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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
Commission file number 1-9447
KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3030279
(State of incorporation) (I.R.S. Employer
Identification No.)
5847 SAN FELIPE, SUITE 2600, HOUSTON, TEXAS 77057-3010
(Address of principal executive offices) (Zip Code)
(713) 267-3777
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
------ --------
At August 6, 1999, the registrant had 79,404,553 shares
of Common Stock outstanding.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 26.2 $ 98.3
Receivables 271.7 282.7
Inventories 524.7 543.5
Prepaid expenses and other current assets 132.8 105.5
------------------------------
Total current assets 955.4 1,030.0
Investments in and advances to unconsolidated affiliates 101.2 128.3
Property, plant, and equipment - net 1,088.0 1,108.7
Deferred income taxes 405.9 377.9
Other assets 495.7 346.0
------------------------------
Total $ 3,046.2 $ 2,990.9
==============================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 148.1 $ 173.3
Accrued interest 37.3 37.3
Accrued salaries, wages, and related expenses 62.4 73.8
Accrued postretirement medical benefit obligation -
current portion 48.2 48.2
Other accrued liabilities 167.3 148.3
Payable to affiliates 79.7 77.1
Long-term debt - current portion .4 .4
------------------------------
Total current liabilities 543.4 558.4
Long-term liabilities 670.0 532.9
Accrued postretirement medical benefit obligation 687.5 694.3
Long-term debt 962.3 962.6
Minority interests 116.4 123.5
Commitments and contingencies
Stockholders' equity:
Common stock .8 .8
Additional capital 536.7 535.4
Accumulated deficit (470.9) (417.0)
------------------------------
Total stockholders' equity 66.6 119.2
------------------------------
Total $ 3,046.2 $ 2,990.9
==============================
</TABLE>
The accompanying notes to interim consolidated financial
statements are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited)
(In millions of dollars, except share amounts)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net sales $ 525.0 $ 614.8 $ 1,004.4 $ 1,211.8
----------------------------- -----------------------------
Costs and expenses:
Cost of products sold 473.9 503.5 933.8 1,000.6
Depreciation and amortization 24.1 24.9 48.5 50.3
Selling, administrative, research and
development, and general 26.3 31.1 54.4 60.8
----------------------------- -----------------------------
Total costs and expenses 524.3 559.5 1,036.7 1,111.7
----------------------------- -----------------------------
Operating income (loss) .7 55.3 (32.3) 100.1
Other income (expense):
Interest expense (27.4) (26.9) (55.1) (54.9)
Other - net 1.2 (2.7) 2.5 (1.9)
----------------------------- -----------------------------
Income (loss) before income taxes and minority
interests (25.5) 25.7 (84.9) 43.3
Benefit (provision) for income taxes 8.6 (9.0) 28.8 (15.2)
Minority interests 1.2 - 2.2 .6
----------------------------- -----------------------------
Net income (loss) $ (15.7) $ 16.7 $ (53.9) $ 28.7
============================= =============================
Earnings (loss) per share:
Basic $ (.20) $ .21 $ (.68) $ .36
Diluted $ (.20) $ .21 $ (.68) $ .36
Weighted average shares outstanding (000):
Basic 79,377 79,145 79,266 79,077
Diluted 79,377 79,234 79,266 79,160
</TABLE>
The accompanying notes to interim consolidated financial
statements are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In millions of dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (53.9) $ 28.7
Adjustments to reconcile net income (loss) to net
cash (used) provided by operating activities:
Depreciation and amortization (including
deferred financing costs of $2.1 and $2.0) 50.6 52.3
Gain on sale of interest in AKW joint venture (50.5) -
Equity in (income) loss of unconsolidated
affiliates, net of distributions (4.2) 1.5
Minority interests (2.2) (.6)
Decrease in receivables 11.0 45.5
Decrease in inventories 18.8 61.5
(Increase) decrease in prepaid expenses and
other current assets (37.4) 11.0
Decrease in accounts payable and accrued
interest (25.2) (19.8)
Increase (decrease) in payable to affiliates
and other accrued liabilities 4.3 (31.5)
(Decrease) increase in accrued and deferred
income taxes (36.5) 5.3
Increase (decrease) in net long-term assets and
liabilities 11.1 (9.6)
Other 1.3 7.4
------------------------------
Net cash (used) provided by operating (112.8) 151.7
activities ------------------------------
Cash flows from investing activities:
Proceeds from sale of interest in AKW joint venture 70.4 -
Capital expenditures (30.3) (36.7)
Other .2 (3.1)
------------------------------
Net cash provided (used) by investing
activities 40.3 (39.8)
------------------------------
Cash flows from financing activities:
Borrowings under revolving credit facility, net - -
Repayments of long-term debt (.3) (7.0)
Capital stock issued 1.3 -
Decrease in restricted cash, net .8 1.2
Redemption of minority interests' preference stock (1.4) (8.5)
------------------------------
Net cash provided (used) by financing
activities .4 (14.3)
------------------------------
Net (decrease) increase in cash and cash equivalents
during the period (72.1) 97.6
Cash and cash equivalents at beginning of period 98.3 15.8
------------------------------
Cash and cash equivalents at end of period $ 26.2 $ 113.4
==============================
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 53.0 $ 53.2
Income taxes paid 8.8 8.9
</TABLE>
The accompanying notes to interim consolidated financial
statements are an integral part of these statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except prices and per share amounts)
1. GENERAL
Kaiser Aluminum Corporation (the "Company") is a
subsidiary of MAXXAM Inc. ("MAXXAM"). MAXXAM and one of its
wholly owned subsidiaries together own approximately 63% of the
Company's Common Stock with the remaining approximately 37%
publicly held. The Company operates through its subsidiary,
Kaiser Aluminum & Chemical Corporation ("KACC").
The foregoing unaudited interim consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article
10 of Regulation S-X as promulgated by the Securities and
Exchange Commission. Accordingly, these financial statements
do not include all of the disclosures required by generally
accepted accounting principles for complete financial
statements. These unaudited interim consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements for the year ended December
31, 1998. In the opinion of management, the unaudited interim
consolidated financial statements furnished herein include all
adjustments, all of which are of a normal recurring nature,
necessary for a fair statement of the results for the interim
periods presented.
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 operations.
Operating results for the quarter and six-month periods
ended June 30, 1999, are not necessarily indicative of the
results that may be expected for the year ending December 31,
1999.
Certain reclassifications of prior-year information were
made to conform to the current presentation.
INCIDENT AT GRAMERCY FACILITY
On July 5, 1999, KACC's Gramercy, Louisiana alumina
refinery was extensively damaged by an explosion in the
digestion area of the plant. Approximately 24 employees were
injured in the incident, several of them severely. The cause of
the incident is under investigation by KACC and governmental
agencies.
As previously announced, KACC expects that production at
the plant will be curtailed for many months. KACC has
declared force majeure with respect to certain of its sales
and purchase contracts, but continues to work with customers
to assist them in securing alternative sources of alumina.
More than 30 lawsuits have been filed against KACC
alleging, among other things, property damage and personal
injury as a result of the incident. In addition, a claim for
alleged business interruption losses has been made by a
neighboring business. The aggregate amount of damages sought
in the lawsuits and other claims cannot be determined at this
time.
KACC has significant amounts of property damage, business
interruption, liability and workers compensation insurance
coverage relating to the Gramercy incident. Deductibles and
self-retention provisions under the insurance coverage for the
Gramercy incident total $5.0.
The incident will cause KACC to incur incremental costs
for clean-up and other activities in the second half of 1999
and will cause the affected operations to incur certain operating
losses until production can be restored. Further, depending
on the outcome of the ongoing investigations by various
regulatory agencies, KACC could also be subject to certain
fines or penalties, which may not be covered by insurance.
However, based on what is known to date, the Company currently
believes that the financial impact of this incident (in excess
of the deductibles and self-retention provisions) will be
largely offset by insurance coverage.
The accompanying consolidated financial statements as of
and for the periods ended June 30, 1999, do not include any
provisions for the Gramercy incident.
LABOR RELATED COSTS
The Company is currently operating five of its U.S.
facilities with salaried employees and other workers as a
result of the September 30, 1998, strike by the United
Steelworkers of America ("USWA") and the subsequent "lock-out"
by the Company in January 1999. However, the Company has
continued to accrue certain benefits for the USWA members
during the period of the strike and subsequent lock-out. For
purposes of computing the benefit-related costs and liabilities
to be reflected in the accompanying interim consolidated
financial statements, the Company has based its accruals on
the terms of the previously existing (expired) USWA contract.
Any differences between any amounts accrued and any amounts
ultimately agreed to during the collective bargaining process
will be reflected in future results during the term of any new
contract.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standard Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 requires companies to
recognize all derivative instruments as assets or liabilities
in the balance sheet and to measure those instruments at fair
value. Under SFAS No. 133, the Company will be required to
"mark-to-market" its hedging positions at each period-end in
advance of recording the physical transactions to which the
hedges relate. Changes in the fair value of the Company's
open hedging positions will be reflected as an increase or
reduction in stockholders' equity through comprehensive income.
The impact of the changes in fair value of the Company's
hedging positions will reverse out of comprehensive income (net
of any fluctuations in other "open" positions) and will be
reflected in traditional net income when the subsequent
physical transactions occur. Currently, the dollar amount of
the Company's comprehensive income adjustments is not
significant so there is not a significant difference between
"traditional" net income and comprehensive income. However,
differences between comprehensive income and traditional net
income may become significant in future periods as SFAS No.
133 will result in fluctuations in comprehensive income and
stockholders' equity in periods of price volatility, despite
the fact that the Company's cash flow and earnings will be
"fixed" to the extent hedged. This result is contrary to the
intent of the Company's hedging program, which is to "lock-in"
a price (or range of prices) for products sold/used so that
earnings and cash flows are subject to reduced risk of
volatility.
Adoption of SFAS No. 133 was initially required on or
before January 1, 2000. However, in June 1999, the FASB
issued SFAS No. 137 which delayed the required implementation
date of SFAS No. 133 to no later than January 1, 2001. The
Company is currently evaluating how and when to implement SFAS
No. 133.
2. EARNINGS (LOSS) PER SHARE
Basic - Basic earnings (loss) per share is computed by
dividing net income (loss) by the weighted average number of
shares of Common Stock outstanding during the period including
the weighted average impact of the shares of Common Stock
issued during the year from the date(s) of issuance.
Diluted - The impact of outstanding stock options was excluded
from the computation of Diluted loss per share for the quarter
and six-month periods ended June 30, 1999, as its effect would
have been antidilutive. Diluted earnings per share for the
quarter and six-month periods ended June 30, 1998, include the
dilutive effect of outstanding stock options of 89,000 and
83,000 shares, respectively.
3. INVENTORIES
The classification of inventories is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------------------
<S> <C> <C>
Finished fabricated aluminum products $ 118.2 $ 112.4
Primary aluminum and work in process 171.6 205.6
Bauxite and alumina 118.9 109.5
Operating supplies and repair and maintenance parts 116.0 116.0
------------------------------
Total $ 524.7 $ 543.5
==============================
</TABLE>
Substantially all product inventories are stated at last-in,
first-out (LIFO) cost, not in excess of market.
Replacement cost is not in excess of LIFO cost.
4. CONTINGENCIES
ENVIRONMENTAL CONTINGENCIES
The Company and KACC are subject to a number of
environmental laws, to fines or penalties assessed for alleged
breaches of such environmental laws, and to claims and
litigation based upon such laws. KACC currently is subject to
a number of claims under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended
by the Superfund Amendments Reauthorization Act of 1986
("CERCLA"), and, along with certain other entities, has been
named as a potentially responsible party for remedial costs at
certain third-party sites listed on the National Priorities
List under CERCLA.
Based on the Company's evaluation of these and other
environmental matters, the Company has established
environmental accruals primarily related to potential solid
waste disposal and soil and groundwater remediation matters.
At June 30, 1999, the balance of such accruals, which are
primarily included in Long-term liabilities, was $50.1. 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 actions 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 1999 through 2003 and an aggregate of
approximately $30.0 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. 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. No
assurances can be given that the Company will be successful in
attempts to recover incurred or future costs from insurers or
that the amount of recoveries received will ultimately be
adequate to cover costs incurred.
While uncertainties are inherent in the final outcome of
these environmental matters, and it is presently impossible to
determine the actual costs that ultimately may be incurred,
management currently believes that the resolution of such
uncertainties should not have a material adverse effect on the
Company's consolidated financial position, results of
operations, or liquidity.
ASBESTOS CONTINGENCIES
KACC is a defendant in a number of lawsuits, some of
which involve claims of multiple persons, in which the
plaintiffs allege that certain of their injuries were caused
by, among other things, exposure to asbestos during, and as a
result of, their employment or association with KACC or
exposure to products containing asbestos produced or sold by
KACC. The lawsuits generally relate to products KACC has not
sold for at least 20 years. At June 30, 1999, the number of
such claims pending was approximately 94,700, as compared with
86,400 at December 31, 1998. In 1998, approximately 22,900 of
such claims were received and 13,900 were settled or
dismissed. During the quarter and six-month periods ended
June 30, 1999, approximately 7,000 and 16,300 of such claims
were received and 3,600 and 8,000 of such claims were settled
or dismissed. However, the foregoing claim and settlement
figures as of and for the quarter and six-month periods ended
June 30, 1999, do not reflect the fact that as of June 30,
1999, KACC has reached agreements under which it will settle
approximately 27,000 of the pending asbestos-related claims
over an extended period.
The Company maintains a liability for estimated asbestos-
related costs for claims filed to date and an estimate of
claims expected to be filed over a 10 year period (i.e.,
through 2009). The Company's estimate is based on the
Company's view, at each balance sheet date, of the current and
anticipated number of asbestos-related claims, the timing and
amounts of asbestos-related payments, and the advice of Wharton
Levin Ehrmantraut Klein & Nash, P.A., with respect to the
current state of the law related to asbestos claims. However,
there are inherent uncertainties involved in estimating
asbestos-related costs and the Company's actual costs could
exceed the Company's estimates due to changes in facts and
circumstances after the date of each estimate. Further, while
the Company does not presently believe there is a reasonable
basis for estimating asbestos-related costs beyond 2009 and,
accordingly, no accrual has been recorded for any costs which
may be incurred beyond 2009, there is a reasonable possibility
that such costs may continue beyond 2009, and that such costs
could be substantial. As of June 30, 1999, an estimated
asbestos-related cost accrual of $337.5, before consideration
of insurance recoveries, has been reflected in the accompanying
financial statements primarily in Long-term liabilities. The
Company estimates that annual future cash payments for
asbestos-related costs will be approximately $37.0 to $54.0 for
each of the years 1999 through 2003, and an aggregate of
approximately $123.0 thereafter.
The Company believes that KACC has insurance coverage
available to recover a substantial portion of its asbestos-
related costs. Although the Company has settled asbestos-related
coverage matters with certain of its insurance
carriers, other carriers have not yet agreed to settlements.
The timing and amount of future recoveries from these
insurance carriers will depend on the pace of claims review
and processing by such carriers and on the resolution of any
disputes regarding coverage under such policies. The Company
believes that substantial recoveries from the insurance
carriers are probable. The Company reached this conclusion
after considering its prior insurance-related recoveries in
respect of asbestos-related claims; existing insurance
policies; and the advice of Heller Ehrman White & McAuliffe
with respect to applicable insurance coverage law relating to
the terms and conditions of those policies. Accordingly, an
estimated aggregate insurance recovery of $272.5, determined on
the same basis as the asbestos-related cost accrual, is
recorded primarily in Other assets at June 30, 1999.
Management continues to monitor claims activity, the
status of lawsuits (including settlement initiatives),
legislative developments, and costs incurred in order to
ascertain whether an adjustment to the existing accruals should
be made to the extent that historical experience may differ
significantly from the Company's underlying assumptions. In the
second quarter of 1999, this process resulted in the Company
reflecting a $38.0 charge (included in Other income(expense))
for asbestos-related claims, net of expected insurance
recoveries, based on recent cost and other trends experienced
by KACC and other companies. While uncertainties are inherent
in the final outcome of these asbestos matters and it is
presently impossible to determine the actual costs that
ultimately may be incurred and insurance recoveries that will
be received, management currently believes that, based on the
factors discussed in the preceding paragraphs, the resolution
of asbestos-related uncertainties and the incurrence of
asbestos-related costs net of related insurance recoveries
should not have a material adverse effect on the Company's
consolidated financial position or liquidity. However, as the
Company's estimates are periodically re-evaluated, additional
charges may be necessary and such charges could be material to
the results of the period in which they are recorded.
LABOR MATTERS
In connection with the USWA strike and subsequent lock-out
by KACC, certain allegations of unfair labor practices ("ULPs")
were filed with the National Labor Relations Board ("NLRB") by
the USWA. As previously disclosed, KACC responded to all such
allegations and believed that they were without merit. In
July 1999, all material charges were dismissed by the NLRB's
Regional Director. The USWA has announced its intention to
appeal the dismissal. If the allegations are sustained on
appeal, KACC could be required to make locked-out employees
whole for back wages from the date of the lock-out in January
1999. While uncertainties are inherent in the final outcome
of such matters, the Company believes that the resolution of
the alleged ULPs should not result in a material adverse
effect on the Company's consolidated financial position,
results of operations, or liquidity.
OTHER CONTINGENCIES
The Company or KACC is involved in various other claims,
lawsuits, and other proceedings relating to a wide variety of
matters. While uncertainties are inherent in the final
outcome of such matters, and it is presently impossible to
determine the actual costs that ultimately may be incurred,
management currently believes that the resolution of such
uncertainties and the incurrence of such costs should not have
a material adverse effect on the Company's consolidated
financial position, results of operations, or liquidity.
See Note 9 of Notes to Consolidated Financial Statements
for the year ended December 31, 1998, for additional
information on commitments and contingencies.
5. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING
PROGRAMS
At June 30, 1999, the net unrealized loss on KACC's
position in aluminum forward sales and option contracts
(excluding the impact of those contracts discussed below which
have been marked to market), energy forward purchase and
option contracts, and forward foreign exchange contracts was
approximately $15.5 (based on comparisons to applicable
quarter-end published market prices). As KACC's hedging
activities are generally designed to lock-in a specified price
or range of prices, gains or losses on the derivative
contracts utilized in these hedging activities will generally
be offset by losses or gains, respectively, on the
transactions being hedged.
ALUMINA AND ALUMINUM
The Company's earnings are sensitive to changes in the
prices of alumina, primary aluminum and fabricated aluminum
products, and also depend to a significant degree upon the
volume and mix of all products sold. Primary aluminum prices
have historically been subject to significant cyclical price
fluctuations. Alumina prices as well as fabricated aluminum
product prices (which vary considerably among products) are
significantly influenced by changes in the price of primary
aluminum but generally lag behind primary aluminum price
changes by up to three months. Since 1993, the Average Midwest
United States transaction price for primary aluminum has ranged
from approximately $.50 to $1.00 per pound.
From time to time in the ordinary course of business,
KACC enters into hedging transactions to provide price risk
management in respect of the net exposure of earnings and cash
flows resulting from (i) anticipated sales of alumina, primary
aluminum and fabricated aluminum products, less (ii) expected
purchases of certain items, such as aluminum scrap, rolling
ingot, and bauxite, whose prices fluctuate with the price of
primary aluminum. Forward sales contracts are used by KACC to
effectively fix the price that KACC will receive for its
shipments. KACC also uses option contracts (i) to establish a
minimum price for its product shipments, (ii) to establish a
"collar" or range of prices for KACC's anticipated sales,
and/or (iii) to permit KACC to realize possible upside price
movements. As of June 30, 1999, KACC had sold forward, at
fixed prices, approximately 12,000 tons* of primary aluminum
with respect to 1999. As of June 30, 1999, KACC had also
entered into option contracts that established a price range
----------------------
* All references to tons in this report refer to metric tons
of 2,204.6 pounds.
for an additional 130,000, 353,000 and 124,000 tons of
primary aluminum for 1999, 2000 and 2001, respectively.
Additionally, through June 30, 1999, KACC had entered a
series of transactions with a counterparty that will provide
KACC with a premium over the forward market prices at the date
of the transaction for 4,000 tons of primary aluminum per
month during the period July 1999 through June 2001. KACC
also contracted with the counterparty to receive certain fixed
prices (also above the forward market prices at the date of
the transaction) on 8,000 tons of primary aluminum per month
over a three year period commencing October 2001, unless
market prices during certain periods decline below a stipulated
"floor" price, in which case, the fixed price sales portion of
the transactions terminate. The price at which the October
2001 and later transactions terminate is well below current
market prices. While the Company believes that the October
2001 and later transactions are consistent with its stated
hedging objectives, these positions do not qualify for
treatment as a "hedge" under current accounting guidelines.
Accordingly, these positions are "marked to market" each
period. For the quarter and six-month periods ended June 30,
1999, the Company recorded mark-to-market charges of $13.5 and
$14.1 in Other income (expense) associated with the above
transactions.
As of June 30, 1999, KACC had sold forward virtually all
of the alumina available to it in excess of its projected
internal smelting requirements for 1999, 2000 and 2001 at
prices indexed to future prices of primary aluminum.
ENERGY
KACC is exposed to energy price risk from fluctuating
prices for fuel oil, diesel fuel and natural gas consumed in
the production process. Accordingly, KACC from time to time
in the ordinary course of business enters into hedging
transactions with major suppliers of energy and energy related
financial instruments. As of June 30, 1999, KACC had a
combination of fixed price purchase and option contracts for
the purchase of approximately 27,000 MMBtu of natural gas per
day during the remainder of 1999. As of June 30, 1999, KACC
also held a combination of fixed price purchase and option
contracts for an average of 249,000 and 232,000 barrels per
month of fuel oil and diesel fuel for 1999 and 2000,
respectively.
FOREIGN CURRENCY
KACC enters into forward exchange contracts to hedge
material cash commitments to foreign subsidiaries or
affiliates. At June 30, 1999, KACC had net forward foreign
exchange contracts totaling approximately $138.9 for the
purchase of 208.7 Australian dollars from July 1999 through
May 2001, in respect of its Australian dollar-denominated
commitments for the remainder of 1999 through May 2001.
See Note 1 of the Notes to Consolidated Financial
Statements for the year ended December 31, 1998, for
additional information concerning the use of derivative
financial instruments.
6. SIGNIFICANT ACQUISITIONS AND DISPOSITIONS
In February 1999, KACC, through a subsidiary, completed
the acquisition of its joint venture partner's 45% interest in
Kaiser LaRoche Hydrate Partners ("KLHP") for a cash purchase
price of approximately $10.0. As KACC already owned 55% of
KLHP, the results of KLHP were already included in the
Company's consolidated financial statements.
On April 1, 1999, KACC completed the previously announced
sale of its 50% interest in AKW L.P. ("AKW"), an aluminum
wheels joint venture, to its partner, Accuride Corporation for
$70.4. The sale resulted in the Company recognizing a net
pre-tax gain of $50.5 in the second quarter of 1999. The
Company's equity in income of AKW for the quarter ended March
31, 1999, was $2.5. The Company's equity in income of AKW for
the quarter and six-month periods ended June 30, 1998, was
$2.3 and $3.4, respectively.
7. INTERIM OPERATING SEGMENT INFORMATION
The Company uses a portion of its bauxite, alumina and
primary aluminum production for additional processing at its
downstream facilities. Transfers between business units are
made at estimated market prices. The accounting policies of
the segments are the same as those described in Note 1 of
Notes to Consolidated Financial Statements for the year ended
December 31, 1998. Business unit results are evaluated
internally by management before any allocation of corporate
overhead and without any charge for income taxes or interest
expense. See Note 11 of Notes to Consolidated Financial
Statements for the year ended December 31, 1998, for
additional information regarding the Company's segments.
Financial information by operating segment for the quarters and
six months ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
-------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net Sales:
Bauxite and Alumina:
Net sales to unaffiliated customers $ 110.8 $ 136.9 $ 200.5 $ 230.2
Intersegment sales 29.6 36.1 52.6 78.3
------------------------------ ------------------------------
140.4 173.0 253.1 308.5
------------------------------ ------------------------------
Primary Aluminum:
Net sales to unaffiliated customers 100.5 105.8 189.6 232.0
Intersegment sales 63.1 61.0 112.2 127.8
------------------------------ ------------------------------
163.6 166.8 301.8 359.8
------------------------------ ------------------------------
Flat-Rolled Products 155.3 197.0 303.6 391.3
Engineered Products 137.8 156.0 271.3 318.6
Minority interests 20.6 19.2 39.4 39.8
Eliminations (92.7) (97.2) (164.8) (206.2)
------------------------------ ------------------------------
$ 525.0 $ 614.8 $ 1,004.4 $ 1,211.8
============================== ==============================
Operating income (loss):
Bauxite and Alumina $ (3.5) $ 17.8 $ (11.3) $ 29.4
Primary Aluminum (1) 1.6 22.1 (20.5) 42.2
Flat-Rolled Products 7.5 23.2 14.9 39.5
Engineered Products 10.7 15.2 17.6 31.5
Micromill (3.0) (4.7) (6.3) (9.9)
Eliminations 1.9 (.7) 5.5 2.4
Corporate and Other (14.5) (17.6) (32.2) (35.0)
------------------------------ ------------------------------
$ .7 $ 55.3 $ (32.3) $ 100.1
============================== ==============================
Depreciation and amortization:
Bauxite and Alumina $ 8.9 $ 9.0 $ 17.8 $ 18.6
Primary Aluminum 7.0 7.5 14.3 15.0
Flat-Rolled Products 4.1 4.0 8.2 8.1
Engineered Products 2.6 2.7 5.3 5.4
Micromill .7 .8 1.4 1.5
Corporate and Other .8 .9 1.5 1.7
------------------------------ ------------------------------
$ 24.1 $ 24.9 $ 48.5 $ 50.3
============================== ==============================
</TABLE>
(1) Includes potline preparation and restart costs of $2.5 and
$9.6 for the quarter and six-month periods ended June 30,
1999, respectively.
Excluding the February 1999 purchase of the remaining
interest in KLHP, which affected the Bauxite and Alumina
segment, and the April 1999 sale of KACC's interest in AKW,
which affected the Engineered Products segment, there were no
material changes in segment assets since December 31, 1998.
Capital expenditures made during the first half of 1999 (other
than the acquisition of the interest in KLHP) were incurred on
a relatively ratable basis among KACC's four primary operating
business segments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
--------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
------------------------------------
This section should be read in conjunction with the
response to Item 1, Part I, of this Report.
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, for
example, "Recent Events and Developments," "Results of
Operations," and "Liquidity and Capital Resources"). 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, year 2000 technology
issues, new or modified statutory or regulatory requirements,
and changing prices and market conditions. This section and
the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, each 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.
RECENT EVENTS AND DEVELOPMENTS
INCIDENT AT GRAMERCY FACILITY
On July 5, 1999, KACC's Gramercy, Louisiana alumina
refinery was extensively damaged by an explosion in the
digestion area of the plant. Approximately 24 employees were
injured in the incident, several of them severely.
The cause of the incident is under investigation by KACC
and governmental agencies. KACC's continuing investigation
suggests that the incident was caused by a power distribution
interruption involving the plant's on-site power house that caused
process flow pumps to cease operating.
KACC has also identified certain other conditions that
were present at the time of the incident and continues to
investigate these and other matters.
As previously announced, KACC expects that production at
the plant will be curtailed for many months. KACC has
declared force majeure with respect to certain of its sales
and purchase contracts, but continues to work with customers
to assist them in securing alternative sources of alumina.
More than 30 lawsuits have been filed against KACC
alleging, among other things, property damage and personal
injury as a result of the incident. In addition, a claim for
alleged business interruption losses has been made by a
neighboring business. The aggregate amount of damages sought
in the lawsuits and other claims cannot be determined at this
time.
KACC has significant amounts of property damage, business
interruption, liability and workers compensation insurance
coverage relating to the Gramercy incident. Deductibles and
self-retention provisions under the insurance coverage for the
Gramercy incident total $5.0 million.
The incident will cause KACC to incur incremental costs
for clean-up and other activities in the second half of 1999
and will cause the affected operations to incur certain operating
losses until production can be restored. Further, depending
on the outcome of the ongoing investigations by various
regulatory agencies, KACC could also be subject to certain
fines or penalties, which may not be covered by insurance.
However, based on what is known to date, the Company currently
believes that the financial impact of this incident (in excess
of the deductibles and self-retention provisions) will be
largely offset by insurance coverage.
The accompanying consolidated financial statements as of
and for the periods ended June 30, 1999, do not include any
provisions for the Gramercy incident.
KACC has announced that its intention is to rebuild the
Gramercy facility assuming that it is able to reach acceptable
agreements with the various stakeholders to ensure the plant's
competitive future. KACC hopes to have the plant operating
at a reduced production level in mid-2000 and to have the plant
completely operational by the end of 2000. However, there can be
no assurance that the Gramercy facility will be made operational
on this schedule.
LABOR MATTERS
Substantially all of KACC's hourly workforce at its
Gramercy, Louisiana, alumina refinery, Mead and Tacoma,
Washington, aluminum smelters, Trentwood, Washington, rolling
mill, and Newark, Ohio, extrusion facility were covered by a
master labor agreement with the United Steelworkers of America
(the "USWA") which expired on September 30, 1998. The parties
did not reach an agreement prior to the expiration of the
master agreement and the USWA chose to strike. As previously
announced, in January 1999 KACC declined an offer by the USWA
to have the striking workers return to work at the five plants
without a new agreement. KACC imposed a lock-out to support
its bargaining position and continues to operate the plants
with salaried employees and other workers as it has since the
strike began.
As a result of the USWA strike, KACC temporarily
curtailed three out of a total of eleven potlines at its Mead
and Tacoma, Washington, aluminum smelters at September 30, 1998
(representing approximately 70,000 tons per year of production
capacity out of a total combined production capacity of
273,000 tons per year at the facilities.) The first of the two
Mead potline restarts began in March 1999 and was completed
during the second quarter of 1999. Restart activities on the
second of the two Mead potlines commenced during the second
quarter of 1999, and the Company expects the line to be fully
operational before the end of the third quarter of 1999. The
timing for any restart of the Tacoma potline has yet to be
determined and will depend upon market conditions and other
factors.
While the Company initially experienced an adverse strike-
related impact on its profitability, the Company currently
believes that KACC's operations at the affected facilities have
been substantially stabilized and will be able to run at, or
near, full capacity, and that the effect of the incremental
costs associated with operating the affected plants during the
dispute was eliminated or substantially reduced as of January
1999 (excluding the impacts of the restart costs discussed
above and the effect of market factors such as the continued
market-related curtailment at the Tacoma smelter). However, no
assurances can be given that KACC's efforts to run the plants
on a sustained basis, without a significant business
interruption or material adverse impact on the Company's
operating results, will be successful.
KACC and the USWA continue to communicate. A series of
bargaining sessions are scheduled for August 1999. The
objective of KACC has been, and continues to be, to negotiate
a fair labor contract that is consistent with its business
strategy and the commercial realities of the marketplace.
STRATEGIC INITIATIVES
The Company has previously disclosed that it believes it
had met, and exceeded, its goal of achieving $120.0 million of
pre-tax cost reductions and other profit improvements,
independent of metal price changes, measured against 1996
results prior to the end of the third quarter of 1998, when
the impact of such items as smelter operating levels, the USWA
strike and changes in foreign currency exchange rates are
excluded from the analysis. The Company remains committed to
sustaining the full $120.0 million improvement and to
generating additional profit improvements in future years;
however, no assurances can be given that the Company will be
successful in this regard.
In addition to working to improve the performance of the
Company's existing assets, the Company has devoted significant
efforts analyzing its existing asset portfolio with the intent
of focusing its efforts and capital in sectors of the industry
that are considered most attractive, and in which the Company
believes it is well positioned to capture value. The initial
steps of this process resulted in the June 1997 acquisition of
the Bellwood extrusion facility, the May 1997 formation of AKW
L.P. ("AKW"), the rationalization of certain of the Company's
Engineered Products operations, the Company's investment to
expand its production capacity for heat treat flat-rolled
products at its Trentwood, Washington, rolling mill, and the
Company's fourth quarter 1998 decision to seek a strategic
partner for further development and deployment of KACC's
Micromill(TM) technology. This process has continued in 1999.
In February 1999, KACC completed the acquisition of the
remaining 45% interest in Kaiser LaRoche Hydrate Partners
("KLHP"), an alumina marketing venture, from its joint venture
partner for a cash purchase price of approximately $10.0
million. Additionally, in April 1999, KACC completed the sale
of its interest in AKW L.P., an aluminum wheel joint venture,
to its partner, Accuride Corporation for $70.4 million. The
cash sale represents a continuation of the Company's strategy
to focus its resources and efforts in industry segments that
are considered most attractive and in which it believes it is
well positioned to capture value.
Another area of emphasis has been a continuing focus on
managing the Company's legacy liabilities, including the
Company's active pursuit of claims in respect of insurance
coverage for certain incurred and future environmental costs,
as evidenced by the Company's fourth quarter 1998, receipt of
recoveries totaling approximately $35.0 million related to
current and future claims against certain of its insurers.
See Note 9 of Notes to Consolidated Financial Statements for
the year ended December 31, 1998, for additional information
regarding insurance recoveries.
Additional portfolio analysis and initiatives are
continuing.
VALCO OPERATING LEVEL
The Company's 90%-owned Volta Aluminium Company Limited
("Valco") smelter in Ghana operated only one of its five
potlines during most of 1998. Each of Valco's potlines is
capable of producing approximately 40,000 tons per year of
primary aluminum. Valco earned compensation in 1998 (in the
form of energy credits to be utilized over the last half of
1998 and during 1999) from the Volta River Authority ("VRA")
in lieu of the power necessary to run two of the potlines that
were curtailed during 1998. The compensation substantially
mitigated the financial impact in 1998 of the curtailment of
such lines. However, Valco did not receive any compensation
from the VRA for one additional potline which was curtailed in
January 1998. Valco currently expects to operate an average
of three lines during 1999, an operating rate that it reached
during the second quarter of 1999.
Valco has notified the VRA that it believes it had the
contractual rights at the beginning of 1998 and 1999 to
sufficient energy to run four and one-half potlines for the
balance of both years. Valco continues to seek compensation
from the VRA with respect to the 1998 and 1999 reductions in
its power allocation. Valco and the VRA also are in
continuing discussions concerning other matters, including
steps that might be taken to reduce the likelihood of power
curtailments in the future. No assurances can be given as to
the success of these discussions.
RESULTS OF OPERATIONS
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
downstream facilities. Intersegment transfers are valued at
estimated market prices. The following table provides selected
operational and financial information on a consolidated basis
with respect to the Company for the quarters ended June 30,
1999 and 1998. The following data should be read in
conjunction with the Company's interim consolidated financial
statements and the notes thereto, contained elsewhere herein.
See Note 11 of Notes to Consolidated Financial Statements for
the year ended December 31, 1998, for further information
regarding segments.
Interim results are not necessarily indicative of those
for a full year.
SELECTED OPERATIONAL AND FINANCIAL INFORMATION
(Unaudited)
(In millions of dollars, except shipments and prices)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Shipments: (000 tons)
Alumina
Third Party 611.4 652.5 1,098.4 1,077.1
Intersegment 189.3 196.6 339.6 412.4
----------------------------- -----------------------------
Total Alumina 800.7 849.1 1,438.0 1,489.5
----------------------------- -----------------------------
Primary Aluminum
Third Party 69.0 68.3 131.9 148.8
Intersegment 46.3 42.5 85.8 86.1
----------------------------- -----------------------------
Total Primary Aluminum 115.3 110.8 217.7 234.9
----------------------------- -----------------------------
Flat-Rolled Products 59.0 63.6 111.5 123.3
----------------------------- -----------------------------
Engineered Products 43.5 44.2 84.9 90.0
----------------------------- -----------------------------
Average Realized Third Party Sales Price: (1)
Alumina (per ton) $ 170 $ 197 $ 171 $ 198
Primary Aluminum (per pound) $ .66 $ .70 $ .65 $ .71
Net Sales:
Bauxite and Alumina
Third Party (includes net sales of $ 110.8 $ 136.9 $ 200.5 $ 230.2
bauxite)
Intersegment 29.6 36.1 52.6 78.3
----------------------------- -----------------------------
Total Bauxite & Alumina 140.4 173.0 253.1 308.5
----------------------------- -----------------------------
Primary Aluminum
Third Party 100.5 105.8 189.6 232.0
Intersegment 63.1 61.0 112.2 127.8
----------------------------- -----------------------------
Total Primary Aluminum 163.6 166.8 301.8 359.8
----------------------------- -----------------------------
Flat-Rolled Products 155.3 197.0 303.6 391.3
Engineered Products 137.8 156.0 271.3 318.6
Minority Interests 20.6 19.2 39.4 39.8
Eliminations (92.7) (97.2) (164.8) (206.2)
----------------------------- -----------------------------
Total Net Sales $ 525.0 $ 614.8 $ 1,004.4 $ 1,211.8
============================= =============================
Operating Income (Loss):
Bauxite & Alumina $ (3.5) $ 17.8 $ (11.3) $ 29.4
Primary Aluminum (2) 1.6 22.1 (20.5) 42.2
Flat-Rolled Products 7.5 23.2 14.9 39.5
Engineered Products 10.7 15.2 17.6 31.5
Micromill(TM) (3.0) (4.7) (6.3) (9.9)
Eliminations 1.9 (.7) 5.5 2.4
Corporate (14.5) (17.6) (32.2) (35.0)
----------------------------- -----------------------------
Total Operating Income (Loss) $ .7 $ 55.3 $ (32.3) $ 100.1
============================= =============================
Net Income (Loss) $ (15.7) $ 16.7 $ (53.9) $ 28.7
============================= =============================
Capital Expenditures $ 13.8 $ 23.0 $ 30.3 $ 36.7
============================= =============================
</TABLE>
(1) Average realized prices for the Company's Flat-rolled
products and Engineered products segments are not
presented as such prices are subject to fluctuations due
to changes in product mix. Average realized third party
sales prices for alumina and primary aluminum include the
impact of hedging activities.
(2) Results for the Primary aluminum segment include potline
restart costs of $2.5 and $9.6 for the quarter and six-month
periods ended June 30, 1999, respectively.
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 KACC's hedging
strategies. Primary aluminum prices have historically been
subject to significant cyclical price fluctuations. See Note
5 of Notes to Interim Consolidated Financial Statements for a
discussion of KACC's hedging activities.
During 1998, the Average Midwest United States transaction
price ("AMT Price") per pound of primary aluminum experienced
a steady decline during the year, beginning the year in the
$.70 to $.75 range and ending the year in the low $.60 range.
During the first quarter of 1999, the AMT Price for primary
aluminum was in the $.57 to $.59 per pound range most of the
quarter, but increased in March 1999 and ended the second
quarter at approximately $.67. The AMT Price for primary
aluminum for the week ended July 30, 1999, was approximately
$.68 per pound.
QUARTER AND SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO
QUARTER AND SIX MONTHS ENDED JUNE 30, 1998
SUMMARY
The Company reported a net loss of $15.7 million or $.20
of basic loss per share, for the second quarter of 1999,
compared to a net income of $16.7 million, or $.21 of basic
earnings per share, for the same period of 1998. Results for
the quarter ended June 30, 1999, included a pre-tax gain of
$50.5 million, or $.42 per share, on the sale of the Company's
interests in AKW. The gain was offset by a non-cash pre-tax
charge of $38.0 million, or $.32 per share, for asbestos-related
claims and a pre-tax charge of $13.5 million, or $.11
per share, to reflect a mark-to-market adjustment on certain
primary aluminum hedging transactions. Results for the quarter
ended June 30, 1998, included charges related to additional
litigation reserves of $3.9 million.
For the six-month period ended June 30, 1999, the Company
reported a net loss of $53.9 million, or basic loss per share
of $.68 compared to net income of $28.7 million, or basic
earnings per share of $.36 for the six-month period ended June
30, 1998.
Net sales for the second quarter of 1999 totaled $525.0
million compared to $614.8 million in the second quarter of
1998. Net sales for the six-month period ended June 30, 1999,
were $1,004.4 million compared to $1,211.8 for the first six
months of 1998.
BAUXITE AND ALUMINA
Third party net sales of alumina declined 19% for the
quarter ended June 30, 1999, as compared to the same period in
1998 as a result of a 14% decline in third party average
realized price and a 6% decline in third party alumina
shipments. The decline in 1999 third party average realized
prices resulted from lower first quarter 1999 market prices
for primary aluminum on the Company's alumina sales contracts,
substantially all of which are linked (on a lagged basis of up
to three months) to changes in primary aluminum market prices.
Although market prices for primary aluminum recovered somewhat
during the second quarter of 1999, the beneficial impacts of
these price increases on the segment's operating income will
not be fully realized until the third quarter of 1999. The
impact of lower prices for primary aluminum in 1999 on the
Company's third party average realized prices was partially
offset by allocated net gains from the KACC hedging
activities. The decline in third party shipments of alumina
between the second quarter of 1999 and 1998 resulted primarily
from differences in the timing of shipments rather than any
specific operating trend.
Intersegment net sales for the second quarter of 1999
declined by 22% as compared to the same period in 1998. The
decline in net sales was primarily due to a 14% decline in
intersegment average realized price due to lower primary
aluminum prices as well as a decline in intersegment
shipments, resulting from potline curtailments at the Company's
Washington smelters and Valco.
For the six-month period ended June 30, 1999, third party
net sales of alumina were 12% lower than the comparable period
in 1998 as a 14% decline in average realized prices was only
partially offset by a 2% increase in third party shipments.
The decline in average realized prices during the first six
months of 1999 as compared to 1998 was attributable to the
linkage of third party sales contracts to primary aluminum
prices as more fully described above, offset by allocated net
gains from KACC's hedging activities. The increase in year-over-
year shipments was the result of the timing of individual
shipments, rather than a specific operating trend.
Intersegment net sales for the six-month period ended June
30, 1999, declined by 33% as compared to the same period in
1998. The decline in net sales was primarily due to the 14%
decline in intersegment average realized price due to lower
primary aluminum prices as well as reduced intersegment
shipments, resulting from potline curtailments at the Company's
Washington smelters and Valco.
Segment operating income for the quarter and six-month
periods ended June 30, 1999, were down significantly from the
comparable periods of 1998 primarily as a result of the price
and, to a lesser extent, the volume factors discussed above.
PRIMARY ALUMINUM
Third party net sales of primary aluminum for the second
quarter of 1999 were down 5% as compared to the same period in
1998 primarily as a result of a 6% decrease in average
realized third party sales prices, reflecting lower market
prices offset, in part, by allocated net gains from KACC's
hedging activities. Partially offsetting the decline in
average realized price was a 1% increase in third party
shipments. Intersegment net sales in the second quarter of
1999 were up approximately 4% over 1998. Intersegment
shipments increased 9% from the comparable prior year period
while average realized price dropped by 5%. The decline in
average realized price resulted from lower market prices for
primary aluminum in 1999. The increase in intersegment
shipments between 1999 and 1998 was due to the timing of
shipments to the Company's fabricated business units, as on a
year-to-date basis intersegment shipments were essentially
flat.
For the six-month period ended June 30, 1999, third party
net sales of primary aluminum declined approximately 16% from
the comparable period in 1998, reflecting a 8% decline in
third party average realized prices and an 11% reduction in
third party shipments. The decline in third party average
realized price reflects lower 1999 market prices for primary
aluminum offset, in part, by allocated net gains from KACC's
hedging activities. The reduction in third party shipments
reflects the impact of the potline curtailments at KACC's
Washington smelters. Intersegment net sales for the first
half of 1999 were down 12% as compared to the same period in
1998. Intersegment average realized prices were down 12%
reflecting lower market prices for aluminum. Intersegment
shipments were essentially flat.
Segment operating income for the quarter and six-month
periods ended June 30, 1999, was down significantly from the
comparable periods of 1998. The most significant component of
this decline was the reduction in average realized prices
discussed above. However, also included in 1999 results were
the adverse impact of the Valco and Washington smelter potline
curtailments (including the fact that there is no mitigating
compensation being earned in 1999 for the Valco potline
curtailments) and costs of approximately $2.5 and $9.6 for the
quarter and six-month periods ended June 30, 1999,
respectively, associated with preparing and restarting potlines
at Valco and the Washington smelters.
FLAT-ROLLED PRODUCTS
Net sales of flat-rolled products for the second quarter
of 1999 declined by 21% compared to the second quarter of 1998
as a result of a 14% decline in average realized prices and a
7% decline in shipments. The reduction in shipments was due
to reduced demand in 1999 for aerospace heat treat products
offset, in small part, by increased shipments of general
engineering products. The decline in 1999 average realized
prices resulted from a shift of product mix (from aerospace
products, which have a higher price and operating margin, to
other products) as well as the impact of lower market prices
for primary aluminum.
For the six-month period ended June 30, 1999, net sales
of flat rolled products declined by 22% from the comparable
period in 1998 as a result of a 14% decline in average realize
price and a 10% decline in product shipments. The declines in
year-to-date 1999 prices and shipments as compared to 1998
were attributable to the same factors described above for the
second quarter of 1999 and were also responsible for the
significant decline in segment operating income both for the
second quarter and year-to-date periods.
ENGINEERED PRODUCTS
Second quarter 1999 net sales of engineered products
declined by approximately 12% compared to the second quarter
of 1998, reflecting a 10% decline in average realized prices
and a 2% decline in product shipments. The decline in
quarterly shipments was due to reduced demand in 1999 for
aerospace products offset almost entirely by a strong increase
in 1999 demand for ground transportation products. The
reduction in average realized price between periods was
attributable to the change in product mix (lower aerospace
shipments offset by higher ground transportation shipments) as
well as lower 1999 market prices for primary aluminum. For
the six-month period ended June 30, 1999, net sales of
engineered products declined by approximately 15% from the
comparable period in 1998, as a result of a 10% decline in
average realized prices and a 6% declined in product
shipments. The reasons for the year-to-date price and volume
declines were the same as the factors that affected the second
quarter of 1999.
Segment operating income for the 1999 quarter and year-to-
date periods declined from the comparable periods in 1998 as a
result of the reduced equity in earnings from AKW as well as
the product mix shift discussed above.
ELIMINATIONS
Eliminations of intersegment profit vary from period to
period depending on fluctuations in market prices as well as
the amount and timing of the affected segments' production and
sales.
CORPORATE AND OTHER
Corporate operating expenses included corporate general
and administrative expenses which were not allocated to the
Company's business segments.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
At June 30, 1999, the Company had working capital of
$412.0 million, compared with working capital of $471.6 million
at December 31, 1998. The decrease in working capital
primarily resulted from a decrease in Cash and cash
equivalents. Increases in Prepaid expenses and other current
assets, primarily resulting from increased insurance deposits,
were generally offset by an increase in Other accrued
liabilities resulting primarily from an increase in expected
payments for asbestos-related costs. Changes in Receivables,
Inventories and Accounts payable reflect reduced metal prices
in 1999 as well as other factors described in "Results of
Operations."
INVESTING ACTIVITIES
Capital expenditures during the six months ended June 30,
1999, were $30.3 million. The only significant expenditure was
the purchase of the remaining 45% interest in KLHP for
approximately $10.0 million. The remainder of the year-to-date
1999 capital expenditures were primarily used to improve
production efficiency and reduce operating costs.
Total consolidated capital expenditures (of which
approximately 8% is expected to be funded by the Company's
minority partners in certain foreign joint ventures) are
expected to be between $70 and $90 million per annum in each
of 1999 through 2001, prior to any consideration of plans to
rebuild the Gramercy facility. Management continues to
evaluate numerous projects all of which would require
substantial capital, both in the United States and overseas.
The level of capital expenditures may be adjusted from time to
time depending on the Company's price outlook for primary
aluminum and other products, KACC's ability to assure future
cash flows through hedging or other means, the Company's
financial position and other factors.
FINANCING ACTIVITIES AND LIQUIDITY
At June 30, 1999, the Company had long-term debt of
$962.7 million, compared with $963.0 million at December 31,
1998.
At June 30, 1999, $273.7 million (of which $73.7 million
could have been used for letters of credit) was available to
KACC under the Credit Agreement and no amounts were
outstanding under the revolving credit facility. Loans under
the Credit Agreement bear interest at a spread (which varies
based on the results of a financial test) over either a base
rate or LIBOR at the Company's option.
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
meet its working capital and capital expenditure requirements
for the next year. Additionally, 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.
CAPITAL STRUCTURE
MAXXAM Inc. ("MAXXAM") and one of its wholly owned
subsidiaries collectively own approximately 63% of the
Company's Common Stock, with the remaining approximately 37% of
the Company's Common Stock being publicly held. Certain of
the shares of the Company's Common Stock beneficially owned by
MAXXAM are subject to certain pledge agreements by MAXXAM and
its subsidiary.
The Company has an effective "shelf" registration
statement covering the offering from time to time of up to
$150.0 million of equity securities. Any such offering will
only be made by means of a prospectus. The Company also has
an effective "shelf" registration statement covering the
offering of up to 10,000,000 shares of the Company's Common
Stock that are owned by MAXXAM. The Company will not receive
any of the net proceeds from any transaction initiated by
MAXXAM pursuant to this registration statement.
The Credit Agreement does not permit the Company or KACC
to pay any dividends on their common stock.
OTHER MATTERS
YEAR 2000 READINESS DISCLOSURE
The Company utilizes software and related technologies
throughout its business that will be affected by the date
change to the year 2000. There may also be technology
embedded in certain of the equipment owned or used by the
Company that is susceptible to the year 2000 date change as
well. The Company has implemented a company-wide program to
coordinate the year 2000 efforts of its individual business
units and to track their progress. The intent of the program
is to make sure that critical items are identified on a
sufficiently timely basis to assure that the necessary
resources can be committed to address any material risk areas
that could prevent the Company's systems and assets from being
able to meet the Company's business needs and objectives.
Year 2000 progress and readiness has also been the subject of
the Company's normal, recurring internal audit function.
Each of the Company's business units has developed year
2000 plans specifically tailored to its individual situations.
A wide range of solutions is being implemented, including
modifying existing systems and, in limited cases where it is
cost effective, purchasing new systems. Total spending related
to these projects, which began in 1997 and is expected to
continue through 1999, is currently estimated to be in the
$10-15 million range. As of June 30, 1999, the Company
estimates that approximately $3 million of year 2000
expenditures are yet to be incurred. Such remaining amounts
are expected to be incurred over the balance of 1999,
primarily in the third quarter of the year. System
modification costs are being expensed as incurred. Costs
associated with new systems are being capitalized and will be
amortized over the life of the system. In total, the Company
believes that its remediation and testing efforts are
approximately 85% complete at July 31, 1999. The balance is
expected to be substantially completed by the end of the third
quarter of the year. The Company plans to commit the
necessary resources for these efforts.
In addition to addressing the Company's internal systems,
the company-wide program involves identification of key
suppliers, customers, and other third-party relationships that
could be impacted by year 2000 issues. A general survey has
been conducted of the Company's supplier and customer base.
Direct contact has been made, or is in progress, with parties
which are deemed to be particularly critical including
financial institutions, power suppliers, and customers, with
which the Company has a material relationship.
Each business unit, including the corporate group, is
developing a contingency plan covering the steps that would be
taken if a year 2000 problem were to occur despite the
Company's best efforts to identify and remediate all critical
at-risk items. Formal contingency plans have been completed
for approximately 75% of the Company's facilities and their
individual systems as of July 31, 1999. Contingency plans for
the remaining facilities and systems are expected to be
completed by October 31, 1999. When complete, each
contingency plan will address, among other things, matters such
as alternative suppliers for critical inputs, incremental
standby labor requirements at the millennium to address any
problems as they occur, and backup processing capabilities for
critical equipment or processes. The goal of the contingency
plans will be to minimize any business interruptions and the
associated financial implications.
While the Company believes that its program is sufficient
to identify the critical issues and associated costs necessary
to address possible year 2000 problems in a timely manner,
there can be no assurances that the program or underlying
steps implemented will be successful in resolving all such
issues prior to the year 2000. If the steps taken by the
Company (or critical third parties) are not made in a timely
manner, or are not successful in identifying and remediating
all significant year 2000 issues, business interruptions or
delays could occur and could have a material adverse impact on
the Company's results and financial condition. However, based
on the information the Company has gathered to date and the
Company's expectations of its ability to remediate problems
encountered, the Company currently believes that significant
business interruptions that would have a material impact on
the Company's results or financial condition will not be
encountered.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
------------------------------------------------------
RISK
----
See Part I, Item 7A. "QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK" in the Company's Form 10-K for
the year ended December 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------
The annual meeting of stockholders of the Company was
held on May 19, 1999, at which meeting the stockholders voted
to elect management's slate of nominees as directors of the
Company. The nominees for election as directors of the
Company are listed below, together with the number of votes
cast for, against, and with held with respect to each such
nominees, as well as the number of abstentions and broker
nonvotes with respect to each such nominee:
Robert J. Cruikshank
Votes For: 75,504,199
Votes Against:
Votes Withheld: 145,483
Abstentions:
Broker Nonvotes:
George T. Haymaker, Jr.
Votes For: 75,503,674
Votes Against:
Votes Withheld: 146,008
Abstentions:
Broker Nonvotes:
Charles E. Hurwitz
Votes For: 75,453,477
Votes Against:
Votes Withheld: 196,205
Abstentions:
Broker Nonvotes:
Ezra G. Levin
Votes For: 75,499,799
Votes Against:
Votes Withheld: 149,883
Abstentions:
Broker Nonvotes:
Raymond J. Milchovich
Votes For: 75,505,799
Votes Against:
Votes Withheld: 143,883
Abstentions:
Broker Nonvotes:
James D. Woods
Votes For: 75,498,899
Votes Against:
Votes Withheld: 150,783
Abstentions:
Broker Nonvotes:
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
Asbestos-related Litigation
KACC is a defendant in a number of lawsuits, some of
which involve claims of multiple persons, in which the
plaintiffs allege that certain of their injuries were caused
by, among other things, exposure to asbestos during, and as a
result of, their employment or association with KACC or
exposure to products containing asbestos produced or sold by
KACC. The portion of Note 4 of Notes to Interim Consolidated
Financial Statements contained in this report under the heading
"Asbestos Contingencies" is incorporated herein by reference.
See Part I, Item 3. "LEGAL PROCEEDINGS - Asbestos-related
Litigation" in the Company's Form 10-K for the year ended
December 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
---------------------------------
(a) Exhibits.
Exhibit No. Exhibit
---------- -------
3.1 Restated Certificate of Incorporation of Kaiser
Aluminum Corporation (the "Company" or "KAC"),
dated February 21, 1991 (incorporated by
reference to Exhibit 3.1 to Amendment No. 2 to
the Registration Statement on Form S-1, dated
June 11, 1991, filed by KAC, Registration No.
33-37895).
3.2 Certificate of Retirement of KAC, dated October
24, 1995 (incorporated by reference to Exhibit
3.2 to the Report on Form 10-K for the period
ended December 31, 1995, filed by KAC, File No.
1-9447).
3.3 Certificate of Retirement of KAC, dated February
12, 1998 (incorporated by reference to Exhibit
3.3 to the Report on Form 10-K for the period
ended December 31, 1997, filed by KAC, File No.
1-9447).
Exhibit No. Exhibit
----------- -------
*3.4 Certificate of Elimination of KAC, dated July 1,
1998.
3.5 Amended and Restated Bylaws of KAC, dated
October 1, 1997 (incorporated by reference to
Exhibit 3.3 to the Report on Form 10-Q for the
quarterly period ended September 30, 1997, filed
by KAC, File No. 1-9447).
*10.1 Employment Agreement, dated as of June 1, 1999,
between Kaiser Aluminum & Chemical Corporation
and Raymond J. Milchovich.
*10.2 Restated Promissory Note, dated June 14, 1999,
from Raymond J. Milchovich to Kaiser Aluminum &
Chemical Corporation.
*27 Financial Data Schedule.
(b) Reports on Form 8-K.
No report on Form 8-K was filed by the Company during the
quarter ended June 30, 1999. However, subsequent to June
30, 1999, two Form 8-K's were filed.
A Report on Form 8-K was filed by the Company on July 2,
1999, announcing the expected impact of certain non-operating
adjustments on second quarter 1999 results.
A Report on Form 8-K was filed by the Company on July 9,
1999, announcing that on July 5, 1999, KACC's Gramercy,
Louisiana alumina refinery had been extensively damaged by
an explosion and that production at the plant would be
curtailed for several months.
---------------
* Filed herewith
SIGNATURE
Pursuant to the requirements 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, who have signed this report on behalf of the
registrant as the principal financial officer and principal
accounting officer of the registrant, respectively.
KAISER ALUMINUM CORPORATION
/s/John T. La Duc
By:---------------------------
John T. La Duc
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/Daniel D. Maddox
By:---------------------------
Daniel D. Maddox
Vice President and Controller
(Principal Accounting
Officer)
Dated: August 13, 1999
Exhibit 3.4
CERTIFICATE OF ELIMINATION
OF
KAISER ALUMINUM CORPORATION
UNDER
SECTION 151 OF THE GENERAL CORPORATION LAW OF DELAWARE
In accordance with Section 151 of the General Corporation Law of the
State of Delaware, Kaiser Aluminum Corporation (the "Corporation"), a
Delaware corporation, DOES HEREBY CERTIFY:
FIRST: That the following resolution has been adopted by the Board
of Directors of the Corporation:
"RESOLVED, that none of the authorized shares of the 8.255% PRIDES,
Convertible Preferred Stock, par value $.05 per share, (the "8.255%
PRIDES") of Kaiser Aluminum Corporation (the "Corporation"), are
outstanding; and that none will be issued subject to the Certificate
of Designations of 8.255% PRIDES, Convertible Preferred Stock of
Kaiser Aluminum Corporation previously filed with respect to the
8.255% PRIDES."
SECOND: That when this Certificate of Elimination becomes effective
in accordance with Section 103 of the General Corporation Law of the State
of Delaware, it shall have the effect of eliminating from the Restated
Certificate of Incorporation of the Corporation all matters set forth in
the Certificate of Designations of 8.255% PRIDES, Convertible Preferred
Stock of Kaiser Aluminum Corporation with respect to the 8.255% PRIDES.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Elimination to be signed by E. Bruce Butler, a Vice President, and attested
by John Wm. Niemand II, its Secretary, this 1st day of July, 1998.
KAISER ALUMINUM CORPORATION
By: /S/ E. BRUCE BUTLER
E. Bruce Butler, Vice President
ATTEST:
/S/ JOHN WM. NIEMAND II
John Wm. Niemand II, Secretary
[Corporate Seal]
EMPLOYMENT AGREEMENT
This Agreement (the "Agreement") is made effective for the
period from June 1, 1999 to December 31, 2004, (such term being
hereinafter referred to as the "Employment Period") between
Kaiser Aluminum & Chemical Corporation, a Delaware corporation
("Company"), and Raymond J. Milchovich ("Executive").
WHEREAS, Executive is currently employed by the Company as a
senior executive and Chief Operating Officer; and
WHEREAS, the Company desires to secure the services of
Executive as Chief Executive Officer effective as of January 1,
2000, and Executive desires to perform such services for the
Company, on the terms and conditions as set forth herein;
NOW, THEREFORE, in consideration of the premises and of the
covenants and agreements set forth below, it is mutually agreed
as follows:
1. Effective Date, Term and Duties. The term of
-------------------------------
employment of Executive by the Company hereunder shall commence
effective as of January 1, 2000 and end on December 31, 2004,
(the "Employment Period") unless earlier terminated pursuant to
Section 4.
Executive shall have such duties as the Company may from
time to time prescribe consistent with his position as Chief
Executive Officer of the Company (the "Services"). Executive
shall report directly to the Board of Directors. Executive shall
devote his full time, attention, energies and best efforts to the
business of the Company. The Executive shall relocate his office
to Houston, Texas.
2. Compensation. The Company shall pay and Executive
------------
shall accept as full consideration for the Services compensation
consisting of the following:
2.1 Base Salary. Effective upon announcement of the
-----------
promotion, $550,000 per year base salary, payable in installments
in accordance with the Company's normal payroll practices, less
such deductions or withholdings required by law. On January 1,
2000, an increase to no less than $630,000 per year will be
effective which will subsequently increase to no less than
$692,000 on January 1, 2001 and no less than $750,000 on January
1, 2002. Base Salary shall be reviewed annually by the
Compensation Committee of the Company to evaluate the performance
of Executive and his duties hereunder, and in any event on and
after January 1, 2003 will be adjusted for inflation consistent
with the general program of increases for other executives and
management employees.
2.2 Annual Bonus. A target bonus equal to 80% of base
------------
salary per year ("Target Annual Bonus") shall be payable based on
the attainment by the Company of the Short-Term Bonus Plan
Objectives under the Company's Executive Bonus Plan for each such
year, which such Short-Term Bonus Plan Objectives shall be agreed
upon by the Executive and the Company annually and shall be
consistent with the Company's business plan for the relevant
year.
2.3 Long-Term Compensation. Upon execution hereof
----------------------
Executive shall receive a stock option grant of 750,000 shares
under the Company's Stock Option Plan. Twenty percent (20%) or
150,000 of the stock options will be granted at $9.50, 40% or
300,000 of the options will be granted with an exercise price of
$12.35, and the remaining 40% or 300,000 of the options will have
an exercise price of $14.25. The schedule in Exhibit A
illustrates the value of the new stock option grant and 60% of
the 1998 stock option grant at various strike prices. The new
(750,000) options will have an exercise period of ten years from
date of grant. Such options shall be in lieu of any payment of
long-term incentive compensation under the Company's Executive
Bonus Plan ("Plan") for the five year period beginning January 1,
2000, although Executive shall be eligible for additional option
grants at the discretion of the Company's Compensation Committee.
The existing grant will continue to vest as scheduled and the new
grant shall vest at the rate of 20% per year, beginning on
January 1, 2001, unless: (i) Executive becomes employed by an
affiliate or "spin-out" of Kaiser Aluminum, in which case a pro
rata amount of the options will vest equal to the percentage of
days during the Employment Period which the Executive has been
employed; or (ii) Executive's service is terminated by the
Company for any reason other than for "Cause", or Executive's
employment terminates by the expiration of the Employment Period
without an offer for continued employment by the Company for a
position of responsibility comparable to that held by Executive
at the beginning of the Employment Period and on substantially
the same or improved terms and conditions, or Executive
terminates his employment for "Good Reason" or in event of a
Change in Control in which cases vesting of all outstanding
options is accelerated as provided in Section 4.
Such option grant shall provide that upon exercise of any
option, Executive will be entitled to receive shares pursuant to
the Company's Stock Option Plan but also any securities that have
been distributed in respect to such shares. For example, if the
Company were to spin off part of its business as a new company
and distribute to its stockholders one share of stock of the new
company for each one share of stock under the Company's Stock
Option Plan, then, upon a subsequent exercise by Executive of the
stock under the Company's Stock Option Plan, Executive would also
receive one new company share along with one share under the
Company's Stock Option Plan. All such grants shall be governed
by the Company's Stock Option Plan and by the agreement executed
by the Company and Executive at the time of the option grant.
2.4 Indemnification. In the event Executive is made,
---------------
or threatened to be made, a party to any legal action or
proceeding, whether civil or criminal, by reason of the fact that
Executive is or was a director or officer of the Company or
serves or served any other corporation fifty percent (50%) or
more owned or controlled by the Company in any capacity at the
Company's request, Executive shall be indemnified by the Company,
and the Company shall pay Executive related expenses when and as
incurred, all to the fullest extent permitted by law, provided,
however, that the Company shall have the right of defense to any
action or proceeding.
3. Benefits during Employment Period. Employee will be
---------------------------------
eligible to participate in the Company's employee benefit plans
of general application, including, without limitation, those
plans covering medical disability and life insurance in
accordance with the rules established for individual
participation in any such plan and under applicable law.
Employee will be eligible for vacation and sick leave in
accordance with the policies in effect during the term of this
Agreement and will receive such other benefits as the Company
generally provides to its other employees of comparable position
and experience.
4. Benefits Upon Termination. Notwithstanding anything in
-------------------------
the Agreement to the contrary, if (i) Executive's employment is
terminated during the Employment Period for any reason other than
(a) termination by the Company for "Cause" (as defined in
Subsection 4.1), (b) acceptance by Executive of an offer of
employment with an affiliate of the Company, or (c) a voluntary
termination by Executive for other than "Good Reason", then
Executive will be entitled to receive the following benefits:
(A) An Early Retirement Lump Sum Payment by the
Company as described below:
The Early Retirement Lump Sum Payment by the
Company shall be equal to the excess, if any, of the sum of (i)
plus (ii) less the amount computed in accordance with (iii).
(i) The lump sum benefit from the Kaiser Aluminum
Salaried Employees Retirement Plan (KRP) that the Executive would
have been entitled to as of the date of his actual termination
calculated, for this purpose, as if the terms of KRP in effect on
such date were identical to the terms of KRP in effect on the
effective date of this Agreement (except for such changes
required to maintain the qualified status of KRP), and as if the
Executive qualified for a KRP Full Early Retirement Pension:
provided, however, in calculating such amount, his actual age,
credited service, social security benefits and final average
monthly compensation in effect on the date of his actual
termination shall be used as well as the daily yields on longer
term treasury issues and the PBGC applicable interest rates in
effect on such date.
(ii) The lump sum benefit from the Kaiser Aluminum
Supplemental Benefits Plan (KASBP) based on KRP limitations, that
the Executive would have been entitled to as of the date of his
actual termination calculated, for this purpose, as if (i) the
terms of KASBP in effect on such date were identical to the terms
of KASBP in effect on the effective date of this Agreement, (ii)
the Executive qualified for a KRP Full Early Retirement Pension,
and (iii) the other assumptions set forth in "(i)" above
including interest rates were in effect in calculating the
benefits under Section C-2(a) and (b) of KASBP.
(iii) An amount equal to the lump sum actuarial
equivalent of (a) the Executive's actual benefit payable from KRP
on account of his actual termination, plus (b) the Executive's
actual benefit payable from KASBP based on KRP limitations on
account of his actual termination.
(B) Full health benefits as if the Executive had qualified
for an Early Retirement Pension.
(C) A lump sum amount equal to Executive's base salary as
of the date of Executive's termination for a period equal to the
greater of (i) the number of months remaining in the Employment
Period or (ii) two years. In addition, Executive shall be
entitled to receive Executive's Target Annual Bonus for the year
of termination in one lump sum payment. Such salary and Target
Annual Bonus payments shall be referred to as "Termination Pay".
Such Termination Pay shall be in lieu of any claims Executive may
have had with respect to termination benefits.
(D) All of the unvested stock options held by Executive
on the date of such termination that would have vested during the
Employment Period shall immediately vest and become exercisable
in full for the remaining portion of the applicable period.
4.1 Circumstances Under Which Termination Benefits
----------------------------------------------
Would Not Be Paid. The Company shall not be obligated to pay
- -----------------
Executive the termination benefits pursuant to Section 4 if the
Executive's employment is terminated for Cause. For purposes of
this Agreement, "Cause" shall be limited to (1) Executive's gross
misconduct or fraud, in the performance of his employment; (2)
Executive's conviction or guilty plea with respect to any felony
(except for motor vehicle violations); or (3) Executive's
material breach of this Agreement after written notice delivered
to Executive of such breach and a reasonable opportunity to cure
such breach.
4.2 Constructive Termination. Notwithstanding
------------------------
anything in this Section 4 or Section 5 to the contrary, the
Employment Period will be deemed to have been terminated (a
"Constructive Termination") and Executive will be deemed to have
Good Reason for voluntary termination of the Employment Period
("Good Reason"), if there should occur:
(A) a material adverse change in Executive's position
causing it to be of materially less stature or responsibility
without Executive's written consent, and such a materially
adverse change shall in all events be deemed to occur if on and
after January 1, 2000 Executive no longer serves as Chief
Executive Officer reporting to the Board of Directors, unless
Executive consents in writing to such change;
(B) a reduction, without Executive's written consent,
in his level of base compensation (including base salary and
fringe benefits) by more than ten percent (10%) or a reduction
by more than ten percent (10%) in his Target Annual Bonus under
the CEO Bonus Plan; or
(C) a relocation of his principal place of employment
by more than 50 miles without Executive's consent, after
Executive's relocation to Houston, Texas.
4.3 Termination by Reason of Death or Disability. In
--------------------------------------------
the event of Employee's death during the Employment Period, the
Company shall pay to Employee or Employee's estate Employee's
Target Annual Bonus for the Company's fiscal year in which death
occurred or, if no such Target Annual Bonus has been scheduled,
an amount equal to the Target Annual Bonus paid to Employee for
the Company's fiscal year immediately preceding the year in which
death occurred. In addition, Employee's estate will receive
payment for all salary, bonuses and unpaid Vacation accrued as of
the date of Employee's death and any other benefits payable under
the Company's then existing benefit plans and policies in
accordance with such plans and policies in effect on the date of
death and in accordance with applicable law. In the event that
during the term of this Agreement, Employee is unable to perform
his job due to disability (as determined under the Company's
long-term disability insurance program) for six (6) months in any
twelve (12) month period, the Company may, at its election,
terminate Employee's employment with the Company and such
termination shall be deemed to be termination by the Company
other than for Cause and Employee shall be entitled to receive
the benefits set forth in Section 4 hereof.
5. Change in Control
-----------------
Should there occur a Change in Control (as defined below),
then the following provisions shall become applicable:
(A) During the period (if any) following a Change in
Control that Executive shall continue to provide the Services,
then the terms and provisions of this Agreement shall continue in
full force and effect, and Executive shall continue to vest in
all of his unvested stock options; or
(B) In the event of (x) a termination of the employment by
the Company other than for Cause or (y) a termination of
employment by Executive for any reason within twelve (12) months
following such Change in Control the benefits listed in Section 4
shall become due and payable:
For purposes of this Section 5, a Change of Control shall be
deemed to occur upon:
(I) the sale, lease, conveyance or other disposition of all
or substantially all of the Company's assets as an entirety or
substantially as an entirety to any person, entity or group of
persons acting in concert other than in the ordinary course of
business;
(II) any transaction or series of related transactions (as a
result of a tender offer, merger, consolidation or otherwise)
that results in any Person (as defined in Section 13(h)(8)(E)
under the Securities Exchange Act of 1934) becoming the
beneficial owner (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934), directly or indirectly, of more than 50%
of the aggregate voting power of all classes of common equity of
the Company, except if such Person is (A) a subsidiary of the
Company, (B) an employee stock ownership plan for employees of
the Company or (C) a company formed to hold the Company's common
equity securities and whose shareholders constituted, at the time
such company became such holding company, substantially all the
shareholders of the Company; or
(III) a change in the composition of the Company's Board of
Directors over a period of thirty-six (36) consecutive months or
less such that a majority of the then current Board members
ceases to be comprised of individuals who either (a) have been
Board members continuously since the beginning of such period, or
(b) have been elected or nominated for election as Board members
during such period by at least a majority of the Board members
described in clause (a) who were still in office at the time such
election or nomination was approved by the Board.
In the event that the severance and other benefits provided
to Executive constitute "parachute payments" within the meanings
of Section 28OG of the Internal Revenue Code of 1986, as amended
(the "Code"), either alone or in conjunction with other payments,
Executive has the right to receive either directly or indirectly
from the Company (the "Total Payments"), that would constitute an
excess parachute payment under Section 28OG of the Code. Company
agrees to pay Executive an amount (the "Gross-up Payment"), such
that after payment by Executive of all taxes, including interest
and penalties imposed with respect to such taxes, including any
excise tax imposed by Section 4999 of the Code, (the "Excise
Tax") Executive retains an amount of the Gross-up Payment equal
to the Excise Tax imposed upon the Total Payments.
Unless the Company and Executive otherwise agree in writing, any
determination required under this Section 5 shall be made in
writing by independent public accountants agreed to by the
Company and Executive (the "Accountants"), whose determination
shall be conclusive and binding upon Executive and the Company
for all purposes. For purposes of making the calculations
required by this Section 5, the Accountants may make reasonable
assumptions and approximations concerning applicable taxes and
may rely on reasonable, good faith interpretations concerning the
application of Sections 28OG and 4999 of the Code. The Company
and Executive shall fumish to the Accountants such information
and documents as the Accountants may reasonably request in order
to make a determination under this Section 5. The Company shall
bear all costs the Accountants may reasonably incur in connection
contemplated by this Section 5.
6. Dispute Resolution. The Company and Executive agree
------------------
that any dispute regarding the interpretation or enforcement of
this Agreement shall be decided by confidential, final and
binding arbitration conducted by Judicial Arbitration and
Mediation Services ("JAMS") under the then-existing JAMS rules,
rather than by litigation in court, trial by jury, administrative
proceeding, or in any other forum. Executive and Company agree
that in any dispute resolution proceedings arising out of this
Agreement, the Company shall be responsible for all reasonable
attorney's fees and costs incurred by Executive, not to exceed
$10,000 in connection with the resolution of the dispute in
addition to any other relief granted.
7. Cooperation with the Company After Termination of the
-----------------------------------------------------
Employment Period. Following termination of the Employment
- -----------------
Period by Executive, Executive shall fully cooperate with the
Company in all matters relating to the winding up of his pending
work on behalf of the Company and the orderly transfer of any
such pending work to other employees of the Company as may be
designated by the Company.
8. Confidentiality; Return of Property. Executive
-----------------------------------
acknowledges that an Employee Invention and Confidential
Information Agreement executed by Executive on October 28, 1996
will continue in effect.
9. Non-Competition. Executive agrees that a
---------------
Noncompetition Agreement shall be executed by Executive and
attached hereto as Exhibit B shall continue in effect.
10. General.
-------
10.1 Waiver. Neither party shall, by mere lapse of
------
time, without giving notice or taking other action hereunder, be
deemed to have waived any breach by the other party of any of the
provisions of this Agreement. Further, the waiver by either
party of a particular breach of this Agreement by the other shall
neither be construed as, nor constitute a, continuing waiver of
such breach or of other breaches by the same or any other
provision of this Agreement.
10.2 Severability. If for any reason a court of
------------
competent jurisdiction or arbitrator finds any provision of this
Agreement to be unenforceable, the provision shall be deemed
amended as necessary to conform to applicable laws or
regulations, or if it cannot be so amended without materially
altering the intention of the parties, the remainder of the
Agreement shall continue in full force and effect as if the
offending provision were not contained herein.
10.3 No Mitigation. Executive shall have no duty to
-------------
mitigate the Company's obligation with respect to the termination
payments set forth in Sections 4 or 5 by seeking other employment
following termination of his employment, nor shall such
termination payments be subject to offset or reductions by reason
of any compensation received by Executive from such other
employment. The Company's obligations to make payments under
Sections 4 or 5 shall not terminate in the event Executive
accepts other full time employment.
10.4 Notices. All notices and other communications
-------
required or permitted to be given under this Agreement shall be
in writing and shall be considered effective upon personal
service or upon depositing such notice in the U.S. Mail postage
prepaid, return receipt requested and addressed to the Chairman
of the Board of the Company at its principal corporate address,
and to Executive at his most recent address shown on the
Company's corporate records, or at any other address which he may
specify in any appropriate notice to the Company.
10.5 Counterparts. This Agreement may be executed in
------------
any number of counterparts, each of which shall be deemed an
original and all of which taken together constitutes one and the
same instrument and in making proof hereof it shall not be
necessary to produce or account for more than one such
counterpart.
10.6 Entire Agreement. The parties hereto acknowledge
----------------
that each has read this Agreement, understands it, and agrees to
be bound by its terms. The parties further agree that this
Agreement and the referenced stock option agreement constitute
the complete and exclusive statement of the agreement between the
parties and supersedes all proposals (oral or written),
understandings, representations, conditions, covenants, and all
other communications between the parties relating to the subject
matter hereof. The parties further agree that this Agreement
supersedes the employment agreement between the Company and
Executive effective June 1, 1998. Notwithstanding anything to
the contrary, Sections 4 and 5 of this Agreement shall govern all
options issued to Executive by the Company prior to and after the
effective date of this Agreement.
10.7 Governing Law. This Agreement shall be governed
-------------
by the law of the State of Texas.
10.8 Assignment and Successors. The Company shall have
-------------------------
the right to assign its rights and obligations under this
Agreement to an entity which acquires substantially all of the
assets of the Company. The rights and obligation of the Company
under this Agreement shall inure to the benefit and shall be
binding upon the successors and assigns of the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date first above written.
KAISER ALUMINUM & CHEMICAL EXECUTIVE
CORPORATION
By: /s/ George T. Haymaker, Jr. /s/ Raymond J. Milchovich
------------------------------ -----------------------
Raymond J. Milchovich
Name: George T. Haymaker, Jr.
------------------------------
Title: Chairman and Chief
Executive Officer
------------------------------
EXHIBIT B
AGREEMENT REGARDING NON-COMPETITION
This Agreement is by and between the employer, Kaiser Aluminum &
Chemical Corporation ("Company") and Raymond J. Milchovich
("Executive"). In consideration of the Company's employment of
Executive, the compensation paid for Executive's services in the
course of such employment, and the training (internal and
external, formal and informal) received by Executive in the
course of such employment, Executive agrees as follows:
1. NON-COMPETITION. During the term of employment and for a
period of two (2) years after the termination of employment,
Executive agrees that he will not knowingly, for any person or
entity other than the Company or its affiliates, directly or
indirectly, own, manage, operate, join, control or participate
in, be compensated by or be connected with as an officer,
employee, agent, consultant, partner, stockholder, or otherwise,
any Competitive Business anywhere within which the Company
conducts business.
2. SOLICITATION. As part of the consideration for the
compensation and benefits to be paid to Executive thereunder, in
keeping with Executive's duties as a fiduciary, and in order to
protect Company's interest in the trade secrets of Company, and
as an additional incentive for Company to enter into this
Agreement, Executive agrees that Executive will not, directly or
indirectly, for Executive or for others, knowingly induce any
employee of Company or any of its affiliates to terminate his or
her employment with Company or its affifiates, or knowingly hire
or assist in the hiring of any such employee by any person,
association, or entity not affiliated with Company. The
obligations in this Section shall extend throughout the Term of
this Agreement and for a period of two (2) years after the
termination of the employment relationship between Company and
Executive.
3. ENFORCEABILITY. Executive acknowledges that money damages
would not be sufficient remedy for any breach of this Agreement
by Executive, and Company shall be entitled to specific
performance and injunctive relief as remedies for such breach or
any threatened breach. Such remedies shall not be deemed the
exclusive remedies for a breach, but shall be in addition to all
remedies available at law or in equity to Company, including,
without limitation, the recovery of damages from Executive and
his agents involved in such breach. If any provision of this
Agreement is invalid or unenforceable, the remaining provisions
shall continue in effect.
4. CONSTRUCTION. The terms of this Agreement may not be
modified orally and may only be modified by a written instrument
executed by the parties hereto. This Agreement shall be governed
by and construed in accordance with the laws of the state of
Texas.
5. SURVIVAL. The provisions of Sections 1 through 4
hereinabove shall give the termination of Executive's employment
with the Company.
6. DUPLICATE ORIGINALS. This Agreement has been executed in
duplicate originals.
KAISER ALUMINUM & CHEMICAL EXECUTIVE
CORPORATION
By: /s/ George T. Haymaker, Jr. /s/ Raymond J. Milchovich
------------------------------ -----------------------
Raymond J. Milchovich
Name: George T. Haymaker, Jr.
------------------------------
Title: Chairman and Chief
Executive Officer
------------------------------
<TABLE>
Kaiser Aluminum & Chemical Corporation
Recommended Stock Option Grant
Assume that fair market value is considered to be $9.50
Five Year LTI Target $5,308,000
B-S Value of Previous Award $3,149,600
60% of Previous Grant as Offset to Target $1,889,760
Target New Grant Expected Value $3,418,240
Assume Option Awards Have a 10 Year Term(1)
Option
Number of Strike Option Gains at Various Share Prices
(2) Options Price $12 $15 $16.20 $17 $19 $21 $23 $25 $30
------- ----- --- --- ------ --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Options 150,000 $ 9.50 $ 375,000 $ 825,000 $1,005,000 $1,125,000 $1,425,000 $ 1,725,000 $ 2,025,000 $ 2,325,000 $ 3,075,000
Issued
at FMV
Options 300,000 $12.35 $ - $ 795,000 $1,155,000 $1,395,000 $1,995,000 $ 2,595,000 $ 3,195,000 $ 3,795,000 $ 5,295,000
Issued
at 130%
of FMV
Options 300,000 $14.25 $ - $ 225,000 $ 585,000 $ 825,000 $1,425,000 $ 2,025,000 $ 2,625,000 $ 3,225,000 $ 4,725,000
Issued
at 150%
of FMV
Total 750,000 $ 375,000 $1,845,000 $2,745,000 $3,345,000 $4,845,000 $ 6,345,000 $ 7,845,000 $ 9,345,000 $13,095,000
Value
of New
Award
Value 381,000 $ 9.41 $ 986,790 $2,129,790 $2,586,990 $2,891,790 $3,653,790 $ 4,415,790 $ 5,177,790 $ 5,939,790 $ 7,844,790
of 60%
of Previous
Award
GRAND $1,361,790 $3,974,790 $5,331,990 $6,236,790 $8,498,790 $10,760,790 $13,022,790 $15,284,790 $20,939,790
TOTAL
(1) The term of the new grant is ten years, but the options vest 20% per year beginning on January 1, 2001.
(2) The columns indicating the Black-Scholes values were eliminated because the approach is based on a targeted
gain at the achievement of a stock price goal, rather than a Black-Scholes valuation methodology.
</TABLE>
Exhibit 10.2
RESTATED PROMISSORY NOTE
$350,000.00
Houston, Texas
June 14, 1999
For value received, the undersigned hereby promises to pay to Kaiser
Aluminum & Chemical Corporation, a Delaware corporation, or order, at 5847
San Felipe, Suite 2600, Houston, Texas, on or before the Maturity Date (as
defined below) the lesser of (a) the principal amount of Three Hundred
Fifty Thousand Dollars ($350,000.00), and (b) the aggregate unpaid
principal amount outstanding under this Restated Promissory Note (this
"Note"). No interest will be due and payable with respect to such amounts
paid on or before the Maturity Date.
Amounts borrowed by the undersigned and evidenced by this Note may be
used only to purchase (including remodel) the undersigned's new principal
residence in Houston, Texas. The undersigned may borrow under this Note
from time to time between the date hereof and the Maturity Date. Any
amount borrowed under this Note may be repaid, in whole or in part and from
time to time before the Maturity Date, without premium or penalty. Amounts
borrowed and repaid may not be reborrowed. If not repaid sooner, the
aggregate unpaid principal amount outstanding under this Note shall be paid
in full, without presentment, grace, demand, or notice upon the earliest to
occur of (a) fifteen (15) days after the closing of the sale of the
residence of the undersigned located at 5431 Blackhawk Drive, Danville,
California, and (b) December 31, 1999 (the "Maturity Date").
Should default be made in the payment of any amount due under this
Note, the entire outstanding principal amount outstanding under this Note
shall be immediately due and payable, without presentment, grace, demand,
or notice. After default, interest shall accrue on all unpaid amounts
under this Note at the highest rate then lawful in the State of Texas;
provided, in no event shall interest on the debt evidenced by this Note
exceed the maximum amount of nonusurious interest that may be contracted
for, taken, charged or received under any applicable law.
Principal, and interest if any, shall be payable in lawful money of
the United States of America. The undersigned agrees that the records of
Kaiser Aluminum & Chemical Corporation as to the amount of principal
outstanding and unpaid under this Note from time to time shall be deemed
presumptively correct in the absence of manifest error.
If action is instituted on this Note, the undersigned shall pay to
Kaiser Aluminum & Chemical Corporation such sums as a court of competent
jurisdiction may fix as reasonable attorneys' fees and as costs. The loans
evidenced by this Note were negotiated and consummated in the State of
Texas, and it is agreed and understood that the legality, enforceability,
and construction of this Note shall be governed by the laws of the State of
Texas.
This Note restates in its entirety the Promissory Note, dated June 14,
1999, from the undersigned to Kaiser Aluminum & Chemical Corporation.
/s/ Raymond J. Milchovich
____________________________________
Raymond J. Milchovich
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of the Company for the six months ended
June 30, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000811596
<NAME> KAISER ALUMINUM CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 26
<SECURITIES> 0
<RECEIVABLES> 278
<ALLOWANCES> 6
<INVENTORY> 525
<CURRENT-ASSETS> 955
<PP&E> 2,007
<DEPRECIATION> 918
<TOTAL-ASSETS> 3,046
<CURRENT-LIABILITIES> 543
<BONDS> 963
0
0
<COMMON> 1
<OTHER-SE> 66
<TOTAL-LIABILITY-AND-EQUITY> 3,046
<SALES> 1,004
<TOTAL-REVENUES> 1,004
<CGS> 934
<TOTAL-COSTS> 934
<OTHER-EXPENSES> 49
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> (83)
<INCOME-TAX> (29)
<INCOME-CONTINUING> (54)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (54)
<EPS-BASIC> (.68)
<EPS-DILUTED> (.68)
</TABLE>
