5 $ 2,237.8 $ 1,781.5 $ 1,719.1
-------------- -------------- -------------- -------------- --------------
Costs and expenses:
Cost of products sold 1,962.6 1,869.1 1,798.4 1,625.5 1,587.7
Depreciation 91.1 96.0 94.3 95.4 97.1
Selling, administrative, research
and development, and general 129.9 125.3 134.0 116.5 121.6
Restructuring of operations 19.7 - - - 35.8
-------------- -------------- -------------- -------------- --------------
Total costs and expenses 2,203.3 2,090.4 2,026.7 1,837.4 1,842.2
Operating income (loss) 169.9 100.1 211.1 (55.9) (123.1)
Other income (expense):
Interest expense (110.7) (93.4) (93.9) (88.6) (84.2)
Other - net 2.8 (2.6) (14.1) (7.3) (1.5)
-------------- -------------- -------------- -------------- --------------
Income (loss) before income taxes,
minority interests, extraordinary
loss, and cumulative effect of
changes in accounting principles 62.0 4.1 103.1 (151.8) (208.8)
Credit (provision) for income taxes (9.4) 8.4 (37.4) 54.0 86.9
Minority interests (.5) .7 (.4) 1.6 4.3
-------------- -------------- -------------- -------------- --------------
Income (loss) before extraordinary loss
and cumulative effect of changes in
accounting principles 52.1 13.2 65.3 (96.2) (117.6)
Extraordinary loss on early
extinguishments of debt, net of
tax benefits of $2.9 and $11.2 for
1994 and 1993, respectively - - - (5.4) (21.8)
Cumulative effect of changes in
accounting principles, net of tax
benefit of $237.7 - - - - (507.9)
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ 52.1 $ 13.2 $ 65.3 $ (101.6) $ (647.3)
============== ============== ============== ============== ==============
</TABLE>
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------
(In millions of dollars) March 31 June 30 September 30 December 31
- -------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C>
1997
Net sales $ 547.4 $ 597.1 $ 634.1 $ 594.6
Operating income 32.8 35.6 (1) 54.6 46.9
Net income 4.3 14.6 (2) 18.4 14.8
1996
Net sales $ 531.1 $ 567.6 $ 553.4 $ 538.4
Operating income 40.6 36.8 11.4 11.3 (3)
Net income (loss) 11.1 9.4 (4.8) (2.5)(3)
</TABLE>
(1) Includes a $19.7 pre-tax charge for restructuring of operations and a
$5.8 pre-tax charge for litigation matters.
(2) Includes a $19.7 pre-tax charge for restructuring of operations, an
offsetting after-tax benefit of $12.5 related to the
settlement of certain tax matters and a $5.8 pre-tax charge for litigation
matters.
(3) Includes approximately $17.0 on an after tax basis resulting from
settlements of certain tax matters.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Information required under PART III (Items 10, 11, 12, and 13)
has been omitted from this Report since the Company intends to
file with the Securities and Exchange Commission, not later than
120 days after the close of its fiscal year, a definitive proxy
statement pursuant to Regulation 14A which involves the election
of directors, and such information is incorporated by reference
from such definitive proxy statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
1. Financial Statements Page
-------------------- ----
Report of Independent Public Accountants 20
Consolidated Balance Sheets 21
Statements of Consolidated Income 22
Statements of Consolidated Cash Flows 23
Notes to Consolidated Financial Statements 24
Five-Year Financial Data 45
Quarterly Financial Data 47
2. Financial Statement Schedules
-----------------------------
Financial statement 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 50),
which index is incorporated herein by reference.
(b) REPORTS ON FORM 8-K
No Report on Form 8-K was filed by the Company during the
last quarter of the period covered by this Report.
(c) EXHIBITS
Reference is made to the Index of Exhibits immediately
preceding the exhibits hereto (beginning on page 50), which
index is incorporated herein by reference.
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 & CHEMICAL
CORPORATION
Date: March 26, 1998
By George T. Haymaker, Jr.
------------------------------
George T. Haymaker, Jr.
Chairman of the Board
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 26, 1998 George T. Haymaker, Jr.
------------------------------
George T. Haymaker, Jr.
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Date: March 26, 1998 John T. La Duc
------------------------------
John T. La Duc
Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: March 26, 1998 Daniel D. Maddox
------------------------------
Daniel D. Maddox
Controller - Corporate
Consolidation and Reporting
(Principal Accounting Officer)
Date: March 26, 1998 Robert J. Cruikshank
------------------------------
Robert J. Cruikshank
Director
Date: March 26, 1998 Charles E. Hurwitz
------------------------------
Charles E. Hurwitz
Director
Date: March 26, 1998 Ezra G. Levin
------------------------------
Ezra G. Levin
Director
Date: March 26, 1998 Robert Marcus
------------------------------
Robert Marcus
Director
Date: March 26, 1998 Robert J. Petris
------------------------------
Robert J. Petris
Director
INDEX OF EXHIBITS
Exhibit
Number Description
------ -----------
3.1 Restated Certificate of Incorporation of Kaiser Aluminum &
Chemical Corporation (the "Company" or "KACC"), dated July
25, 1989 (incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1, dated August 25, 1991,
filed by KACC, Registration No. 33-30645).
3.2 Certificate of Retirement of KACC, dated February 7, 1990
(incorporated by reference to Exhibit 3.2 to the Report on
Form 10-K for the period ended December 31, 1989, filed by
KACC, File No. 1-3605).
3.3 Amended and Restated By-Laws of Kaiser Aluminum & Chemical
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 KACC,
File No. 1-3605).
4.1 Indenture, dated as of February 1, 1993, among KACC, as
Issuer, Kaiser Alumina Australia Corporation, Alpart Jamaica
Inc., and Kaiser Jamaica Corporation, as Subsidiary
Guarantors, and 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 Kaiser Aluminum
Corporation ("Kaiser" or "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).
Exhibit
Number Description
------ -----------
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).
Exhibit
Number Description
------ -----------
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.
4.25 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).
4.26 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).
4.27 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).
Exhibit
Number Description
------ -----------
4.28 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).
KACC 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
KACC and its subsidiaries on a consolidated basis. KACC
agrees and undertakes to furnish a copy of any such
instrument to the Securities and Exchange Commission upon
its request.
10.1 Form of indemnification agreement with officers and
directors (incorporated by reference to Exhibit (10)(b)
to the Registration Statement of KAC on Form S-4, File
No. 33-12836).
10.2 Tax Allocation Agreement, dated as of December 21,
1989, between MAXXAM and KACC (incorporated by
reference to Exhibit 10.21 to Amendment No. 6 to the
Registration Statement on Form S-1, dated December 14,
1989, filed by KACC, Registration No. 33-30645).
10.3 Tax Allocation Agreement, dated as of February 26,
1991, between KAC and MAXXAM (incorporated by reference
to Exhibit 10.23 to Amendment No. 2 to the Registration
Statement on Form S-1, dated June 11, 1991, filed by
KAC, Registration No. 33-37895).
10.4 Tax Allocation Agreement, dated as of June 30, 1993,
between KACC and KAC (incorporated by reference to
Exhibit 10.3 to the Report on Form 10-Q for the
quarterly period ended June 30, 1993, filed by KACC,
File No. 1-3605).
Executive Compensation Plans and Arrangements
[Exhibits 10.5 - 10.14, inclusive]
10.5 KACC's Bonus Plan (incorporated by reference to Exhibit
10.25 to Amendment No. 6 to the Registration Statement
on Form S-1, dated December 14, 1989, filed by KACC,
Registration No. 33-30645).
10.6 Kaiser 1993 Omnibus Stock Incentive Plan (incorporated
by reference to Exhibit 10.1 to the Report on Form 10-Q
for the quarterly period ended June 30, 1993, filed by
KACC, File No. 1-3605).
10.7 Kaiser 1995 Employee Incentive Compensation Program
(incorporated by reference to Exhibit 10.1 to the
Report on Form 10-Q for the quarterly period ended
March 31, 1995, filed by KAC, File No. 1-9447).
10.8 Kaiser 1995 Executive Incentive Compensation Program
(incorporated by reference to Exhibit 99 to the Proxy
Statement, dated April 26, 1995, filed by KAC, File No.
1-9447).
10.9 Kaiser 1997 Omnibus Stock Incentive Plan (incorporated
by reference to Appendix A to the Proxy Statement,
dated April 29, 1997, filed by KAC, File No. 1-9447).
10.10 Employment Agreement, dated April 1, 1993, among KAC,
KACC, and George T. Haymaker, Jr. (incorporated by
reference to Exhibit 10.2 to the Report on Form 10-Q
for the quarterly period ended March 31, 1993, filed by
KAC, File No. 1-9447).
10.11 First Amendment to Employment Agreement by and between
KACC, KAC and George T. Haymaker, Jr. (incorporated by
reference to Exhibit 10 to the Report on Form 10-Q for
the quarterly period ended June 30, 1996, filed by KAC,
File No. 1-9447).
Exhibit
Number Description
------ -----------
*10.12 Second Amendment to Employment Agreement, dated as of
December 10, 1997, by and between KAC, KACC, and George
T. Haymaker, Jr.
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 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).
*21 Significant Subsidiaries of KACC.
*27 Financial Data Schedule.
-------------
* Filed herewith
Exhibit 21
SUBSIDIARIES
Listed below are the principal subsidiaries of Kaiser Aluminum
Corporation, the jurisdiction of their incorporation or
organization, and the names under which such subsidiaries do
business. Certain subsidiaries are omitted which, considered in
the aggregate as a single subsidiary, would not constitute a
significant subsidiary.
Place of
Incorporation
Name or Organization
---- ---------------
Alpart Jamaica Inc. Delaware
Alumina Partners of Jamaica (partnership) Delaware
Anglesey Aluminium Limited United Kingdom
Kaiser Alumina Australia Corporation Delaware
Kaiser Aluminium International, Inc. Delaware
Kaiser Aluminum & Chemical of Canada Limited Ontario
Kaiser Bauxite Company Nevada
Kaiser Finance Corporation Delaware
Kaiser Jamaica Bauxite Company (partnership) Jamaica
Kaiser Jamaica Corporation Delaware
Queensland Alumina Limited Queensland
Volta Aluminium Company Limited Ghana
Principal California Oklahoma
Domestic ---------- --------
Operations Los Angeles (City Tulsa
(Partial List) of Commerce) Engineered
Engineered Products
Products Pennsylvania
Los Angeles (Santa ------------
Fe Springs) Erie (50%)
Engineered Engineered
Products Products
Fabricating South Carolina
Oxnard --------------
Engineered Greenwood
Products Engineered
Pleasanton Products
R&D at the Greenwood
Center for Engineered
Technology, Products
Administrative Machine Shop
Offices Tennessee
Florida ---------
------- Jackson
Mulberry Engineered
Sodium Products
Silicofluoride Texas
Potassium -----
Silicofluoride Houston
Louisiana Kaiser
--------- Aluminum
Baton Rouge Corporation
Environmental Headquarters
Offices Sherman
Gramercy Engineered
Alumina Products
Michigan Virginia
-------- --------
Detroit Richmond
(Southfield) Engineered
Automotive Products
Product Washington
Development ----------
and Sales Mead
Nevada Primary
------ Aluminum,
Reno Northwest
Micromill(TM) Engineering
Ohio Center
---- Richland
Canton Engineered
Engineered Products
Products Tacoma
Cuyahoga Falls Primary
(50%) Aluminum
Engineered Trentwood
Products Flat-Rolled
Newark Products
Engineered
Products
-----------------------------------------------------------------
Principal Australia Jamaica
Worldwide --------- -------
Operations Queensland Alumina Alumina Partners of
(Partial List) Limited (28.3%) Jamaica (65%)
Alumina Bauxite,
Canada Alumina
------ Kaiser Jamaica
Kaiser Aluminum & Bauxite Company
Chemical of (49%)
Canada Limited Bauxite
(100%) Russia
Engineered Products ------
Ghana Kaiser Aluminium
----- Russia, Inc. (100%)
Volta Aluminium International
Company Limited Business
(90%) Development
Primary Wales, United Kingdom
Aluminum ---------------------
Anglesey Aluminium
Limited (49%)
Primary
Aluminum
EXECUTION COPY
TWELFTH AMENDMENT TO CREDIT AGREEMENT
-------------------------------------
THIS TWELFTH AMENDMENT TO CREDIT AGREEMENT (this
"Amendment"), dated as of January 13, 1998, is by and between
---------
KAISER ALUMINUM & CHEMICAL CORPORATION, a Delaware corporation
(the "Company"), KAISER ALUMINUM CORPORATION, a Delaware
-------
corporation (the "Parent Guarantor"), the various financial
----------------
institutions that are or may from time to time become parties to the Credit
Agreement referred to below (collectively, the "Lenders" and, individually,
a "Lender"), and BANKAMERICA
------- ------
BUSINESS CREDIT, INC., a Delaware corporation, as agent (in such capacity,
together with its successors and assigns in such capacity, the "Agent") for
the Lenders. Capitalized terms used,
-----
but not defined, herein shall have the meanings given to such terms in the
Credit Agreement, as amended hereby.
W I T N E S S E T H:
WHEREAS, the Company, the Parent Guarantor, the Lenders and the
Agent are parties to the Credit Agreement, dated as of February 15, 1994,
as amended by the First Amendment to Credit Agreement, dated as of July 21,
1994, the Second Amendment to Credit Agreement, dated as of March 10, 1995,
the Third Amendment to Credit Agreement and Acknowledgement, dated as of
July 20, 1995, the Fourth Amendment to Credit Agreement, dated as of
October 17, 1995, the Fifth Amendment to Credit Agreement dated as of
December 11, 1995, the Sixth Amendment to Credit Agreement dated as of
October 1, 1996, the Seventh Amendment to Credit Agreement, dated as of
December 17, 1996, the Eighth Amendment to Credit Agreement, dated as of
February 24, 1997, the Ninth Amendment to Credit Agreement and
Acknowledgment, dated as of April 21, 1997, the Tenth Amendment to Credit
Agreement and Assignment, dated as of June 25, 1997, and the Eleventh
Amendment to Credit Agreement and Limited Waivers, dated as of October 20,
1997 (the "Credit Agreement"); and
----------------
WHEREAS, the parties hereto have agreed to amend the Credit
Agreement as herein provided;
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Amendments to Credit Agreement.
------------------------------
1.1 Amendments to Article I: Definitions.
-------------------------------------
A. Section 1.1 of the Credit Agreement is hereby
-----------
amended by amending the following definitions contained therein to read in
their entirety as follows:
"`Revolving Commitment Termination Date' means the
-------------------------------------
earliest of
(a) March 31, 1994 (unless the Initial Borrowing Date shall
have occurred before the close of business, San Francisco time, on such
date);
(b) August 15, 2001;
(c) the date on which the Revolving Commitment Amount is
reduced to zero pursuant to Section 2.2; and
-----------
(d) the date on which any Commitment Termination Event
occurs.
Upon the occurrence of any event described in clause (a), (b),
----------- ----
(c), or (d), the Revolving Commitment of each Lender and the
- --- ----
Swingline Commitment of Business Credit shall terminate automatically and
without any further action."
"`Stated Maturity Date' means (a) in the case of any
--------------------
Revolving Loan, August 15, 2001, and (b) in the case of any Swingline Loan,
the earlier of (i) the seventh calendar day following the date such
Swingline Loan is made or (ii) August 15, 2001."
1.2 Amendments to Article V: Letters of Credit.
------------------------------------------
A. Section 5.1 of the Credit Agreement is hereby
-----------
amended by amending clause (b)(iii) thereof to read in its entirety as
follows:
"(iii) such Letter of Credit is not stated to expire on a date
(its "Stated Expiry Date") no later than the tenth
------------------
Business Day immediately preceding August 15, 2001;"
1.3 Amendments to Article IX: Covenants.
------------------------------------
A. Section 9.2.2 of the Credit Agreement is hereby
-------------
amended by deleting the reference to "February 15, 1999" contained in
clause (b)(x) thereof and substituting a reference
-------------
to "August 15, 2001" therefor.
B. Section 9.2.3 of the Credit Agreement is hereby
-------------
amended by deleting the reference to "February 15, 1999" contained in
clause (w) thereof and substituting a reference to
----------
"August 15, 2001" therefor.
C. Section 9.2.7 of the Credit Agreement is hereby
-------------
amended by adding the phrase "and each Fiscal Year thereafter" following
the date "1998" contained therein.
Section 2. Conditions to Effectiveness.
---------------------------
This Amendment shall become effective as of the date hereof only
when the following conditions shall have been satisfied and notice thereof
shall have been given by the Agent to the Parent Guarantor, the Company and
each Lender (the date of satisfaction of such conditions and the giving of
such notice being referred to herein as the "Twelfth Amendment Effective
----------------------------
Date"):
- -----
A. The Agent shall have received for each Lender counterparts hereof duly
executed on behalf of the Parent Guarantor, the Company, the Agent and the
Required Lenders (or notice of the approval of this Amendment by the
Required Lenders satisfactory to the Agent shall have been received by the
Agent).
B. The Agent shall have received:
(1) Resolutions of the Board of Directors or of the
Executive Committee of the Board of Directors of the Company and the Parent
Guarantor approving and authorizing the execution, delivery and performance
of this Amendment, certified by their respective corporate secretaries or
assistant secretaries as being in full force and effect without
modification or amendment as of the date of execution hereof by the Company
or the Parent Guarantor, as the case may be;
(2) A signature and incumbency certificate of the officers
of the Company and the Parent Guarantor executing this Amendment;
(3) For each Lender an opinion, addressed to the Agent and
each Lender, from Kramer, Levin, Naftalis & Frankel, in form and substance
satisfactory to the Agent; and
(4) Such other information, approvals, opinions, documents,
or instruments as the Agent may reasonably request.
Section 3. Company's Representations and Warranties.
----------------------------------------
In order to induce the Lenders and the Agent to enter into this
Amendment and to amend the Credit Agreement in the manner provided herein,
the Parent Guarantor and the Company represent and warrant to each Lender
and the Agent that, as of the Twelfth Amendment Effective Date after giving
effect to the effectiveness of this Amendment, the following statements are
true and correct in all material respects:
A. Authorization of Agreements. The execution and
---------------------------
delivery of this Amendment by the Company and the Parent Guarantor and the
performance of the Credit Agreement as amended by this Amendment (the
"Amended Agreement") by the Company and the Parent Guarantor are within
such Obligor's corporate powers
----------------
and have been duly authorized by all necessary corporate action on the part
of the Company and the Parent Guarantor, as the case may be.
B. No Conflict. The execution and delivery by the
-----------
Company and the Parent Guarantor of this Amendment and the performance by
the Company and the Parent Guarantor of the Amended Agreement do not:
(1) contravene such Obligor's Organic Documents;
(2) contravene the Senior Indenture, the New Senior
Indenture, the Additional New Senior Indentures, or the Subordinated
Indenture or contravene any other contractual restriction where such a
contravention has a reasonable possibility of having a Materially Adverse
Effect or contravene any law or governmental regulation or court decree or
order binding on or affecting such Obligor or any of its Subsidiaries; or
(3) result in, or require the creation or imposition of,
any Lien on any of such Obligor's properties or any of the properties of
any Subsidiary of such Obligor, other than pursuant to the Loan Documents.
C. Binding Obligation. This Amendment has been duly
------------------
executed and delivered by the Company and the Parent Guarantor and this
Amendment and the Amended Agreement constitute the legal, valid and binding
obligations of the Company and the Parent Guarantor, enforceable against
the Company and the Parent Guarantor in accordance with their respective
terms, except as may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or limiting creditors' rights
generally and by general principles of equity.
D. Governmental Approval, Regulation, etc. No
---------------------------------------
authorization or approval or other action by, and no notice to or filing
with, any governmental authority or regulatory body or any other Person is
required for the due execution, delivery or performance of this Amendment
by the Company or the Parent Guarantor.
E. Incorporation of Representations and Warranties
-----------------------------------------------
from Credit Agreement. Each of the statements set forth in
- ---------------------
Section 7.2.1 of the Credit Agreement is true and correct.
- -------------
Section 4. Acknowledgement and Consent.
---------------------------
The Company is a party to the Company Collateral Documents, in
each case as amended through the date hereof, pursuant to which the Company
has created Liens in favor of the Agent on certain Collateral to secure the
Obligations. The Parent Guarantor is a party to the Parent Collateral
Documents, in each case as amended through the date hereof, pursuant to
which the Parent Guarantor has created Liens in favor of the Agent on
certain Collateral and pledged certain Collateral to the Agent to secure
the Obligations of the Parent Guarantor. Certain Subsidiaries of the
Company are parties to the Subsidiary Guaranty and/or one or more of the
Subsidiary Collateral Documents, in each case as amended through the date
hereof, pursuant to which such Subsidiaries have (i) guarantied the
Obligations and/or (ii) created Liens in favor of the Agent on certain
Collateral. The Company, the Parent Guarantor and such Subsidiaries are
collectively referred to herein as the "Credit
------
Support Parties", and the Company Collateral Documents, the Parent
Collateral Documents, the Subsidiary Guaranty and the Subsidiary Collateral
Documents are collectively referred to herein as the "Credit Support
Documents".
------------------------
Each Credit Support Party hereby acknowledges that it has
reviewed the terms and provisions of the Credit Agreement as amended by
this Amendment and consents to the amendment of the Credit Agreement
effected as of the date hereof pursuant to this Amendment.
Each Credit Support Party acknowledges and agrees that any of the
Credit Support Documents to which it is a party or otherwise bound shall
continue in full force and effect. Each Credit Support Party hereby
confirms that each Credit Support Document to which it is a party or
otherwise bound and all Collateral encumbered thereby will continue to
guaranty or secure, as the case may be, the payment and performance of all
obligations guaranteed or secured thereby, as the case may be.
Each Credit Support Party (other than the Company and the Parent
Guarantor) acknowledges and agrees that (i) notwithstanding the conditions
to effectiveness set forth in this Amendment, such Credit Support Party is
not required by the terms of the Credit Agreement or any other Loan
Document to consent to the amendments to the Credit Agreement effected
pursuant to this Amendment and (ii) nothing in the Credit Agreement, this
Amendment or any other Loan Document shall be deemed to require the consent
of such Credit Support Party to any future amendments to the Credit
Agreement.
Section 5. Miscellaneous.
-------------
A. Reference to and Effect on the Credit Agreement and the
-------------------------------------------------------
Other Loan Documents.
- --------------------
(1) On and after the Twelfth Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the Credit
Agreement, and each reference in the other Loan Documents to the "Credit
Agreement", "thereunder", "thereof" or words of like import referring to
the Credit Agreement shall mean and be a reference to the Amended
Agreement.
(2) Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in full force
and effect and are hereby ratified and confirmed.
B. Applicable Law. THIS AMENDMENT SHALL BE DEEMED TO
--------------
BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF
NEW YORK, WITHOUT GIVING EFFECT TO SUCH LAWS RELATING TO CONFLICTS OF LAWS.
C. Headings. The various headings of this Amendment
--------
are inserted for convenience only and shall not affect the meaning or
interpretation of this Amendment or any provision hereof.
D. Counterparts. This Amendment may be executed by
------------
the parties hereto in several counterparts and by the different parties on
separate counterparts, each of which shall be deemed to be an original and
all of which shall constitute together but one and the same instrument;
signature pages may be detached from multiple separate counterparts and
attached to a single counterpart so that all signature pages are physically
attached to the same document.
E. Severability. Any provision of this Amendment
------------
which is prohibited or unenforceable in any jurisdiction shall, as to such
provision and such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining
provisions of this Amendment or affecting the validity or enforceability of
such provisions in any other jurisdiction.
IN WITNESS WHEREOF, this Amendment has been duly executed and
delivered as of the day and year first above written.
KAISER ALUMINUM CORPORATION KAISER ALUMINUM & CHEMICAL
CORPORATION
By: /s/ Karen A. Twitchell By: /s/ Karen A. Twitchell
Name Printed: Karen A. Twitchell Name Printed: Karen A. Twitchell
Its: Treasurer Its: Treasurer
BANKAMERICA BUSINESS CREDIT, BANKAMERICA BUSINESS CREDIT,
INC., as Agent INC.
By: /s/ Michael J. Jasaitis By: /s/ Michael J. Jasaitis
Name: Michael J. Jasaitis Name: Michael J. Jasaitis
Its: Vice President Its: Vice President
BANK OF AMERICA NATIONAL TRUST THE CIT GROUP/BUSINESS
AND SAVINGS ASSOCIATION CREDIT, INC.
By: /s/James P. Johnson By: /s/ Timothy S. Culver
Name Printed: James P. Johnson Name Printed: Timothy S. Culver
Its: Managing Director Its: Assistant Vice President
CONGRESS FINANCIAL CORPORATION HELLER FINANCIAL, INC.
(WESTERN)
By: /s/ Kristine Metchikian By: /s/ Sara Hopkins
Name Printed: Kristine Metchikian Name Printed: Sara Hopkins
Its: Vice President Its: Vice President
LA SALLE NATIONAL BANK TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: /s/ Douglas C. Colletti By: /s/ Robert L. Heinz
Name Printed: Douglas C. Colletti Name Printed: Robert L. Heinz
Its: First Vice President Its: Senior Vice President
ABN AMRO BANK N.V.
San Francisco International Branch
by: ABN AMRO North America,
Inc., as agent
By: /s/ Bradford H. Leahy
Name Printed: Bradford H. Leahy
Its: Assistant Vice President
By: /s/ Jeffrey A. French
Name Printed: Jeffrey A. French
Its: Group Vice President & Director
ACKNOWLEDGED AND AGREED TO:
AKRON HOLDING CORPORATION KAISER ALUMINUM & CHEMICAL
INVESTMENT, INC.
By: /s/ Karen A. Twitchell By: /s/ Karen A. Twitchell
Name Printed: Karen A. Twitchell Name Printed: Karen A. Twitchell
Its: Treasurer Its: Treasurer
KAISER ALUMINUM PROPERTIES, KAISER ALUMINUM TECHNICAL
INC. SERVICES, INC.
By: /s/ Karen A. Twitchell By: /s/ Karen A. Twitchell
Name Printed: Karen A. Twitchell Name Printed: Karen A. Twitchell
Its: Treasurer Its: Treasurer
OXNARD FORGE DIE COMPANY, INC. KAISER ALUMINIUM
INTERNATIONAL, INC.
By: /s/ Karen A. Twitchell By: /s/ Karen A. Twitchell
Name Printed: Karen A. Twitchell Name Printed: Karen A. Twitchell
Its: Treasurer Its: Treasurer
KAISER ALUMINA AUSTRALIA KAISER FINANCE CORPORATION
CORPORATION
By: /s/ Karen A. Twitchell By: /s/ Karen A. Twitchell
Name Printed: Karen A. Twitchell Name Printed: Karen A. Twitchell
Its: Treasurer Its: Treasurer
ALPART JAMAICA INC. KAISER JAMAICA CORPORATION
By: /s/ Karen A. Twitchell By: /s/ Karen A. Twitchell
Name Printed: Karen A. Twitchell Name Printed: Karen A. Twitchell
Its: Treasurer Its: Treasurer
KAISER BAUXITE COMPANY KAISER EXPORT COMPANY
By: /s/ Karen A. Twitchell By: /s/ Karen A. Twitchell
Name Printed: Karen A. Twitchell Name Printed: Karen A. Twitchell
Its: Treasurer Its: Treasurer
KAISER MICROMILL HOLDINGS, LLC KAISER SIERRA MICROMILLS, LLC
By: /s/ Karen A. Twitchell By: /s/ Karen A. Twitchell
Name Printed: Karen A. Twitchell Name Printed: Karen A. Twitchell
Its: Treasurer Its: Treasurer
KAISER TEXAS SIERRA MICROMILLS, KAISER TEXAS MICROMILL
LLC HOLDINGS, LLC
By: /s/ Karen A. Twitchell By: /s/ Karen A. Twitchell
Name Printed: Karen A. Twitchell Name Printed: Karen A. Twitchell
Its: Treasurer Its: Treasurer
KAISER BELLWOOD CORPORATION
By: /s/ Karen A. Twitchell
Name Printed: Karen A. Twitchell
Its: Treasurer
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
----------------------------------------
This Second Amendment to Employment Agreement is made and entered into
as of December 10, 1997, by and between Kaiser Aluminum Corporation ("KAC")
and Kaiser Aluminum & Chemical Corporation ("KACC"), which are collectively
referred to herein as the "Company", and George T. Haymaker, Jr., referred
to herein as "Haymaker". The Company and Haymaker are collectively
referred to herein as the "Parties".
WHEREAS, the Company and Haymaker entered into an Employment Agreement
on and as of April 1, 1993 (the "Agreement"); and
WHEREAS, the Parties entered into a First Amendment (the "First
Amendment") of said Agreement on and as of November 28, 1995, to clarify
and amend certain provisions of the Agreement; and
WHEREAS, the Parties wish to extend the Term of the Agreement
including the First Amendment and to amend certain other provisions to
recognize events during the passage of time since the First Amendment;
NOW, THEREFORE, the Parties do covenant and agree and amend the
Agreement, as amended by the First Amendment, as follows:
1. Section 2 of the Agreement is amended to read in full
as follows:
2. TERM AND STARTING DATE
This Agreement and its Amendments shall be binding and effective
from and after the date of its execution, April 1, 1993, and shall
continue, subject to earlier termination as hereinafter set forth,
until December 5, 1999, Haymaker's sixty-second birthday.
2. Section 3 of the First Amendment and the Agreement are
amended to read in full as follows:
3. SALARY AND BONUS
Until the last day of January, 1998, Haymaker will be paid a base
salary of $504,000. Effective February 1, 1998, Haymaker will be paid
a base salary of no less than $569,000. Haymaker is a continuing
participant in the Kaiser Executive Compensation Programs which went
into effect in 1995, 1996, and 1997, and will participate in future
approved Executive Compensation Programs going into effect in 1998 and
1999.
The Total Annual Incentive Target for Haymaker's participation in
the Executive Compensation Programs was set at $1,035,000 as of July
30, 1997, and will be increased to $1,315,000 at January 31, 1998, as
previously approved by the Compensation Committee. The Total Annual
Incentive Target includes both a Short Term Incentive Target for the
applicable year and the Long Term Incentive Target for a Performance
Period covering three years including the applicable year.
Haymaker's Short Term Incentive Target for 1997 is $311,000, and
his Long Term Incentive Targets for the years ending 1997, 1998, and
1999 are: $717,100; $818,500; and $850,000, respectively, such amounts
being equal to the Long Term Incentive Targets approved at the
beginning of each Long Term Incentive Performance Period adjusted for
the amounts and effective dates of subsequent increases approved by
the Compensation Committee.
Haymaker's Short Term Incentive Target for 1998 and 1999 will be
$387,900 and $395,000, giving effect to the levels previously approved
by the Compensation Committee, unless subsequently increased by the
Committee; and his Long Term Incentive Targets for the portions of the
three year Long Term Incentive Performance Periods ending in the years
2000 and 2001 in which he participates will be $914,600 and $920,000,
respectively, also giving effect to the amounts previously approved by
the Compensation Committee, unless subsequently increased by the
Committee.
3. Section 10(d) of the Agreement is amended to read in
full as follows:
d. By the Company Without Cause
This Agreement may also be terminated by the Company without
cause upon 30 days advance written notice to Haymaker. However, if
the Company terminates this Agreement without cause prior to the full
vesting of the SERB, the initial grant of options to Haymaker made in
accordance with this Employment Agreement shall fully vest and become
exercisable commencing at the time that the notice of termination is
provided to Haymaker. KACC shall also pay to Haymaker a severance
payment equal to two times the amount of Haymaker's base annual salary
at the time of the notice of termination.
IN WITNESS WHEREOF, the Parties have signed this Second Amendment to
Employment Agreement as of the date first above written.
Haymaker The Company
- -------- ------------
Kaiser Aluminum Corporation
/s/ George T. Haymaker, Jr.
- --------------------------
George T. Haymaker, Jr. By /s/ E. Bruce Butler
-----------------------------
E. Bruce Butler
Vice President and General Counsel
Kaiser Aluminum & Chemical
Corporation
By: /s/ E. Bruce Butler
-----------------------------
E. Bruce Butler
Vice President and General Counsel
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of the Company for the twelve months ended
December 31, 1997, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000054291
<NAME> KAISER ALUMINUM & CHEMICAL CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 345
<ALLOWANCES> 6
<INVENTORY> 568
<CURRENT-ASSETS> 1,051
<PP&E> 1,172
<DEPRECIATION> 91
<TOTAL-ASSETS> 3,017
<CURRENT-LIABILITIES> 594
<BONDS> 963
28
2
<COMMON> 15
<OTHER-SE> 105
<TOTAL-LIABILITY-AND-EQUITY> 3,017
<SALES> 2,373
<TOTAL-REVENUES> 2,373
<CGS> 1,963
<TOTAL-COSTS> 1,963
<OTHER-EXPENSES> 221
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> 111
<INCOME-PRETAX> 62
<INCOME-TAX> 9
<INCOME-CONTINUING> 52
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52
<EPS-PRIMARY> .00
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</TABLE>
