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                                    FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 19992002 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 2600,2500, HOUSTON, TEXAS  77057-301077057-3268
               (Address of principal executive offices)   (Zip Code)

       Registrant's telephone number, including area code: (713) 267-3777

        Securities registered pursuant to Section 12(b) of the Act: NameNone

           Securities registered pursuant to Section 12(g) of each exchange
          Title of each class                        on which registered
          -------------------                        -------------------the Act:

                          Common Stock, $.01 par value                 New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X  NO
                         ---   ---/X/ No / /

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).  Yes / /  No /X/

As of JanuaryFebruary 28, 2000,2003, there were 79,405,33380,271,570 shares of the Common Stock of the
registrant outstanding. Based upon the New York Stock Exchange closing price on
JanuaryAs of February 28, 2000,2003, the aggregate market value of
the registrant's Common Stock held by non-affiliates, based upon the average bid
and asked price of the Common Stock as reported by the OTC Bulletin Board
maintained by the National Association of Securities Dealers, Inc., for June 30,
2002 (which was $183.1 million.

Certain portionsthe last day of the registrant's definitive proxy statement to be filed not
later than 120 days aftermost recently completed second
fiscal quarter) was $2.5 million. However, the closemarket value of the registrant's
fiscal year are
incorporated by reference into Part IIICommon Stock may not be meaningful, because as part of this Report on Form 10-K.



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   2a plan of reorganization,
it is possible that the interests of the Company's existing stockholders could
be diluted or cancelled.

                       Documents Incorporated By Reference
                                      None

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                                      NOTE

Kaiser Aluminum Corporation's Report on Form 10-K filed with the Securities and
Exchange Commission includes all exhibits required to be filed with the Report.
Copies of this Report on Form 10-K, including only Exhibit 21 of the exhibits
listed on pages 6997 - 75102 of this Report, are available without charge upon
written request. The registrant will furnish copies of the other exhibits to
this Report on Form 10-K upon payment of a fee of 25 cents per page. Please
contact the office set forth below to request copies of this Report on Form 10-K
and for information as to the number of pages contained in each of the exhibits
and to request copies of such exhibits:



                                     Corporate Secretary
                                     Kaiser Aluminum Corporation
                                     5847 San Felipe, Suite 26002500
                                     Houston, Texas 7705777057-3268
                                     (713) 267-3777
















                                       (i)


   3



KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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                                TABLE OF CONTENTS

Page ---- PART I........................................................................................................ 1 ITEM 1. BUSINESS.................................................................................... 1 ITEM 2. PROPERTIES.................................................................................. 15 ITEM 3. LEGAL PROCEEDINGS........................................................................... 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 17 PART II....................................................................................................... 17PART I ITEM 1. BUSINESS ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................................................... 17 ITEM 6. SELECTED FINANCIAL DATA..................................................................... 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................... 18 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................. 30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................................................... 61 PART III...................................................................................................... 61 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................... 61 ITEM 11. EXECUTIVE COMPENSATION...................................................................... 61 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................................................ 61 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................. 61 PART IV....................................................................................................... 61 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....................................................................... 61 SCHEDULE I ............................................................................................ 64 SIGNATURES ............................................................................................ 68 INDEX OF EXHIBITS............................................................................................. 69 EXHIBIT 21 SUBSIDIARIES................................................................................ 76
(ii) 4 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------------RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PART IV ITEM 14. CONTROLS AND PROCEDURES ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K SCHEDULE I SIGNATURES INDEX OF EXHIBITS EXHIBIT 21 SUBSIDIARIES PART I ITEM 1. BUSINESS This Annual Report on Form 10-K (the "Report") contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Report (see, for example,(including, but not limited to, Item 1. "Business - Incident at Gramercy Facility,"" - Strategic Initiatives," " - Business Operations," " - Competition," " - Research and Development," " - Environmental Matters," and " - Factors Affecting Future Performance," Item 3. "Legal Proceedings," and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations"). Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include the effectiveness of management's strategies and decisions, general economic and business conditions, developments in technology, new or modified statutory or regulatory requirements, and changing prices and market conditions. Certain sections of this Report identify other factors that could cause differences between such forward-looking statements and actual results.results (for example, see Item 1. "Business - Factors Affecting Future Performance"). 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. GeneralGENERAL Kaiser Aluminum Corporation (the "Company" or "Kaiser"), a Delaware corporation organized in 1987, is a subsidiary of MAXXAM Inc. ("MAXXAM"). MAXXAM and one of its wholly-ownedwholly owned subsidiaries together own approximately 63%62% of the Company's Common Stock, with the remaining approximately 37%38% publicly held. The Company, through its wholly-ownedwholly owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), and its subsidiaries, operates in all principal aspects of the aluminum industry - the mining of bauxite, the refining of bauxite into alumina, the production of primary aluminum from alumina, and the manufacture of fabricated (including semi-fabricated) aluminum products. REORGANIZATION PROCEEDINGS The Company and 25 of its subsidiaries have filed separate voluntary petitions in the United States Bankruptcy Court for the District of Delaware (the "Court") for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Code"); the Company, KACC and 15 of KACC's subsidiaries (the "Original Debtors") filed in the first quarter of 2002 and nine additional KACC subsidiaries (the "Additional Debtors") filed in the first quarter of 2003. The Original Debtors and Additional Debtors are collectively referred to herein as the "Debtors" and the Chapter 11 proceedings of these entities are collectively referred to herein as the "Cases." For purposes of this Report, the term "Filing Date" shall mean, with respect to any particular Debtor, the date on which such Debtor filed its Case. None of KACC's non-U.S. joint ventures are included in the Cases. The Cases are being jointly administered. The Debtors are managing their businesses in the ordinary course as debtors-in-possession subject to the control and administration of the Court. Original Debtors. During the first quarter of 2002, the Original Debtors filed separate voluntary petitions for reorganization. The wholly owned subsidiaries of KACC included in such filings were: Kaiser Bellwood Corporation, Kaiser Aluminium International, Inc., Kaiser Aluminum Technical Services, Inc., Kaiser Alumina Australia Corporation (and its wholly owned subsidiary, Kaiser Finance Corporation) and ten other entities with limited balances or activities. The necessity for filing the Cases by the Original Debtors was attributable to the liquidity and cash flow problems of the Company and its subsidiaries arising in late 2001 and early 2002. The Company was facing significant near-term debt maturities at a time of unusually weak aluminum industry business conditions, depressed aluminum prices and a broad economic slowdown that was further exacerbated by the events of September 11, 2001. In addition, the Company had become increasingly burdened by asbestos litigation and growing legacy obligations for retiree medical and pension costs. The confluence of these factors created the prospect of continuing operating losses and negative cash flow, resulting in lower credit ratings and an inability to access the capital markets. The outstanding principal of, and accrued interest on, all debt of the Original Debtors became immediately due and payable upon commencement of the Cases. However, the vast majority of the claims in existence at the Filing Date (including claims for principal and accrued interest and substantially all legal proceedings) are stayed (deferred) during the pendency of the Cases. In connection with the filing of the Original Debtors' Cases, the Court, upon motion by the Original Debtors, authorized the Original Debtors to pay or otherwise honor certain unsecured pre-Filing Date claims, including employee wages and benefits and customer claims in the ordinary course of business, subject to certain limitations. In July 2002, the Court also issued a final order authorizing the Company to fund the cash requirements of its foreign joint ventures in the ordinary course of business and to continue using the Company's existing cash management systems. The Original Debtors also have the right to assume or reject executory contracts existing prior to the production utilizedFiling Date, subject to Court approval and certain other limitations. In this context, "assumption" means that the Original Debtors agree to perform their obligations and cure certain existing defaults under an executory contract and "rejection" means that the Original Debtors are relieved from their obligations to perform further under an executory contract and are subject only to a claim for damages for the breach thereof. Any claim for damages resulting from the rejection of an executory contract is treated as a general unsecured claim in the Cases. Generally, pre-Filing Date claims, including certain contingent or unliquidated claims, against the Original Debtors will fall into two categories: secured and unsecured. Under the Code, a creditor's claim is treated as secured only to the extent of the value of the collateral securing such claim, with the balance of such claim being treated as unsecured. Unsecured and partially secured claims do not accrue interest after the Filing Date. A fully secured claim, however, does accrue interest after the Filing Date until the amount due and owing to the secured creditor, including interest accrued after the Filing Date, is equal to the value of the collateral securing such claim. The amount and validity of pre-Filing Date contingent or unliquidated claims, although presently unknown, ultimately may be established by the Court or by agreement of the parties. As a result of the Cases, additional pre-Filing Date claims and liabilities may be asserted, some of which may be significant. On February 12, 2002, the Company and KACC entered into a post-petition credit agreement with a group of lenders for debtor-in-possession financing (the "DIP Facility"). The Court signed a final order approving the DIP Facility in March 2002. The DIP Facility provides for a secured, revolving line of credit through the earlier of February 12, 2004, the effective date of a plan of reorganization or voluntary termination by the Company. Under the DIP Facility, KACC is able to borrow by means of revolving credit advances and to issue letters of credit (up to $125.0 million) in an aggregate amount equal to the lesser of $300.0 million or a borrowing base relating to eligible accounts receivable, eligible inventory and eligible fixed assets, reduced by certain reserves, as defined in the DIP Facility agreement. The DIP Facility is guaranteed by the Company and certain significant subsidiaries of KACC. Interest on any outstanding borrowings will bear a spread over either a base rate or LIBOR, at KACC's option. In October 2002, the Court set January 31, 2003 as the last date by which holders of pre-Filing Date claims against the Original Debtors (other than asbestos-related personal injury claims and certain hearing loss claims) could file their claims. Any holder of a claim that was required to file a claim by such date and did not do so may be barred from asserting such claim against any of the Original Debtors and, accordingly, may not be able to participate in any distribution in any of the Cases on account of such claim. Because the Company has not had sufficient time to analyze the proofs of claim to determine their validity, no provision has been included in the accompanying financial statements for claims that have been filed. The January 31, 2003 bar date does not apply to asbestos-related personal injury claims, for which the Original Debtors reserve the right to establish a separate bar date at a later time. A separate bar date of June 30, 2003 has been set for certain hearing loss claims. Additional Debtors. On January 14, 2003, the Additional Debtors filed separate voluntary petitions for reorganization. The wholly owned subsidiaries included in such filings were: Kaiser Bauxite Company, Kaiser Jamaica Corporation, Alpart Jamaica Inc., Kaiser Aluminum & Chemical of Canada Limited and five other entities with limited balances or activities. The Cases filed by the Additional Debtors were commenced, among other reasons, to protect the assets held by these Debtors against possible statutory liens that might arise and be enforced by the Pension Benefit Guaranty Corporation ("PBGC") primarily as a result of the Company's failure to meet a $17.0 million accelerated funding requirement to its operations,salaried employee retirement plan in January 2003. From an operating perspective, the filing of the Cases by the Additional Debtors had no impact on the Company's day-to-day operations. In connection with the Additional Debtors' filings, the Court authorized the Additional Debtors to continue to make payments in the normal course of business (including payments of pre-Filing Date amounts), including payments of wages and benefits, payments for items such as materials, supplies and freight and payments of taxes. The Court also approved the continuation of the Company's existing cash management systems and routine intercompany transactions involving, among other transactions, the transfer of materials and supplies among affiliates. In March 2003, the Additional Debtors were added as co-guarantors and the DIP Facility lenders received super priority status with respect to certain of the Additional Debtors' assets. In March 2003, the Court set May 15, 2003 as the last date by which holders of pre-Filing Date claims against the Additional Debtors (other than asbestos-related personal injury claims and certain hearing loss claims) must file their claims. All Debtors. The following table sets forth certain financial information for the Debtors and non-Debtors as of and for the year ended December 31, 2002. Consolidation/ Original Additional Elimination Debtors Debtors Non-Debtors Entries Consolidated ---------------- --------------- ------------- -------------- -------------- Net sales $ 1,323.6 $ 47.6 $ 209.7 $ (111.3) $ 1,469.6 Operating income (420.8) 33.1 (18.3) - (406.0) Net income (loss) (468.7) 22.6 (12.8) (9.8) (468.7) Total assets $ 1,947.3 $ 1,219.4 $ 608.6 $ (1,549.9) $ 2,225.4 Liabilities not subject to compromise 306.2 28.6 130.4 (2.0) 463.2 Liabilities subject to compromise 2,726.0 - - - 2,726.0 Minority interests .7 - 102.3 18.8 121.8 Total stockholders' equity (deficit) (1,085.6) 1,190.8 375.9 (1,566.7) (1,085.6) The Debtors' objective is to achieve the highest possible recoveries for all creditors and stockholders, consistent with the Debtors' abilities to pay, and the continuation of their businesses. However, there can be no assurance that the Debtors will be able to attain these objectives or achieve a successful reorganization. While valuation of the Debtors' assets and pre-Filing Date claims at this stage of the Cases is subject to inherent uncertainties, the Debtors currently believe that it is likely that their liabilities will be found in the Cases to exceed the fair value of their assets. Therefore, the Debtors currently believe that it is likely that pre-Filing Date claims will be paid at less than 100% of their face value and the equity of the Company's stockholders will be diluted or cancelled. Under the Code, the rights and ultimate payments to pre-Filing Date creditors and stockholders may be substantially altered. At this time, it is not possible to predict the outcome of the Cases, in general, or the effect of the Cases on the businesses of the Debtors. Two creditors' committees, one representing the unsecured creditors and the other representing the asbestos claimants, have been appointed as official committees in the Cases and, in accordance with the provisions of the Code, will have the right to be heard on all matters that come before the Court. The Debtors expect that the appointed committees, together with the legal representative for potential future asbestos claimants that has been appointed in the Cases, will play important roles in the Cases and the negotiation of the terms of any plan or plans of reorganization. The Debtors are required to bear certain costs and expenses for the committees and the legal representative for potential future asbestos claimants, including those of their counsel and other advisors. The Debtors anticipate that substantially all liabilities of the Debtors as of the Filing Date will be resolved under one or more plans of reorganization to be proposed and voted on in the Cases in accordance with the provisions of the Code. Although the Debtors intend to file and seek confirmation of such a plan or plans, there can be no assurance as to when the Debtors will file such a plan or plans, or that such plan or plans will be confirmed by the Court and consummated. As provided by the Code, the Original Debtors had the exclusive right to propose a plan of reorganization for 120 days following the initial Filing Date. The Court has subsequently approved extensions of the exclusivity period for all Debtors through April 30, 2003. Additional extensions are likely to be sought. However, no assurance can be given that such future extension requests will be granted by the Court. If the Debtors fail to file a plan of reorganization during the exclusivity period, or if such plan is not accepted by the requisite number of creditors and equity holders entitled to vote on the plan, other parties in interest in the Cases may be permitted to propose their own plan(s) of reorganization for the Debtors. The Company expects that, when the Debtors ultimately file a plan of reorganization, it will reflect the Company's strategic vision for emergence from Chapter 11: (a) a standalone going concern with manageable leverage, improved cost structure and competitive strength; (b) a company positioned to execute its long-standing vision of market leadership and growth in fabricated products specifically with a financial structure that provides financial flexibility, including access to capital markets, for accretive acquisitions; (c) a company that delivers a broad product offering and leadership in service and quality for its customers and distributors; and (d) a company with continued presence in those commodities markets that have the potential to generate significant cash at steady-state metal prices. The Company's advisors have developed a preliminary timeline that, assuming the current pace of the Cases continues, could allow the Company to emerge from Chapter 11 in 2004. While no assurances can be given in this regard, the Company's management continues to push for an aggressive pace in advancing the Cases. Continued sales of non-core assets and facilities that are ultimately determined not to be an important part of the reorganized entity are likely. The Company's strategic vision, which is subject to continuing review in consultation with the Company's stakeholders, may also be modified from time to time as the Cases proceed due to changes in such items as changes in the global markets, changes in the economics of the Company's facilities or changing financial circumstances. SUMMARY OF OPERATIONS KACC sells significant amounts of alumina and primary aluminum in domestic and international markets. In 1999, KACC produced approximately 2,524,000 tons[1] of alumina, of which approximately 83% was sold to third parties, and produced approximately 426,400 tons of primary aluminum, of which approximately 62% was sold to third parties. In 1999, KACC shipped approximately 389,000 tons of fabricated aluminum products to third parties, which accounted for approximately 5% of total United States domestic shipments. The Company's operations are conducted through KACC's business units. The following table sets forth totalproduction and third party purchases of bauxite, alumina and primary aluminum and third party shipments and intersegment transfers of KACC'sbauxite, alumina, primary aluminum and fabricated products for the years ended December 31, 2002, 2001 and 2000: Sources(1) Uses(1) ------------------------------------ ---------------------------------- Third Party Third Party Intersegment Production(2) Purchases Shipments(2) Transfers ------------------ ---------------- ----------------- --------------- (in thousands of tons*) Bauxite - 2002 6,289.7 1,582.5 1,568.1 4,493.5 2001 5,628.3 1,916.3 1,512.2 4,355.4 2000 4,305.0 2,290.0 2,007.0 2,342.0 Alumina - 2002 2,848.5 258.9 2,626.6 343.9 2001 2,813.9(3) 115.0 2,582.7 422.8 2000 2,042.9 322.0 1,927.1 751.9 Primary Aluminum - 2002 187.4 6.1 194.8 1.7 2001 214.3 27.3 244.7 2.3 2000 411.4 56.1 345.5 148.9 Fabricated Aluminum Products(4) - 2002 - 164.7 170.7 - 2001 - 187.1 192.5 - 2000 - 155.4 326.9 - (1) Sources and uses will not equal due to the impact of intrasegment consumption, inventory changes and alumina and primary aluminum operations:
Year Ended December 31, ---------------------------------- 1999 1998 1997 -------- -------- -------- (in thousands of tons) ALUMINA: (1) Shipments to Third Parties 2,093.9 2,250.0 1,929.8 Intersegment Transfers 757.3 750.7 968.0 -------- -------- -------- PRIMARY ALUMINUM: 2,851.2 3,000.7 2,897.8 -------- -------- -------- Shipments to Third Parties 295.6 263.2 327.9 Intersegment Transfers 171.2 162.8 164.2 -------- -------- -------- 466.8 426.0 492.1 -------- -------- -------- FLAT-ROLLED PRODUCTS 217.9 235.6 247.9 ENGINEERED PRODUCTS 171.1 169.4 152.1
(1) Asswaps. (2) Production and third party shipments include Kaiser's share of consolidated joint venture activities. (3) During September 2001, KACC sold an 8.3% interest in Queensland Alumina Limited ("QAL"). See "Business Operations--Bauxite and Alumina Business Unit--QAL" below for a resultdiscussion of effects of the explosion at the Gramercysale on alumina refineryproduction. (4) Fabricated aluminum products activity is reported in July 1999, which completely curtailed production ("the Gramercy incident"), shipments to third parties and intersegment transfers for 1999 include approximately 264,000equivalent tons of primary aluminum. Third party purchases represent purchases of primary aluminum, including scrap. - ---------------- [1]--------------------------- * All references to tons in this Report refer to metric tons of 2,204.6 pounds. 1 5 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) alumina purchased and resold to certain unaffiliated customers and 131,000 tons of alumina purchased and transferred to the Company's primary aluminum business unit. See Note 2 of Notes to Consolidated Financial Statements for additional information regarding the impact of the Gramercy incident. See Note 12 of Notes to Consolidated Financial Statements for segment and geographical financial information. Incident at Gramercy Facility On July 5, 1999, KACC's Gramercy, Louisiana alumina refinery was extensively damaged by an explosion in the digestion area of the plant. Twenty-four employees were injured in the incident, several of them severely. As a result of the incident, alumina production at the facility was completely curtailed. Production at the plant is currently expected to remain completely curtailed until the third quarter of 2000 when KACC expects to begin partial production. Based on current estimates, full production is expected to be achieved during the first quarter of 2001 or shortly thereafter. KACC has received the regulatory permit required to operate the plant once the facility is ready to resume production. In the interim, KACC is purchasing alumina from third parties, in excess of the amounts of alumina available from other KACC-owned facilities, to supply major customers' needs and to meet intersegment requirements. The cause of the incident is under investigation by KACC and governmental agencies. In January 2000, the U.S. Mine Safety and Health Administration ("MSHA") issued 21 citations in connection with its investigation of the incident. The citations allege, among other things, that certain aspects of the plant's operations were unsafe and that such mode of operation contributed to the explosion. To date, no monetary penalty has been proposed by MSHA. Although the Company expects that a fine will be levied, the Company cannot predict the amount of any such fine(s). It is possible that other civil or criminal fines or penalties could be levied against KACC. KACC has previously announced that it disagrees with the substance of the citations and has challenged them. However, as more fully explained below, based on what is known to date and discussions with the Company's advisors, the Company believes that the financial impact of this incident (in excess of insurance deductibles and self-retention provisions) will be largely offset by insurance coverage. Deductibles and self-retention provisions under the insurance coverage for the incident total $5.0 million, which amounts have been charged to Cost of products sold in 1999. As of December 31, 1999, the Company had recorded estimated recoveries for clean-up, site preparation and business interruption costs incurred of approximately $55.0 million. As of December 31, 1999, approximately $50.0 million of insurance recoveries had been received. Additionally through February 29, 2000, KACC had received approximately $25.0 million of additional insurance recoveries. Also, based on discussions with the insurance carriers and their representatives and third party engineering reports, KACC recorded a pretax gain of $85.0 million, representing the difference between the minimum expected property damage reimbursement amount and the net carrying value of the damaged property of $15.0 million. KACC continues to work with the insurance carriers to maximize the amount of recoveries and to minimize, to the extent possible, the period of time between when KACC expends funds and when it is reimbursed. However, KACC will likely have to fund an average of 30 - 60 days of property damage and business interruption activity, unless some other arrangement is agreed with the insurance carriers, and such amounts will be significant. The Company believes it has sufficient financial resources to fund the construction and business interruption costs on an interim basis. However, no assurances can be given in this regard. If insurance recoveries were to be delayed or if there were to be other significant uses of KACC's existing Credit Agreement capacity, delays in the rebuilding of the Gramercy refinery could occur and could have a material adverse impact on the Company's and KACC's liquidity and operating results. See Note 2 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financing Activities and Liquidity" for more detailed information regarding the impacts of the Gramercy incident. Labor Matters Substantially all of KACC's hourly workforce at the Gramercy, Louisiana, alumina refinery, Mead and Tacoma, Washington, aluminum smelters, Trentwood, Washington, rolling mill, and Newark, Ohio, extrusion facility were covered by a master labor agreement with the United Steelworkers of America (the "USWA") which expired on September 30, 1998. The parties did not reach an agreement prior to the expiration of the master agreement and the USWA chose to strike. In January 1999, KACC declined an offer by the USWA to have the striking workers return to work at the five plants without a new agreement. KACC imposed a lock-out to support its bargaining position and continues to operate the plants with salaried employees and other workers as it has since the strike began. 2 6 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) 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, excluding the Gramercy facility (see "- Incident at Gramercy Facility" above), have been substantially stabilized and will be able to run at, or near, full capacity, and that the incremental costs associated with operating the affected plants during the dispute were virtually eliminated in early 1999 (excluding the impacts of the restart costs and the effect of market factors such as the continued partial curtailment at the Tacoma smelter (see " - Business Operations - Primary Aluminum Business Unit" in this Report). However, no assurances can be given that KACC's efforts to run the plants on a sustained basis, without a significant business interruption or material adverse impact on the Company's operating results, will be successful. Further, the Company believes that charges of unfair labor practices made against KACC by the USWA are without merit. See Note 10 of Notes to Consolidated Financial Statements. KACC and the USWA continue to communicate. The objective of KACC has been, and continues to be, to negotiate a fair labor contract that is consistent with its business strategy and the commercial realities of the marketplace. See Note 1 of Notes to Consolidated Financial Statements, "- Labor Related Costs," Note 10 of Notes to Consolidated Financial Statements, "- Labor Matters" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Labor Matters" for additional information with respect to the USWA dispute. Strategic Initiatives KACC's strategy is to improve its financial results by: increasing the competitiveness of its existing plants; continuing its cost reduction initiatives; adding assets to businesses it expects to grow; pursuing divestitures of non-core businesses; and strengthening its financial position. In 1999, KACC completed the acquisition of the remaining 45% interest in Kaiser LaRoche Hydrate Partners ("KLHP"), an alumina marketing venture, for a purchase price of approximately $10.0 million and the sale of its 50% interest in AKW L. P. ("AKW") to its partner for $70.4 million. The strategic analysis process also resulted in the Company's agreement in January 2000 to sell KACC's Micromill(TM) assets and technology. See Notes 3 and 4 of Notes to Consolidated Financial Statements for information on the AKW and Micromill sales. Another area of emphasis has been a continuing focus on managing the Company's legacy liabilities. The Company believes that KACC has insurance coverage available to recover certain incurred and future environmental costs and a substantial portion of its asbestos-related costs and is actively pursuing claims in this regard. During 1998, KACC received recoveries totaling approximately $35.0 million from certain of its insurers related to current and future environmental claims. The timing and amount of future recoveries of asbestos-related claims from insurance carriers remains a major priority of the Company, but will depend on the pace of claims review and processing by such carriers and the resolution of any disputes regarding coverage under the insurance policies that may arise. However, during 1999, KACC reached preliminary agreements under which it expects to collect a substantial portion of its 2000 expected asbestos-related payments from certain insurance carriers. See Note 10 of Notes to Consolidated Financial Statements for additional information regarding the legacy liabilities and related insurance coverages. Sensitivity to Prices and Hedging Programs The Company's operating results are sensitive to changes in the prices of alumina, primary aluminum, and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold. Primary aluminum prices have historically been subject to significant cyclical fluctuations. Alumina prices, as well as fabricated aluminum product prices (which vary considerably among products), are significantly influenced by changes in the price of primary aluminum and generally lag behind primary aluminum prices by up to three months. In addition, the Company's operations are exposed to risks from fluctuating energy prices for fuels used in the production process and from foreign currency movements in respect of material cash commitments to foreign subsidiaries and affiliates. From time to time in the ordinary course of business, KACC enters into 3 7 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) hedging transactions to provide risk management in respect of its net exposure of earnings and cash flow related to the above items. While such hedging activities typically are designed to provide protection against unfavorable price charges, they can, in certain circumstances, limit the Company's ability to realize favorable price changes and can also impact the Company's liquidity. See Note 1 of Notes to Consolidated Financial Statements, " - Derivative Financial Instruments," Note 11 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Activities and Liquidity," for additional information. Business OperationsOPERATIONS KACC conducts its business through fourits five main business units (Bauxite and alumina, Primary aluminum, Commodities marketing, Flat-rolled products and Engineered products), each of which is discussed below. o- - Bauxite and Alumina Business Unit The following table lists KACC's bauxite mining and alumina refining facilities as of December 31, 1999:
Annual Production Total Capacity Annual Company Available to Production Activity Facility Location Ownership the Company Capacity - -------- -------- -------- --------- ------------ ---------- (tons) (tons) Bauxite Mining KJBC Jamaica 49.0% 4,500,000 4,500,000 Alpart(1) Jamaica 65.0% 2,275,000 3,500,000 --------- --------- 6,775,000 8,000,000 ========= ========= Alumina Refining Gramercy(2) Louisiana 100.0% 1,075,000 1,075,000 Alpart Jamaica 65.0% 942,500 1,450,000 QAL Australia 28.3% 1,032,950 3,650,000 --------- --------- 3,050,450 6,175,000 ========= =========
2002: Annual Production Total Capacity Annual Company Available to Production Activity Facility Location Ownership the Company Capacity - ------------------ ------------ -------------- ---------------- ----------------- ---------------- (tons) (tons) Bauxite Mining KJBC Jamaica 49.0% 4,500,000 4,500,000 Alpart(1) Jamaica 65.0% 2,275,000 3,500,000 ----------------- ---------------- 6,775,000 8,000,000 ================= ================ Alumina Refining Gramercy Louisiana 100.0% 1,250,000 1,250,000 Alpart Jamaica 65.0% 942,500 1,450,000 QAL Australia 20.0% 730,000 3,650,000 ----------------- ---------------- 2,922,500 6,350,000 ================= ================ - ------------ (1) Alumina Partners of Jamaica ("Alpart") bauxite is refined into alumina at the Alpart refinery. (2) Production is currently completely curtailed. See discussion below. KACC is a major producer of alumina and sells significant amounts of its alumina production in domestic and international markets. KACC's strategy is to sell a substantial portion of the alumina available to it in excess of its internal smelting requirements under multi-year sales contracts with prices linked to the price of primary aluminum. See "- Competition" and "- Sensitivity to Prices and Hedging Programs"Commodity Marketing" in this Report. During 2002, KACC sold alumina to approximately 14 customers, the largest and top five of which accounted for approximately 20% and 73%, respectively, of the business unit's third-party net sales. All of KACC's third-party sales of bauxite in 2002 were made to one customer, which sales represent approximately 6% of the business unit's third-party net sales. KACC's principal customers for bauxite and alumina consist of other aluminum producers, trading intermediaries, and users of chemical grade alumina. Marketing and sales efforts are conducted by personnel located in Baton Rouge, Louisiana. KJBC. The Government of Jamaica has granted KACC a mining lease for the mining of bauxite which will, at a minimum, satisfy the bauxite requirements of KACC's Gramercy, Louisiana, alumina refinery so that it will be able to produce at its current rated capacity until 2020. Kaiser Jamaica Bauxite Company ("KJBC") mines bauxite from the land which is subject to the mining lease as an agent for KACC. KACC holds its interest in KJBC through a wholly owned subsidiary (Kaiser Bauxite Company) which was one of KACC's subsidiaries that filed a petition for reorganization under the Code in January 2003. KJBC did not file a petition for reorganization. KACC and Kaiser Bauxite Company have the authority from the Court to fund KJBC's cash requirements in the ordinary course of business. Although KACC (through Kaiser Bauxite Company) owns 49% of KJBC, it is entitled to, and generally takes, all of its bauxite output. A substantial majority of the bauxite mined by KJBC is refined into alumina at the Gramercy facility and the remainder is sold to a third party.sold. KJBC's operations have beenwere impacted by the Gramercy incident. Subject to the rebuilding of theincident (see Gramercy facility with a double digest bauxite system, thebelow). The Government of Jamaica, which owns 51% of KJBC, has recently agreed to grant KACC an additional bauxite mining lease. The new mining lease will be effective upon the expiration of the current lease in 2020 and will enable the Gramercy facility to produce at its rated capacity for an additional ten year period. See Note 2 of Notes to Consolidated Financial Statements for a detailed discussion of the Gramercy incident. 4 8 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED)Gramercy. Alumina produced by the Gramercy plantrefinery is primarily sold to third parties butparties. The Gramercy refinery produces two products: smelter grade alumina and chemical grade alumina (e.g. hydrate). Smelter grade alumina is sold under long-term contracts typically linked to London Metal Exchange prices ("LME prices") for primary aluminum. Chemical grade alumina is sold at a portion is used by KACC in its operations.premium price over smelter grade alumina. Production at the Gramercy refinery is currently completelyplant was curtailed from July 1999 until December 2000 (at which time partial production commenced) as it was extensively damaged bya result of an explosion in the digestion area of the plant in July 1999. Productionplant. Construction at the plant is currently expected to remain curtailed untilfacility was substantially completed in the third quarter of 2000 when partial2001. During the first nine months of 2001, the plant operated at approximately 68% of its newly-rated estimated annual capacity of 1,250,000 tons. During the fourth quarter of 2001, the plant operated at approximately 90% of its newly-rated capacity. Since the end of February 2002, the plant has, except for normal operating variations, generally operated at approximately 100% of its newly-rated capacity. During 2001, abnormal Gramercy-related start-up costs and litigation costs totaled approximately $64.9 million and $6.5 million, respectively. These incremental costs for 2001 were offset by approximately $36.6 million of additional insurance benefit (recorded as a reduction of Bauxite and alumina business unit's cost of products sold). The abnormal start-up costs in 2001 resulted from operating the plant in an interim mode pending completion of construction at well less than the expected production is expectedrate or full efficiency. During 2002, because the plant was operating at near full capacity, the amount of start-up costs was substantially reduced as compared to begin. Based on current estimates, full production is expected to be achievedprior periods. Such costs were approximately $3.0 million during the first quarter of 2001 or shortly thereafter. In2002 and were substantially eliminated during the interim,balance of 2002. The facility is now focusing its efforts on achieving its full operating efficiency. While production was curtailed, KACC is purchasingpurchased alumina from third parties, in excess of the amounts of alumina available from other KACC-owned facilities, to supply major customers' needs as well as to meet intersegment requirements. The Company believes that the cost to rebuild the Gramercy facility and the adverse impact of the incident on operations will be largely offset by insurance coverage. See Note 2 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financing Activities and Liquidity" for additional information regarding the impacts of the Gramercy incident. Also, the Gramercy refinery is one of the five KACC plants which is subject to the continuing USWA dispute. See Note 10 of Notes to Consolidated Financial Statements, "- Labor Matters" for a discussion of the labor dispute. In February 1999, KACC, through a subsidiary, purchased its partner's 45% interest in KLHP, a partnership which markets chemical grade alumina manufactured at KACC's Gramercy facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Strategic Initiatives" for additional information. Chemical grade alumina is sold at a premium price over smelter grade alumina, and this acquisition will permit KACC to expand its market position in this business in North America. However, these operations have been impacted by the Gramercy incident. KACC has entered into the necessary arrangements to allow it to supply a significant portion of its customers' chemical grade alumina needs. The Company believes that any incremental costs incurred in connection with such arrangements, as well as lost profits, will be substantially covered by KACC's insurance. Alpart holds bauxite reserves and owns a 1,450,000 ton per year alumina plant located in Jamaica.Alpart. KACC owns a 65% interest in Alpart, and Hydro Aluminium a.s ("Hydro") owns the remaining 35% interest. KACC holds its interests in Alpart through two wholly owned subsidiaries (Kaiser Jamaica Corporation and Alpart Jamaica Inc.), which were two of KACC's subsidiaries that filed petitions for reorganization under the Code in January 2003. Alpart did not file a petition for reorganization. The Debtors have the authority from the Court to fund Alpart's cash requirements in the ordinary course of business. Alpart holds bauxite reserves and owns a 1,450,000 ton per year alumina plant located in Jamaica. KACC has management responsibility for the facility on a fee basis. KACC and Hydro have agreed to beare responsible for their proportionate shares of Alpart's costs and expenses. The Government of Jamaica has granted Alpart a mining lease and has entered into other agreements with Alpart designed to assure that sufficient reserves of bauxite will be available to Alpart to operate its refinery, as it may be expanded up to a capacity of 2,000,000 tons per year, through the year 2024. In 1999, Alpart and JAMALCO, a joint venture between affiliates of Alcoa Inc. and the Government of Jamaica, agreed to formhave been operating a bauxite mining operation joint venture that will consolidateconsolidated their bauxite mining operations in Jamaica withsince the objectivefirst half of optimizing mining operating and capital costs.2000. The joint venture agreement also grants Alpart certain rights to acquire bauxite mined from JAMALCO's reserves. The joint venture will commencereserves with the objective to optimize mining operations and capital costs. As part of the Company's initiatives launched in the first quarter2001, Alpart's annual production capacity is expected to increase to 1,650,000 tons per year during 2003, which would equate to an increase in KACC's share of 2000.annual production by over 100,000 tons per year. QAL. KACC owns a 28.3%20% interest in QAL, after selling an approximate 8.3% interest in September 2001. KACC holds its interest in QAL through a wholly owned subsidiary (Kaiser Alumina Australia Corporation ("KAAC")) which is one of KACC's subsidiaries that filed a petition for reorganization under the Code in 2002. The Debtors have the authority from the Court to fund QAL's cash requirements in the ordinary course of business. QAL, which is located in Queensland, Alumina Limited ("QAL"), whichAustralia, owns one of the largest and one of the most competitive alumina refineries in the world, located in Queensland, Australia.world. QAL refines bauxite into alumina, essentially on a cost basis, for the account of its shareholders under long-term tolling contracts. The shareholders, including KACC,KAAC, purchase bauxite from another QAL shareholder under long-term supply contracts. KACCKAAC has contracted with QAL to take approximately 868,000600,000 tons per year of alumina or pay standby charges. KACCKAAC is unconditionally obligated to pay amounts calculated to service its share ($103.649.0 million at December 31, 1999)2002) of certain debt of QAL, as well as other QAL costs and expenses, including bauxite shipping costs. In 1999,Historically, KACC has sold about half of its share of QAL's production to third parties and has used the remainder to supply its Mead and Tacoma smelters, which have been curtailed since the last half of 2000. The reduction in KACC's alumina supply associated with its sale of a portion of its QAL interest has been substantially offset by the return of its Gramercy alumina refinery to approximately 21 customers,full operations during the largestfirst quarter of 2002 at a higher capacity, by reduced internal requirements due to production curtailments of primary aluminum facilities and top fiveby the previously noted planned increase in capacity in 2003 at its Alpart alumina refinery in Jamaica. Accordingly, the sale of which accounted for approximately 23% and 72%a portion of net sales, respectively. All ofthe Company's QAL interest did not have an adverse impact on KACC's ability to satisfy existing third-party sales of bauxite in 1999 were made to one customer which sales represent approximately 7% of total bauxite and alumina third party net sales. KACC's principal customers for bauxite and alumina consist of other aluminum producers that purchase bauxite and smelter grade alumina, trading intermediaries who resell raw materials to end-users, and users of chemical grade alumina. 5 9 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIEScontracts. - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) o- Primary Aluminum Business Unit The following table lists KACC's primary aluminum smelting facilities as of December 31, 1999:
Annual Rated Total 19992002: Annual Rated Total 2002 Capacity Annual Average Company Available to Rated Operating Location Facility Ownership the Company Capacity Rate - -------- -------- --------- ------------- -------- --------- (tons) (tons) United States Washington Mead 100% 200,000 200,000 102%(1) Washington Tacoma 100% 73,000 73,000 73%(1) ------- ------- Subtotal 273,000 273,000 ------- ------- International Ghana Valco 90% 180,000 200,000 57%(2) Wales, United Kingdom Anglesey 49% 66,150 135,000 102% ------- ------- Subtotal 246,150 335,000 ------- ------- Total 519,150 608,000 ======= =======
- ------------------------- ---------- ------------ ---------------- ----------- ------------ (tons) (tons) Ghana Valco 90% 180,000 200,000 66% Wales, United Kingdom Anglesey 49% 66,150 135,000 103% Washington, United States Mead 100% 200,000 200,000 -(1) ---------------- ----------- Total 446,150 535,000 ================ =========== - -------------- (1) 1999 operating rates were affected byProduction was completely curtailed during 2002. In January 2003, the continuing USWA dispute. See discussionCompany announced the indefinite curtailment of the Mead facility - see below. (2) See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Valco Operating Level" for additional information regarding recent and future operating levels. KACC has developed and installeduses proprietary retrofit and control technology in all of its smelters, as well as at third party locations.smelters. This technology - which includes the redesign of the cathodes, anodes and bus that conduct electricity through reduction cells, improved feed systems that add alumina to the cells, computerized process control and energy management systems, and furnace technology for baking of anode carbon - has significantly contributed to increased and more efficient production of primary aluminum and enhanced KACC's ability to compete more effectively with the industry's newer smelters. The Mead facility uses pre-bake technology. Approximately 77%KACC's principal primary aluminum customers consist of Mead's 1999large trading intermediaries and metal brokers. In 2002, KACC sold its primary aluminum production was used at KACC's Trentwood, Washington, rolling mill,to approximately 37 customers, the largest and top five of which accounted for approximately 52% and 99%, respectively, of the balance was sold to third parties.business unit's third-party net sales. See "-Competition" in this Report. Marketing and sales efforts are conducted by personnel located in Baton Rouge, Louisiana. Electric power represents an important production input for KACC has modernized and expanded the carbon baking furnace at its Mead smelter. The project has improved the reliability of the carbon baking operations, increased productivity, enhanced safety, and improved the environmental performance of the facility. The first stage of this project, the construction of a new 90,000 ton per year furnace, was completed in 1997. The remaining modernization work was completed in early 1999. The Tacoma facility uses Soderberg technology and produces primary aluminum and high-grade, continuous-cast, redraw rod, which currently commands a premium price in excess of the price of primary aluminum. Both smelters have achieved significant production efficiencies through retrofit technology and a variety of cost controls, leading to increases in production volume and enhancing their ability to compete with newer smelters. The business unit maintains specialized laboratories and a miniature carbon plant in the state of Washington which concentrate on the development of cost-effective technical innovations such as equipment and process improvements. The Mead and Tacoma, Washington, smelters are two of the five KACC plants which are subject to the continuing USWA dispute. KACC temporarily curtailed three out of a total of eleven potlines at its Mead and Tacoma, Washington, aluminum smelters at September 30, 1998, as a result ofand its cost can significantly affect the USWA strike. The curtailed potlines represented approximately 70,000 tons of annual production capacity out of a total combined production capacity of 273,000 tons per year at the facilities. Restarts of the two Mead potlines were completed during mid-1999. While a portion of the curtailed potline at Tacoma has been restarted to meet internal requirements, the timing for a complete restart of the potline (representing approximately 10,000 tons of idle production capacity) has yet to be determined and will depend upon market conditions and other factors. See Note 10 of Notes to Consolidated Financial Statements, " - Labor Matters" for a discussion of the labor dispute on smelting production rates. 6 10 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED)Business Unit's profitability. Valco. KACC manages, and directly owns a 90% interest in, the Volta Aluminium Company Limited ("Valco") aluminum smelter in Ghana. The Valco smelter uses pre-bake technology and processes alumina supplied by KACC and the other participant into primary aluminum under tolling contracts which provide for proportionate payments by the participants. KACC's share of the primary aluminum is sold to third parties. Valco's operating level has been subject to fluctuations resulting from the amount of power it is allocated by the Volta River Authority ("VRA"). The operating level over the last five years has ranged from one to four out of a total of five potlines. During 1999,2002 and 2001, Valco operated an average of three potlines.and four potlines, respectively. The Company expectsamount of power made available to Valco by the VRA depends in large part on the level of the lake that is the primary source for generating the hydroelectric power used to supply the smelter. The level of the lake is primarily a function of the level of annual rainfall and the alternative (non-Valco) uses of the power generated, as directed by the VRA. As of February 28, 2003, the lake level was at a ten-year low. During late 2000, Valco, the Government of Ghana ("GoG") and the VRA reached an agreement, subject to Parliamentary approval, that would provide sufficient power for Valco to operate at least three and one-half of its five potlines through 2017. However, Parliamentary approval was not received and, in March 2002, the GoG reduced Valco's power allocation forcing Valco to curtail one of its four potlines during 2000. See "Management's Discussionoperating potlines. Valco's power allocation was further reduced in January 2003 resulting in the curtailment of two additional operating potlines. As of February 28, 2003, Valco was operating one of its five potlines. However, no assurances can be given that Valco will continue to receive sufficient power to operate the one remaining operating potline. Valco has met with the GoG and Analysisthe VRA and anticipates such discussions will continue in respect of Financial Condition and Results of Operations - Overview - Valco Operating Level" for additional information regarding pastthe current and future operating levels.power situations. Valco has objected to the power curtailments and expects to seek appropriate compensation from the GoG. In addition, Valco and the Company have filed for arbitration with the International Chamber of Commerce in Paris against both the GoG and the VRA. However, no assurances can be given as to the ultimate success of any such actions or to the likelihood of Valco receiving any compensation from the VRA or GoG. Valco did not file a petition for reorganization. KACC does not expect Valco's operations to be adversely affected as a result of the Cases as the Debtors have received the authority from the Court to fund Valco's cash requirements in the ordinary course of business. The Company and the PBGC have entered into a stipulation, which was approved by the Court, that extends the automatic stay in bankruptcy to Valco to prevent statutory liens from arising against Valco in respect of certain pension obligations related to KACC's U.S. pension plans (see Note 10 of Notes to Consolidated Financial Statements). The stipulation currently expires on December 31, 2003. It can be extended beyond that date either through agreement of the parties or involuntarily by order of the Court. The Company is unable to assess at this time whether an extension of the stipulation might be necessary or whether, if sought, an extension might be obtained. If the stipulation were not extended, a PBGC lien could arise against Valco that could have material consequences. The Company is unable to state at this time whether a lien, if one arose, would be enforceable in Ghana against Valco. Anglesey. KACC also owns a 49% interest in the Anglesey Aluminium Limited ("Anglesey") aluminum smelter at Holyhead, Wales. The Anglesey smelter uses pre-bake technology. KACC supplies 49% of Anglesey's alumina requirements and purchases 49% of Anglesey's aluminum output. KACC sells its share of Anglesey's output to third parties. KACC's principal primary aluminum customers consistAnglesey operates under a power agreement that provides sufficient power to sustain its operations at full capacity through September 2009. Anglesey did not file a petition for reorganization. KACC does not expect Anglesey's operations to be adversely affected as a result of large trading intermediariesthe Cases as the Debtors have received the authority from the Court to fund Anglesey's cash requirements in the ordinary course of business. Mead and metal brokers.Tacoma. The Mead facility uses pre-bake technology. Through 2000, the Bonneville Power Administration ("BPA") was supplying approximately half of the electric power for the Mead and Tacoma smelters, with the balance coming from other suppliers. In 1999,response to the unprecedented high market prices for power in the Pacific Northwest, KACC sold itscurtailed primary aluminum production not utilizedat the Mead and Tacoma, Washington, smelters during the last half of 2000 and all of 2001 and 2002. During this same period, as permitted under the BPA contract, KACC remarketed to the BPA the available power that it had under contract through September 30, 2001. As a result of the curtailments, KACC avoided the need to purchase power on a variable market price basis and received cash proceeds sufficient to more than offset the cash impact of the potline curtailments over the period for internal purposeswhich the power was sold. Both smelters remained completely curtailed during 2001 and 2002. During October 2000, KACC signed a new power contract with the BPA under which the BPA, starting October 1, 2001, was to provide KACC's operations in the State of Washington with approximately 290 megawatts of power through September 2006. The contract provided KACC with sufficient power to fully operate KACC's Trentwood facility (which requires up to approximately 42 customers,40 megawatts), as well as approximately 40% of the largestcombined capacity of KACC's Mead and top fiveTacoma aluminum smelting operations. However, the October 2000 contract was less favorable than the prior contract and contained several clauses that had adverse consequences for KACC. As a part of the reorganization process, the Company concluded that it was in its best interest to reject the BPA contract as permitted by the Code. See Note 3 of Notes to Consolidated Financial Statements for a discussion of the Company's rejection of the BPA contract. In January 2003, the Company announced the indefinite curtailment of the Mead facility. The curtailment of the Mead facility was due to the continuing unfavorable market dynamics, specifically unattractive long-term power prices and weak primary aluminum prices - both of which accountedare significant impediments for approximately 29%an older smelter with higher-than-average operating costs. The Mead facility is expected to remain completely curtailed unless and 68%until an appropriate combination of reduced power prices, higher primary aluminum prices and other factors occurs. If KACC were to restart all or a portion of its Mead facility, it would take between three to six months to reach the full operating rate for such operations, depending upon the number of lines restarted. Even after achieving the full operating rate, operating only a portion of the Mead facility would result in production and cost inefficiencies such that operating results would, at best, be breakeven to modestly negative at long-term primary aluminum prices. In January 2003, the Court approved the sale of the Tacoma smelter to the Port of Tacoma. The sale closed in February 2003. See Note 15 of Notes to Consolidated Financial Statements for additional discussion on the sale of the Tacoma smelter. - - Commodities Marketing Business Unit The Company's operating results are sensitive to changes in the prices of alumina, primary aluminum, and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold. Primary aluminum prices have historically been subject to significant cyclical fluctuations. Alumina prices, as well as fabricated aluminum product prices (which vary considerably among products), are significantly influenced by changes in the price of primary aluminum and generally lag behind primary aluminum prices by up to three months. From time to time in the ordinary course of business, KACC enters into hedging transactions to provide risk management in respect of its net sales, respectively. See "- Competition" in this Report. Marketingexposure of earnings and sales effortscash flow related to primary aluminum price changes. Given the significance of primary aluminum hedging activities to the Company and KACC, the Company reports its primary aluminum-related hedging activities as a separate segment. Primary aluminum-related hedging activities are conducted by personnel located in Houston, Texas; and Tacoma and Spokane, Washington. Electric Power Electric power represents an important production cost for KACC at its aluminum smelters. For informationmanaged centrally on this subject, see " - Factors Affecting Future Performance - The operationsbehalf of all of KACC's smelters depend on attaining reliablebusiness segments to minimize transaction costs, to monitor consolidated net exposures and affordable electric power"to allow for increased responsiveness to changes in this Report. omarket factors. Because the agreements underlying KACC's hedging positions provided that the counterparties to the hedging contracts could liquidate KACC's hedging positions if KACC filed for reorganization, KACC chose to liquidate those positions in advance of the initial Filing Date. The net gain associated with those liquidated positions was deferred and is being recognized as income through December 31, 2003 (the period during which the underlying transactions are expected to occur). During December 2002 and the first quarter of 2003, the Company, with Court approval, reinstituted its hedging program when it entered into hedging transactions with respect to a portion of its 2003 fuel oil requirements consumed in its production process. The Company anticipates that, subject to the prevailing economic conditions, it may enter into additional hedging transactions with respect to primary aluminum prices, natural gas and fuel oil prices and foreign currency values to protect the interests of its constituents. However, no assurance can be given as to when or if the Company will enter into such additional hedging activities. Hedging activities conducted in respect of the Company's cost exposure to energy prices and foreign exchange rates are not considered a part of the Commodity marketing segment. Rather, such activities are included in the results of the business unit to which they relate. - - Flat-Rolled Products Business Unit The flat-rolledFlat-rolled products business unit operates the Trentwood, Washington, rolling mill. TheDuring recent years, the business unit sellshas sold to the aerospace, transportation and general engineeringindustrial ("ATI") markets (producing heat treatheat-treat sheet and plate products), the beverage container market (producing body, lid, and tab stock), and the specialty coil markets (producing automotive brazing sheet, wheel, and tread products), both directly and through distributors. The Trentwood facility is one of the fiveDuring 2000, KACC plants which is subject to the continuing USWA dispute. See Note 10 of Notes to Consolidated Financial Statements, "- Labor Matters" for additional information on the labor dispute. KACC continues to shiftshifted the product mix of its Trentwood rolling mill away fromtoward higher value-added product lines, exited beverage can body stock, toward higher value added product lines, such as heat treat, beveragewheel and common alloy products in 2001 and exited the can lid and tab stock automotive, and other niche businessesbrazing sheet products in 2002 in an effort to maximizeenhance its profitability. Global sales of KACC's heat treat products are made primarily to the aerospace and general engineering markets. In 1999,2002, the business unit shipped productssold to approximately 14782 customers in the aerospace, transportation, and industrial ("ATI")ATI markets, most of which wererepresented heat-treat product shipments to distributors who sell to a variety of industrial end-users. The largest and top five customers in the ATI markets for flat-rolled products accounted for approximately 18% of the business unit's net sales. KACC's flat-rolled products are also sold to beverage container manufacturers located primarily in western North America16% and in the Asian Pacific Rim countries. Quality of products for the beverage container industry, service, price, and timeliness of delivery are the primary bases on which KACC competes. In 1999, the business unit had approximately 25 domestic and foreign can stock customers, supplying approximately 35 can plants worldwide. The largest and top five of such customers accounted for approximately 12% and 36%41%, respectively, of the business unit's third-party net sales. See "- Competition" in this Report. The marketing staff for the business unit is located at the Trentwood facility. Sales are made directly to end-use customers and distributors from fourby KACC sales officesrepresentatives located in the United States from a sales office in England,and Europe, and by independent sales agents in Asia and Latin America. 7 11 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIESAsia. - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) o- Engineered Products Business Unit The engineeredEngineered products business unit operates soft-alloy and hard-alloy extrusion facilities and engineered component (forgings) facilities in the United States and Canada. Major markets for extruded products are in the ground transportation industry, to which the business unit sells extruded shapesextrusions for automobiles, light-duty vehicles, heavy duty trucks and trailers, and shipping containers, and in the distribution, durable goods, defense, building and construction, ordnance and electrical markets. Soft-alloy extrusion facilities are located in Los Angeles, California; Sherman, Texas; Tulsa, Oklahoma; Richmond, Virginia; and London, Ontario, Canada. Products manufactured at these facilities include rod, bar, tube, shapes and billet. Hard-alloy extrusion facilities are located in Newark, Ohio, and Jackson, Tennessee, and produce rod, bar, screw machine stock, redraw rod, forging stock and billet. The business unit also extrudes seamless tubing in both hard- and soft-alloys at a facility in Richland, Washington and produces drawn tube in both hard- and soft-alloys at its operations in Chandler, Arizona, that it purchased in May 2000. Soft-alloy extruded seamless and drawn tubing is also produced at the Richmond, Virginia facility. The business unit sells forged parts to customers in the automotive, heavy-duty truck, general aviation, rail, machinery and equipment, and ordnance markets. The high strength-to-weight properties of forged aluminum make it particularly well-suited for automotive applications. The business unit maintains aKACC's remaining forging facility is located in Greenwood, South Carolina. Another forging facility located in Oxnard, California was sold in December 2002. Through its sales and engineering office in Southfield, Michigan, whichthe business unit staff works with automobile makers and other customers and plant personnel to create new automotive component designs and to improve existing products. Soft-alloy extrusion facilities are located in Los Angeles, California; Sherman, Texas; Richmond, Virginia; andKACC's London, Ontario Canada. Each of the soft-alloy extrusion facilities has fabricating capabilities and provides finishing services. Products manufactured at these facilities include rod, bar, tube, shapes, and billet. The Richmond, Virginia, facility was acquired in mid- 1997 and increased KACC's extruded products capacity and enhanced its existing extrusion business due to that facility's ability to manufacture seamless tubing and large circle size extrusions and to serve the distribution and ground transportation industries. A 1999 acquisition of an extrusion press in the Los Angeles area also increased capacity in both seamless tube and rod and bar products. Hard-alloy rod and bar extrusion facilities are located in Newark, Ohio, and Jackson, Tennessee, and produce screw machine stock, redraw rod, forging stock, and billet. The Newark facility is owned by a wholly owned subsidiary (Kaiser Aluminum & Chemical of Canada Limited ("KACCL")) which was one of KACC's subsidiaries that filed a petition for reorganization under the five KACC plants which is subject toCode in January 2003. The Company does not believe KACCL's operations will be adversely affected by the continuing USWA dispute. See Note 10 of Notes to Consolidated Financial Statements, "- Labor Matters" for additional information onCases. In 2002, the labor dispute. A facility located in Richland, Washington, produces seamless tubing in both hard and soft alloys. The business unit also operates an aluminum cathodic protection business located in Tulsa, Oklahoma. The business unit operates forging facilities at Oxnard, California, and Greenwood, South Carolina, and a machine shop at Greenwood, South Carolina. KACC sold a small casting operations in Canton, Ohio in May 1999. In 1997, KACC and Accuride Corporation ("Accuride") formed AKW to design, manufacture and sell heavy aluminum truck wheels. In April 1999, KACC sold its 50% interest in AKW to Accuride for $70.4 million, which resulted in a net pre-tax gain of $50.5 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Strategic Initiatives" and Note 3 of Notes to Consolidated Financial Statements. In 1999, the engineeredEngineered products business unit had approximately 400600 customers, the largest and top five of which accounted for approximately 5%10% and 18%25%, respectively, of the business unit's third-party net sales. See "- Competition" below. Sales are made directly from plantsto end-use customers and from marketing locations elsewhere indistributors by KACC sales representatives located across the United States. CompetitionCOMPETITION KACC competes globally with producers of bauxite, alumina, primary aluminum, and fabricated aluminum products. Many of KACC's competitors have greater financial resources than KACC. Primary aluminum and, to some degree, alumina are commodities with generally standard qualities, and competition in the sale of these commodities is based primarily upon price, quality and availability. Aluminum competes in many markets with steel, copper, glass, plastic, and other materials. Beverage container materials, including aluminum, face increased competition from plastics as increased polyethylene terephthalate ("PET") container capacity is brought on line by plastics manufacturers. KACC competes with numerous domestic and international fabricators in the sale of fabricated aluminum products. KACC manufactures and markets fabricated aluminum products for the transportation, packaging, construction, and consumer durables marketsit manufactures in the United States and abroad. Sales in these markets are made directly and through distributors to a large number of customers. Competition in the sale of fabricated products is based upon quality, availability, price and service, including delivery performance. KACC concentrates its fabricating operations on selected products in which it believes it has production expertise, high-quality capability, and geographic and other competitive advantages. The Company believes that, assuming the current relationship between worldwide supply and demand for alumina and primary aluminum does not change materially, the loss of any one of KACC's customers, including intermediaries, would not have a material adverse effect on the Company's financial condition or results of operations. 8 12 KAISER ALUMINUM CORPORATIONRESEARCH AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) See the discussion of competitive conditions, markets, and principal methods of competition in the description of each business unit under the headings "-Alumina Business Unit," "-Primary Aluminum Business Unit," "-Flat-Rolled Products Business Unit," and "-Engineered Products Business Unit" in this Report. Research and DevelopmentDEVELOPMENT Net expenditures for Company-sponsored research and development activities were $11.0$1.8 million in 1999, $13.72002, $4.0 million in 1998,2001, and $19.7$5.6 million in 1997. Approximately $.8 million of the 1999 research and development net expenditures were attributable to the development of the Micromill assets and technology, which were sold in January 2000 (see Note 4 of Notes to Consolidated Financial Statements). KACC's research staff totaled 50 at December 31, 1999.2000. KACC estimates that research and development net expenditures will be in the range of $9.0$2.0 million to $11.0$3.0 million in 2000. Employees During 1999, KACC employed an average of approximately 8,600 persons, compared with an average of approximately 9,200 persons in 1998 and approximately 9,600 persons in 1997.2003. EMPLOYEES At December 31, 1999,2002, KACC employed approximately 8,300 persons. The foregoing employee counts for 1999 and 1998 include the USWA workers who are currently subject to the lockout imposed by KACC as a result5,200 persons, of the continuing labor dispute. Since the inception of the labor dispute, KACC has operated the five affected facilities with temporary workers who are not included in the employee counts for 1999 and 1998. The average number of temporary workerswhich approximately 3,400 were employed during 1999 at the five plants affected by the USWA labor dispute wasDebtors and 1,800 were employed by non-Debtors. At December 31, 2001, KACC employed approximately 25% less than the average number of USWA workers employed prior to the labor dispute.5,800 persons. The labor agreements with the employees at the Valco smelter in Ghana and the employees at the Alpart refinery in Jamaica were renewed in 2002 and with the Valco smelteremployees at the London, Ontario facility in Ghana both expire in 2001. Environmental MattersFebruary 2003. ENVIRONMENTAL MATTERS The Company and KACC are subject to a wide variety of international, federal, state and local environmental laws and regulations. For a discussion of this subject, see "Factors Affecting Future Performance - KACC's current or past operations subject it to environmental compliance, clean-up and damage claims that may be costly" below. Factors Affecting Future PerformanceDuring the pendency of the Cases, substantially all pending litigation, except certain environmental claims and litigation, against the Debtors is stayed. FACTORS AFFECTING FUTURE PERFORMANCE This section discusses certain factors that could cause actual results to vary, perhaps materially, from the results described in forward-looking statements made in this Report. Forward-looking statements in this Report are not guarantees of future performance and involve significant risks and uncertainties. In addition to the factors identified below, actual results may vary materially from those in such forward-looking statements as a result of a variety of other factors including the effectiveness of management's strategies and decisions, general economic and business conditions, developments in technology, new or modified statutory or regulatory requirements, and changing prices and market conditions. This Report also identifies other factors that could cause such differences. No assurance can be given that these factors are all of the factors that could cause actual results to vary materially from the forward-looking statements. o- - The Cases and any plan of reorganization may have adverse consequences on the Company and its stakeholders and/or our reorganization from the Cases may not be successful Our objective is to achieve the highest possible recoveries for all creditors and stockholders, consistent with our ability to pay and the continuation of our businesses. However, there can be no assurance that we will be able to attain these objectives or achieve a successful reorganization and remain a going concern. The consolidated financial statements included elsewhere in this Report do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or the effect on existing stockholders' equity that may result from any plans, arrangements or other actions arising from the Cases, or the possible inability of the Debtors to continue in existence. Adjustments necessitated by such plans, arrangements or other actions could materially change the consolidated financial statements included elsewhere in this Report. For example, 1. If the Debtors were to decide to sell certain assets not deemed a critical part of a reorganized Kaiser, such asset sales could result in gains or losses (depending on the asset sold) and such gains or losses could be significant. 2. Additional pre-Filing Date claims may be identified through the proof of claim reconciliation process and may arise in connection with actions taken by the Debtors in the Cases. For example, while the Debtors consider rejection of the BPA contract to be in the Company's best long-term interests, such rejection may increase the amount of pre-Filing Date claims by approximately $75.0 million based on the BPA's proof of claim filed in connection with the Cases in respect of the contract rejection. 3. As more fully discussed below, the amount of pre-Filing Date claims ultimately allowed by the Court in respect of contingent claims and benefit obligations may be materially different from the amounts reflected in the consolidated financial statements. While valuation of the Debtors' assets and pre-Filing Date claims at this stage of the Cases is subject to inherent uncertainties, the Debtors currently believe that it is likely that their liabilities will be found in the Cases to exceed the fair value of their assets. Therefore, the Debtors currently believe that it is likely that pre-Filing Date claims will be paid at less than 100% of their face value and the equity of the Company's stockholders will be diluted or cancelled. Because of such possibility, the value of the Common Stock is speculative and any investment in the Common Stock would pose a high degree of risk. Additionally, while the Debtors operate their businesses as debtors-in-possession pursuant to the Code during the pendency of the Cases, the Debtors will be required to obtain the approval of the Court prior to engaging in any transaction outside the ordinary course of business. In connection with any such approval, creditors and other parties in interest may raise objections to such approval and may appear and be heard at any hearing with respect to any such approval. Accordingly, the Debtors may be prevented from engaging in transactions that might otherwise be considered beneficial to the Company. The Court also has the authority to oversee and exert control over the Debtors' ordinary course operations. - - We may not operate profitably in the future We reported a net loss of $468.7 million for the year ended December 31, 2002, which included a number of significant special items and non-cash charges. Even if such items were excluded from the results for 2002, results for the year ended December 31, 2002 would have been a net loss. There can be no assurance that we will generate a profit from recurring operations or that we will operate profitably in future periods. During 2002, the Company experienced a net decrease in cash and cash equivalents of $74.6 million; $49.6 million of which was used in operating activities and $25.0 million of which was used in investing and financing activities. The $49.6 million of cash and cash equivalents used in operations included several items not typically considered part of our normal recurring operations including: (a) asbestos-related insurance recoveries of $23.3 million; (b) approximately $30.0 million of funding to QAL in respect of QAL's scheduled debt maturities; and (c) foreign income tax payments related to prior year activities of $8.0 million. The balance of the cash and cash equivalents used in operations ($34.9 million) resulted from a combination of adverse market factors in the business segments in which the Company operates including (a) primary aluminum prices below long-term averages, (b) a weak demand for fabricated metal products, particularly aerospace products, and (c) higher than average power, fuel oil and natural gas prices. To date, despite the foregoing adverse consequences, the Company's liquidity (cash and cash equivalents plus unused availability under the DIP Facility) has remained strong, averaging between $200.0 million and $250.0 million during the fourth quarter of 2002. The completed sales of the Tacoma facility and the Company's interests in an office building during the first quarter of 2003 are expected to further bolster the Company's liquidity. However, no assurances can be given that the Company's liquidity will not erode if the adverse market factors continue for an extended period or for other reasons. - - Our earnings are sensitive to a number of variables Our operating earnings are sensitive to a number of variables over which we have no direct control. Two keyKey variables in this regard are commodityinclude prices for primary aluminum and energy and general economic conditions. The commodity price of primary aluminum significantly affects our financial results. Primary aluminum prices historically have been subject to significant cyclical price fluctuations. The Company believes the timing of changes in the market price of aluminum are largely unpredictable. Since 1993, the Average Midwest United Statesaverage LME transaction price (the "AMT price") has ranged from approximately $.50 to $1.00 per pound. During 1999, the AMT price averaged $.66 per pound. At January 28, 2000, the AMT price was $.84 per pound. Although KACC attemptsElectric power represents an important production input for us at our aluminum smelters and its cost can significantly affect our profitability. Power contracts for our smelters have varying contractual terms. See "Business--Primary Aluminum Business Unit." Our earnings, particularly in our Bauxite and Alumina business unit, are also sensitive to mitigate the impact of low prices through hedging activity (as described below), changes in marketthe prices for primary aluminum typically influence the realized prices for KACC's products, most directlynatural gas, fuel oil and diesel oil which are used in the aluminaour production processes, and primary aluminum businesses. 9 13 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED)to foreign exchange rates in respect of our cash commitments to our foreign subsidiaries and affiliates. Changes in global, regional, or country-specific economic conditions can have a significant impact on overall demand for aluminum-intensive fabricated products in the transportation, distribution, and packagingaerospace markets. Such changes in demand can directly affect our earnings by impacting the overall volume and mix of such products sold. To the extent that these end-use markets weaken, demand can also diminish for alumina and primary aluminum. o Our profits and cash flows- - The indefinite curtailment of the Mead facility may be adversely impacted by the results of KACC's hedging programs We are exposed to the risk of fluctuating aluminum prices, which influence the prices at which KACC sells its products. KACC enters into hedging transactions to limit its net exposure resulting from (1) its anticipated sales of alumina, primary aluminum, and fabricated aluminum products, less (2) its expected costs of purchasing certain items such as aluminum scrap, bauxite and rolling ingot, whose prices fluctuate with the price of primary aluminum. Such hedging transactions may involve the use of forward sales contracts, which effectively fix the price at which KACC sells its products, or the use of option contracts, which set a floor or a ceiling or bothhave adverse impacts on the price at which KACC sells its products. To the extent that theCompany The Mead facility is expected to remain curtailed indefinitely unless/until an appropriate combination of reduced power prices, for primary aluminum exceed the fixed or ceiling prices established by KACC's hedging transactions, our profits and cash flow would be lower than they otherwise would have been. As a result of KACC's hedging activities, at December 31, 1999, approximately 70% and 40% of KACC's net hedgeable volume with respect to 2000 and 2001, respectively, is subject to minimum and maximum contract prices. The average minimum contract price with respect to each period is significantly below the average AMT price for the week ended January 28, 2000. The average maximum contract price with respect to 2000 is below the average AMT price for the week ended January 28, 2000. The average maximum contract price with respect to 2001 approximates the AMT price for the week ended January 28, 2000. Because the average maximum contract price of our 2000 and 2001 hedging positions approximates or is below the AMT price for the week ended January 28, 2000, we will not realize the full benefit of such AMT price or any subsequent price increases that may occur with respect to the volumes covered by our 2000 and 2001 hedging positions. Hedging activities can also have a temporary adverse impact on our and KACC's liquidity. KACC has established credit limits with certain counterparties related to open forward sales and option contracts. When unrealized gains or losses on open positions are in excess of such credit limits, KACC is entitled to receive margin advances from the counterparties or is required to make margin advances to counterparties, as the case may be. At December 31, 1999, KACC had made margin advances of $38.0 million and had posted letters of credit totaling $40.0 million in lieu of making margin advances. Increases inhigher primary aluminum prices subsequentand other factors occurs. Until then, the Company will incur certain costs to December 31, 1999, could resultsafely maintain the property. While other costs are being reduced to a minimum, these costs may range from $3.0 million to $5.0 million per year and will reduce KACC's otherwise available liquidity. However, at some point in KACC havingthe future, the Company may decide, due to make additional margin advanceseconomic conditions and foreign competition and other factors, to sell the facility. If, in connection with such a hypothetical disposition, the Company were required to dismantle, demolish or post additional letters of creditotherwise permanently close the Mead facility, the demolition and such amountsenvironmental remediation costs could be significant. KACC's exposure to margin advances is expected to improve throughout 2000 as its year 2000 positions, which have a lower average maximum contract price than KACC's 2001 positions, expire. KACC is considering various financing and hedging strategies to limit its exposure to further margin advances inWhile the event of aluminum price increases. However, we cannot assure you KACC will be successful in this regard. A portion of the metal hedging transactions KACC has entered into do not qualify for "hedge" accounting under current accounting guidelines, even though they are consistent with its hedging objectives. Accordingly, we must reflect the change in the market value of these transactions in each period's earnings. This can cause material swings in our reported financial results when period-end to period-end movements in prices are large. A total of approximately $32.8 million of net pre-tax mark-to-market charges was reflected in the Company's 1999 results. If the forward price for primary aluminum were to increase further from the year-end price, additional mark-to-market charges would be required and the charges could be significant. KACC from time to time in the ordinary course of business also enters into hedging transactions with major suppliers of energy and energy related financial instruments to reduce its exposure to the energy price risk from fluctuating prices for fuel oil and diesel oil used in its production process. In addition, KACC enters into foreign exchange contracts to hedge its cash commitments in respect of foreign subsidiaries and affiliates. However, we cannot assure you that KACC's hedging strategies will reduce our exposure to the risk of fluctuating prices for fuel oil, diesel oil and foreign currencies or that the resultsproceeds of such hedging transactions willa disposition might offset such costs, no assurances can be more favorable than if KACC hadprovided that such amounts would fully or substantially offset the environmental remediation costs. - - We may not entered into such transactions. o KACC's substantial indebtednesshave electric power in sufficient amounts and/or at affordable costs available for our smelting operations Electric power represents an important production input at our aluminum smelters and high leverage could adverselyits cost can significantly affect us KACC is highly leveraged and has significant debt services requirements. As of December 31, 1999, KACC's total debt was approximately $972.8 million which does not give effectour profitability. Power contracts for our smelters have varying contractual terms. In March 2002, the GoG reduced the power allocation for our 90% owned Valco smelter forcing Valco to $103.6 million of our guaranteed debt of unconsolidated affiliates and 10 14 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) $57.6 million of other guarantees and letters of credit. The ratio of our total debt to stockholders' equity was approximately 15 to 1. In addition, we expect KACC to borrow additional amounts under its credit agreement, as amended (the "Credit Agreement"), or from other sources in the future, if available. KACC's high level of debt affects our operations in several important ways: o a large portion of the cash KACC generates is used to pay interest; o the agreements governing such debt may limit KACC's and our flexibility in planning for and reacting to changes in our business conditions; o KACC and we may be more vulnerable in the event of a downturn in our business, the aluminum industry or general economic conditions; o some or all of the agreements governing such debt limit KACC's and/or our ability to borrow additional money, to pay dividends and to consolidate or merge with other companies; o a high level of debt may impair KACC's and our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes; o KACC may experience a competitive disadvantage because it is more highly leveraged than somecurtail one of its competitors; and ofour operating potlines. In January 2003, Valco's power allocation was further reduced forcing the agreements governing such debt permit KACC's and our creditors to accelerate payments if KACC or we default or experience a change in the controlcurtailment of our ownership as set forth in such agreements. KACC's ability to make payments on and to refinance such debt depends on its ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond KACC's control. KACC will need to refinance all or a substantial portion of such debt on or before its maturity. KACC has a $325.0 million Credit Agreement which expires in August 2001.two additional operating potlines. As of February 29, 2000, KACC had $212.6 million of unused availability remaining under the Credit Agreement after allowing for $30.0 million of outstanding borrowings and $82.4 million for outstanding letters of credit. In addition, as of December 31, 1999, KACC had $850.2 million of public notes outstanding, of which $224.6 million principal amount of senior notes are due in 2002, $400.0 million principal amount of senior subordinated notes are due in28, 2003, and $225.6 million principal amount of senior notes are due in 2006. We cannot assure you that KACC will be able to refinance such debt on acceptable terms, if at all. o The explosion at the Gramercy alumina refinery could result in adverse consequences to us On July 5, 1999, KACC's Gramercy, Louisiana, alumina refineryValco was extensively damaged by an explosion. The cause of the explosion is under investigation by various governmental agencies. In January 2000, the U.S. Mine Safety and Health Administration ("MSHA") issued 21 citations in connection with its investigation of the Gramercy incident. The citations allege, among other things, that certain aspects of the plant's operations were unsafe and that such mode of operation contributed to the explosion. Additional civil or criminal fines or penalties are still possible. To date, no monetary penalty has been proposed by MSHA. Although the Company expects that a fine will be levied, the Company cannot predict the amount of any such fine(s). It is possible that other civil or criminal fines or penalties could be levied against KACC. KACC has previously announced that it disagrees with the substance of the citations and has challenged them. Twenty-four employees were injured in the incident, several of them severely. KACC may be liable for claims relating to the injured employees. The incident has also resulted in thirty-six class action lawsuits being filed against KACC alleging, among other things, property damage and personal injury. The aggregate amount of damages sought in the lawsuits cannot be determined at this time. While we believe KACC's insurance will cover the majority of these lawsuits and claims relating to the injured employees, it is anticipated that any civil or criminal fines or penalties will not be covered by such insurance. 11 15 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) Production at the plant is expected to be completely curtailed until the third quarter of 2000 when we expect partial production to begin and, based on our current estimates, we expect full production to be achieved during the first quarter of 2001 or shortly thereafter. KACC has received the regulatory permit required to operate the plant once the facility is ready to resume production. In addition, shortly after the incident, KACC declared force majeure with respect to certainoperating only one of its sales contracts with customers. KACC could experience the loss of one or more customers as a result of the Gramercy incident. Such a loss would adversely affect the plant's competitive position unless KACC is able to gain new customers. KACC is working with its customers to ensure a continued supply of alumina by purchasing alumina for its customers in the open market at prices in excess of the prices KACC is currently receiving from its customers. KACC is also currently purchasing alumina in the open market for a portion of its internal requirements. While the excess cost of such open market purchases is expected to be substantially offset by insurance recoveries, if, in the future, KACC is not successful in assuring an adequate supply of alumina at a competitive price for its smelters or if delays in the rebuild were to occur and certain sublimits within its insurance coverage were deemed to apply, our results could be negatively affected. KACC continues to work with the insurance carriers to maximize the amount of recoveries and to minimize, to the extent possible, the period of time between when KACC expends funds and when it is reimbursed. However, KACC will likely have to fund an average of 30 - 60 days of property damage and business interruption activity, unless some other arrangement is agreed with the insurance carriers, and such amounts could be significant. If insurance recoveries were to be delayed or if there were other significant uses of KACC's existing Credit Agreement capacity, delays in the rebuilding of the Gramercy refinery could occur and could have a material adverse impact on KACC's and our liquidity and operating results. Based on what is known to date and discussions with our advisors, we believe that the financial impact of this incident (in excess of the $5 million of insurance deductibles and self-retention provisions, which has already been recorded) will be largely offset by insurance coverage. However, delays in receiving insurance proceeds could adversely affect the timing of rebuilding the Gramercy refinery and could have an adverse impact on KACC's and our operating results and liquidity. o KACC's labor dispute could adversely affect us Substantially all of KACC's hourly work force at its Gramercy, Louisiana, alumina refinery; Mead and Tacoma, Washington aluminum smelters, Trentwood, Washington, rolling mill; and Newark, Ohio, extrusion facility were covered by a master labor agreement with the USWA which expired on September 30, 1998. The parties did not reach an agreement prior to the expiration of the master agreement and the USWA chose to strike. In January 1999, KACC declined an offer by the USWA to have the striking workers return to work at the five plants without a new agreement. KACC imposed a lock-out to support its bargaining position and continues to operate the plants (excluding our Gramercy facility) with salaried employees and other workers as it has since the strike began. The labor dispute with the USWA involves a number of uncertainties, including the ultimate cost of a settlement with the USWA and the resolution of the USWA's appeal of a ruling by the Oakland, California, regional office of the National Labor Relations Board (the "NLRB") that was favorable to KACC. Although we are satisfied with the productivity improvements achieved by the temporary work force at these plants and although turnover rates have declined significantly since the beginning of the dispute, there can be no assurance about KACC's ability to retain and motivate such a work force for an indefinite period. Since the beginning of the dispute, KACC has held periodic but unsuccessful talks with the USWA to seek a new labor agreement. KACC's proposal to the union has encompassed wage and benefit increases in exchange for productivity improvements. We believe such a proposal would result in a significant net reduction in operating costs for the affected plants compared to pre-strike levels. However, upon settlement, KACC's and our earnings may reflect a one-time charge for certain costs associated with the new labor agreement. There can be no assurance that this proposal will be accepted. In July 1999, the Oakland, California regional office of the NLRB dismissed the USWA's allegations of unfair labor practices against KACC. In September 1999, the union filed an appeal of this ruling with the NLRB general counsel's office in Washington, D.C. If the original decision were to be reversed, the matter would be referred to an administrative judge for a hearing whose outcome would be subject to additional appeal either by the USWA or KACC. This process could take months or years. There can be no certainty that the original NLRB decision will be upheld. If these proceedings eventually resulted in a definitive ruling 12 16 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) against KACC, KACC could be obligated to provide back pay to USWA members at the five plants. The amount of such back pay could be significant. Back pay, if any, would not cover the period prior to the USWA's January 1999 offer to return to work. The USWA has publicly stated that it is conducting a corporate campaign against KACC. Such campaigns are often conducted by unions during a labor dispute and are designed to bring public pressure to bear on a company in the belief that such pressure will expedite the settlement of the dispute. As part of its corporate campaign against KACC, the USWA has engaged in a number of activities, including contacting KACC's customers, suppliers, members of the investment community, clergymen, and various public agencies with whom KACC has ongoing relationships. Although such efforts on the part of the USWA have generated publicity in the news media, we believe that they have had little or no material impact on our operations. We do not know if the corporate campaign will continue or, if so, how long it might continue, or what specific actions the USWA may take. We do not know if such efforts may have a material impact on KACC's operations in the future. o The asbestos-related lawsuits against KACC could continue to increase and could adversely impact our financial position KACC is a defendant in numerous lawsuits in which the plaintiffs allege that they have injuries caused by exposure to asbestos during, and as a result of, their employment or association with KACC, or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC sold twenty or more years ago. On December 31, 1999, there were 100,000 claims pending, compared with 86,400 claims at December 31, 1998. KACC has reached agreements under which it expects to settle approximately 31,900 of the claims pending on December 31, 1999 over an extended period. Our December 31, 1999, balance sheet includes a liability for estimated asbestos-related costs of $387.8 million. We cannot assure you that this liability will not increase in the future. In determining the amount of the liability, we have only included estimates for the cost of claims for a ten year period through 2009 because we do not have a reasonable basis for estimating costs beyond that period. However, we expect that these costs may continue beyond 2009 and that they could be substantial. We believe KACC has insurance coverage for a substantial portion of such asbestos-related costs. Accordingly, our December 31, 1999, balance sheet includes a long term receivable for estimated insurance recoveries of $315.5 million. As a result of the net increases in our estimates for such asbestos-related liabilities and receivables during 1999, we recorded pre-tax charges of $53.2 million during the year ended December 31, 1999. Prior to insurance recoveries, we estimate that KACC's annual cash payments for asbestos-related costs will be approximately $75.0 - $85.0 million for each of the years 2000 through 2002, approximately $35.0 - $55.0 million for each of the years 2003 and 2004, and a total of $58.0 million beyond 2004. We believe that KACC will recover a substantial portion of these payments from insurance, but cannot assure you that KACC will receive substantial insurance payments or that the timing of such payments will occur in the year KACC is required to make the payments. However, KACC has reached preliminary agreements with certain insurance carriers under which it expects to collect a substantial portion of its anticipated 2000 asbestos-related payments. However, delays in receiving these or future repayments would have an adverse impact on KACC's liquidity. We continue to monitor claims activity, the status of lawsuits, legislative developments and other factors. We cannot assure you that our estimates of liabilities and recoveries will not change in the future. We also cannot assure you that the amounts related to future asbestos-related claims will not exceed KACC's aggregate insurance coverage. o We have recently experienced net losses We reported a net loss of $54.1 million for the year ended December 31, 1999. There can be no assurance that we will operate profitability in future periods. o We operate in a highly competitive industry The production of alumina, primary and fabricated aluminum products is highly competitive. There are numerous companies who operate in the aluminum industry. Certain of our competitors are substantially larger, have greater financial resources than we do and may have other strategic advantages. 13 17 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) o The operation of KACC's smelters depends on obtaining reliable and affordable electric power The process of converting alumina into aluminum requires significant amounts of electric power. The cost of electric power is an important production cost of KACC's aluminum smelters. KACC has smelters located in Mead and Tacoma, Washington, Ghana, and Wales, the United Kingdom. Pacific Northwest o KACC purchases electric power for the Mead and Tacoma, Washington, smelters from the Bonneville Power Administration ("BPA"), which supplies approximately half of the electric power for the two plants, and from other suppliers. The power contracts with the BPA expire in September 2001, and the power contracts with other suppliers expire at various times though September 2001. The BPA is engaged in the process of determining the allocation and price of electric power to its customers for the period October 2001 to September 2006. We believe that adequate electric power will be available during that period, from the BPA and from other suppliers, for the operation of KACC's smelters in Washington. The price of power purchased from the BPA could be significantly greater than the current price for such power, which would have an adverse effect on the profitability of such facilities. Ghana o Electric power for the 90%-owned Valco smelter is produced by hydroelectric generators operated by the Volta River Authority ("VRA"). The delivery of electric power to the smelter is subject to interruption periodically because of drought and other factors beyond the control of Valco. Electric power is supplied under a contract with the VRA which expires in 2017. The power contract indexes a portion of the price of power to the market price of primary aluminum, and provides for a review and adjustment of the base power rate and the price index every five years. In December 1999, Valco and the VRA reached an agreement that provides for sufficient power to operate four of Valco's five potlines in 2000 and 2001. In addition, the agreement provides a framework for resolving longer-term issues. This framework, among other things, is anticipated to result in an improvement in the reliability of Valco's long-term power supply and an increase in the price of power beginning in 2000, which increase will be partially offset in 2000 and 2001 by compensation Valco will receive from the VRA with respect to the provision of power in 1998 and 1999. However, we cannot provide assurance that in the long-term Valco will continue to be allocated sufficient power to operate at the desired operating levels past 2001 or that such power will be available at an affordable price. Wales o Electric power for the 49%-owned Anglesey smelter is supplied under a contract which expires in 2001. Anglesey expects to enter into a new power agreement during the first quarter of 2000 under which the existing contract would terminate early, in April 2000, and the new agreement would replace it for the period April 2000 through September 2005. We expect that the price of power under the new agreement will be significantly greater than the price under the present contract, which would have an adverse effect on KACC's financial results associated with the Anglesey smelter. However, Anglesey has ongoing initiatives to offset the impact of increased energy costs through cost reduction and revenue enhancement initiatives by 2001. However, we cannot assure you that these initiatives will be successful in fully offsetting such increased energy costs.potlines. See "Business--Primary Aluminum Business Unit--Valco." We cannot provide assurance that electric power at affordable prices will be available in the future, at affordable prices, for theseour smelters. o- - KACC's current or past operations subject it to environmental compliance, clean-up and damage claims that mayhave been and continue to be costly The operations of KACC's facilities are regulated by a wide variety of international, federal, state and local environmental laws. These environmental laws regulate, among other things: othings, air and water emissions and discharges; o the generation, storage, treatment, transportation and disposal of solid and hazardous waste; and 14 18 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 1. BUSINESS (CONTINUED) o the release of hazardous or toxic substances, pollutants and contaminants into the environment. Compliance with these environmental laws is costly. While legislative, regulatory and economic uncertainties make it difficult for us to project future spending for these purposes, we currently anticipate that in the 20002003 - 20012004 period, KACC's environmental capital spending will be approximately $13.0$1.3 million per year and that KACC's operating costs will include pollution control costs totaling approximately $35.0$14.8 million per year. However, subsequent changes in environmental laws may change the way KACC must operate and may force KACC to spend more thenthan we currently project. Additionally, KACC's current and former operations can subject it to fines or penalties for alleged breaches of environmental laws and to other actions seeking clean-up or other remedies under these environmental laws. KACC also may be subject to damages related to alleged injuries to health or to the environment, including claims with respect to certain waste disposal sites and the clean-up of sites currently or formerly used by KACC. Currently, KACC is subject to certain lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). KACC, along with certain other companies, has been named as a Potentially Responsible Party for clean-up costs at certain third-party sites listed on the National Priorities List under CERCLA. As a result, KACC may be exposed not only to its assessed share of clean-up but also to the costs of others if they are unable to pay. Additionally, KACC's Mead, Washington, facility has been listed on the National Priorities List under CERCLACERCLA. KACC and KACC will be required to implement one of several acceptable remedial options suggested by the regulatory authorities.authorities agreed to a plan of remediation in respect of the Mead facility in January 2000. In response to environmental concerns, we have established environmental accruals representing our estimate of the costs we reasonably expect KACC to incur in connection with these matters. Our estimates are based on presently enacted laws, existing technology, and our assessment of the likely remediation to be performed in each case. At December 31, 1999,2002, the balance of our accruals, which are primarily included in our long-term liabilities, was $48.9$59.1 million. We estimate that the annual costs charged to these environmental accruals will be approximately $3.0$.6 million to $9.0$12.3 million per year for the years 20002003 through 20042007 and an aggregate of approximately $23.0$33.3 million thereafter. However, we cannot assure you that KACC's actual costs will not exceed our current estimates. As additional facts develop, definitive clean-up plans are established, the necessary regulatory approvals are received, or other technologies are developed, changes in these and other factors may result in KACC's costs exceeding our current expectations. We believe that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $30.0 million. AsSee Note 12 of Notes to Consolidated Financial Statements for additional information. - - The settlement of the asbestos-related matters may have a major impact on our plan of reorganization KACC has been one of many defendants in numerous lawsuits in which the plaintiffs allege that they have injuries caused by exposure to asbestos during, and as a result of, their employment or association with KACC, or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC sold more than 20 years ago. Due to the Cases, existing lawsuits are stayed and new lawsuits cannot be commenced against us or KACC. Our December 31, 2002, balance sheet includes a liability for estimated asbestos-related costs of $610.1 million. In determining the amount of the liability, we have included estimates only for the costs of claims through 2011 because we do not have a reasonable basis for estimating costs beyond that period. However, the plan of reorganization process will require an estimation of KACC's entire asbestos-related liability, which may go beyond 2011. Additional asbestos-related claims are likely to be filed against KACC as a part of the Chapter 11 process. Management cannot reasonably predict the ultimate number of such claims or the amount of the associated liability. However, it is likely that such amounts could exceed, perhaps significantly, the liability amounts reflected in the Company's consolidated financial statements, which (as previously stated) is only reflective of an estimate of claims through 2011. KACC's obligations in respect of the currently pending and future asbestos-related claims will ultimately be determined (and resolved) as a part of the overall Chapter 11 proceedings. It is anticipated that resolution of these matters will be a lengthy process. Management will periodically continue to reassess its asbestos-related liabilities and estimated insurance recoveries as the Cases proceed. However, absent unanticipated developments such as asbestos-related legislation, material developments in other asbestos-related proceedings or in the Company's or KACC's Chapter 11 proceedings, it is not anticipated that the Company will have sufficient information to reevaluate its asbestos-related obligations and estimated insurance recoveries until much later in the Cases. Any adjustments ultimately deemed to be required as a result of the reevaluation of KACC's asbestos-related liabilities or estimated insurance recoveries could have a material impact on the Company's future financial statements. We believe KACC has insurance coverage for a substantial portion of such asbestos-related costs. Accordingly, our December 31, 2002 balance sheet includes a long-term receivable for estimated insurance recoveries of $484.0 million. We believe that recovery of this amount is probable and additional amounts may be recoverable in the future if additional claims are received. However, we cannot assure you that all such amounts will be collected. The timing and amount of future recoveries from KACC's insurance carriers will depend on the pendency of the Cases and on the resolution of disputes regarding coverage under the applicable insurance policies. During October 2001, the court ruled favorably on a number of policy interpretation issues, one of which was affirmed in February 2002 by an intermediate appellate court in response to a petition from the insurers. The rulings did not result in any changes to our estimates of current and future asbestos-related insurance recoveries. The trial court is scheduled to decide certain policy interpretation issues in Spring 2003 and may hear additional issues from time to time. Given the expected significance of probable future asbestos-related payments, the receipt of timely and appropriate payments from KACC's insurers is critical to a successful plan of reorganization and our long-term liquidity. - - The outcome of the unfair labor practices ("ULPs") action filed by the United Steelworkers of America ("USWA") could adversely affect us In connection with the strike by the USWA and the subsequent lock-out by KACC, the USWA filed twenty-four allegations of ULPs. Twenty-two of the allegations were dismissed. A trial before an administrative law judge on the two remaining allegations concluded in September 2001. In May 2002, the administrative law judge ruled against KACC in respect of the two remaining ULP allegations and recommended that the National Labor Relations Board ("NLRB") award back wages, plus interest, less any earnings of the workers during the period of the lockout. The administrative law judge's ruling did not contain any specific amount of the proposed award and is not self-executing. The USWA has filed a proof of claim of approximately $240.0 million in the Cases in respect of this matter. The NLRB also filed a proof of claim in respect of this matter. The NLRB claim was for $117.0 million, including interest of $18.0 million. The Company continues to believe that the allegations are without merit and will vigorously defend its position. KACC has appealed the ruling of the administrative law judge to the full NLRB. The NLRB general counsel and USWA have cross-appealed. Any outcome from the NLRB appeal would be subject to further regulatory reviewadditional appeals in a United States Circuit Court of Appeals by the general counsel of the NLRB, the USWA or KACC. This process could take several years. Because the Company believes that it may prevail in the appeals process, the Company has not recognized a charge in response to the adverse ruling. However, it is possible that, if the Company's appeal(s) are not ultimately successful, a charge in respect of this matter may be required in one or more future periods and the amount of such charge(s) could be significant. Any amounts ultimately determined by a court to be payable in this matter will be dealt with in the overall context of the Debtors' plan of reorganization and will be subject to compromise. Accordingly, any payments that may ultimately be required in respect of this matter would likely only be paid upon or after the Company's emergence from the Cases. - - Our profits and cash flows may be adversely impacted by the results of KACC's hedging programs From time to time in the ordinary course of business, KACC enters into hedging transactions to limit its exposure resulting from (1) its anticipated sales of alumina, primary aluminum, and fabricated aluminum products, net of expected purchase costs for items that fluctuate with primary aluminum prices, (2) energy price risk from fluctuating prices for natural gas, fuel oil and diesel oil used in its production process, and (3) foreign currency requirements with respect to its cash commitments with foreign subsidiaries and affiliates. To the extent that the prices for primary aluminum exceed the fixed or ceiling prices established by KACC's hedging transactions or that energy costs or foreign exchange rates are below the fixed prices, our profits and cash flow would be lower than they otherwise would have been. Because the agreements underlying KACC's hedging positions provided that the counterparties to the hedging contracts could liquidate KACC's hedging positions if KACC filed for reorganization, KACC chose to liquidate those positions in advance of the Filing Date. During December 2002 and the first quarter of 2003, the Company, with Court approval, reinstituted its hedging program when it entered into hedging transactions with respect to a portion of its 2003 fuel oil requirements. The Company anticipates that, subject to prevailing economic conditions, it may enter into additional hedging transactions with respect to primary aluminum prices, natural gas and fuel oil prices and foreign currency values to protect the interests of its constituents. However, no assurance can be given as to when or if the factors upon whichCompany will enter into such additional hedging activities. - - We operate in a substantial portionhighly competitive industry The production of this estimatealumina, primary aluminum and fabricated aluminum products is based can be expected to be resolved. However,highly competitive. There are numerous companies who operate in the aluminum industry. Certain of our competitors are substantially larger, have greater financial resources than we are currently working to resolve certain of these matters. odo and may have other strategic advantages. - - KACC is subject to political and regulatory risks in a number of countries KACC operates facilities in the U.S.United States and in a number of other countries, including Australia, Canada, Ghana, Jamaica, and the United Kingdom. While we believe KACC's relationships in the countries in which it operates are generally satisfactory, we cannot assure you that future country developments or governmental actions in these countries will not adversely affect KACC's operations particularly or the aluminum industry generally. Among the risks inherent in KACC's operations are unexpected changes in regulatory requirements, unfavorable legal rulings, new or increased taxes and levies, and new or increased import or export restrictions. KACC's operations outside of the U.S.United States are subject to a number of additional risks, including but not limited to currency exchange rate fluctuations, currency restrictions, and nationalization of assets. ITEM 2. PROPERTIES The locations and general character of the principal plants, mines, and other materially important physical properties relating to KACC's operations are described in Item 1 "- Business Operations" and those descriptions are incorporated herein by reference. KACC owns in fee or leases all the real estate and facilities used in connection with its business. Plants and equipment and other facilities other than the Gramercy, Louisiana alumina refinery (see Item 1 "- Incident at Gramercy Facility"), are generally in good condition and suitable for their intended uses, subjectuses. However, the Mead facility is expected to changing environmental requirements. Although KACC's domesticremain completely curtailed unless and until an appropriate combination of reduced power prices, higher primary aluminum smeltersprices and alumina facility were initially designed early in KACC's history, they have been modified frequently over 15 19 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- the years to incorporate technological advances in order to improve efficiency, increase capacity, and achieve energy savings. The Company believes that KACC's plants are cost competitive on an international basis.other factors occurs. KACC's obligations under the Credit AgreementDIP Facility are secured by, among other things, mortgages on KACC's major domestic plants (other than the Gramercy alumina refinery).plants. See Note 57 of Notes to Consolidated Financial Statements for further discussion. ITEM 3. LEGAL PROCEEDINGS This section contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See Item 1 of this Report for cautionary information with respect to such forward-looking statements. Gramercy Litigation On July 5, 1999, KACC's Gramercy, Louisiana, alumina refinery was extensively damaged by an explosion inREORGANIZATION PROCEEDINGS During the digestion areapendency of the plant. The cause ofCases, substantially all pending litigation, except certain environmental claims and litigation, against the accidentDebtors is under investigation by KACC and various governmental agencies. In January 2000, MSHA issued 21 citationsstayed. Generally, claims against a Debtor arising from actions or omissions prior to its Filing Date will be settled in connection with its investigationthe plan of reorganization. See Item 1. "Business - Reorganization Proceedings" for a discussion of the Gramercy incident. The citations allege, among other things, that certain aspects of the plant's operations were unsafe and that such mode of operation contributed to the explosion. To date, no monetary penalty has been proposedreorganization proceedings. Such discussion is incorporated herein by MSHA. Although the Company expects that a fine will be levied, the Company cannot predict the amount of any such fine(s). It is possible that other civil or criminal fines or penalties could be levied against KACC. KACC has previously announced that it disagrees with the substance of the citations and has challenged them. Twenty-four employees were injured in the incident, several of them severely. KACC may be liable for claims relating to the injured employees. The incident has also resulted in thirty-six lawsuits, most of which were styled as class action suits, being filed against KACC on behalf of more than 13,000 claimants. The lawsuits allege, among other things, property damage and personal injury. Such lawsuits were initially filed, on dates ranging from July 5, 1999, through December 26, 1999, in the Fortieth Judicial District Court for the Parish of St. John the Baptist, State of Louisiana, or in the Twenty-Third Judicial District Court for the Parish of St. James, State of Louisiana, and such lawsuits have been removed to the United Stated District Court, Eastern District of Louisiana, and are consolidated under the caption Carl Bell, et al. v. Kaiser Aluminum & Chemical Corporation, No. 99-2078, et seq. Plaintiffs have filed motions to remand the actions to state court, and the federal court has taken the matter under advisement. The cases are currently stayed pending mediation between the parties. The aggregate amount of damages sought in the lawsuits cannot be determined at this time. See Note 2 of Notes to Consolidated Financial Statements. Asbestos-related Litigationreference. ASBESTOS-RELATED LITIGATION KACC is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at leastmore than 20 years. The lawsuits are currently stayed by the Cases. The portion of Note 1012 of Notes to Consolidated Financial Statements under the heading "Asbestos Contingencies" is incorporated herein by reference. Labor MattersLABOR MATTERS In connection with the USWA strike and subsequent lock-out by KACC, certain allegations of unfair labor practices ("ULPs")ULPs were filed by the USWA with the National Labor Relations Board ("NLRB").NLRB. Twenty-two of the twenty-four allegations of ULPs brought against KACC by the USWA were dismissed. A trial on the remaining two allegations before an administrative law judge concluded in September 2001. In July 1999,May 2002, the Oakland, California, regional officeadministrative law judge ruled against KACC in respect of the two remaining ULP allegations and recommended that the NLRB award back wages, plus interest, less any earnings of the workers during the period of the lockout. The Company continues to believe that the allegations are without merit and will vigorously defend its position. KACC has appealed the ruling of the administrative law judge to the full NLRB. The NLRB general counsel and the USWA have cross-appealed. Any outcome from the NLRB appeal would be subject to additional appeals in a United States Circuit Court of Appeals by the general counsel of the NLRB, dismissed all material charges filed againstthe USWA or KACC. In September 1999,This process could take several years. This matter is not currently stayed by the union filed an appealCases. Any amounts ultimately determined by a court to be payable in this matter will be dealt with in the overall context of this ruling with the NLRB general counsel's office in Washington, D.C.Debtors' plan of reorganization and will be subject to compromise. The portion of Note 1012 of Notes to Consolidated Financial Statements under the heading "Labor Matters" is incorporated herein by reference. Other MattersGRAMERCY LITIGATION On July 5, 1999, KACC's Gramercy, Louisiana, alumina refinery was extensively damaged by an explosion in the digestion area of the plant. A number of employees were injured in the incident, several of them severely. The incident resulted in a significant number of individual and class action lawsuits being filed against KACC and others alleging, among other things, property damage, business interruption losses by other businesses and personal injury. During 2002, all of these matters were settled for amounts which, after the application of insurance, were not material to KACC. OTHER MATTERS Various other lawsuits and claims are pending against KACC. While uncertainties are inherent in the final outcome of such matters and it is presently impossible to determine the actual costs that ultimately may be incurred, management believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. See Note 1012 of Notes to Consolidated Financial Statements. 16 20 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------------Statements for discussion of additional litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS DuringNo matter was submitted to a vote of security holders of the Company during the fourth quarter of 1999, written consents of the holders of the Company's Common Stock were solicited to approve an amendment to the Company's Restated Certificate of Incorporation to increase the number of shares of Common Stock which the Company has authority to issue by 25,000,000, from 100,000,000 to 125,000,000, and, consequently, to increase the total number of shares of all classes of stock which the Company has authority to issue by 25,000,000, from 120,000,000 to 145,000,000. The amendment was approved in January 2000, with 50,383,413 consents submitted for the amendment, 24,007 consents submitted against the amendment, and 13,702 consents submitted abstaining.2002. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS TheThrough April 2, 2002, the Company's Common Stock iswas traded on the New York Stock Exchange under the symbol "KLU." However, on April 2, 2002, the New York Stock Exchange announced that it was suspending trading of the Company's Common Stock because the price of the Common Stock had fallen below the New York Stock Exchange's continued listing standard regarding the average closing price of a security for a consecutive 30 trading day period. As of April 3, 2002, the Company's Common Stock began trading on the OTC Bulletin Board under the symbol "KLUCQ." The number of record holders of the Company's Common Stock at JanuaryFebruary 28, 2003, was 467. The high and low sales prices for the Company's Common Stock for each quarterly period of 2002, 2001 and 2000, was 317. The informationas reported on the OTC Bulletin Board and the New York Stock Exchange is set forth in Note 5 of Notes to Consolidatedthe Quarterly Financial Statements under the heading "Debt CovenantsData on page 68 in this Report and Restrictions" is incorporated herein by reference. It is possible that, as a part of a plan of reorganization, the interests of the Company's existing stockholders could be diluted or cancelled. The Company has not paid any dividends on its Common Stock during the two most recent fiscal years. In accordance with the Code and the DIP Facility, the Company is not permitted to pay any dividends or purchase any of its stock. The high and low sales prices forCompany's non-qualified stock option plans, which are the Company's only stock option plans, have been approved by the Company's stockholders. The number of shares of Common Stock to be issued upon exercise of outstanding options, the weighted average price per share of the outstanding options and the number of shares of Common Stock available for each quarterly periodfuture issuance under the Company's non-qualified stock option plans at December 31, 2002, included under the heading "Incentive Plans" in Note 10 of 1999, 1998 and 1997, as reported on the New York Stock Exchange is set forth in the QuarterlyNotes to Consolidated Financial Data on page 58 in this Report andStatements is incorporated herein by reference. The Credit Agreement contains restrictions on the ability of the Company to pay dividends on or make distributions on account of the Company's Common Stock, and the Credit Agreement and the indentures governing KACC's public debt contain restrictions on the ability of the Company's subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances. See Note 57 of Notes to Consolidated Financial Statements under the heading "Debt Covenants and Restrictions" and the " Management's Discussion and Analysis of Financial Condition and Results of Operations - Financing ActivitiesLiquidity and Liquidity andCapital Resources - - Capital Structure" for additional information.information, which information is incorporated herein. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the Company is incorporated herein by reference to the table at page 14 of this Report, to the table at pages 18 - 19page 17 of Management's Discussion and Analysis of Financial Condition and Results of Operations, to Note 12 of Notes to Consolidated Financial Statements, and to Thethe Five-Year Financial Data on pages 5969 - 6070 in this Report. 17 21 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Kaiser Aluminum Corporation ("Kaiser"REORGANIZATION PROCEEDINGS The Company and 25 of its subsidiaries have filed separate voluntary petitions with the Court for reorganization under Chapter 11 of the Code; the Company, KACC and 15 of KACC's subsidiaries (the "Original Debtors") filed in the first quarter of 2002 and nine additional KACC subsidiaries (the "Additional Debtors") filed in the first quarter of 2003. The Original Debtors and Additional Debtors are collectively referred to herein as the "Debtors" and the Chapter 11 proceedings of these entitles are collectively referred to herein as the "Cases." For purposes of this Report, the term "Filing Date" shall mean, with respect to any particular Debtor, the date on which such Debtor filed its Case. None of KACC's non-U.S. joint ventures are included in the Cases. The Cases are being jointly administered. The Debtors are managing their businesses in the ordinary course as debtors-in-possession subject to the control and administration of the Court. Original Debtors. The necessity for filing the Cases by the Original Debtors was attributable to the liquidity and cash flow problems of the Company and its subsidiaries arising in late 2001 and early 2002. The Company was facing significant near-term debt maturities at a time of unusually weak aluminum industry business conditions, depressed aluminum prices and a broad economic slowdown that was further exacerbated by the events of September 11, 2001. In addition, the Company had become increasingly burdened by asbestos litigation and growing legacy obligations for retiree medical and pension costs. The confluence of these factors created the prospect of continuing operating losses and negative cash flow, resulting in lower credit ratings and an inability to access the capital markets. In connection with the filing of the Original Debtors' Cases, the Original Debtors are prohibited from paying pre-Filing Date obligations other than those related to certain joint ventures and in certain other limited circumstances approved by the Court. In October 2002, the Court set January 31, 2003 as the last date by which holders of pre-Filing Date claims against the Original Debtors (other than asbestos-related personal injury claims and certain hearing loss claims) could file their claims. Any holder of a claim that was required to file a claim by such date and did not do so may be barred from asserting such claim against any of the Original Debtors and, accordingly, may not be able to participate in any distribution in any of the Cases on account of such claim. Because the Company has not had sufficient time to analyze the proofs of claim to determine their validity, no provision has been included in the accompanying financial statements for claims that have been filed. The bar date does not apply to asbestos-related claims, for which the Original Debtors reserve the right to establish a separate bar date at a later date. A separate bar date of June 30, 2003 has been set for certain hearing loss claims. Additional Debtors. The Cases filed by the Additional Debtors were commenced, among other reasons, to protect the assets held by these Debtors against possible statutory liens that might arise and be enforced by the PBGC primarily as a result of the Company's failure to meet a $17.0 million accelerated funding requirement to its salaried employee retirement plan in January 2003. From an operating perspective, the filing of the Cases by the Additional Debtors had no impact on the Company's day-to-day operations. In contrast to the circumstances of the Original Debtors, the Court authorized the Additional Debtors to continue to make all payments in the normal course of business (including payments of pre-Filing Date amounts) to creditors. In March 2003, the Court set May 15, 2003 as the last date by which holders of pre-Filing Date claims against the Additional Debtors (other than asbestos-related personal injury claims and certain hearing loss claims) must file their claims. All Debtors. The Debtors' objective in the Cases is to achieve the highest possible recoveries for all creditors and stockholders and to continue the operation of their businesses. However, there can be no assurance that the Debtors will be able to attain these objectives or to achieve a successful reorganization. While valuation of the Debtors' assets and pre-Filing Date claims at this stage of the Cases is subject to inherent uncertainties, the Debtors currently believe that it is likely that their liabilities will be found in the Cases to exceed the fair value of their assets. Therefore, the Debtors currently believe that it is likely that pre-Filing Date claims will be paid at less than 100% of their face value and the equity of the Company's stockholders will be diluted or cancelled. Because of such possibility, the value of the Common Stock is speculative and any investment in the Common Stock would pose a high degree of risk. As provided by the Code, the Original Debtors had the exclusive right to propose a plan of reorganization for 120 days following the initial Filing Date. The Court has subsequently approved extensions of the exclusivity period for all Debtors through April 30, 2003. Additional extensions are likely to be sought. Extensions of this nature are believed to be routine in complex cases such as the Debtors' Cases. However, no assurance can be given that such future requests will be granted by the Court. If the Debtors fail to file a plan of reorganization during the exclusivity period, or if such plan is not accepted by the requisite numbers of creditors and equity holders entitled to vote on the plan, other parties in interest in the Cases may be permitted to propose their own plan(s) of reorganization for the Debtors. The Company expects that, when the Debtors ultimately file a plan of reorganization, it will reflect the Company's strategic vision for emergence from Chapter 11: (a) a standalone going concern with manageable leverage, improved cost structure and competitive strength; (b) a company positioned to execute its long-standing vision of market leadership and growth in fabricated products specifically with a financial structure that provides financial flexibility, including access to capital markets, for accretive acquisitions; (c) a company that delivers a broad product offering and leadership in service and quality for its customers and distributors; and (d) a company with continued presence in those commodities markets that have the potential to generate significant cash at steady-state metal prices. The Company's advisors have developed a preliminary timeline that, assuming the current pace of the Cases continues, could allow the Company to emerge from Chapter 11 in 2004. While no assurances can be given in this regard, the Company's management continues to push for an aggressive pace in advancing the Cases. Continued sales of non-core assets and facilities that are ultimately determined not to be an important part of the reorganized entity are likely. The Company's strategic vision, which is subject to continuing review in consultation with the Company's stakeholders, may also be modified from time to time as the Cases proceed due to changes in such items as changes in the global markets, changes in the economics of the Company's facilities or changing financial circumstances. Impact of the Cases on Financial Information. In light of the Cases, the accompanying financial information of the Company and related discussions of financial condition and results of operations are based on the assumption that the Company will continue as a "going concern," which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business; however, as a result of the commencement of the Cases, such realization of assets and liquidation of liabilities are subject to a significant number of uncertainties. Specifically, the financial information for the year ended December 31, 2002, contained herein does not present: (a) the realizable value of assets on a liquidation basis or the "Company"),availability of such assets to satisfy liabilities, (b) the amount which will ultimately be paid to settle liabilities and contingencies that may be allowed in the Cases, or (c) the effect of any changes that may occur in connection with the Debtors' capitalizations or operations resulting from a plan of reorganization. Because of the ongoing nature of the Cases, the discussions and consolidated financial statements contained herein are subject to material uncertainties. OVERVIEW The Company, through its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"),KACC, operates in all principal aspects of the aluminum industry through the following business segments: Bauxite and alumina, Primary aluminum, Flat-rolled products, Engineered products and Engineered products.Commodities marketing. 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 table below provides selected operational and financial information on a consolidated basis with respect to the Company for the years ended December 31, 1999, 1998,2002, 2001 and 1997.2000. The following data should be read in conjunction with the Company's consolidated financial statements and the notes thereto contained elsewhere herein. See Note 1216 of Notes to Consolidated Financial Statements for further information regarding segments. (All references to tons refer to metric tons of 2,204.6 pounds.)
Intersegment transfers are valued at estimated market prices. Year Ended December 31, ------------------------------------------------ (In millions of dollars, except shipments and prices) 1999 1998 1997 - ----------------------------------------------------- ---------- ---------- ---------- Shipments: (000 tons) Alumina Third Party 2,093.9(1) 2,250.0 1,929.8 Intersegment 757.3(1) 750.7 968.0 ---------- ---------- ---------- Total Alumina 2,851.2 3,000.7 2,897.8 ---------- ---------- ---------- Primary Aluminum Third Party 295.6 263.2 327.9 Intersegment 171.2 162.8 164.2 ---------- ---------- ---------- Total Primary Aluminum 466.8 426.0 492.1 ---------- ---------- ---------- Flat-Rolled Products 217.9 235.6 247.9 ---------- ---------- ---------- Engineered Products 171.1 169.4 152.1 ---------- ---------- ---------- Average Realized Third Party Sales Price:(2) Alumina (per ton) $ 177 $ 197 $ 198 Primary Aluminum (per pound) $ .67 $ .71 $ .75 Net Sales: Bauxite and Alumina Third Party (includes net sales of bauxite) $ 397.9(1) $ 472.7 $ 411.7 Intersegment 129.0(1) 135.8 201.7 ---------- ---------- ---------- Total Bauxite & Alumina 526.9 608.5 613.4 ---------- ---------- ---------- Primary Aluminum Third Party 439.1 409.8 543.4 Intersegment 240.6 233.5 273.8 ---------- ---------- ---------- Total Primary Aluminum 679.7 643.3 817.2 ---------- ---------- ---------- Flat-Rolled Products 576.2 714.6 743.3 Engineered Products 542.6 581.3 581.0 Minority Interests 88.5 78.0 93.8 Eliminations (369.6) (369.3) (475.5) ---------- ---------- ---------- Total Net Sales $ 2,044.3 $ 2,256.4 $ 2,373.2 ========== ========== ========== Operating Income (Loss): Bauxite & Alumina $ (6.0)(3) $ 42.0(7) $ 54.2 Primary Aluminum 8.0(4) 49.9(7) 148.3 Flat-Rolled Products 17.1 70.8(7) 28.2(8) Engineered Products 38.6 47.5(7) 42.3(8) Micromill (30.7)(5) (63.4)(5) (24.5) Eliminations 6.9 8.9 (5.9) Corporate (62.8) (65.1) (74.6)(8) ---------- ---------- ---------- Total Operating Income (Loss) $ (28.9) $ 90.6 $ 168.0 ========== ========== ========== Net Income (Loss) $ (54.1)(6) $ .6 $ 48.0 ========== ========== ========== Capital Expenditures $ 68.4 $ 77.6 $ 128.5 ========== ========== ==========
18 22 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- (1) Net sales for the year ended December 31, 1999, included approximately 264 tons----------------------------------------------- (In millions of alumina purchased from third partiesdollars, except shipments and resold to certain unaffiliated customersprices) 2002 2001 2000 - -------------------------------------------------------------- ------------- --------------- -------------- Shipments: (000 tons) Alumina Third Party 2,626.6 2,582.7 1,927.1 Intersegment 343.9 422.8 751.9 ------------- --------------- -------------- Total Alumina 2,970.5 3,005.5 2,679.0 ------------- --------------- -------------- Primary Aluminum(1) Third Party 194.8 244.7 345.5 Intersegment 1.7 2.3 148.9 ------------- --------------- -------------- Total Primary Aluminum 196.5 247.0 494.4 ------------- --------------- -------------- Flat-Rolled Products 46.3 74.4 162.3 ------------- --------------- -------------- Engineered Products 124.4 118.1 164.6 ------------- --------------- -------------- Average Realized Third Party Sales Price:(2) Alumina (per ton) $ 165 $ 186 $ 209 Primary Aluminum (per pound) $ .62 $ .67 $ .74 Net Sales: Bauxite and 131 tonsAlumina Third Party (includes net sales of alumina purchased from third partiesbauxite) $ 458.1 $ 508.3 $ 442.2 Intersegment 58.6 77.9 148.3 ------------- --------------- -------------- Total Bauxite & Alumina 516.7 586.2 590.5 ------------- --------------- -------------- Primary Aluminum(1) Third Party 265.3 358.9 563.7 Intersegment 2.5 3.8 242.3 ------------- --------------- -------------- Total Primary Aluminum 267.8 362.7 806.0 ------------- --------------- -------------- Flat-Rolled Products 183.6 308.0 521.0 Engineered Products 425.0 429.5 564.9 Commodities Marketing(3) 39.1 22.9 (25.4) Minority Interests 98.5 105.1 103.4 Eliminations (61.1) (81.7) (390.6) ------------- --------------- -------------- Total Net Sales $ 1,469.6 $ 1,732.7 $ 2,169.8 ============= =============== ============== Operating Income (Loss): Bauxite & Alumina (4) $ (48.5) $ (46.9) $ 57.2 Primary Aluminum(5) (23.1) 5.1 100.1 Flat-Rolled Products(5)(6) (30.7) .4 16.6 Engineered Products(5)(6) 8.5 4.6 34.1 Commodities Marketing 36.2 5.6 (48.7) Eliminations 1.7 1.0 .1 Corporate and transferred toOther(7) (98.9) (68.5) (61.4) Non-Recurring Operating (Charges) Benefits, Net(8) (251.2) 163.6 41.3 ------------- --------------- -------------- Total Operating Income (Loss) $ (406.0) $ 64.9 $ 139.3 ============= =============== ============== Net Income (Loss) $ (468.7) $ (459.4) $ 16.8 ============= =============== ============== Capital Expenditures $ 47.6 $ 148.7 $ 296.5 ============= =============== ============== (1) Beginning in the Company'sfirst quarter of 2001, as a result of the continuing curtailment of KACC's Northwest smelters, the Flat-rolled products business unit began purchasing its own primary aluminum rather than relying on the Primary aluminum business unit.unit to supply its aluminum requirements through production or third party purchases. The Engineered products business unit was already responsible for purchasing the majority of its primary aluminum requirements. (2) Average realized prices for the Company's Flat-rolled products and Engineered products segments are not presented as such prices are subject to fluctuations due to changes in product mix. Average realized third party(3) Net sales pricesin 2002 primarily represent partial recognition of deferred gains from hedges closed prior to the commencement of the Cases. Net sales in 2001 and 2000 represent net settlements with counterparties for aluminamaturing derivative positions. (4) Operating results for 2002 include $4.4 of charges resulting from an increase in the allowance for doubtful receivables and primarya LIFO inventory charge of $.5. Operating results for 2001 include abnormal Gramercy-related start-up costs and litigation costs, net of business interruption-related insurance accruals, of $34.8 and a LIFO inventory charge of $3.7. (5) Operating results for 2002 include LIFO inventory charges of: Primary aluminum - $2.1, Flat-Rolled Products - $2.0 and Engineered Products - $1.5. (6) Operating results for 2001 include the impact of hedging activities. (3)LIFO inventory charges of: Flat-Rolled Products - $3.0 and Engineered Products - $1.5. (7) Operating income (loss)results for the year ended December 31, 1999, included2002 include special pension charges of $5.0 related$24.1 and key employee retention program charges of $5.1. (8) See Note 6 of Notes to insurance deductibles and self-insurance provisions and estimated business interruption insurance recoveries totaling $41.0. Additionally, depreciation was suspendedConsolidated Financial Statements for the Gramercy, Louisiana alumina refinery for the last six months of 1999, as a resultdetailed summary of the July 5, 1999, incident. Depreciation expense for the Gramercy refinery for the six months ended June 30, 1999, was approximately $6.0. (4) Operating income (loss) for the year ended December 31, 1999, included potline restart costscomponents of $12.8. (5) Operating income (loss) for the years ended December 31, 1999 and 1998 included non-cash charges of $19.1 and $45.0, respectively, related to the impairment of the Company's Micromill assets. (6) Net income (loss) for the year ended December 31, 1999, included a pre-tax gain of $85.0 on involuntary conversion at Gramercy facility, which amount represents the difference between the minimum expected property damage reimbursement amount for the Gramercy alumina refinerynon-recurring operating (charges) benefits, net and the net carrying value ofbusiness segment to which the damaged property. (7) Operating income (loss) for the year ended December 31, 1998, for the Bauxite and alumina, Primary aluminum, Flat-rolled products and Engineered products segments included unfavorable strike-related impacts of approximately $11.0, $29.0, $16.0, and $4.0, respectively. (8) Operating income (loss) for the year ended December 31, 1997, included pre-tax charges of $2.6, $12.5 and $4.6 related to restructuring of operations for the Flat-rolled products, Engineered products and Corporate segments, respectively.items relate. This sectionReport contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this section (see "Overview," "Results of Operations," "Liquidity and Capital Resources" and "Other Matters"). Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include the effectiveness of management's strategies and decisions, general economic and business conditions, developments in technology, new or modified statutory or regulatory requirements and changing prices and market conditions. See Item 1. "Business - Factors Affecting Future Performance." 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. OVERVIEWSIGNIFICANT ITEMS Market-related FactorsFactors. The Company's operating results are sensitive to changes in the prices of alumina, primary aluminum, and fabricated aluminum products, and also depend to a significant degree on the volume and mix of all products sold and on KACC's hedging strategies. Primary aluminum prices have historically been subject to significant cyclical price fluctuations. See Notes 12 and 1113 of Notes to Consolidated Financial Statements for a discussion of KACC's hedging activities. Changes in global, regional, or country-specific economic conditions can have a significant impact on overall demand for aluminum-intensive fabricated products in the transportation, distribution, and packaging markets. Such changes in demand can directly affect the Company's earnings by impacting the overall volume and mix of such products sold. To the extent that these end-use markets weaken, demand can also diminish for what the Company sometimes refers to as the "upstream" products: alumina and primary aluminum. During 1999,2002, the Average Midwest United States transactionaverage LME price ("AMT price") per pound offor primary aluminum declined to a low of approximately $.57was $.61. During 2001, the LME price began the year at $.71 per pound in February 1999 and then began a steady increasedecrease ending 19992001 at $.79$.61 per pound. During 1998, the AMT price per pound of primary aluminum experienced a steady decline during the year, beginning the year in the $.70 to $.75 range and ending the year in the low $.60 range. During 1997, the AMT price remained in the $.75 to $.80 price range for the first eleven months before declining to the low $.70 range in December. Subsequent to December 31, 1999, the AMT price continued to rise. At January 28, 2000, the AMTaverage LME price was $.70 per pound. At February 28, 2003, the LME price was approximately $.84$.66 per pound. 19 23 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- Incident at Gramercy Facility On July 5, 1999, KACC's Gramercy, Louisiana alumina refinery was extensively damaged by an explosion inIndefinite Curtailment of Mead Facility. In January 2003, the digestion areaCompany announced the indefinite curtailment of the plant. Twenty-four employees were injured inMead facility. The curtailment of the incident, severalfacility was due to the continuing unfavorable market dynamics, specifically unattractive long-term power prices and weak primary aluminum prices, both of them severely.which are significant impediments for an older smelter with higher-than-average operating costs. The Mead facility is expected to remain completely curtailed unless and until an appropriate combination of reduced power prices, higher primary aluminum prices and other factors occurs. As a result of the incident,indefinite curtailment, in December 2002, the Company recorded non-cash non-recurring charges of: (a) $138.5 million to write-down the Washington smelter assets to their estimated fair value; (b) a net charge of $18.6 million to write-down certain aluminum and alumina productioninventories at the facility was completely curtailed. ProductionNorthwest smelters to their net realizable values based on the Company's intent to sell (rather than use) such inventories; and (c) a LIFO inventory charge of $.9 million which resulted from the write-down of the aluminum and alumina inventories. Additionally, during December 2002, the Company accrued approximately $58.8 million of pension, postretirement benefit and related obligations for the hourly employees who had been on a laid-off status and under the terms of their labor contract became eligible to elect early retirement because of the indefinite curtailment. See Note 5 of Notes to Consolidated Financial Statements for additional discussion of the Mead curtailment. Approximately $1.5 million of charges associated with salaried workforce reductions at the plant is currently expected to remain completely curtailed until the third quarter of 2000 when KACC expects to begin partial production. Based on current estimates, full production is expected toMead facility will be achieved duringrecorded in the first quarter of 2001 or shortly thereafter. KACC has received2003 because the regulatory permit requiredrecognition requirements under generally accepted accounting principles for such charges were not met at December 31, 2002. Liquidity/Negative Cash Flow. During 2002, the Company experienced a net decrease in cash and cash equivalents of $74.6 million; $49.6 million of which was used in operating activities and $25.0 million of which was used in investing and financing activities. The $49.6 million of cash and cash equivalents used in operations included several items not typically considered part of our normal recurring operations including: (a) asbestos-related insurance recoveries of $23.3 million; (b) approximately $30.0 million of funding to operate the plant once the facility is readyQAL in respect of QAL's scheduled debt maturities; and (c) foreign income tax payments related to resume production.prior year activities of $8.0 million. The causebalance of the incident is under investigation by KACCcash and governmental agencies. In January 2000,cash equivalent used in operations ($34.9 million) resulted from a combination of adverse market factors in the U.S. Mine Safety and Health Administration ("MSHA") issued 21 citationsbusiness segments in connection with its investigation of the incident. The citations allege, among other things, that certain aspects of the plant's operations were unsafe and that such mode of operation contributed to the explosion. To date, no monetary penalty has been proposed by MSHA. Althoughwhich the Company expectsoperates including (a) primary aluminum prices that were below long-term averages, (b) a fine will be levied,weak demand for fabricated metal products, particularly aerospace products, and (c) higher than average power, fuel oil and natural gas prices. Despite the Company cannot predict the amount of any such fine(s). It is possible that other civil or criminal fines or penalties could be levied against KACC. KACC has previously announced that it disagrees with the substance of the citations and has challenged them. However, as more fully explained below, based on what is known to date and discussions withforegoing, the Company's advisors, the Company believes that the financial impact of this incident (in excess of insurance deductiblesliquidity (cash and self-retention provisions) will be largely offset by insurance coverage. Deductibles and self-retention provisionscash equivalents plus unused availability under the insurance coverage for the incident total $5.0 million, which amounts were charged to Cost of products sold in 1999. KACC's insurance policies provide that KACC will be reimbursed for the costs of repairing or rebuilding the damaged portion of the facility using new materials of like kind and quality with no deduction for depreciation. Based on discussions with the insurance carriers and their representatives and third party engineering reports, KACC recorded a pretax gain of $85.0 million, representing the differenceDIP Facility) has remained strong, averaging between the minimum expected property damage reimbursement amount and the net carrying value of the damaged property of $15.0 million. The receivable attributable to the minimum expected property damage reimbursement has been classified as a long-term item in Other assets, despite the fact that substantially all such amounts are expected to be spent during 2000, as such proceeds will be invested in property, plant and equipment. The overall impact of recognizing the gain will be a significant increase in stockholders' equity and an increase in deprecation expense in future years once production is restored. The Gramercy facility has incurred incremental costs for clean-up and other activities during 1999 and will continue to incur such costs in 2000. These clean-up and site preparation activities have been offset by accruals of approximately $14.0 million for estimated insurance recoveries. KACC's insurance policies provide for the reimbursement of specified continuing expenses incurred during the interruption period plus lost profits (or less expected losses) plus other expenses incurred as a result of the incident. KACC had recorded expected business interruption insurance recoveries totaling $19.0$200.0 million and $41.0$250.0 million in the quarter and year ended December 31, 1999, as a reduction of Cost of products sold, which amounts substantially offset actual expenses incurred during these periods. However, the business interruption insurance amounts recorded represent estimates of KACC's business interruption coverage, based on preliminary discussions with the insurance carriers and their representatives, and are, therefore, subject to change. KACC currently believes that additional amounts may be recoverable. Any adjustments to the recorded amounts of expected recovery will be reflected from time to time as such amounts are agreed to by the insurance carriers. The amounts of such adjustments could be material. Since production has been curtailed at the Gramercy facility, KACC has, for the time being, suspended depreciation of the facility. Depreciation expense for the first six months of 1999 was approximately $6.0 million. However, KACC believes that the depreciation expense that would have been incurred may, at least in part, be recoverable under its business interruption insurance coverage. The incident has also resulted in thirty-six class action lawsuits being filed against KACC alleging, among other things, property damage and personal injury. In addition, a claim for alleged business interruption losses has been made by a neighboring business. The aggregate amount of damages sought in the lawsuits and other claims cannot be determined at this time; however, KACC does not currently believe the damages will exceed the amount of coverage under its liability policies. Claims relating to all of the injured employees are expected to be covered under KACC's workers' compensation or liability policies. However, the aggregate amount of workers' compensation claims cannot be determined at this time and it is possible that such claims could exceed KACC's coverage limitations. While it is presently impossible to determine the aggregate amount 20 24 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- of claims that may be incurred, or whether they will exceed KACC's coverage limitations, KACC currently believes that any amount in excess of the coverage limitations will not have a material effect on the Company's consolidated financial position or liquidity. However, it is possible that as additional facts become available, additional charges may be required and such charges could be material to the period in which they are recorded. Labor Matters Substantially all of KACC's hourly workforce at the Gramercy, Louisiana, alumina refinery, Mead and Tacoma, Washington, aluminum smelters, Trentwood, Washington, rolling mill, and Newark, Ohio, extrusion facility were covered by a master labor agreement with the United Steelworkers of America (the "USWA") which expired on September 30, 1998. The parties did not reach an agreement prior to the expiration of the master agreement and the USWA chose to strike. In January 1999, KACC declined an offer by the USWA to have the striking workers return to work at the five plants without a new agreement. KACC imposed a lock-out to support its bargaining position and continues to operate the plants with salaried employees and other workers as it has since the strike began. As a result of the USWA strike, the Company temporarily curtailed three out of a total of eleven potlines at its Mead and Tacoma, Washington, aluminum smelters at September 30, 1998 (representing approximately 70,000 tons per year of production capacity out of a total combined production capacity of 273,000 tons per year at the facilities). Restarts of the two Mead potlines were completed during mid-1999. While a portion of the curtailed potline at Tacoma has been restarted to meet internal requirements, the timing for a complete restart of the potline (representing approximately 10,000 tons of idle production capacity) has yet to be determined and will depend upon market conditions and other factors. While the Company initially experienced an adverse strike-related impact on its profitability in the fourth quarter of 1998,2002. Recent improvements in primary aluminum prices, fabricated product demand, particularly aerospace products, and the Company currently believes that KACC's operations at the affected facilities have been substantially stabilized and will be able to run at, or near, full capacity, and that the incremental costs associated with operating the affected plants during the dispute were virtually eliminated as of January 1999 (excluding the impactssale of the restart costs discussed aboveTacoma facility and the effectCompany's interests in an office building in the first quarter of market factors such as2003 are expected to further bolster the continued market-related curtailment at the Tacoma smelter).Company's liquidity. However, no assurances can be given that KACC's efforts to run the plants on arecent primary aluminum price increase and fabricated product market demand improvement will be sustained basis, without a significant business interruption or material adverse impact onthat the Company's operating results,liquidity will be successful. KACC and the USWA continue to communicate.not erode for other reasons. Pension Plan Matters. 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 realitiesassets of the marketplace. Strategic Initiatives KACC's strategy isCompany-sponsored pension plans, like numerous other companies' plans, are, to improve its financial results by: increasinga substantial degree, invested in the competitiveness of its existing plants; continuing its cost reduction initiatives; adding assets to businesses it expects to grow; pursuing divestitures of its non-core businesses;capital markets and strengthening its financial position. In addition to working to improvemanaged by a third party. Given the performance of the Company's existingstock market during 2002, and the resulting decline in the value of the assets held by the Company pension plans, the Company was required to reflect additional minimum pension liabilities of $133.1 million in its 2002 financial statements. Additionally, 2003 operating results are expected to be adversely impacted by higher pension costs resulting from the decline in the value of the pension plans' assets and increased liabilities due to lower interest rates, restructuring activities and the incurrence of additional full early retirement obligations in respect of KACC's Washington smelters. However, the Company does not currently intend to fund the remaining required pension contributions due in 2003 as it believes that virtually all of such amounts are pre-Filing Date obligations. As previously announced, the Company has devoted significant efforts analyzing its existing asset portfoliomet on several occasions with the intentPBGC to discuss alternative solutions to the pension funding issue that would assist the Company in assessing its alternatives for a plan of focusing its efforts and capital in sectorsreorganization. These options include extended amortization periods for payments of unfunded liabilities or the potential termination of the industryplans. Also, during 2002, the Company recorded charges of $24.1 million for additional pension expense. See Note 10 of Notes to Consolidated Financial Statements for additional discussion of the additional pension expense. Valco Operating Level. The amount of power made available to Valco by the VRA depends in large part on the level of the lake that are considered most attractive,is the primary source for generating the hydroelectric power used to supply the smelter. The level of the lake is primarily a function of the level of annual rainfall and the alternative (non-Valco) uses of the power generated, as directed by the VRA. As of February 28, 2003, the lake level was at a ten-year low. During late 2000, Valco, the GoG and the VRA reached an agreement, subject to Parliamentary approval, that would provide sufficient power for Valco to operate at least three and one-half of its five potlines through 2017. However, Parliamentary approval was not received and, in whichMarch 2002, the Company believes it is well positionedGoG reduced Valco's power allocation forcing Valco to capture value. The initial stepscurtail one of this process resultedits four operating potlines. Valco's power allocation was further reduced resulting in the June 1997 acquisitioncurtailment of the Bellwood extrusion facility, the May 1997 formation of AKW L.P. ("AKW"), the rationalization of certain of the Company's engineered products operations and the Company's investment to expand its production capacity for heat treat flat-rolled products at its Trentwood, Washington, rolling mill. This process has continued in 1999. In February 1999, KACC completed the acquisition of the remaining 45% interest in Kaiser LaRoche Hydrate Partners ("KLHP"), an alumina marketing venture, from its joint venture partner for a cash purchase price of approximately $10.0 million. Additionally, in April 1999, KACC completed the sale of its 50% interest in AKW, to its partner for $70.4 million. The strategic analysis process also resulted in the Company's decision in the latter part of 1998 to seek a strategic partner for the further development and deployment of KACC's Micromill(TM) technology and to KACC's later agreementtwo additional operating potlines in January 20002003. In connection with such curtailments, $5.5 million of end-of-service benefits were paid resulting in a $3.2 million charge to sell the Micromill assetsearnings in January 2003. Additional curtailments and technology, for a nominal payment at closing and future payments based on subsequent performance and profitabilityend-of-service payments/charges are possible. As of the Micromill technology. Another area of emphasis has been a continuing focus on managing the Company's legacy liabilities. The Company believes that KACC has insurance coverage available to recover certain incurred and future environmental costs and a substantial portion of its asbestos-related costs and is actively pursing claims in this regard. During 1998, KACC received recoveries totaling 21 25 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- approximately $35.0 million from certain of its insurers related to current and future environmental claims. The timing and amount of future recoveries of asbestos-related claims from insurance carriers remain a major priority of the Company, but will depend on the pace of claims review and processing by such carriers and the resolution of any disputes regarding coverage under the insurance policies. However, during 1999, KACC reached preliminary agreements under which it expects to collect a substantial portion of its expected asbestos-related payments from certain insurance carriers in 2000. Additional portfolio analysis and initiatives are continuing. Valco Operating Level In 1999, the power allocation for KACC's 90%-owned Volta Aluminium Company Limited ("Valco") smelter in Ghana was sufficient for the smelter to operate three out of a total of five potlines as of January 1. Each of Valco's potlines is capable of producing approximately 40,000 tons per year of primary aluminum. However, production was well below this level in the first half of the year due to the timing of restarts for the two incremental potlines. Consequently, to compensate for the low production in the first half of the year, Valco operated above an equivalent three-potline annual rate during the last six months of 1999. At December 31, 1999,February 28, 2003, Valco was operating four potlines. Valco operated only one potline during most of 1998. However, Valco earned compensation in 1998 (in the form of energy credits to be utilized over the last half of 1998 and during 1999) from the Volta River Authority ("VRA") in lieu of the power necessary to run two of the potlines that were curtailed during 1998. The compensation substantially mitigated the financial impact in 1998 of the curtailment of such lines. However, Valco did not receive any compensation from the VRA for one additional potline which was curtailed in January 1998. Under a December 1999 agreement between Valco and the VRA, Valco's power allocation for 2000 and 2001 will be sufficient for the smelter to operate four of its five potlines. No assurance can be given that Valco will continue to receive sufficient power to operate the one remaining operating potline. Valco has met with the GoG and the VRA and anticipates such discussions will continue in respect of the current and future power situations. Valco has objected to the power curtailments and expects to seek appropriate compensation from the GoG. In addition, Valco and the VRA also reached an agreementCompany have filed for arbitration with the International Chamber of Commerce in December 1999 that provides a framework for resolving longer-term issues. This framework, among other things, is anticipated to result in an improvement inParis against both the reliability of Valco's long-term power supplyGoG and an increase in the price for power beginning in 2000. The increase in the price for power willVRA. However, no assurances can be partially offset by net payments of approximately $13 million Valco will receive from the VRA over the period 2000 to 2001 with respectgiven as to the provisionultimate success of power in 1998 and 1999. Flat-Rolled Products In December 1999, the Company announced that its flat-rolled products business unit expects to accelerate its product mix shift toward higher value added product linesany such as heat-treat, beverage can lid and tab stock, automotive and other niche businesses, and away from beverage can body stock. The initial steps of this process should be completed by early 2000, at which point the Company will assess related issues such as employment levels at the Trentwood facility. Although the shift in product mix is expected to have a favorable impact on the Company's results and financial position over the long term, it is possible that such a product mix shift may result in certain non-recurring charges that would have an adverse impact on the Company's near term results.actions. RESULTS OF OPERATIONS 1999 AS COMPARED TO 1998 Summary -Summary. The Company reported a net loss of $54.1$468.7 million, or $.68$5.82 of basic loss per common share for 19992002, compared to a net loss of $459.4 million, $5.73 of basic loss per common share for 2001 and net income of $.6$16.8 million, or $.01$.21 of basic income per common share, for 1998.2000. Net sales in 19992002 totaled $2,044.3$1,469.6 million compared to $2,256.4$1,732.7 million in 1998. Net loss for 1999 included a non-cash pre-tax charge of $19.12001 and $2,169.8 million or $.16 per share, to reduce the carrying value of KACC's Micromill assets, pre-tax charges of $32.8 million, or $.27 per common share, to reflect mark-to-market adjustments on certain primary aluminum hedging transactions and non-cash pre-tax charges of $53.2 million, or $.44 per common share, for asbestos- related claims. The 1999 charges were offset by a pre-tax gain on involuntary conversion at Gramercy facility of $85.0 million, or $.69 per share, a pre-tax gain of $50.5 million, or $.42 per common share, on the sale of the Company's 50% interests in AKW and a non-cash tax benefit of $4.0 million, or $.05 per share, resulting from the resolution of certain tax matters. Net income for 1998 included approximately $60.0 million, $.50 per common share, of pre-tax incremental expense and the earnings impact of lost volume associated with the strike by members of the USWA (more fully discussed above), a non-cash pre-tax charge of $45.0 million, $.38 per common share, to reduce the carrying value of KACC's Micromill assets, (more fully discussed above) and a non-cash tax benefit of $8.3 million, $.10 per common share, resulting from the resolution of certain tax matters. 22 26 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------------2000. 2002 AS COMPARED TO 2001 Bauxite and Alumina -Alumina. Third party net sales were down 16% in 1999of alumina for 2002 decreased 10% as compared to 19982001, primarily due to an 11% decrease in third party average realized prices. The decrease in average realized prices was due to a decrease in primary aluminum market prices to which the Company's third party alumina sales contracts are linked. Third party shipments were up modestly primarily due to the curtailment of one of Valco's operating potlines in March 2002 discussed below. Intersegment net sales for 2002 decreased 25% as compared to 2001 as the result of a 19% decrease in the intersegment shipments and a 7% decrease in intersegment average realized prices. The decrease in shipments was due to reduced shipments to the Primary alumina business unit primarily due to the curtailment of one of Valco's operating potlines in March 2002. The decrease in intersegment average realized prices is the result of a decrease in primary aluminum prices from period to period as intersegment transfers are made on the basis of primary aluminum market prices on a lagged basis of one month. Segment operating results (excluding non-recurring items) for 2002 were modestly worse than 2001. The decrease was primarily due to the decrease in the average realized price discussed above and the reduction in alumina shipments associated with the sale of a portion of our interest in QAL offset by the decrease in abnormal Gramercy related net start-up costs, favorable caustic prices at QAL and the return to a more normal cost performance at KJBC resulting in part from increased production volume (due to the Gramercy restart). Results for 2002 also included an increase of $4.4 million in the allowance for doubtful accounts and a LIFO charge of $.5 million. Operating results for 2001 included: (1) abnormal Gramercy-related start-up costs and litigation costs of $64.9 million and $6.5 million, respectively, offset by business interruption-related insurance accruals of $36.6 million; and (2) a LIFO inventory charge of $3.7 million. Segment operating results for 2002, discussed above, exclude non-recurring costs of $2.0 million incurred in connection with cost reduction initiatives. Segment operating results for 2001 exclude non-recurring costs of $15.8 million also incurred in connection with cost reduction initiatives. Because of the January 2003 curtailment of two additional potlines at Valco (see "Valco Operating Level" above), it is anticipated that 2003 intersegment shipments will decline but will be substantially offset by an increase in third-party sales of alumina. Primary Aluminum. Third party net sales of primary aluminum decreased 26% for 2002 as compared to 2001 as a result of a 10% decline20% decrease in third party average realized pricesshipments and a 7% decrease in third party alumina shipments. The decline in the average realized prices in 1999 as compared to 1998 was primarily attributable to a decrease in net gains from KACC hedging activities.prices. The decrease in year-over-year shipments was primarily the net effect of the Gramercy incident after considering the 264,000 tons of alumina purchased by KACC from third parties to fulfill third party sales contract. Intersegment net sales for 1999 declined 5% as compared to 1998. The decline was primarily due to a 6% decline in the intersegment average realized price, offset in part by a 1% increase in intersegment shipments, resulting from potline restarts at Valco and at the Company's Washington smelters. Intersegment net sales include approximately 131,000 tons of alumina purchased from third-parties and transferred to the primary aluminum business unit. Segment operating income was down in 1999 as compared to 1998 primarily as a result of the price and volume factors discussed above. Segment operating income for 1999 was also adversely affected by the $5.0 million cost of insurance deductibles and self-retention provisions related to the Gramercy incident and was favorably impacted by the fact that depreciation on the Gramercy facility was suspended in July 1999. Segment operating income for 1998 included the adverse impact of approximately $11.0 million of incremental strike-related costs. Primary Aluminum - Third party net sales of primary aluminum were up 7% as compared to 1998 as a result of a 12% increase in third party shipments offset by a 6% decrease in the average realized third party sales prices. The increase in shipments was primarily due to the favorable impactcurtailment of Valcoone of Valco's operating three potlines in 1999 as compared to one potlineMarch 2002 and the curtailment of the rod operations at the Tacoma facility in 1998. While average primary aluminum market prices for 1999 were approximately the same as 1998, the Company experienced a reduction in third party average realized prices as a resultsecond quarter of a2001. The decrease in net gains from KACC hedging activities. Intersegment net sales for 1999 were up 3% as compared to 1998. Intersegment shipments increased 5% due to the timing of shipments to the Company's fabricated business units while intersegment average realized prices were down 2%. Segment operating income for 1999 was down compared to 1998. The most significant component of this decline was the reduction in the average realized prices was primarily due to the decrease in primary aluminum market prices. Since the beginning of 2001, the Northwest smelters have been completely curtailed. The Mead facility is expected to remain curtailed indefinitely unless and until an appropriate combination of reduced power prices and higher primary aluminum prices occurs. The Tacoma facility was sold in February 2003. As a result, intersegment net sales of primary aluminum for 2002 and 2001 have been minimal. Beginning in the first quarter of 2001, the Flat-rolled products business unit began purchasing its own primary aluminum rather than relying on the Primary aluminum business unit to supply its aluminum requirements through production or third party purchases. The Engineered products business unit was already responsible for purchasing the majority of its primary aluminum requirements. Segment operating results (before non-recurring items) for 2002 were substantially worse than 2001. The primary reasons for the decrease were the decreases in the average realized prices and net shipments discussed above and Valco potline shutdown and pension costs, offset by lower alumina metal prices and reductions in overhead costs. Results for 2002 also included a LIFO inventory charge of $2.1 million. Segment operating results for 2002, discussed above, exclude a non-cash charge of approximately $138.5 million related to the write-down of the Washington smelter assets to their estimated fair value, a non-cash charge of approximately $21.4 million related to a write-down of certain aluminum and alumina inventories, an $.8 million LIFO inventory charge which resulted in connection with the write-down of the aluminum and alumina inventories and non-recurring costs of $2.7 million incurred in connection with cost reduction initiatives. Segment operating results for 2002 also exclude approximately $58.8 million of pension and postretirement benefits and related obligations for the hourly employees who had been on a laid-off status and under the terms of their labor contract are eligible for early retirement because of the indefinite curtailment of the Mead facility. Segment operating results for 2001 excluded non-recurring net power sales gains of $229.2 million. These gains were offset by costs of $7.5 million also incurred in connection with cost reduction initiatives and contractual labor costs related to the Washington smelter impairment of $12.7 million. Because of the January 2003 curtailment of two additional potlines at Valco (see "Valco Operating Level" above), it is anticipated that 2003 primary aluminum shipments will decline substantially. Flat-Rolled Products. Net sales of flat-rolled products decreased 40% in 2002 as compared to 2001 primarily due to a 38% decrease in product shipments and a 4% decrease in realized prices. Shipments in 2002 were lower than 2001 primarily due to a continuation of soft aerospace products demand and by the second quarter of 2002 exit of the can lid and tab stock and brazing sheet products offset modestly by an increase in general engineering plate demand. The decrease in average realized prices was due to the impact of weaker demand. Segment operating results (before non-recurring items) for 2002 were worse than 2001 primarily due to the decrease in shipments and product prices discussed above. ResultsOperating results for 19992002 were also adversely impacted by a LIFO inventory charge of $2.0 million. Partially offsetting these adverse impacts were reductions in overhead and other costs as a result of cost cutting initiatives. Operating results for 2001 included a LIFO inventory charge of $3.0 million. Segment operating results for 2002 exclude non-recurring costs of approximately $1.3$7.9 million incurred in connection with cost reduction initiatives and $12.8product line exit. Segment operating results for 2002 also exclude a $1.6 million for the fourth quarter and the year, respectively,non-cash LIFO inventory charge associated with preparing and restarting potlines at Valco and the Washington smelters. The favorable impact of Valco operating at a higher rate in 1999 (as compared to 1998) was substantially offset by the fact that Valco earned mitigating compensation of approximately $29.0 million in 1998 for two of its curtailed potlines.product line exits. Segment operating incomeresults for 1998 included2001 excludes a non-cash impairment charge of $17.7 million associated with certain equipment that the adverse impact of approximately $29.0 million of incremental strike-related costs and the favorable impact of the previously mentioned compensation earned by ValcoCompany planned to sell or idle as a result of the curtailmentplanned 2002 exit from the brazing heat-treat and tab stock product lines and non-recurring costs of two of its potlines. Flat-Rolled Products - Net sales of flat-rolled products for 1999 declined by 19% compared to 1998 as a result of a 13% decline$10.7 million also incurred in average realized prices and an 8% decline in product shipments. The decline in average realized prices resulted primarily from a shift in product mix (from aerospace products, which have a higher price and operating margin, to other products) and aconnection with cost reduction in prices resulting from reduced demand for heat treat products. The reduction in shipments was primarily due to reduced demand in 1999 for aerospace heat treat products offset, in small part, by increased shipments of general engineered products. The decline in 1999 prices and shipments as compared to 1998 was responsible for the decline in segment operating income for 1999. Segment operating income for 1998 included the adverse impact of approximately $16.0 million of incremental strike-related costs.initiatives. Engineered Products -Products. Net sales of engineered products for 1999 decreased 7%modestly during 2002 as compared to 1998 primarily due to an 8% decline2001, as a 6% decrease in average realized prices. Product shipments were essentially flat. The decline in the average sales realized prices in 1999 was attributable to a change in product mix (higher ground transportation products offset by lower aerospace shipments). While there was a strong increase in 1999 in the demand for ground transportation products it wassubstantially offset by a reduced demand for aerospace products. Segment operating income for 1999 decreased compared5% increase in product shipments. The decrease in average realized prices was due to 1998 as a result of the factors discussed abovelower metal prices as well as some erosion in overall product prices resulting from continuing weak overall market conditions. The increase in product shipments was the result of increased ground transportation markets offset in part by reduced equity in earnings from AKW (which partnership interests were sold in April 1999).general aviation market shipments. Segment operating results (before non-recurring items) for 2002 improved as compared to 2001. Such increase was primarily attributable to improved cost performance, higher shipment volumes and reductions in energy and overhead costs, offset in part by the net effect of the lower product prices factor described above and a LIFO inventory charge of $1.5 million. Operating results for 2001 included a LIFO inventory charge of $1.5 million. Commodities Marketing. In 2002, net sales for this segment primarily represents recognition of deferred gains from hedges closed prior to the commencement of the Cases. See Note 13 of Notes to Consolidated Financial Statements. Gains or losses associated with these liquidated positions are initially deferred in Other comprehensive income and are subsequently recognized over the original hedging periods as the underlying purchases/sales occur. In 2001, net sales for 1998 includedthis segment represented net settlements with third party brokers for maturing derivative positions. Segment operating results for 2002 increased compared to the adverse impactcomparable periods in 2001 due to the higher prices implicit in the liquidation of approximately $4.0 million of incremental strike-related costs. 23 27 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- Eliminations -the positions in January 2002 versus the prevailing market prices during 2001. Eliminations. Eliminations of intersegment profitsprofit 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. Eliminations for 2002 include a benefit of $2.8 million of deferred intersegment profit offsetting the $21.4 million inventory write-down in the Primary aluminum business segment discussed above. Corporate and Other -Other. Corporate operating expenses represent corporate general and administrative expenses which are not allocated to the Company's business segments. CorporateThe increase in corporate operating expenses for 1999 were lower than 1998 primarily due to reduced incentive compensation expense resulting from the decline(excluding non-recurring items) in operating results. 1998 AS COMPARED TO 1997 Summary - The Company reported net income of $.6 million, or $.01 basic income per common share, for 19982002 as compared to net income2001 was due largely to higher medical and pension cost accruals for active and retired employees and non-cash pension charges of $48.0$19.9 million or $.57(see Note 10 of basic income per common share, for 1997. Net sales in 1998 totaled $2,256.4 million comparedNotes to $2,373.2 million in 1997. Net income for 1998 included the effectConsolidated Financial Statements), charges of certain non-recurring items, including approximately $60.0 million, $.50 per common share, of pre-tax incremental expense and the earnings impact of lost volume associated with a strike by members of the USWA (more fully discussed above), a pre-tax non-cash charge of $45.0 million, $.38 per common share, to reduce the carrying value of the Company's Micromill assets and a non-cash tax benefit of $8.3 million, $.10 per common share, resulting from the resolution of certain tax matters. Net income for 1997 included the effect of two essentially offsetting non-recurring items: a $19.7 million pre-tax restructuring charge and a non-cash tax benefit of approximately $12.5$5.1 million related to the settlementCompany's key employee retention program (see Note 14 of Notes to Consolidated Financial Statements) and payments in January 2002 of approximately $4.2 million to a trust in respect of certain tax matters.management compensation agreements (see Note 10 of Notes to Consolidated Financial Statements) offset in part primarily by reduced salary and litigation expenses. Corporate operating results for 2002, discussed above, exclude a non-cash impairment charge of approximately $20.0 million related to the Kaiser Center office complex, one of the Company's non-operating properties. Corporate operating results for 2001, discussed above, exclude non-recurring costs of $1.2 million incurred in connection with the Company's cost reduction initiatives. 2001 AS COMPARED TO 2000 Bauxite and Alumina - Third partyAlumina. Third-party net sales of alumina in 2001 were up 16%15% higher than in 19982000 as a 34% increase in third-party shipments was only partially offset by an 11% decrease in third-party average realized prices. The increase in period-over-period shipments resulted primarily from (1) higher third-party sales due to reduced internal alumina requirements as a result of the curtailment of the Washington smelters, (2) the restart of production at the Gramercy refinery in December 2000 and (3) the timing of shipments. The decrease in average realized prices was due to a decrease in primary aluminum market prices to which our third-party alumina sales contracts are linked, typically on a lagged basis of three months. Intersegment net sales for 2001, decreased 47% as compared to 19972000. The decrease was due to a 44% decrease in the intersegment shipments and a 7% decrease in intersegment average realized prices. The decrease in shipments was primarily due to a 17% increase in third party shipments. The increase in 1998 third party shipments (and offsetting decrease in 1998 intersegment shipments) resulted from reduced shipments to Valco, due to the production curtailment more fully discussed above and to a lesser extent, the fourth quarter strike-related curtailmentcurtailments of three potlines at the Company's Washington smelters. The decrease in the intersegment average realized priceprices was the result of the decrease in primary aluminum prices from period to period as intersegment transfers are made on the basis of primary aluminum market prices on a lagged basis of one month. Segment operating results (excluding non-recurring items) for third party alumina sales was2001 were down significantly from 2000. Increased net shipments only slightly as the allocated net gains from the Company's hedging activities substantiallypartially offset the declinedecrease in market pricesthe average realized sales prices. Additionally, operating income for 2001 was adversely affected by abnormal Gramercy related start-up costs and litigation costs of approximately $71.4 million, less than satisfactory bauxite mining cost performance at KJBC and a LIFO inventory charge of $3.7 million. These charges were offset in part by $36.6 million of additional insurance benefits related to the Company'sGramercy incident. Segment operating income for 2001 discussed above, excludes non-recurring costs of $15.8 million incurred in connection with the performance improvements initiative program. Segment operating income for 2000 excludes labor settlement charges of $2.1 million and three Gramercy-related items: a $7.0 million non-cash LIFO inventory charge, incremental maintenance spending of $11.5 million and an $.8 million non-cash restructuring charge. Primary Aluminum. Third party sales of primary aluminum-linked customer sales contracts. In additionaluminum for 2001 decreased approximately 36% from 2000, reflecting a 29% decrease in third-party shipments and a 9% decrease in third-party average realized prices. The decrease in shipments was primarily due to being impacted by the reduced shipments to Valco andcomplete curtailment of the Washington smelters during 2001, as discussed above, intersegment sales were adversely affected bycompared to 2000 when these smelters operated during a substantial market-related decline in intersegment average sales prices. Segment operating income was essentially unchanged, excluding the impactsignificant portion of the approximate $11.0 million of incremental strike-related costs.year. The adverse impact of reduced intersegmentdecrease in the average realized prices was essentially offset by improved operating performance resulting from higher production as well as lower energy costs. Primary Aluminum - 1998 third partyprimarily due to the decrease in primary aluminum market prices. Intersegment net sales of primary aluminum were down 25% asfor 2001 decreased significantly compared to 19972000 primarily as a result of a 20% reductionsubstantial decrease in shipments, caused byintersegment shipments. This change resulted primarily from a change in the 1998 potline curtailments at Valco andCompany's methodology for handling aluminum supply logistics for the WashingtonFlat-rolled products business unit as a result of the continuing curtailment of the Northwest smelters. A 5% reductionBeginning in the first quarter of 2001, the Flat-rolled products business unit began purchasing its own primary aluminum rather than relying on the Primary aluminum business unit to supply its aluminum requirements through production or third party purchases. The Engineered products business unit was already responsible for purchasing the majority of its primary aluminum requirements. The intersegment average realized third party sales prices between 1998 and 1997 (reflecting lower market prices offset, in part, by allocated net gains from KACC's hedging activities), also adversely impacted third party net sales. Intersegment net sales were downprice for 2001 was approximately 15% between 1998 and 1997. Whilethe same as 2000 because substantially all of the intersegment shipments occurred in the first quarter of 2001 when the intersegment average realized price approximated the 2000 intersegment average realized price. Segment operating income (excluding non-recurring items) for 2001 decreased significantly versus 2000. The primary reasons for the decrease were essentially unchanged from the prior year,decreases in the average realized prices droppedand shipments discussed above as well as overhead and other fixed costs associated with the curtailed Northwest smelting operations, which totaled approximately $30.0 million during 2001. The Company believes that approximately half of such costs incurred are "excess" to the run rate that can be achieved during a prolonged curtailment period. During the third quarter of 2001, management took actions to minimize the excess outflows associated with the curtailed operations. These actions resulted in the elimination of most of the excess cost in 2002. Period-over-period results were also unfavorably impacted by 14% reflecting lower market prices for primary aluminum.higher energy costs at the Anglesey aluminum smelter, resulting from a new power contract entered into by Anglesey at the end of the first quarter of 2000. Segment operating income for 2001, discussed above, excludes non-recurring net power sale gains of $229.2 million. These gains were offset by costs of $7.5 million incurred in 1998 was down significantly from 1997. Theconnection with the Company's performance improvement initiative program and contractual labor costs related to the Northwest smelter curtailment of $12.7 million. Segment operating income impactfor 2000 excludes net power sale gains of the Valco potline curtailments was partially mitigated$159.5 million. These gains were offset by the compensation from the VRA for twoa non-cash smelter impairment charge of the three curtailed potlines. In addition$33.0 million, labor settlement charges of $15.9 million and costs related to the impactstaff reduction initiatives of the one uncompensated potline curtailment at Valco, 1998 results were also negatively affected by the impact of the potline curtailments at the Company's Washington smelters, reduced average realized prices (primarily on intersegment sales), and an adverse strike-related impact of approximately $29.0$3.1 million. Flat-Rolled Products -Products. Net sales of flat-rolled products for 2001 decreased by 4% during 1998approximately 41% as compared to 19972000 as a 5% reduction54% decrease in product shipments was partially offset by a 29% increase in average realized prices. The decrease in shipments was primarily due to reduced shipments of can body stock, as a part of the planned exit from this product line. Current period shipments were also adversely affected by the reduced demand for general engineering heat-treat products and can lid and tab stock, due to a weak market. These decreases were only modestly offset by a strong aerospace demand during the first nine months of 2001. However, after the events of September 11, 2001, aerospace demand and the price impact of changesfor aerospace products declined substantially. The increase in average realized prices primarily reflects the change in product mix.mix from can body stock to heat-treat products. Segment operating income (excluding non-recurring items) for 2001 was down significantly from 2000. The mix of productprimary reasons for the decrease were the substantial decrease in shipments in 1998 reflects a higher demandand weakened pricing for heat treat products primarily in the first half of the year, offset by reduced can sheet shipments and an increased level of tolling, all as compared to 1997. Segment operating income increased significantly in 1998 primarily as a result of the weaker U.S. economy which were worsened after September 11, 2001 to the point that fourth quarter operating results were a loss. Operating results were also adversely impacted by increased demand for heat treat productsoperating costs, mainly due to a lag in the first half of 1998ability to scale back costs to reflect the revised product mix and improved operating efficiencies. Segmentthe substantial volume decline caused by weakened demand. Operating results for 1998 were particularly strong in light of the unfavorable strike-related impact of approximately $16.0 million. Segment results for 19972001 also included a LIFO inventory charge of $3.0 million and higher metal sourcing costs due to plant curtailments. Segment operating income for 2001, discussed above, excludes a non-cash impairment charge recorded inof $17.7 million associated with certain equipment that the second quarterCompany plans to sell or idle as the result of 1997a planned 2002 exit from the brazing heat-treat and lid and tab stock for the beverage container market and non-recurring costs of $10.7 million incurred in connection with restructuring activities. 24 28 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------------the performance improvement program. Segment operating income for 2000 excludes labor settlement charges of $18.2 million, an $11.1 million non-cash LIFO inventory charge and non-cash impairment charges associated with a product line exit of $1.5 million. Engineered Products -Products. Net sales of engineered products were relatively flat year to year. An 11% increasefor 2001 decreased by approximately 24% as a 28% decrease in product shipments was effectively offset by market-related reductionsa 6% increase in average realized prices. The decrease in product shipments was the result of reduced transportation and electrical product shipments due to weak U.S. market demand. The increase in average realized prices reflects a shift in product mix to higher value-added products. Segment operating income (excluding non-recurring items) for 2001 decreased as compared to 2000 primarily due to the volume and price factors described above. The segment's operating results were also adversely impacted by a LIFO inventory charge of $1.5 million and because cost reduction lagged the substantial volume decline. Segment operating income for 2000, discussed above, excludes a non-recurring non-cash impairment charge associated with product line exit of $5.6 million and a labor settlement charge of $2.3 million. Commodities Marketing. Net sales for this segment represent net settlements with third-party brokers for maturing derivative positions. Operating income represents the combined effect of such net settlements, any net premium costs associated with maturing options, as well as by thenet results of internal hedging activities with our fabricated products segments. The minimum (and maximum) price impact of changes in product mix. The increase in year-over-year shipments is in part due to the impact of the Company's ownershiphedges in any given period is primarily the result of the Bellwood extrusion facility in Richmond, Virginia, for alltiming of 1998 versus only halfthe execution of 1997. This was, in part, offset by a decline in year-over-year sales, attributable to the AKW wheels joint venture formation in May 1997 and reduced shipments caused by labor difficulties at two major customers.hedging contracts. Segment operating income declined by approximately 6% in 1998 asfor 2001 increased compared to 1997, excluding the 1997 pre-tax net charge related to restructuring of operations and approximately $4.0 million of adverse incremental strike-related impactcomparable period in 1998, as a2000. This is primarily the result of 2001 hedging positions having higher minimum prices than the positions in 2000, combined with the fact that 2000 market impact of the previously mentioned labor difficulties at two major customers and due to an overall softeningprices were higher than those experienced in demand, particularly in the second half of the year. Eliminations -2001. 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 -Other. Corporate operating expenses (excluding non-recurring items) represent corporate general and administrative expenses which are not allocated to the Company's business segments. Excluding the 1997 pre-tax charge associatedThe increase in corporate operating expenses in 2001, as compared to 2000 was primarily due to higher medical and pension costs accruals for active and retired employees. Corporate operating results for 2001, discussed above, exclude costs of $1.2 million incurred in connection with the Company's restructuringperformance improvement program. Corporate operating results for 2000 exclude costs related to staff reduction and efficiency initiatives of operations, corporate expenses were lower in 1998 than in 1997 primarily as a result of lower consulting and other costs associated with the Company's ongoing profit improvement program and portfolio review initiatives.$5.5 million. LIQUIDITY AND CAPITAL RESOURCES As a result of the filing of the Cases, claims against the Debtors for principal and accrued interest on secured and unsecured indebtedness existing on their Filing Date are stayed while the Debtors continue business operations as debtors-in-possession, subject to the control and supervision of the Court. See Note 51 of Notes to Consolidated Financial Statements for a listingadditional discussion of the Company's indebtedness and information concerning certain restrictive debt covenants.Cases. At this time, it is not possible to predict the effect of the Cases on the businesses of the Debtors. Operating ActivitiesActivities. In 1999,2002, operating activities used $90.6$49.6 million of cash. This amount compares with 1998 and 19972001 when operating activities provided cash of $170.7$249.8 million and $45.0 million, respectively.2000 when operating activities provided cash of $83.1 million. The major reason for the decrease in cash flows from operating activities between 19992002 and 1998 was2001 is due primarily to the impactnon-recurring nature of 1999 results, excluding non-cash charges, and an increased investment in working capital (excluding cash).the 2001 power sales. The increase in cash flows from operating activities between 19982001 and 1997 was due2000 resulted primarily to a reduced investment in working capital (excluding cash), the receipt of $35.0 million of environmental insurance recoveries andfrom the impact of 1998 results (excluding non-cash charges).power sales and a decline in Gramercy-related receivables. The $49.6 million of cash and cash equivalents used in operations in 2002 included several items not typically considered part of our normal recurring operations including: (a) asbestos-related insurance recoveries of $23.3 million; (b) approximately $30.0 million of funding to QAL in respect of QAL's scheduled debt maturities; and (c) foreign income tax payments related to prior year activities of $8.0 million. The balance of the cash and cash equivalents used in operations ($34.9 million) resulted from a combination of adverse market factors in the business segments in which the Company operates including (a) primary aluminum prices that were below long-term averages, (b) a weak demand for fabricated metal products, particularly aerospace products, and (c) higher than average power, fuel oil and natural gas prices. Investing ActivitiesActivities. Total consolidated capital expenditures were $68.4, $77.6,$47.6, $148.7 and $128.5$296.5 million in 1999, 1998,2002, 2001 and 1997,2000, respectively (of which $4.8, $7.2,$9.6, $10.4 and $6.6$5.4 million were funded by the minority partners in certain foreign joint ventures). Except forCapital expenditures in 2001 and 2000 included $78.6 and $239.1 million spent with respect to rebuilding the Gramercy facility. Capital expenditures in 2000 also included $13.3 million spent with respect to the purchase in 1999 of the remaining 45% interest in KLHP for approximately $10.0 million,non-working capital assets of the Chandler, Arizona drawn tube aluminum fabricating operation. The capital expenditures in 2002 and the remaining capital expenditures in 2001 and 2000 were made primarily to improve production efficiency, reduce operating costs and expand capacity at existing facilities. Total consolidated capital expenditures excluding the expenditures to rebuild the Gramercy, Louisiana facility which will be partially funded with insurance proceeds (see " - Overview - Incident at Gramercy Facility" above,) are currently expected to be between $80.0$50.0 and $115.0$80.0 million per year in each of 2000 through 20022003 and 2004 (of which approximately 10%15% is expected to be funded by the Company's minority partners in certain foreign joint ventures). See " - Financing Activities and Liquidity" below for a discussion of Gramercy related capital spending. Management continues to evaluate numerous projects, all of which would require substantial capital, both in the United States and overseas. The level of capital expenditures may be adjusted from time to time depending on the Company's price outlook for primary aluminum and other products, KACC's ability to assure future cash flows through hedging or other means, the Company's financial position and other factors. Financing Activities and Liquidity AsLiquidity. On February 12, 2002, the Company and KACC entered into the DIP Facility which provides for a secured, revolving line of December 31, 1999,credit through the Company's total consolidated indebtedness was $972.8 million, including $10.4 million outstanding under KACC's credit agreement,earlier of February 12, 2004, the effective date of a plan of reorganization or voluntary termination by the Company. The Court signed a final order approving the DIP Facility in March 2002. In March 2003, the Additional Debtors were added as amended, (the "Credit Agreement"). At February 29, 2000, KACC had $212.6 millionco-guarantors and the DIP Facility lenders received super priority status with respect to certain of unused availability remaining under the Credit Agreement after allowing for $30.0 million of outstanding borrowings and $82.4 million for outstanding letters of credit. Under the Credit Agreement,Additional Debtors' assets. KACC is able to borrow under the DIP Facility by means of revolving credit advances and to issue letters of credit (up to $125.0 million) in an aggregate amount equal to the lesser of $325.0$300.0 million or a borrowing base relating to eligible accounts receivable, 25 29 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------------eligible inventory and eligible inventory.fixed assets reduced by certain reserves, as defined in the DIP Facility agreement. The Credit Agreement, which matures in August 2001,DIP Facility is guaranteed by the Company and by certain significant subsidiaries of KACC. The Credit Agreement requires KACC to comply with certain financial covenants, places significant restrictionsInterest on any outstanding borrowings will bear a spread over either a base rate or LIBOR, at KACC's option. During March 2003, the Company obtained a waiver from the lenders in respect of its compliance with a financial covenant covering the four-quarter period ending March 31, 2003. The waiver is of limited duration and KACC, andwill lapse on June 29, 2003 unless otherwise incorporated into a formal amendment. The Company is secured by a substantial majority of the Company's and KACC's assets. The Credit Agreement does not permit the Company, and significantly restricts KACC's ability, to pay any dividends on their common stock. The indentures governing KACC's public debt includes various restrictions on KACC and its subsidiaries and repurchase obligations upon a Change of Control (as defined). KACC's and the Company's near-term liquidity will be, as more fully discussed below, affected by three significant items: the Gramercy incident, aluminum hedging margin requirements and the amount of net payments for asbestos liabilities. As of December 31, 1999, the Company had recorded estimated recoveries for clean-up, site preparation and business interruption costs incurred relating to the Gramercy incident of approximately $55.0 million. As of December 31, 1999, approximately $50.0 million of insurance recoveries had been received. Additionally, through February 29, 2000, KACC had received approximately $25.0 million of additional insurance recoveries. During 2000, capital spending related to rebuilding the Gramercy facility is expected to be approximately $200.0 million. KACC believes that between 50% and 80% of such expenditures will ultimately be funded by proceeds from KACC's insurance contracts. The remainder of the Gramercy-related capital expenditures will be funded by KACC using existing cash resources, funds from operations and/or borrowings under KACC's Credit Agreement. The amount of capital expenditures to be funded by KACC will depend on, among other things, the ultimate cost and timing of the rebuild and negotiationsworking with the insurance carriers. In addition, KACC will incur continuing expenseslenders to complete such an amendment that would incorporate the limited waiver and experience lost profits subsequent to 1999 as a result ofalso modify the Gramercy incident which amounts (based on current primary aluminum prices and available facts and circumstances) are expected to total another $100.0 million, which amount is expected to be largely offset by insurance recoveries. KACC continues to work with the insurance carriers to maximize the amount of recoveries and to minimize, to the extent possible, the period of time between when KACC expends funds and when it is reimbursed. KACC will likely have to fund an average of 30 - 60 days of property damage and business interruption activity, unless some other arrangement is agreed with the insurance carriers, and such amounts will be significant. The Company believes it has sufficient financial resources to fund the construction and business interruption costs on an interim basis. However, no assurances can be given in this regard. If insurance recoveries were to be delayed or if there were other significant uses of KACC's existing Credit Agreement capacity, delays in the rebuilding of the Gramercy refinery could occur and could have a material adverse impact on the Company's and KACC's liquidity and operating results. Hedging activities could also have an adverse impact on KACC's near-term liquidity. At December 31, 1999, KACC had made margin advances of $38.0 million and had posted letters of credit totaling $40.0 million in lieu of making margin advances. Increases in primary aluminum pricescovenant for periods subsequent to December 31, 1999, could result in KACC having to make additional margin advances or post additional letters of credit and such amounts could be significant. KACC's exposure to margin advances is expected to improve throughout 2000 as its year 2000 positions, which have a lower average maximum contract price than KACC's 2001 positions, expire. KACC is considering various financing and hedging strategies to limit its exposure to further margin advances in the event of aluminum price increases. However, no assurance can be given that KACC will be successful in this regard. KACC's estimated annual cash payments, prior to insurance recoveries, for asbestos-related costs will be approximately $75.0 million to $85.0 million for each of the years 2000 through 2002. The Company believes that KACCsuch an amendment will recover a substantial portion of these payments from insurance. Preliminary agreements have been reachedbe agreed with certain insurance carriers under which it expects to collect a substantial portion of its 2000 asbestos-related payments. However, delays in receiving these or future insurance repayments would have an adverse impact on KACC's liquidity.the DIP Facility lenders not later than May 2003. While no assurance canabsolute assurances cannot be given that existing cash sources will be sufficient to meetin respect of the Company's short-term liquidity requirements, managementability to successfully obtain the necessary covenant modification, based on discussions with the DIP lenders and the fact that there are currently no outstanding borrowings and only a limited amount of letters of credit outstanding under the DIP Facility, the Company believes that acceptable modifications are likely to be obtained. As a part of this amendment, the Company's existingCompany also plans to request that the lenders extend the DIP Facility past its current February 2004 expiration. The Company and KACC currently believe that the cash resources, together withand cash equivalents of $78.7 million at December 31, 2002, cash flows from operations, cash proceeds from the sale of assets that are ultimately determined not to be an important part of the reorganized entity and cash available from the DIP Facility will provide sufficient working capital to allow the Company to meet its obligations during the pendency of the Cases. At February 28, 2003, there were no outstanding borrowings under the Credit Agreement, willrevolving credit facility and there were outstanding letters of credit of approximately $49.3 million. As of February 28, 2003, $146.0 million (of which $75.7 million could be sufficientused for additional letters of credit) was available to satisfy its working capital and capital expenditure requirements for the next year. KACC's ability to make payments on and to refinance its debt on a long-term basis depends on its ability to generate cash inCompany under the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond KACC's control. KACC will need to refinance all or a substantial portion of its debt on or before its maturity. No assurance can be given that KACC will be able to refinance its debt on acceptable terms. However, with respect to long-term 26 30 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- liquidity, management believes that operating cash flow, together with the ability to obtain both short and long-term financing, should provide sufficient funds to meet KACC's and the Company's working capital and capital expenditure requirements.DIP Facility. Capital StructureStructure. MAXXAM Inc. ("MAXXAM") and one of its wholly owned subsidiaries collectively own approximately 63%62% of the Company's Common Stock, with the remaining approximately 37%38% of the Company's Common Stock being publicly held. CertainAt this time, it is not possible to predict the outcome of the sharesCases, in general, or the effect of the Company's Common Stock beneficially owned by MAXXAM are subjectCases on the interests of the stockholders. However, it is possible that all or a portion of MAXXAM's interests may be diluted or cancelled as a part of a plan of reorganization. Commitments and Contingencies. During the pendency of the Cases, substantially all pending litigation against the Debtors, except that relating to certain pledge agreements. See Note 8 of Notesenvironmental matters, is stayed. Generally, claims against a Debtor arising from actions or omissions prior to Consolidated Financial Statements for a further description of the pledge agreements. The Company has an effective "shelf" registration statement covering the offering from time to time of up to $150.0 million of equity securities. Any such offeringits Filing Date will only be made by meanssatisfied as part of a prospectus. The Company also has an effective "shelf" registration statement covering the offeringplan of up to 10,000,000 shares of the Company's Common Stock that are owned by MAXXAM. The Company will not receive any of the net proceeds from any transaction initiated by MAXXAM pursuant to this registration statement. In January 2000, the Company increased the number of its authorized shares of Common Stock to 125,000,000 from 100,000,000 to improve the Company's flexibility to issue Common Stock under its employee benefit plans, under an existing shelf registration statement, and in connection with other transactions. Commitments and Contingenciesreorganization. The Company and KACC are subject to a number of environmental laws, to fines or penalties assessed for alleged breaches of the environmental laws, and to claims and litigation based upon such laws. KACC currently is subject to a number of claims under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments Act of 1986 ("CERCLA") and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based on the Company's evaluation of these and other environmental matters, the Company has established environmental accruals of $48.9$59.1 million at December 31, 1999.2002. However, the Company believes that it is reasonably possible that changes in various factors could cause costs associated with these environmental matters to exceed current accruals by amounts that could range, in the aggregate, up to an estimated $30.0 million. KACC is also a defendant in a number of asbestos-related 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 leastmore than 20 years. The lawsuits are currently stayed by the Cases. Based on past experience and reasonably anticipated future activity, the Company has established a $387.8$610.1 million accrual at December 31, 1999,2002, for estimated asbestos-related costs for claims filed and estimated to be filed through 2009,2011, before consideration of insurance recoveries. However, the Company believes that substantial recoveries from insurance carriers are probable. The Company reached this conclusion based on prior insurance-related recoveries in respect of asbestos-related claims, existing insurance policies and the advice of outside counsel with respect to applicable insurance coverage law relating to the terms and conditions of these policies. Accordingly, the Company has recorded an estimated aggregate insurance recovery of $315.5$484.0 million (determined on the same basis as the asbestos-related cost accrual) at December 31, 1999.2002. Although the Company has settled asbestos-related coverage matters with certain of its insurance carriers, other carriers have not yet agreed to settlements.settlements and disputes with carriers exist. The timing and amount of future recoveries from theseits insurance carriers will depend on the pacependency of claims review and processing by such carriersthe Cases and on the resolution of any disputes regarding coverage under the applicable insurance policies. In connection with the USWA strike and subsequent lock-out by KACC which was settled in September 2000, certain allegations of ULPs have been filed with the NLRB by the USWA. KACC believes that all such policiesallegations are without merit. Twenty-two of twenty-four allegations of ULPs previously brought against it by the USWA have been dismissed. A trial before an administrative law judge for the two remaining allegations concluded in September 2001. In May 2002, an administrative law judge of the NLRB ruled against KACC in respect of the two remaining ULP allegations and recommended that the NLRB award back wages, plus interest, less any earnings of the workers during the period of the lockout. The administrative law judge's ruling did not contain any specific amount of the proposed award and is not self-executing. The USWA has filed a proof of claim for $240.0 million in the Cases in respect of this matter. The NLRB also filed a proof of claim in respect of this matter. The NLRB claim was for $117.0 million, including interest of approximately $18.0 million. The Company continues to believe that the allegations are without merit and will vigorously defend its position. KACC has appealed the ruling of the administrative law judge to the full NLRB. The NLRB general counsel and the USWA have cross-appealed. Any outcome from the NLRB appeal would be subject to additional appeals in a United States Circuit Court of Appeals by the general counsel of the NLRB, the USWA or KACC. This process could take several years. Because the Company believes that it may prevail in the appeals process, the Company has not recognized a charge in response to the adverse ruling. However, it is possible that, if the Company's appeal(s) are not ultimately successful, a charge in respect of this matter may be required in one or more future periods and the amount of such charge(s) could be significant. Any amounts ultimately determined by a court to be payable in this matter will be dealt with in the overall context of the Debtors' plan of reorganization and will be subject to compromise. Accordingly, any payments that may arise.ultimately be required in respect of this matter would likely only be paid upon or after the Company's emergence from the Cases. While uncertainties are inherent in the final outcome of these matters and it is presently impossible to determine the actual costs that ultimately may be incurred and insurance recoveries that ultimately may be received, management currently believes that the resolution of these uncertainties and the incurrence of related costs, net of any related insurance recoveries, should not have a material adverse effect on the Company's consolidated financial position or liquidity. However, amounts paid, if any, in satisfaction of these matters could be significant to the results of operations, or liquidity. In connection with the USWA strike and subsequent lock-out by KACC, certain allegations of unfair labor practices ("ULPs") have been filed with the National Labor Relations Board ("NLRB")by the USWA. KACC responded to all such allegations and believes thatperiod in which they are without merit. In July 1999, the Oakland, California, regional office of the NLRB dismissed all material charges filed against KACC. In September 1999, the union filed an appeal of this ruling with the NLRB general counsel's office 27 31 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- in Washington, D.C. If the original decision were to be reversed, the matter would be referred to an administrative law judge for a hearing whose outcome would be subject to an additional appeal either by the USWA or KACC. This process could take months or years. There can be no certainty that the original NLRB decision will be upheld. If these proceedings eventually resulted in a definitive ruling against KACC, it could be obligated to provide back pay to USWA members at the five plants and such amount could be significant. However, while uncertainties are inherent in the final outcome of such matters, the Company believes that the resolution of the alleged ULPs should not result in a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity.recorded. See Note 1012 of Notes to Consolidated Financial Statements for a more detailed discussion of these contingencies and the factors affecting management's beliefs. See also "Overview." OTHER MATTERS Year 2000 Readiness Disclosure AlthoughIncome Tax Matters. In light of the Cases, the Company did experience some minor inconveniences in connection with the year 2000 date change, such inconveniences did not have any material adverse impacts on the Company's resultshas provided valuation allowances for all of operations or financial condition. The Company had a company-wide program which coordinated the year 2000 efforts of its individual business units and tracked their progress. Each of the Company's business units developed year 2000 plans specifically tailored to its individual situation. A wide range of solutions were implemented, including modifying existing systems and, in limited cases where it was cost effective, purchasing new systems. Total spending related to these projects, which began in 1997 and continued through 1999, was $8.3 million. System modification costs were expensed as incurred. Costs associated with new systems were capitalized and will be amortized over the life of the system. Income Tax Matters The Company's net deferred income tax assets as of December 31, 1999, were $437.4 million, net of valuation allowances of $125.6 million. Thethe Company no longer believes a long-term view of profitability is appropriate and has concluded that these net deferred income tax assets will morethe "more likely than not be realized.not" recognition criteria were appropriate. See Note 69 of Notes to Consolidated Financial Statements for a discussion of these and other income tax matters. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that are both very important to the portrayal of the Company's financial condition and results, and require management's most difficult, subjective, and/or complex judgments. Typically, the circumstances that make these judgments difficult, subjective and/or complex have to do with the need to make estimates about the effect of matters that are inherently uncertain. While the Company believes that all aspect of its financial statements should be studied and understood in assessing its current (and expected future) financial condition and results, the Company believes that the accounting policies that warrant additional attention include: 1. The fact that the consolidated financial statements as of (and for the year ending) December 31, 2002 have been prepared on a "going concern" basis in accordance with Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and do not include possible impacts arising in respect of the Cases. The consolidated financial statements included elsewhere in this Report do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or the effect on existing stockholders' equity that may result from any plans, arrangements or other actions arising from the Cases, or the possible inability of the Company to continue in existence. Adjustments necessitated by such plans, arrangements or other actions could materially change the consolidated financial statements included elsewhere in this Report. For example, a.If the Company were to decide to sell certain assets not deemed a critical part of a reorganized Kaiser, such asset sales could result in gains or losses (depending on the asset sold) and such gains or losses could be significant. This is because, under generally accepted accounting principles ("GAAP"), assets to be held and used are evaluated for recoverability differently than assets to be sold or disposed of. Assets to be held and used are evaluated based on their expected undiscounted future net revenues. So long as the Company reasonably expects that such undiscounted future net revenues for each asset will exceed the recorded value of the asset being evaluated, no impairment is required. However, if possible or probable plans to sell or dispose of an asset or group of assets meet a number of specific criteria, then, under GAAP, such assets should be considered held for sale/disposition and their recoverability should be evaluated, for each asset, based on expected consideration to be received upon disposition. Sales or dispositions at a particular time will be affected by, among other things, the existing industry and general economic circumstances as well as the Company's own circumstances, including whether or not assets will (or must) be sold on an accelerated or more extended timetable. Such circumstances may cause the expected value in a sale or disposition scenario to differ materially from the realizable value over the normal operating life of assets, which would likely be evaluated on long-term industry trends. b.Additional pre-Filing Date claims may be identified through the proof of claim reconciliation process and may arise in connection with actions taken by the Debtors in the Cases. For example, while the Debtors consider rejection of the BPA contract to be in the Company's best long-term interests, such rejection may increase the amount of pre-Filing Date claims by approximately $75.0 million based on the BPA's proof of claim filed in connection with the Cases in respect of the contract rejection. c.As more fully discussed below, the amount of pre-Filing Date claims ultimately allowed by the Court in respect of contingent claims and benefit obligations may be materially different from the amounts reflected in the Consolidated Financial Statements. While valuation of the Company's assets and pre-Filing Date claims at this stage of the Cases is subject to inherent uncertainties, the Company currently believes that it is likely that its liabilities will be found in the Cases to exceed the fair value of its assets. Therefore, the Company currently believes that it is likely that pre-Filing Date claims will be paid at less than 100% of their face value and the equity of the Company's stockholders will be diluted or cancelled. Because of such possibility, the value of the Common Stock is speculative and any investment in the Common Stock would pose a high degree of risk. 2. The Company's judgments and estimates with respect to commitments and contingencies; in particular: (a) future asbestos related costs and obligations as well as estimated insurance recoveries and (b) possible liability in respect of claims of ULPs which were not resolved as a part of the Company's September 2000 labor settlement. Valuation of legal and other contingent claims is subject to a great deal of judgment and substantial uncertainty. Under GAAP, companies are required to accrue for contingent matters in their financial statements only if the amount of any potential loss is both "probable" and the amount (or a range) of possible loss is "estimatable." In reaching a determination of the probability of an adverse ruling in respect of a matter, the Company typically consults outside experts. However, any such judgments reached regarding probability are subject to significant uncertainty. The Company may, in fact, obtain an adverse ruling in a matter that it did not consider a "probable" loss and which, therefore, was not accrued for in its financial statements. Further, in estimating the amount of any loss, in many instances a single estimation of the loss may not be possible. Rather, the Company may only be able to estimate a range for possible losses. In such event, GAAP requires that a liability be established for at least the minimum end of the range. The Company has two potentially material contingent obligations that are subject to significant uncertainty and variability in their outcome: (a) the USWA's ULP claim, and (b) the net obligation in respect of asbestos-related matters. Both of these matters are discussed in Note 12 of Notes to Consolidated Financial Statements and it is important that you read this note. As more fully discussed in Note 12, we have not accrued any amount in our December 31, 2002 financial statements in respect of the USWA ULP matter as we do not consider the contingent loss to be "probable." The possible range of loss in this matter is in the $100.0 million to $250.0 million range based on the proof of claims filed by the NLRB and USWA in connection with the Company's and KACC's reorganization proceedings. This matter is not currently stayed by the Cases. However, as previously stated, seeing this matter to its ultimate outcome could take several years. Further, any amounts ultimately determined by a court to be payable in this matter will be dealt with in the overall context of the Debtors' plan of reorganization and will be subject to compromise. Accordingly, any payments that may ultimately be required in respect of this matter would only be paid upon or after the Company's emergence from the Cases. Also, as more fully discussed in Note 12, KACC is one of many defendants in personal injury claims by large number of persons who assert that their injuries were caused by, among other things, exposure to asbestos during their employment or association with KACC or by exposure to products containing asbestos last produced or sold by KACC more than 20 years ago. It is difficult to predict the number of claims that will ultimately be made against KACC or the settlement value of such claims. As of December 31, 2002, KACC had recorded an obligation for approximately $610.0 million in respect of pending and an estimate of possible future asbestos claims through 2011. The Company did not accrue for amounts past 2011 because the Company believed that significant uncertainty existed in trying to estimate any such amounts. However, it is possible that a different number of claims will be made during the ten-year period and that the settlement amounts during this period may differ and that this will cause the actual amounts to differ materially from the Company's estimate. Further, the Company expects that, during its reorganization process, an estimate will have to be made in respect of its exposure to asbestos-related claims after 2011 and that such amounts could be substantial. Due to the Cases, holders of asbestos claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against the Debtors. However, during the pendency of the Cases, KACC expects additional asbestos claims will be asserted as part of the claims process. A separate creditors' committee representing the interests of the asbestos claimants has been appointed. The Debtors' obligations with respect to present and future asbestos claims will be resolved pursuant to a plan of reorganization. The Company believes that KACC has insurance coverage in respect of its asbestos-related exposures and that substantial recoveries in this regard are probable. At December 31, 2002, KACC had recorded a receivable for approximately $484.0 million in respect of expected insurance recoveries related to existing claims and the estimate future claims over a ten-year period. However, the actual amount of insurance recoveries may differ from the amount recorded and the amount of such differences could be material. Further, depending on the amount of asbestos-related claims ultimately determined to exist (including those in the periods after 2011), it is possible that the amount of such claims could exceed the amount of additional insurance recoveries available. See Note 12 of Notes to Consolidated Financial Statements for a more complete discussion of these matters. 3. The Company's judgments and estimates in respect of its employee benefit plans. Pension and post-retirement medical obligations included in the consolidated balance sheet are based on assumptions that are subject to variation from year-to-year. Such variations can cause the Company's estimate of such obligations to vary significantly. Restructuring actions (such as the indefinite curtailment of the Mead smelter) can also have a significant impact on such amounts. For pension obligations, the most significant assumptions used in determining the estimated year-end obligation are the assumed discount rate and long-term rate of return ("LTRR") on pension assets. Since recorded pension obligations represent the present value of expected pension payments over the life of the plans, decreases in the discount rate (used to compute the present value of the payments) will cause the estimated obligations to increase. Conversely, an increase in the discount rate will cause the estimated present value of the obligations to decline. The LTRR on pension assets reflects the Company's assumption regarding what the amount of earnings will be on existing plan assets (before considering any future contributions to the plans). Increases in the assumed LTRR will cause the projected value of plan assets available to satisfy pension obligations to increase, yielding a reduced net pension obligation. A reduction in the LTRR reduces the amount of projected net assets available to satisfy pension obligations and, thus, causes the net pension obligation to increase. For post-retirement obligations, the key assumptions used to estimate the year-end obligations are the discount rate and the assumptions regarding future medical costs increases. The discount rate affects the post-retirement obligations in a similar fashion to that described above for pension obligations. As the assumed rate of increase in medical costs goes up, so does the net projected obligation. Conversely, if the rate of increase is assumed to be smaller, the projected obligation will decline. Please refer to Note 10 of Notes to Consolidated Financial Statements for information regarding the Company's pension and post-retirement obligations. Actual results may differ from the assumptions made in computing the estimated December 31, 2002 obligations and such differences may be material. 4. The Company's judgment and estimates in respect to environmental commitments and contingencies. The Company and KACC are subject to a number of environmental laws and regulations ("environmental laws"), to fines or penalties assessed for alleged breaches of the environmental laws, and to claims and litigation based upon such laws. KACC currently is subject to a number of claims under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based on the Company's evaluation of these and other environmental matters, the Company has established environmental accruals, primarily related to potential solid waste disposal and soil and groundwater remediation matters. These environmental accruals represent the Company's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology, and the Company's assessment of the likely remediation action to be taken. However, making estimates of possible environmental remediation costs is subject to inherent uncertainties. 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. An example of how environmental accruals could change is the current situation of KACC's Mead smelter. KACC announced the indefinite curtailment of the Mead smelter in January 2003. The Mead smelter is expected to remain curtailed indefinitely unless and until an appropriate combination of reduced power prices, higher primary aluminum prices and other factors occurs to make a restart commercially feasible. However, at some point in the future, the Company may decide, due to economic conditions, foreign competition or other factors, to dispose of the facility. If, in connection with such hypothetical disposition the Company were required to dismantle, demolish or otherwise permanently close the Mead facility, the demolition and environmental remediation costs could be significant. While proceeds of a disposition might offset such costs, no assurances can be provided that receipts would fully or substantially offset the total costs of the environmental remediation costs. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section contains forward-looking statements that involve risk and uncertainties. Actual results could differ materially from those projected in these forward-looking statements. The Company's operating results are sensitive to changes in the prices of alumina, primary aluminum, and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold. As discussed more fully in Notes 12 and 1113 of Notes to Consolidated Financial Statements, KACC utilizeshistorically has utilized hedging transactions to lock-in a specified price or range of prices for certain products which it sells or consumes in its production process and to mitigate KACC's exposure to changes in foreign currency exchange rates. The following sets forthHowever, because the impact on future earnings of adverse market changes related toagreements underlying KACC's hedging positions provided that the counterparties to the hedging contracts could liquidate KACC's hedging positions if KACC filed for reorganization, KACC chose to liquidate these positions in advance of the initial Filing Date. KACC has only completed limited hedging activities since the Filing Date (see below). The Company anticipates that, subject to prevailing economic conditions, it may enter into additional hedging transactions with respect to commodityprimary aluminum prices, natural gas and fuel oil prices and foreign exchange contracts described more fully in Note 11currency values to protect the interests of Notesits constituents. However, no assurance can be given as to Consolidated Financial Statements. The impact of market changes on energy derivative activities is generally not significant.when or if the Company will enter into such additional hedging activities. SENSITIVITY Alumina and Primary AluminumAluminum. Alumina and primary aluminum production in excess of internal requirements is sold in domestic and international markets, exposing the Company to commodity price opportunities and risks. KACC's hedging transactions are intended to provide price risk management in respect of the net exposure of earnings resulting from (i) anticipated sales of alumina, primary aluminum and fabricated aluminum products, less (ii) expected purchases of certain items, such as aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with the price of primary aluminum. On average, before consideration of hedging activities, any fixed price contracts with fabricated aluminum products customers, variations in production and shipment levels, and timing issues related to price changes, the Company estimates that during 2003 each $.01 increase (decrease) in the market price per price-equivalent pound of primary aluminum increases (decreases) the Company's annual pre-tax earnings by approximately $15.0 million. 28 32 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- As of December 31, 1999, approximately 65% and 45% of KACC's net hedgeable volume with respect to 2000 and 2001, respectively, is subject to a minimum and maximum contract price. Based$5.0 million, based on the average December 1999 London Metal Exchange ("LME") cash price for primary aluminumrecent operating levels. This decrease in pre-tax earnings from prior periods of approximately $.71$10.0 million per pound, the Company estimates that it would realize a net aggregate pre-tax reduction of operating income of approximately $70.0 million from its hedging positions and fixedeach $.01 change in market price customer contracts during 2000 and 2001. The Company estimates that a hypothetical $.10 increase from the above stated December 1999 price would result in an additional net aggregate pre-tax reduction of operating income of approximately $130.0 million being realized during 2000 and 2001 related to KACC's hedging positions and fixed price customer contracts. Approximately 40% of the total reductions in operating income would occur in the first half of 2000. Both amounts are versus what the Company's results would have been without the derivative commodity contracts and fixed price customer contracts discussed above. Conversely, the Company estimates that a hypothetical $.10 decrease from the above stated December 1999 price level would result in an aggregate pre-tax increase in operating income of approximately $30.0 million being realized during 2000 and 2001 related to KACC's hedging positions and fixed price customer contracts. It should be noted, however, that, since the hedging positions and fixed price customer contracts lock-in a specified price or range of prices, any increase or decrease in earnings attributable to KACC's hedging positions or fixed price customer contracts would be significantly offset by a decrease or increase in the value of the hedged transactions. As stated in Note 11 of Notesper price-equivalent is due to the Consolidated Financial Statements, KACC has certain hedging positions which do not qualify for treatment as a "hedge" under current accounting guidelines and thus must be marked-to-market each period. Fluctuations in forward market prices for primary aluminum would likely result in additional earnings volatility as a result of these positions. The Company estimates that a hypothetical $.10 increase in spot market prices from the December 31, 1999, LME cash price of $.74 per pound would, if the forward market were in a "contango" position (i.e., where future prices exceed spot prices), result in additional aggregate mark-to-market charges of between $20.0 - $30.0 million during 2000 and 2001. Conversely, the Company estimates that a hypothetical $.10 decrease in year-end 1999 spot market prices would result in aggregate mark-to-market income of between $20.0 - $30.0 million during 2000 and 2001. For purposes of this computation, the Company assumed that the forward market would be essentially "flat" (i.e., future prices would approximate the current forward market price). The foregoing estimated earnings impact on 2001 excludes the possible effect on pre-tax income of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which must be adopted by the Company as of January 1, 2001. In addition to having an impact on the Company's earnings, a hypothetical $.10-per-pound change in primary aluminum prices would also impact the Company's cash flows and liquidity through changes in possible margin advance requirements. At December 31, 1999, KACC had made margin advances of $38.0 million and had posted letters of credit totaling $40.0 million in lieu of paying margin advances. Increases in primary aluminum prices subsequent to December 31, 1999, could result in KACC having to make additional margin advances or post additional letters of credit and such amounts could be significant. If primary aluminum prices increased by $.10 per pound (from the year-end 1999 price) by March 31, 2000 and the forward curve were as described above, it is estimated that KACC could be required to make additional margin advances in the range of $75 to $100 million. On the other hand, a hypothetical $.10 decrease in primary aluminum prices by March 31, 2000, using the same forward curve assumptions stated above, would be expected to result in KACC receiving a substantial majority of its previous margin advances. KACC's exposure to margin advances is expected to improve throughout 2000 as its year 2000 positions, which have a lower average maximum contract price than KACC's 2001 positions, expire. KACC is considering various financing and hedging strategies to limit its exposure to further margin advances in the event of aluminum price increases. However, no assurance can be given that KACC will be successful in this regard.Valco potline curtailments. Foreign CurrencyCurrency. KACC enters into forward exchange contracts to hedge material cash commitments for foreign currencies. KACC's primary foreign exchange exposure is related to KACC's Australian Dollar (A$) commitments in respect of activities associated with its 28.3%20.0%-owned affiliate, Queensland Alumina Limited.QAL. The Company estimates that, before consideration of any hedging activities, a US $0.01 increase (decrease) in the value of the A$ results in an approximate $1- $2$1.5 million (decrease) increase in the Company's annual pre-tax earnings. At December 31, 1999,operating income. Energy. KACC is exposed to energy price risk from fluctuating prices for natural gas, fuel oil and diesel oil consumed in the Company held derivative foreign currency contracts hedging approximately 82% and 27% of its A$ currency commitments for 2000 and 2001, respectively.production process. The Company estimates that a hypothetical 10% reductioneach $1.00 change in natural gas prices (per mcf) impacts the Company's annual pre-tax operating results by approximately $20.0 million. Further, the Company estimates that each $1.00 change in fuel oil prices (per barrel) impacts the Company's pre-tax operating results by approximately $3.0 million. KACC from time to time in the A$ exchange rateordinary course of business enters into hedging transactions with major suppliers of energy and energy related financial instruments. During December 2002 and the first quarter of 2003, KACC purchased option contracts which cap the price that KACC would have to pay for 2.4 million barrels of fuel oil in 2003. This amount of fuel oil represents substantially all of KACC's exposure to fuel oil requirements for the second through fourth quarter of 2003. Based on an average January 2003 fuel oil price (per barrel) of approximately $30.0, the Company estimates the hedges would result in the Company recognizing a net aggregate pre-tax costincrease to operating income of approximately $3 - $10$1.4 million during 2000 29 33 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES - -------------------------------------------------------------------------------- and 2001 related to KACC's foreign currency hedging positions. This cost is versus what the Company's results would have been without the Company's derivative foreign currency contracts. It should be noted, however, that, since the hedging positions lock- in specified rates, any increase or decrease in earnings attributable to currency hedging instruments would be offset by a corresponding decrease or increase in the valuefirst quarter of the hedged commitments.2003. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ---- Report of Independent Public Accountants..........................................................................31 Consolidated Balance Sheets.......................................................................................32 Statements of Consolidated Income (Loss)..........................................................................33 Statements of Consolidated Cash Flows.............................................................................34 Notes to Consolidated Financial Statements........................................................................35 Quarterly Financial Data (Unaudited)..............................................................................58 Five-Year Financial Data..........................................................................................59
30 34 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIESIndependent Auditors' Report Copy of Report of Independent Public Accountants Consolidated Balance Sheets Statements of Consolidated Income (Loss) Statements of Consolidated Stockholders' Equity (Deficit) and Comprehensive Income (Loss) Statements of Consolidated Cash Flows Notes to Consolidated Financial Statements Quarterly Financial Data (Unaudited) Five-Year Financial Data Independent Auditors' Report - -------------------------------------------------------------------------------- To the Stockholders and the Board of Directors of Kaiser Aluminum Corporation: We have audited the accompanying consolidated balance sheet of Kaiser Aluminum Corporation (Debtor-In-Possession) and subsidiaries as of December 31, 2002, and the related consolidated statements of income (loss), stockholders' equity (deficit) and comprehensive income (loss) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Kaiser Aluminum Corporation as of December 31, 2001 and for the years ended December 31, 2001 and 2000 were audited by other auditors who have ceased operations. In their report, dated April 10, 2002, those auditors expressed an unqualified opinion on those consolidated financial statements with an explanatory paragraph as to the Company's ability to continue as a going concern. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Kaiser Aluminum Corporation and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1, the Company, its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC") and certain of KACC's subsidiaries have filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to pre-petition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 2, the action of filing for reorganization under Chapter 11 of the Federal Bankruptcy Code, losses from operations and stockholders' capital deficiency raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 1. The financial statements do not include adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE Houston, Texas March 28, 2003 COPY OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS - -------------------------------------------------------------------------------- Kaiser Aluminum Corporation dismissed Arthur Andersen on April 30, 2002 and subsequently engaged Deloitte & Touche LLP as its independent auditors. The predecessor auditors' report appearing below is a copy of Arthur Andersen's previously issued opinion dated April 10, 2002. Since Kaiser Aluminum Corporation is unable to obtain a manually signed audit report, a copy of Arthur Andersen's most recent signed and dated report has been included to satisfy filing requirements, as permitted under Rule 2-02(e) of Regulation S-X. To the Stockholders and the Board of Directors of Kaiser Aluminum Corporation: We have audited the accompanying consolidated balance sheets of Kaiser Aluminum Corporation (a Delaware corporation) and subsidiaries as of December 31, 19992001 and 1998,2000, and the related statements of consolidated income (loss), stockholders' equity and comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 1999.2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kaiser Aluminum Corporation and subsidiaries as of December 31, 19992001 and 1998,2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999,2001, in conformity with accounting principles generally accepted in the United States. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern which contemplate among other things, realization of assets and payment of liabilities in the normal course of business. As discussed in Note 1 to the consolidated financial statements, on February 12, 2002, the Company, its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC") and certain of KACC's subsidiaries filed for reorganization under Chapter 11 of the United States Bankruptcy Code. This action raises substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or the effects on existing stockholders' equity that may result from any plans, arrangements or other actions arising from the aforementioned proceedings, or the possible inability of the Company to continue in existence. ARTHUR ANDERSEN LLP Houston, Texas March 7, 2000 31 35 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIESApril 10, 2002 CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------- December 31, ------------------------- (In millions of dollars, except share amounts) 1999 1998 - --------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 21.2 $ 98.3 Receivables: Trade, less allowance for doubtful receivables of $5.9 in 1999 and $6.2 in 1998 154.1 170.1 Other 106.9 112.6 Inventories 546.1 543.5 Prepaid expenses and other current assets 145.6 105.5 ---------- ---------- Total current assets 973.9 1,030.0 Investments in and advances to unconsolidated affiliates 96.9 128.3 Property, plant, and equipment - net 1,053.7 1,108.7 Deferred income taxes 440.0 377.9 Other assets 634.3 346.0 ---------- ---------- Total $ 3,198.8 $ 2,990.9 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 231.7 $ 173.3 Accrued interest 37.7 37.3 Accrued salaries, wages, and related expenses 62.1 73.8 Accrued postretirement medical benefit obligation - current portion 51.5 48.2 Other accrued liabilities 168.8 148.3 Payable to affiliates 85.8 77.1 Long-term debt - current portion .3 .4 ---------- ---------- Total current liabilities 637.9 558.4 Long-term liabilities 727.1 532.9 Accrued postretirement medical benefit obligation 678.3 694.3 Long-term debt 972.5 962.6 Minority interests 117.7 123.5 Commitments and contingencies Stockholders' equity: Common stock, par value $.01, authorized 125,000,000 shares; issued and outstanding, 79,405,333 and 79,153,543 in 1999 and 1998 .8 .8 Additional capital 536.8 535.4 Accumulated deficit (471.1) (417.0) Accumulated other comprehensive income - additional minimum pension liability (1.2) - ---------- ---------- Total stockholders' equity 65.3 119.2 ---------- ---------- Total $ 3,198.8 $ 2,990.9 ========== ==========
- -------------------------------------------------------------------------------- December 31, -------------------------- (In millions of dollars, except share amounts) 2002 2001 - ------------------------------------------------------------------------------- ------------ ----------- ASSETS Current assets: Cash and cash equivalents $ 78.7 $ 153.3 Receivables: Trade, less allowance for doubtful receivables of $11.0 and $7.0 103.1 124.1 Other 46.4 82.3 Inventories 254.9 313.3 Prepaid expenses and other current assets 33.5 86.2 ------------ ----------- Total current assets 516.6 759.2 Investments in and advances to unconsolidated affiliates 69.7 63.0 Property, plant, and equipment - net 1,009.9 1,215.4 Other assets 629.2 706.1 ------------ ----------- Total $ 2,225.4 $ 2,743.7 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Liabilities not subject to compromise - Current liabilities Accounts payable $ 130.6 $ 167.4 Accrued interest 2.9 35.4 Accrued salaries, wages, and related expenses 46.7 88.9 Accrued postretirement medical benefit obligation - current portion 60.2 62.0 Other accrued liabilities 64.2 223.3 Payable to affiliates 28.1 52.9 Long-term debt - current portion .9 173.5 ------------ ----------- Total current liabilities 333.6 803.4 Long-term liabilities 86.9 919.9 Accrued postretirement medical benefit obligation - 642.2 Long-term debt 42.7 700.8 ------------ ----------- 463.2 3,066.3 Liabilities subject to compromise 2,726.0 - Minority interests 121.8 118.5 Commitments and contingencies Stockholders' equity (deficit): Common stock, par value $.01, authorized 125,000,000 shares; issued and outstanding 80,386,563 and 80,698,066 shares .8 .8 Additional capital 539.9 539.1 Accumulated deficit (1,382.4) (913.7) Accumulated other comprehensive income (loss) (243.9) (67.3) ------------ ----------- Total stockholders' equity (deficit) (1,085.6) (441.1) ------------ ----------- Total $ 2,225.4 $ 2,743.7 ============ =========== The accompanying notes to consolidated financial statements are an integral part of these statements. 32 36 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED INCOME (LOSS)
- --------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------- (In millions of dollars, except share amounts) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Net sales $ 2,044.3 $ 2,256.4 $ 2,373.2 ---------- ---------- ---------- Costs and expenses: Cost of products sold 1,859.2 1,906.2 1,951.2 Depreciation and amortization 89.5 99.1 102.5 Selling, administrative, research and development, and general 105.4 115.5 131.8 Non-cash impairment of Micromill assets/restructuring of operations 19.1 45.0 19.7 ---------- ---------- ---------- Total costs and expenses 2,073.2 2,165.8 2,205.2 ---------- ---------- ---------- Operating income (loss) (28.9) 90.6 168.0 Other income (expense): Interest expense (110.1) (110.0) (110.7) Gain on involuntary conversion at Gramercy facility 85.0 - - Other - net (35.9) 3.5 3.0 ---------- ---------- ---------- Income (loss) before income taxes and minority interests (89.9) (15.9) 60.3 Benefit (provision) for income taxes 32.7 16.4 (8.8) Minority interests 3.1 .1 (3.5) ---------- ---------- ---------- Net income (loss) (54.1) .6 48.0 Dividends on preferred stock - - (5.5) ---------- ---------- ---------- Net income (loss) available to common shareholders $ (54.1) $ .6 $ 42.5 ========== ========== ========== Earnings (loss) per share: Basic $ (.68) $ .01 $ .57 ========== ========== ========== Diluted $ (.68) $ .01 $ .57 ========== ========== ========== Weighted average shares outstanding (000): Basic 79,336 79,115 74,221 ========== ========== ========== Diluted 79,336 79,156 74,382 ========== ========== ==========
- -------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------- (In millions of dollars, except share and per share amounts) 2002 2001 2000 - ------------------------------------------------------------------------- ----------- ----------- ----------- Net sales $ 1,469.6 $ 1,732.7 $ 2,169.8 ----------- ----------- ----------- Costs and expenses: Cost of products sold 1,408.2 1,638.4 1,891.4 Depreciation and amortization 91.5 90.2 76.9 Selling, administrative, research and development, and general 124.7 102.8 104.1 Non-recurring operating charges (benefits), net 251.2 (163.6) (41.9) ----------- ----------- ----------- Total costs and expenses 1,875.6 1,667.8 2,030.5 ----------- ----------- ----------- Operating income (loss) (406.0) 64.9 139.3 Other income (expense): Interest expense (excluding unrecorded contractual interest expense of $84.0 in 2002) (20.7) (109.0) (109.6) Reorganization items (33.3) - - Gain on sale of interest in QAL - 163.6 - Other - net .4 (32.8) (4.3) ----------- ----------- ----------- Income (loss) before income taxes and minority interests (459.6) 86.7 25.4 Provision for income taxes (14.9) (550.2) (11.6) Minority interests 5.8 4.1 3.0 ----------- ----------- ----------- Net income (loss) $ (468.7) $ (459.4) $ 16.8 =========== =========== =========== Earnings (loss) per share: Basic/Diluted $ (5.82) $ (5.73) $ .21 =========== =========== =========== Weighted average shares outstanding (000): Basic 80,578 80,235 79,520 =========== =========== =========== Diluted 80,578 80,235 79,523 =========== =========== =========== The accompanying notes to consolidated financial statements are an integral part of these statements. 33 37 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, --------------------------------- (In millions of dollars) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ (54.1) $ .6 $ 48.0 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation and amortization (including deferred financing costs of $4.3, $3.9, and $6.1) 93.8 103.0 108.6 Non-cash impairment of Micromill assets/restructuring of operations 19.1 45.0 19.7 Gain on involuntary conversion at Gramercy facility (85.0) -- -- Gain on sale of interest in AKW joint venture (50.5) -- -- Non-cash benefit for income taxes -- (8.3) (12.5) Equity in (income) loss of unconsolidated affiliates, net of distributions (4.9) .1 7.8 Minority interests (3.1) (.1) 3.5 Decrease (increase) decrease in receivables 21.7 61.5 (92.1) (Increase) decrease in inventories (2.6) 24.8 (9.3) (Increase) decrease in prepaid expenses and other current assets (66.9) 30.1 (10.1) Increase (decrease) in accounts payable and accrued interest 58.8 (3.2) (11.5) Increase (decrease) in payable to affiliates and other accrued liabilities 19.6 (45.3) (23.9) Decrease in accrued and deferred income taxes (55.2) (26.2) (17.4) Increase (decrease) in net long-term assets and liabilities 15.7 (23.9) 28.6 Other 3.0 12.6 5.6 --------- -------- --------- Net cash (used) provided by operating activities (90.6) 170.7 45.0 --------- -------- --------- Cash flows from investing activities: Proceeds from sale of interest in AKW joint venture 70.4 -- -- Additions to property, plant, and equipment (68.4) (77.6) (128.5) Other 1.1 3.2 19.9 --------- -------- --------- Net cash provided (used) by investing activities 3.1 (74.4) (108.6) --------- -------- --------- Cash flows from financing activities: Borrowings under credit agreement, net 10.4 -- -- Borrowings of long-term debt -- -- 19.0 Repayments of long-term debt (.6) (8.9) (8.8) Capital stock issued 1.4 .1 .4 Decrease (increase) in restricted cash, net .8 4.3 (5.3) Incurrence of financing costs -- (.6) (.9) Preferred stock dividends paid -- -- (4.2) Redemption of minority interests' preference stock (1.6) (8.7) (2.1) --------- -------- --------- Net cash provided (used) by financing activities 10.4 (13.8) (1.9) --------- -------- --------- Net (decrease) increase in Cash and cash equivalents during the year (77.1) 82.5 (65.5) Cash and cash equivalents at beginning of year 98.3 15.8 81.3 --------- -------- --------- Cash and cash equivalents at end of year $ 21.2 $ 98.3 $ 15.8 ========= ======== ========= Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest $ 105.4 $ 106.3 $ 102.7 Income taxes paid 24.1 16.8 24.4 Tax allocation payments to MAXXAM Inc. -- -- 11.8
STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS) - -------------------------------------------------------------------------------- (In millions of dollars) - -------------------------------------------------------------------------------- Accumulated Other Common Additional Accumulated Comprehensive Stock Capital Deficit Income (Loss) Total ---------------- ---------------- -------------- ---------------- ----------- BALANCE, December 31, 1999 $ .8 $ 536.8 $ (471.1) $ (1.2) $ 65.3 Net income - - 16.8 - 16.8 Minimum pension liability adjustment, net of income tax benefit of $.4 - - - (.6) (.6) ----------- Comprehensive income - - - - 16.2 Incentive plan accretion - .7 - - .7 ---------------- ---------------- -------------- ---------------- ----------- BALANCE, December 31, 2000 .8 537.5 (454.3) (1.8) 82.2 Net loss - - (459.4) - (459.4) Minimum pension liability adjustment, net of income tax benefit of $38.0 - - - (64.5) (64.5) Adjustment of valuation allowances for net deferred income tax assets provided in respect of items reflected in Other comprehensive income (loss) - - - (25.0) (25.0) Unrealized net gain in value of derivative instruments arising during the year, net of income tax provision of $19.4 - - - 33.1 33.1 Reclassification adjustment for net realized gains on derivative instruments included in net loss, net of income tax benefit of $5.8 - - - (10.9) (10.9) Cumulative effect of accounting change, net of income tax provision of $.5 - - - 1.8 1.8 ----------- Comprehensive income (loss) (524.9) Incentive plan and restricted stock accretion - 1.6 - - 1.6 ---------------- ---------------- -------------- ---------------- ----------- BALANCE, December 31, 2001 .8 539.1 (913.7) (67.3) (441.1) Net loss - - (468.7) - (468.7) Minimum pension liability adjustment - - - (136.6) (136.6) Unrealized net decrease in value of derivative instruments arising during the year prior to settlement - - - (12.1) (12.1) Reclassification adjustment for net realized gains on derivative instruments included in net loss, net - - - (27.9) (27.9) ----------- Comprehensive income (loss) - - - - (645.3) Incentive plan accretion - .8 - - .8 ---------------- ---------------- -------------- ---------------- ----------- BALANCE, December 31, 2002 $ .8 $ 539.9 $ (1,382.4) $ (243.9) $ (1,085.6) ================ ================ ============== ================ =========== The accompanying notes to consolidated financial statements are an integral part of these statements. 34 38 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIESSTATEMENTS OF CONSOLIDATED CASH FLOWS - -------------------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------- (In millions of dollars) 2002 2001 2000 - --------------------------------------------------------------------------------- -------------- -------------- ------------ Cash flows from operating activities: Net income (loss) $ (468.7) $ (459.4) $ 16.8 Adjustments to reconcile net income (loss) to net cash (used) provided by operating activities: Depreciation and amortization (including deferred financing costs of $3.9, $5.1 and $4.4, respectively) 95.4 95.3 81.3 Non-cash charges for reorganization items, non-recurring operating items and other 257.0 41.7 63.3 Gains - sale of real estate and miscellaneous equipment in 2002, sale of QAL interest and real estate in 2001 and real estate in 2000 (3.8) (173.6) (39.0) Equity in (income) loss of unconsolidated affiliates, net of distributions (8.0) 1.1 13.1 Minority interests (5.8) (4.1) (3.0) Decrease (increase) in trade and other receivables 58.0 226.0 (168.8) Decrease in inventories, excluding LIFO adjustments and non-recurring items 31.1 66.7 125.8 Decrease in prepaid expenses and other current assets 46.5 23.2 20.8 Increase (decrease) in accounts payable (associated with operating activities) and accrued interest 20.5 (39.1) (29.7) (Decrease) increase in payable to affiliates and other accrued liabilities (67.8) (48.5) 68.9 (Decrease) increase in accrued and deferred income taxes (24.4) 521.8 (10.2) Net cash impact of changes in long-term assets and liabilities 32.4 (12.5) (69.4) Other (12.0) 11.2 13.2 -------------- -------------- ------------ Net cash (used) provided by operating activities (49.6) 249.8 83.1 -------------- -------------- ------------ Cash flows from investing activities: Capital expenditures (including $78.6 and $239.1 in 2001 and 2000, respectively, related to the Gramercy facility) (47.6) (148.7) (296.5) (Decrease) increase in accounts payable - Gramercy-related capital expenditures - (34.6) 34.6 Gramercy-related property damage insurance recoveries - - 100.0 Net proceeds from dispositions: Oxnard facility, equipment and other in 2002, QAL interest and real estate in 2001 and various real estate in 2000 31.4 171.6 66.9 Other - 2.4 .2 -------------- -------------- ------------ Net cash used by investing activities (16.2) (9.3) (94.8) -------------- -------------- ------------ Cash flows from financing activities: Incurrence of financing costs (8.8) - (.4) (Repayments) borrowings under credit agreement, net - (30.4) 20.0 Repayments of other debt - (74.7) (2.9) Redemption of minority interests' preference stocks - (5.5) (2.8) -------------- -------------- ------------ Net cash (used) provided by financing activities (8.8) (110.6) 13.9 -------------- -------------- ------------ Net (decrease) increase in cash and cash equivalents during the year (74.6) 129.9 2.2 Cash and cash equivalents at beginning of year 153.3 23.4 21.2 -------------- -------------- ------------ Cash and cash equivalents at end of year $ 78.7 $ 153.3 $ 23.4 ============== ============== ============ Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest of $1.2, $3.5 and $6.5 $ 5.4 $ 106.0 $ 105.3 Income taxes paid 37.5 52.1 19.6 The accompanying notes to consolidated financial statements are an integral part of these statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- 1. REORGANIZATION PROCEEDINGS Kaiser Aluminum Corporation ("Kaiser" or the "Company"), its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC") and 24 of KACC's subsidiaries have filed separate voluntary petitions in the United States Bankruptcy Court for the District of Delaware (the "Court") for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Code"); the Company, KACC and 15 of KACC's subsidiaries (the "Original Debtors") filed in the first quarter of 2002 and nine additional KACC subsidiaries (the "Additional Debtors") filed in the first quarter of 2003. The Original Debtors and Additional Debtors are collectively referred to herein as the "Debtors" and the Chapter 11 proceedings of these entities are collectively referred to herein as the "Cases." For purposes of this Report, the term "Filing Date" shall mean, with respect to any particular Debtor, the date on which such Debtor filed its Case. None of KACC's non-U.S. joint ventures are included in the Cases. The Cases are being jointly administered. The Debtors are managing their businesses in the ordinary course as debtors-in-possession subject to the control and administration of the Court. Original Debtors. During the first quarter of 2002, the Original Debtors filed separate voluntary petitions for reorganization. The wholly owned subsidiaries of KACC included in such filings were: Kaiser Bellwood Corporation, Kaiser Aluminium International, Inc., Kaiser Aluminum Technical Services, Inc., Kaiser Alumina Australia Corporation (and its wholly owned subsidiary, Kaiser Finance Corporation) and ten other entities with limited balances or activities. The necessity for filing the Cases by the Original Debtors was attributable to the liquidity and cash flow problems of the Company and its subsidiaries arising in late 2001 and early 2002. The Company was facing significant near-term debt maturities at a time of unusually weak aluminum industry business conditions, depressed aluminum prices and a broad economic slowdown that was further exacerbated by the events of September 11, 2001. In addition, the Company had become increasingly burdened by asbestos litigation (see Note 12) and growing legacy obligations for retiree medical and pension costs (see Note 10). The confluence of these factors created the prospect of continuing operating losses and negative cash flow, resulting in lower credit ratings and an inability to access the capital markets. The outstanding principal of, and accrued interest on, all debt of the Original Debtors became immediately due and payable upon commencement of the Cases. However, the vast majority of the claims in existence at the Filing Date (including claims for principal and accrued interest and substantially all legal proceedings) are stayed (deferred) during the pendency of the Cases. In connection with the filing of the Original Debtors' Cases, the Court, upon motion by the Original Debtors, authorized the Original Debtors to pay or otherwise honor certain unsecured pre-Filing Date claims, including employee wages and benefits and customer claims in the ordinary course of business, subject to certain limitations. In July 2002, the Court also issued a final order authorizing the Company to fund the cash requirements of its foreign joint ventures in the ordinary course of business and to continue using the Company's existing cash management systems. The Original Debtors also have the right to assume or reject executory contracts existing prior to the Filing Date, subject to Court approval and certain other limitations. In this context, "assumption" means that the Original Debtors agree to perform their obligations and cure certain existing defaults under an executory contract and "rejection" means that the Original Debtors are relieved from their obligations to perform further under an executory contract and are subject only to a claim for damages for the breach thereof. Any claim for damages resulting from the rejection of an executory contract is treated as a general unsecured claim in the Cases. Generally, pre-Filing Date claims, including certain contingent or unliquidated claims, against the Original Debtors will fall into two categories: secured and unsecured. Under the Code, a creditor's claim is treated as secured only to the extent of the value of the collateral securing such claim, with the balance of such claim being treated as unsecured. Unsecured and partially secured claims do not accrue interest after the Filing Date. A fully secured claim, however, does accrue interest after the Filing Date until the amount due and owing to the secured creditor, including interest accrued after the Filing Date, is equal to the value of the collateral securing such claim. The amount and validity of pre-Filing Date contingent or unliquidated claims, although presently unknown, ultimately may be established by the Court or by agreement of the parties. As a result of the Cases, additional pre-Filing Date claims and liabilities may be asserted, some of which may be significant. In October 2002, the Court set January 31, 2003 as the last date by which holders of pre-Filing Date claims against the Original Debtors (other than asbestos-related personal injury claims and certain hearing loss claims) could file their claims. Any holder of a claim that was required to file a claim by such date and did not do so may be barred from asserting such claim against any of the Original Debtors and, accordingly, may not be able to participate in any distribution in any of the Cases on account of such claim. Because the Company has not had sufficient time to analyze the proofs of claim to determine their validity, no provision has been included in the accompanying financial statements for claims that have been filed. The January 31, 2003 bar date does not apply to asbestos-related personal injury claims, for which the Original Debtors reserve the right to establish a separate bar date at a later time. A separate bar date of June 30, 2003 has been set for certain hearing loss claims. Additional Debtors. On January 14, 2003, the Additional Debtors filed separate voluntary petitions for reorganization. The wholly owned subsidiaries included in the Cases were: Kaiser Bauxite Company, Kaiser Jamaica Corporation, Alpart Jamaica Inc., Kaiser Aluminum & Chemical of Canada Limited and five other entities with limited balances or activities. The Cases filed by the Additional Debtors were commenced, among other reasons, to protect the assets held by these Debtors against possible statutory liens that may arise and be enforced by the Pension Benefit Guaranty Corporation ("PBGC") primarily as a result of the Company's failure to meet a $17.0 accelerated funding requirement to its salaried employee retirement plan in January 2003 (see Note 10). From an operating perspective, the filing of the Cases by the additional Debtors had no impact on the Company's day-to-day operations. In connection with the Additional Debtors' filings, the Court authorized the Additional Debtors to continue to make payments in the normal course of business (including payments of pre-Filing Date amounts), including payments of wages and benefits, payments for items such as materials, supplies and freight and payments of taxes. The Court also approved the continuation of the Company's existing cash management systems and routine intercompany transactions involving, among other transactions, the transfer of materials and supplies among affiliates. In March 2003, the Court set May 15, 2003, as the last date by which holders of pre-Filing Date claims against the Additional Debtors (other than asbestos-related personal injury claims and certain hearing loss claims) must file their claims. All Debtors. The Debtors' objective is to achieve the highest possible recoveries for all creditors and stockholders, consistent with the Debtors' abilities to pay, and to continue the operations of their businesses. However, there can be no assurance that the Debtors will be able to attain these objectives or achieve a successful reorganization. While valuation of the Debtors' assets and pre-Filing Date claims at this stage of the Cases is subject to inherent uncertainties, the Debtors currently believe that it is likely that their liabilities will be found in the Cases to exceed the fair value of their assets. Therefore, the Debtors currently believe that it is likely that pre-Filing Date claims will be paid at less than 100% of their face value and the equity of the Company's stockholders will be diluted or cancelled. Because of such possibility, the value of the Common Stock is speculative and any investment in the Common Stock would pose a high degree of risk. Under the Code, the rights of and ultimate payments to pre-Filing Date creditors and stockholders may be substantially altered. At this time, it is not possible to predict the outcome of the Cases, in general, or the effect of the Cases on the businesses of the Debtors. Two creditors' committees, one representing the unsecured creditors and the other representing the asbestos claimants, have been appointed as official committees in the Cases and, in accordance with the provisions of the Code, will have the right to be heard on all matters that come before the Court. The Debtors expect that the appointed committees, together with the legal representative for potential future asbestos claimants that has been appointed in the Cases, will play important roles in the Cases and the negotiation of the terms of any plan or plans of reorganization. The Debtors are required to bear certain costs and expenses for the committees and the legal representative for potential future asbestos claimants, including those of their counsel and other advisors. The Debtors anticipate that substantially all liabilities of the Debtors as of the date of the Filing will be resolved under one or more plans of reorganization to be proposed and voted on in the Cases in accordance with the provisions of the Code. Although the Debtors intend to file and seek confirmation of such a plan or plans, there can be no assurance as to when the Debtors will file such a plan or plans, or that such plan or plans will be confirmed by the Court and consummated. As provided by the Code, the Original Debtors had the exclusive right to propose a plan of reorganization for 120 days following the initial Filing Date. The Court has subsequently approved extensions of the exclusivity period for all Debtors through April 30, 2003. Additional extensions are likely to be sought. However, no assurance can be given that such future extension requests will be granted by the Court. If the Debtors fail to file a plan of reorganization during the exclusivity period, or if such plan is not accepted by the requisite numbers of creditors and equity holders entitled to vote on the plan, other parties in interest in the Cases may be permitted to propose their own plan(s) of reorganization for the Debtors. Financial Statement Presentation. The accompanying consolidated financial statements have been prepared in accordance with Statement of Position 90-7 ("SOP 90-7"), Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and on a going concern basis, which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. However, as a result of the Cases, such realization of assets and liquidation of liabilities are subject to a significant number of uncertainties. Financial Information. Condensed consolidating financial statements of the Debtors and non-Debtors are set forth below: CONDENSED CONSOLIDATING BALANCE SHEETS DECEMBER 31, 2002 Consolidation/ Original Additional Elimination Debtors Debtors Non-Debtors Entries Consolidated -------------- --------------- ------------- ---------------- -------------- Current assets $ 359.6 $ 42.3 $ 114.7 $ - $ 516.6 Investments in subsidiaries and affiliates 1,429.7 189.8 .1 (1,549.9) 69.7 Intercompany receivables (payables) (991.1) 884.7 106.4 - - Property and equipment, net 610.7 20.2 379.0 - 1,009.9 Deferred income taxes (81.9) 81.9 - - - Other assets 620.3 .5 8.4 - 629.2 -------------- --------------- ------------- ---------------- -------------- $ 1,947.3 $ 1,219.4 $ 608.6 $ (1,549.9) $ 2,225.4 ============== =============== ============= ================ ============== Liabilities not subject to compromise - Current liabilities $ 233.4 $ 12.3 $ 89.9 $ (2.0) $ 333.6 Long-term liabilities 72.8 16.3 40.5 - 129.6 Liabilities subject to compromise 2,726.0 - - - 2,726.0 Minority interests .7 - 102.3 18.8 121.8 Stockholders' equity (1,085.6) 1,190.8 375.9 (1,566.7) (1,085.6) -------------- ------------------------------ ---------------- -------------- $ 1,947.3 $ 1,219.4 $ 608.6 $ (1,549.9) $ 2,225.4 ============== =============== ============= ================ ============== CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS) FOR THE YEAR ENDED DECEMBER 31, 2002 Consolidation/ Original Additional Elimination Debtors Debtors Non-Debtors Entries Consolidated -------------- --------------- ------------- ---------------- -------------- Net sales $ 1,323.6 $ 47.6 $ 209.7 $ (111.3) $ 1,469.6 -------------- --------------- ------------- ---------------- -------------- Costs and expenses - Non-recurring operating charges (benefits), net (Note 6) 250.2 - 1.0 - 251.2 All other 1,494.2 14.5 227.0 (111.3) 1,624.4 -------------- --------------- ------------- ---------------- -------------- 1,744.4 14.5 228.0 (111.3) 1,875.6 -------------- --------------- ------------- ---------------- -------------- Operating income (loss) (420.8) 33.1 (18.3) - (406.0) Interest expense (19.4) - (1.3) - (20.7) All other income (expense), net (31.8) (11.6) .2 10.3 (32.9) Provision for income tax and minority interests (16.8) 1.1 6.6 - (9.1) Equity in income of subsidiaries 20.1 - - (20.1) - -------------- --------------- ------------- ---------------- -------------- Net income (loss) $ (468.7) $ 22.6 $ (12.8) $ (9.8) $ (468.7) ============== =============== ============= ================ ============== CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2002 Consolidation/ Original Additional Elimination Debtors Debtors Non-Debtors Entries Consolidated ---------------- -------------- -------------- ---------------- -------------- Net cash provided (used) by: Operating activities $ (85.4) $ .7 $ 35.1 $ - $ (49.6) Investing activities 18.1 - (34.3) - (16.2) Financing activities (8.8) - - - (8.8) ---------------- -------------- -------------- ---------------- -------------- Net (decrease) increase in cash and cash equivalents (76.1) .7 .8 - (74.6) Cash and cash equivalents at beginning of period 151.6 1.4 .3 - 153.3 ---------------- -------------- -------------- ---------------- -------------- Cash and cash equivalents at end of period $ 75.5 $ 2.1 $ 1.1 $ - $ 78.7 ================ ============== ============== ================ ============== Classification of Liabilities as "Liabilities Not Subject to Compromise" Versus "Liabilities Subject to Compromise." Liabilities not subject to compromise include: (1) liabilities incurred after the Filing Date of the Cases; (2) pre-Filing Date liabilities that the Debtors expect to pay in full, including priority tax and employee claims and certain environmental liabilities, even though certain of these amounts may not be paid until a plan of reorganization is approved; and (3) pre-Filing Date liabilities that have been approved for payment by the Court and that the Debtors expect to pay (in advance of a plan of reorganization) over the next twelve month period in the ordinary course of business, including certain employee related items (salaries, vacation and medical benefits), claims subject to a currently existing collective bargaining agreement, and postretirement medical and other costs associated with retirees. Liabilities subject to compromise refer to all other pre-Filing Date liabilities of the Debtors. The amounts of the various categories of liabilities that are subject to compromise are set forth below. These amounts represent the Company's estimates of known or probable pre-Filing Date claims that are likely to be resolved in connection with the Cases. Such claims remain subject to future adjustments. There can be no assurance that the liabilities of the Debtors will not be found in the Cases to exceed the fair value of their assets. This could result in claims being paid at less than 100% of their face value and the equity of the Company's stockholders being diluted or cancelled. The amounts subject to compromise at December 31, 2002 consisted of the following items: Items, absent the Cases, that would have been considered current: Accounts payable $ 47.6 Accrued interest 44.0 Accrued salaries, wages and related expenses(1) 59.0 Other accrued liabilities (including asbestos liability of $130.0 - Note 12) 150.6 Items, absent the Cases, that would have been considered long-term: Accrued postretirement medical obligation 672.4 Long-term liabilities(2) 922.2 Debt (Note 7) 830.2 ------------ $ 2,726.0 ============ (1) Accrued salaries, wages and related expenses represents estimated minimum pension contributions for the year ended December 31, 2003. However, the Company does not currently expect to make any pension contributions in respect of its domestic pension plans. See Note 10. (2) Long-term liabilities include pension liabilities of $362.7 (Note 10), environmental liabilities of $21.7 (Note 12) and asbestos liabilities of $480.1 (Note 12). The classification of liabilities "not subject to compromise" versus liabilities "subject to compromise" is based on currently available information and analysis. As the Cases proceed and additional information and analysis is completed or, as the Court rules on relevant matters, the classification of amounts between these two categories may change. The amount of any such changes could be significant. Additionally, as the Company evaluates the proofs of claim filed in the Cases, adjustments will be made for those claims that the Company believes will probably be allowed by the Court. The amount of such claims could be significant. Reorganization Items. Reorganization items under the Cases are expense or income items that are incurred or realized by the Company because it is in reorganization. These items include, but are not limited to, professional fees and similar types of expenses incurred directly related to the Cases, loss accruals or gains or losses resulting from activities of the reorganization process, and interest earned on cash accumulated by the Debtors because they are not paying their pre-Filing Date liabilities. For the year ended December 31, 2002, reorganization items were as follows: Professional fees $ 28.8 Accelerated amortization of certain deferred financing costs 4.5 Interest income (1.8) Other 1.8 -------------- $ 33.3 ============== As required by SOP 90-7, in the first quarter of 2002, the Company recorded the Debtors' pre-Filing Date debt that is subject to compromise at the allowed amount. Accordingly, the Company accelerated the amortization of debt-related premium, discount and costs attributable to this debt and recorded a net expense of approximately $4.5 in Reorganization items during the first quarter of 2002. Trust Fund. During the first quarter of 2002, KACC paid $5.8 into a trust fund in respect of potential liability obligations of directors and officers. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATIONGoing Concern. The consolidated financial statements of the Company have been prepared on a "going concern" basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business; however, as a result of the commencement of the Cases, such realization of assets and liquidation of liabilities are subject to a significant number of uncertainties. Specifically, the consolidated financial statements do not present: (a) the realizable value of assets on a liquidation basis or the availability of such assets to satisfy liabilities, (b) the amount which will ultimately be paid to settle liabilities and contingencies which may be allowed in the Cases, or (c) the effect of any changes which may be made in connection with the Debtors' capitalizations or operations as a result of a plan of reorganization. Because of the ongoing nature of the Cases, the discussions and consolidated financial statements contained herein are subject to material uncertainties. Principles of Consolidation. The consolidated financial statements include the statements of Kaiser Aluminum Corporation ("Kaiser" or the "Company")Company and its majority owned subsidiaries. The Company is a subsidiary of MAXXAM Inc. ("MAXXAM") and conducts its operations through its wholly-ownedwholly owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC").KACC. KACC operates in all principal aspects of the aluminum industry-the mining of bauxite (the major aluminum bearing ore), the refining of bauxite into alumina (the intermediate material), the production of primary aluminum, and the manufacture of fabricated and semi-fabricated aluminum products. Kaiser's production levels of alumina before consideration of the Gramercy incident (see Note 2), and primary aluminum exceed its internal processing needs, which allows it to be a major seller of alumina and primary aluminum to domestic and international third parties (see Note 12)16). The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties, with respect to such estimates and assumptions, are inherent in the preparation of the Company's consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of the Company's consolidated financial position and results of operation. Investments in 50%-or-less-owned entities are accounted for primarily by the equity method. Intercompany balances and transactions are eliminated. Certain reclassificationsRecognition of prior-year information were made to conformSales. Sales are recognized when title, ownership and risk of loss pass to the current presentation. CASH AND CASH EQUIVALENTSbuyer. Earnings per Share. Basic earnings per share is computed by dividing the weighted average number of common shares outstanding during the period, including the weighted average impact of the shares of common stock issued during the year from the date(s) of issuance. However, earnings per share may not be meaningful, because as a part of a plan of reorganization, it is possible that the interests of the Company's existing stockholders could be diluted or cancelled. Diluted earnings per share for the year ended December 31, 2000 included the dilutive effect of outstanding stock options (3,000 shares). The impact of outstanding stock options was excluded from the computation of diluted loss per share for the year ended December 31, 2001, as their effect would have been antidilutive. Cash and Cash Equivalents. The Company considers only those short-term, highly liquid investments with original maturities of 90 days or less to be cash equivalents. INVENTORIESInventories. Substantially all product inventories are stated at last-in, first-out ("LIFO") cost, not in excess of market value. Replacement cost is not in excess of LIFO cost. Other inventories, principally operating supplies and repair and maintenance parts, are stated at the lower of average cost or market. Inventory costs consist of material, labor, and manufacturing overhead, including depreciation. Inventories consist of the following:
December 31, --------------------------- 1999 1998 - -------------------------------------------------------------------------------------- Finished fabricated products $ 118.5 $ 112.4 Primary aluminum and work in process 189.4 205.6 Bauxite and alumina 124.1 109.5 Operating supplies and repair and maintenance parts 114.1 116.0 ----------- ---------- $ 546.1 $ 543.5 =========== ==========
DEPRECIATIONDecember 31, ---------------------------- 2002 2001 - --------------------------------------------------------------------- ------------ ------------- Finished fabricated products $ 28.1 $ 30.4 Primary aluminum and work in process 71.2 108.3 Bauxite and alumina 72.9 77.7 Operating supplies and repair and maintenance parts 82.7 96.9 ------------ ------------- $ 254.9 $ 313.3 ============ ============= Inventories were reduced by the following charges during the years ended December 31, 2002, 2001 and 2000: 2002 2001 2000 - --------------------------------------------------------------------------- -------------- ------------ ------------- Included in cost of products sold: LIFO inventory charges $ 6.1 $ 8.2 $ .6 Included in non-recurring operating charges (benefit), net (see Note 6): Net realizable value charges - Northwest smelters impairment (Primary Aluminum), net of intersegment profit elimination on Primary Aluminum impairment charges of $2.8 18.6 - - Operating supplies and repair and maintenance parts (Bauxite & Alumina - $5.0 and Primary Aluminum - $.6) - 5.6 - LIFO inventory charges associated with permanent inventory reductions - Northwest smelters impairment (Primary Aluminum) .9 - 4.5 Product line exit (Flat-Rolled Products) 1.6 - 11.1 Product line exit (Engineered Products) - - .9 LIFO inventory charge related to Gramercy facility delayed restart (Bauxite & Alumina) - - 7.0 -------------- ------------ ------------- $ 27.2 $ 13.8 $ 24.1 ============== ============ ============= The LIFO inventory charges resulted from reductions in inventory volumes that were in inventory layers with higher costs than current market prices. Depreciation. Depreciation is computed principally by the straight-line method at rates based on the estimated useful lives of the various classes of assets. The principal estimated useful lives of land improvements, buildings, and machinery and equipment are 8 to 25 years, 15 to 45 years, and 10 to 22 years, respectively. STOCK-BASED COMPENSATIONStock-Based Compensation. The Company applies the intrinsic value method to account for a stock-based compensation plan whereby compensation cost is recognized only to the extent that the quoted market price of the stock at the measurement date exceeds the amount an employee 35 39 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- must pay to acquire the stock. No compensation cost has been recognized for this plan as the exercise price of the stock options granted in 1999, 19982001 and 19972000 were at or above the market price (see Note 7). OTHER INCOME (EXPENSE) Other expenseprice. No stock options were granted in 1999, 1998, and 1997, includes $53.2, $12.7, and $8.8, of pre-tax charges related principally to establishing additional litigation reserves for asbestos claims net of estimated aggregate insurance recoveries pertaining to operations which were discontinued prior to the acquisition2002. The pro forma after-tax effect of the Companyestimated fair value of the grants would be to increase the net loss in 2002 and 2001 by MAXXAM$.6 and $.3, respectively, and reduce net income in 1988.2000 by $2.2. While the pro forma after tax effect of the estimated fair value of the grants would have resulted in no change in the basic/diluted loss per share for 2002 and 2001, basic/diluted earnings per share for 2000 would have been reduced to $.18. The fair value of the 2001 and 2000 stock option grants were estimated using a Black-Scholes option pricing model. The pro forma effect of the estimated value of stock options may not be meaningful, because as a part of a plan of reorganization, it is possible the interests of the holders of outstanding options could be diluted or cancelled. Other Income (Expense). Amounts included in Other income (expense) in 2002, 2001 and 2000, other than interest expense, in 1999 also includes $32.8 of pre-tax charges to reflect mark-to-market adjustmentsreorganization items and gain on certain primary aluminum hedging transactions and a net pre-tax gain of $50.5 on the sale of QAL interest, included the Company's 50% interest in AKW L.P. (see Note 3). Other income in 1998 includes $12.0 attributablefollowing pre-tax gains (losses): Year Ended December 31, ------------------------------------------- 2002 2001 2000 - -------------------------------------------------------------------- ------------- ------------ -------------- Gains on sale of real estate and miscellaneous equipment (Note 5) $ 3.8 $ 6.9 $ 22.0 Mark-to-market gains (losses) (Note 13) (.4) 35.6 11.0 Asbestos-related charges (Note 12) - (57.2) (43.0) Adjustment to insurance recoveries related to certain incurred environmental costs (see Note 10). DEFERRED FINANCING COSTSliabilities (Note 12) - (13.5) Investment write-off (Note 4) - (2.8) - Lease obligation adjustment (Note 12) - - 17.0 ------------- ------------ -------------- Special items, net 3.4 (31.0) 7.0 All other, net (3.0) (1.8) (11.3) ------------- ------------ -------------- $ .4 $ (32.8) $ (4.3) ============= ============ ============== Deferred Financing Costs. Costs incurred to obtain debt financing are deferred and amortized over the estimated term of the related borrowing. FOREIGN CURRENCYSuch amortization is included in Interest expense. As a result of the Cases, the amortization of the deferred financing costs related to the Debtors' unsecured debt was discontinued on the Filing Date. Goodwill. Through the year ended December 31, 2001, the goodwill associated with the acquisition of the Chandler, Arizona facility (see Note 5) was being amortized on a straight-line basis over 20 years. Beginning with the first quarter of 2002, the Company discontinued the amortization of goodwill consistent with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). However, the discontinuance of amortization of goodwill did not have a material effect on the Company's results of operations or financial condition (the amount of amortization in 2001 was less than $.8). In accordance with SFAS No. 142, the Company reviews goodwill for impairment at least annually. As of December 31, 2002, unamortized goodwill was approximately $11.4 and was included in Other assets in the accompanying consolidated balance sheets. Foreign Currency. The Company uses the United States dollar as the functional currency for its foreign operations. DERIVATIVE FINANCIAL INSTRUMENTSDerivative Financial Instruments. Hedging transactions using derivative financial instruments are primarily designed to mitigate KACC's exposure to changes in prices for certain of the products which KACC sells and consumes and, to a lesser extent, to mitigate KACC's exposure to changes in foreign currency exchange rates. KACC does not utilize derivative financial instruments for trading or other speculative purposes. KACC's derivative activities are initiated within guidelines established by management and approved by KACC's and the Company's boards of directors. Hedging transactions are executed centrally on behalf of all of KACC's business segments to minimize transaction costs, monitor consolidated net exposures and allow for increased responsiveness to changes in market factors. Most of KACC's hedging activities involve the use of option contracts (which establish a maximum and/or minimum amount to be paid or received) and forward sales contracts (which effectively fix or lock-in the amount KACC will pay or receive). Option contracts typically require the payment of an up-front premiumPre-2001 Accounting. Accounting guidelines in return for the right to receive the amount (if any) by which the price at the settlement date exceeds the strike price. Anyplace through December 31, 2000, provided that any interim fluctuations in option prices prior to the settlement date arewere deferred until the settlement date of the underlying hedged transaction, at which pointtime they are reflectedwere recorded in netNet sales or costCost of salesproducts sold (as applicable) together with the related premium cost. Forward sales contracts do not require an up-front payment and are settled by the receipt or payment of the amount by which the price at the settlement date varies from the contract price. No accounting recognition iswas accorded to interim fluctuations in prices of forward sales contracts. KACC has established margin accounts and credit limits with certain counterparties related to open forward sales and option contracts. When unrealized gains or losses are in excess of such credit limits, KACC is entitled to receive advances from the counterparties on open positions or is required to make margin advances to counterparties, as the case may be. At December 31, 1999, KACC had made margin advances of $38.0 and had posted letters of credit totaling $40.0 in lieu of paying margin advances. At December 31, 1998, KACC had received $9.9 of margin advances. Increases in primary aluminum prices subsequent to December 31, 1999, could result in KACC having to make additional margin advances or post additional letters of credit and such amounts could be significant. Management considers credit risk related to possible failure of the counterparties to perform their obligations pursuant to the derivative contracts to be minimal. Deferred gains or losses as of December 31, 1999, are included in Prepaid expenses and other current assets and Other accrued liabilities (see Note 11). FAIR VALUE OF FINANCIAL INSTRUMENTS The Company estimates the fair value of its outstanding indebtedness to be $970.5 and $950.0 at December 31, 1999 and 1998, respectively, based on quoted market prices for KACC's 9-7/8% Senior Notes due 2002 (the "9-7/8% Notes"), 12-3/4% Senior Subordinated Notes due 2003 (the "12-3/4% Notes"), and 10-7/8% Senior Notes due 2006 (the "10-7/8% Notes"), and the discounted 36 40 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- future cash flows for all other indebtedness, using the current rate for debt of similar maturities and terms. The Company believes that the carrying amount of other financial instruments is a reasonable estimate of their fair value, unless otherwise noted. EARNINGS PER SHARE Basic - Earnings per share is computed by deducting preferred stock dividends from net income (loss) in order to determine net income (loss) available to common shareholders. This amount is then divided by the weighted average number of common shares outstanding during the period, including the weighted average impact of the shares of common stock issued during the year from the date(s) of issuance. Diluted - The impact of outstanding stock options was excluded from the computation of Diluted loss per share for the year ended December 31, 1999, as its effectHedge (deferral) accounting would have been antidilutive. Diluted earnings per share forterminated (resulting in the years ended December 31, 1998 and 1997, includeapplicable derivative positions being marked-to-market) if the dilutive effectlevel of outstanding stock options (41,000 and 161,000 shares, respectively). LABOR RELATED COSTS The Company is currently operating five of its U.S. facilities with salaried employees and other workers as a result ofunderlying physical transactions ever fell below the September 30, 1998, strike by the United Steelworkers of America ("USWA") and the subsequent "lock-out" bynet exposure hedged. This did not occur in 2000. Current Accounting. Effective January 1, 2001, the Company in January 1999. However, the Company has continuedbegan reporting derivative activities pursuant to accrue certain benefits (such as pension and other postretirement benefit costs/liabilities), for the USWA members during the period of the strike and subsequent lock-out. For purposes of computing the benefit-related costs and liabilities to be reflected in the accompanying consolidated financial statements for the year ended December 31, 1999, the Company has based its accruals on the terms of the previously existing (expired) USWA contract. Any differences between the amounts accrued and the amounts ultimately agreed to during the collective bargaining process will be reflected in future results during the term of any new contract. All incremental operating costs incurred as a result of the USWA strike and subsequent lockout are being expensed as incurred. During 1998, such costs were substantial, totaling approximately $50.0. The Company's 1998 results also reflect reduced profitability of approximately $10.0 resulting from the strike-related curtailment of three potlines (representing approximately 70,000 tons* of annual capacity) at the Company's Mead and Tacoma, Washington, smelters and certain other shipment delays experienced at the other affected facilities at the outset of the USWA strike. During 1999, strike related costs were virtually eliminated except for the restart costs of approximately $12.8 associated with restarting potlines at the Company's smelters and the impact of reduced volume. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivative instruments as assets or liabilities in the balance sheet and to measure those instruments at fair value. Under SFAS No. 133, the Company will be required to "mark-to-market" itsvalue by "marking-to-market" all of their hedging positions at each period-end in advance of recording the physical transactions(see Note 13). This contrasts with pre-2001 accounting principles, which generally only required certain "non-qualifying" hedging positions to which the hedges relate.be marked-to-market. Changes in the fairmarket value of the Company's open hedging positions resulting from the mark-to-market process represent unrealized gains or losses. Such unrealized gains or losses will be reflectedfluctuate, based on prevailing market prices at each subsequent balance sheet date, until the transaction date occurs. Under SFAS No. 133, these changes are recorded as an increase or reduction in stockholders' equity through either other comprehensive income. The impact ofincome or net income, depending on the facts and circumstances with respect to the hedge and its documentation. To the extent that changes in fair valuemarket values of the Company's hedging positions willare initially recorded in other comprehensive income, such changes reverse out of Other comprehensive income (net of(offset by any fluctuations in other "open" positions) and will be reflectedare recorded in traditional net income (included in Net sales or Cost of products sold, as applicable) when the subsequent physical transactions occur. Currently,Additionally, under SFAS No. 133, if the dollar amountlevel of physical transactions ever falls below the Company's comprehensivenet exposure hedged, "hedge" accounting must be terminated for such "excess" hedges. In such an instance, the mark-to-market changes on such excess hedges would be recorded in the income adjustments is not significant so there is not a significant difference between "traditional" net income andstatement rather than in Other comprehensive income. However, differencesThis did not occur during 2001 or 2002. Differences between Other comprehensive income and traditional netNet income, which have historically been small, may become significant in future periods as a result of SFAS No. 133. In general, SFAS No. 133 will result in material fluctuations in Other comprehensive income and stockholders'Stockholders' equity in periods of price volatility, despite the fact that the Company's cash flow and earnings will be "fixed" to the extent hedged. This result is contrary to the intent of the Company's hedging program, which is to "lock-in" a price (or range of prices) for products sold/used so that earnings and cash flows are subject to reduced risk of volatility. - ------------------------- *All references to tons in this report refer to metric tons of 2,204.6 pounds. 37 41 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- Adoption of SFAS No. 133 was initially required on or before January 1, 2000. However, in June 1999,requires that, as of 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 howthe initial adoption, the difference between the market value of derivative instruments recorded on the Company's consolidated balance sheet and when to implement SFAS No. 133. 2. INCIDENT AT GRAMERCY FACILITY On July 5, 1999, KACC's Gramercy, Louisiana alumina refinery was extensively damaged by an explosionthe previous carrying amount of those derivatives be reported in net income or Other comprehensive income, as appropriate, as the digestion areacumulative effect of the plant. Twenty-four employees were injureda change in the incident, several of them severely. As a result of the incident, alumina production at the facility was completely curtailed. Production at the plant is currently expected to remain completely curtailed until the third quarter of 2000 when KACC expects to begin partial production.accounting principle. Based on current estimates, full production is expected to be achievedauthoritative accounting literature issued during the first quarter of 2001, or shortly thereafter. KACC has received the regulatory permit required to operate the plant once the facility is ready to resume production. The causeit was determined that all of the incident is under investigation by KACC and governmental agencies. In January 2000,cumulative impact of adopting SFAS No. 133 should be recorded in Other comprehensive income. The cumulative effect amount was reclassified to earnings during 2001. Fair Value of Financial Instruments. Given the U.S. Mine Safety and Health Administration ("MSHA") issued 21 citations in connection with its investigationfact that the fair value of substantially all of the incident. The citations allege, among other things, that certain aspectsCompany's outstanding indebtedness will be determined as part of the plant'splan of reorganization, it is impracticable and inappropriate to estimate the fair value of these financial instruments at December 31, 2002 and 2001. New Accounting Pronouncements. Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations ("SFAS No. 143") was issued in June 2001. In general terms, SFAS No. 143 requires the recognition of a liability resulting from anticipated retirement obligations, offset by an increase in the value of the associated productive asset for such anticipated costs. Over the life of the asset, depreciation expense is to include the ratable expensing of the retirement cost included with the asset value. The statement applies to all legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, or development and (or) the normal operation of a long-lived asset, except for certain lease obligations. Excluded from this statement are obligations arising solely from a plan to dispose of a long-lived asset and obligations that result from the improper operation of an asset (i.e. the type of environmental obligations discussed in Note 12). The Company's consolidated financial statements already reflect reclamation obligations by its bauxite mining operations in accordance with accounting policies consistent with SFAS No. 143. SFAS No. 143 was first applied to the Company's consolidated financial statements beginning January 1, 2003. The adoption of SFAS No. 143 did not have a material impact on the Company's financial statements. Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144") was issued in August 2001. In general terms, SFAS No. 144 establishes a single accounting model for impairment or disposal of long-lived assets, and supersedes prior rules in this regard. SFAS No. 144 retains the existing accounting requirements for recognizing impairments on long-lived assets that are to be held and used. However, it provides additional guidelines such as a "probability-weighted cash flow estimation" approach to deal with situations where alternative and undecided courses of action exist. Under SFAS No. 144, long-lived assets to be disposed of by sale are to be recorded at the lower of their carrying amount or fair value less cost to sell. SFAS No. 144 was applied to the Company's consolidated financial statements beginning January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Company's financial statements. Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS No. 146) was issued in June 2002 and must be first applied to the Company's consolidated financial statements beginning January 1, 2003. SFAS No. 146 requires that a liability for the cost associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is incurred. This contrasts with current accounting principles where a liability for an exit cost was recognized at the date an entity announced commitment to an exit plan. The adoption of SFAS No. 146 did not have a material impact on the Company's financial statements. Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure ("SFAS No. 148") was issued in December 2002. SFAS No. 148 amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123") to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 was first applied to the Company's 2002 year-end financial statements. The adoption of SFAS No. 148 did not have a material impact on the Company's financial statements. 3. PACIFIC NORTHWEST SMELTER CURTAILMENTS AND RELATED POWER MATTERS Future Power Supply and its Impact on Future Operating Rate. During October 2000, KACC signed a new power contract with the Bonneville Power Administration ("BPA") under which the BPA, starting October 1, 2001, was to provide KACC's operations in the State of Washington with approximately 290 megawatts of power through September 2006. The contract provided KACC with sufficient power to fully operate KACC's Trentwood facility (which requires up to an approximate 40 megawatts), as well as approximately 40% of the combined capacity of KACC's Mead and Tacoma aluminum smelting operations which have been curtailed since the last half of 2000. Rates under the BPA contract during the period October 2001 through September 2002 were unsafeapproximately 46% higher than power costs under the prior contract and such rates were subject to changes in future periods. The contract also included a take-or-pay requirement and clauses under which KACC's power allocation could be curtailed, or its costs increased, in certain instances. Under the contract, KACC could only remarket its power allocation to reduce or eliminate take-or-pay obligations. KACC was not entitled to receive any profits from any such remarketing efforts in contrast to KACC's prior contract with the BPA that expired in September 2001. However, under the BPA contract, KACC would have again been liable for take-or-pay costs beginning in October 2002. Given market power prices during 2002, the Company estimated that such modetake-or-pay charges could have been in the range of operation contributedup to the explosion. To date, no monetary penalty has been proposed by MSHA. Although the Company expects that a fine will be levied, the Company cannot predict the$1.0 to $2.0 per month through September 2006. The actual amount of any such fine(s). It is possible that other civil or criminal fines or penalties couldobligation would be levied against KACC. KACC has previously announceddependent upon the then prevailing prices of electricity during the contract period. As a part of the reorganization process, the Company concluded that it disagreeswas in its best interest to reject the BPA contract as permitted by the Code. As such, with the substanceauthorization of the citations andCourt, the Company rejected the BPA contract on September 30, 2002. The contract rejection gives rise to a pre-petition claim. The BPA has challenged them. However, as more fully explained below, based on what is known to date and discussionsfiled a proof of claim for approximately $75.0 in connection with the Company's advisors, the Company believes that the financial impact of this incident (in excess of insurance deductibles and self-retention provisions) will be largely offset by insurance coverage. Deductibles and self-retention provisions under the insurance coverage for the incident total $5.0, which amounts have been charged to Cost of products soldCases in 1999. KACC has significant amounts of insurance coverage related to the Gramercy incident. KACC's insurance coverage has five separate components: property damage, clean-up and site preparation, business interruption, liability and workers' compensation. The insurance coverage components are discussed below. Property Damage. KACC's insurance policies provide that KACC will be reimbursed for the costs of repairing or rebuilding the damaged portionrespect of the facility using new materials of like kind and quality with no deduction for depreciation. Based on discussions with the insurance carriers and their representatives and third party engineering reports, KACC recorded a pretax gain of $85.0, representing the difference between the minimum expected property damage reimbursement amount and the net carrying value of the damaged property of $15.0.contract rejection. The receivable attributable to the minimum expected property damage reimbursement has been classified as a long-term item in Other assets, despite the fact that substantially all such amounts areclaim is expected to be spent during 2000, as such proceeds willsettled in the overall context of the Debtors' plan of reorganization. Accordingly, any payments that may be invested in property, plant and equipment. The overall impact of recognizing the gain will be a significant increase in stockholders' equity and an increase in depreciation expense in future years once production is restored. Clean-up and Site Preparation. The Gramercy facility has incurred incremental costs for clean up and other activities during 1999 and will continue to incur such costs in 2000. These clean-up and site preparation activities have been offset by accruals of approximately $14.0 for estimated insurance recoveries. Business Interruption. KACC's insurance policies provide for the reimbursement of specified continuing expenses incurred during the interruption period plus lost profits (or less expected losses) plus other expenses incurredrequired as a result of the incident. Operationsrejection of the BPA contract are expected to only be made upon the Company's emergence from the Cases. The amount of the BPA claim will be determined either through a negotiated settlement, litigation or a computation of prevailing power prices over the contract period. As the amount of the BPA's claim in respect of the contract rejection has not been determined, no provision has been made for the claim in the accompanying financial statements. KACC has entered into a short-term contract (pending the completion of a longer term arrangement) with an alternate supplier to provide the power necessary to operate its Trentwood facility. The restart of a portion of KACC's Mead facility would require the purchase of additional power from available sources. For KACC to make such a decision, it would have to be able to purchase such power at a reasonable price in relation to current and expected market conditions for a sufficient term to justify its restart costs, which could be significant depending on the Gramercy facilitynumber of lines restarted and the length of time between the shutdown and restart. Given recent primary aluminum prices and the forward price of power in the Northwest, it is unlikely that KACC would operate more than a sisterportion of its Mead facility in Jamaica, which supplies bauxitethe near future. If KACC were to Gramercy, will continuerestart all or a portion of its Mead facility, it would take between three to incursix months to reach the full operating expenses untilrate for such operations, depending upon the number of lines restarted. Even after achieving the full operating rate, operating only a portion of the Mead facility would result in production/cost inefficiencies such that operating results would, at best, be breakeven to modestly negative at long-term primary aluminum prices. See Note 5 for a discussion of the Northwest smelters fourth quarter of 2002 impairment charge. Power Remarketing. In response to the unprecedented high market prices for power in the Pacific Northwest, KACC (first partially and then fully) curtailed the primary aluminum production at the Gramercy facility is restored. KACC will also incur increased costs asTacoma and Mead, Washington smelters during the last half of 2000 and all of 2001 and 2002. As a result of agreements to supply certain of Gramercy's major customers with alumina, despite the factcurtailments, as permitted under the BPA contract, the Company remarketed the power that KACCit had declared force majeure with respect to the contracts shortly after the incident. KACC is purchasing alumina from third parties, in excessunder contract through September 30, 2001 (the end of the prior contract period). In connection with such power remarketing, the Company recorded net pre-tax gains of approximately $229.2 in 2001 and $159.5 in 2000. Gross proceeds were offset by employee-related expenses, a non-cash LIFO inventory charge and other fixed commitments. The resulting net gains have been reflected as Non-recurring operating charges (benefits), net (see Note 6). The net gain amounts were composed of alumina available from other KACC-owned facilities, to supply these customers' needs as well as to meet intersegment requirements. In considerationgross proceeds of $259.5 in 2001 and $207.8 in 2000, of which $347.5 was received in 2001 and $119.8 was received in 2000 (although a portion of such proceeds represent a replacement of the foregoing items, KACC recorded expected business interruption insurance recoveries totaling $19.0 and $41.0 in the quarter and year ended December 31, 1999, as a reduction of Cost of products sold, which amounts substantially offset actual expenses incurred during these periods. Such business interruption insurance amounts represent 38 42 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- estimates of KACC's business interruption coverage based on discussions with the insurance carriers and their representatives and are therefore subject to change. Since production hasprofit that would have otherwise been completely curtailed at the Gramercy facility, KACC has, for the time being, suspended depreciation of the facility. Depreciation expense for the first six months of 1999 was approximately $6.0. Liability. The incident has also resulted in thirty-six class action lawsuits being filed against KACC alleging, among other things, property damage and personal injury. In addition, a claim for alleged business interruption losses has been made by a neighboring business. The aggregate amount of damages sought in the lawsuits and other claims cannot be determined at this time; however, KACC does not currently believe the damages will exceed the amount of coverage under its liability policies. Workers' Compensation. Claims relating to all of the injured employees are expected to be covered under KACC's workers' compensation or liability policies. However, the aggregate amount of workers' compensation claims cannot be determined at this time and it is possible that such claims could exceed KACC's coverage limitations. While it is presently impossible to determine the aggregate amount of claims that may be incurred, or whether they will exceed KACC's coverage limitations, KACC currently believes that any amount in excess of the coverage limitations will not have a material effect on the Company's consolidated financial position or liquidity. However, it is possible that as additional facts become available, additional charges may be required and such charges could be material to the period in which they are recorded. Timing of Insurance Recoveries. As of December 31, 1999, the Company had recorded estimated recoveries for clean-up, site preparation and business interruption costs incurred of approximately $55.0. As of December 31, 1999, approximately $50.0 of insurance recoveries had been received. Additionallygenerated through February 29, 2000, KACC had received approximately $25.0 of additional insurance recoveries. KACC continues to work with the insurance carriers to maximize the amount of recoveries and to minimize, to the extent possible, the period of time between when KACC expends funds and when it is reimbursed. However, KACC will likely have to fund an average of 30 - 60 days of property damage and business interruption activity, unless some other arrangement is agreed with the insurance carriers, and such amounts will be significant. The Company believes it has sufficient financial resources to fund the construction and business interruption costs on an interim basis. However, no assurances can be given in this regard. If insurance recoveries were to be delayed or if there were to be other significant uses of KACC's existing Credit Agreement capacity, delays in the rebuilding of the Gramercy refinery could occur and could have a material adverse impact on the Company's and KACC's liquidity and operating results. 3.operations). 4. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES Summary of combined financial information is provided below for unconsolidated aluminum investments, most of which supply and process raw materials. The investees are Queensland Alumina Limited ("QAL") (28.3%(20.0% owned), Anglesey Aluminium Limited ("Anglesey") (49.0% owned), and Kaiser Jamaica Bauxite Company (49.0% owned), and AKW L.P ("AKW") (50% owned). The Company's equity in income (loss) before income taxes of such operations is treated as a reduction (increase) in costCost of products sold. At December 31, 19992002 and 1998,2001, KACC's net receivables from these affiliates were not material. On April 1, 1999,In September 2001, KACC sold its 50%an approximate 8.3% interest in AKW to its partner for $70.4, which resulted in the Company recognizingQAL and recorded a net pre-tax gain of $50.5approximately $163.6 (included in Other income/expense)(expense) in the accompanying consolidated statements of income (loss)). As a result of the transaction, KACC now owns a 20% interest in QAL. The total value of the transaction was approximately $189.0, consisting of a cash payment of approximately $159.0 plus the purchaser's assumption of approximately $30.0 of off-balance sheet QAL indebtedness guaranteed by KACC prior to the sale. KACC's share of QAL's production for the first eight months of 2001 and for the year ended December 31, 2000 was approximately 668,000 tons and 1,064,000 tons, respectively. Had the sale of the QAL interest been effective as of the beginning of 2000, KACC's share of QAL's production for 2001 and 2000 would have been reduced by approximately 196,000 tons and 312,000 tons, respectively. Historically, KACC has sold about half of its share of QAL's production to third parties and has used the remainder to supply its Northwest smelters, which have been curtailed since the last half of 2000 (see Note 3). The reduction in KACC's alumina supply associated with this transaction is expected to be substantially offset by the return of its Gramercy alumina refinery to full operations during the first quarter of 2002 at a higher capacity, by reduced internal requirements due to curtailments of the primary aluminum facilities and by planned increases during 2003 in capacity at its Alpart alumina refinery in Jamaica. Accordingly, the QAL transaction has not had an adverse impact on KACC's ability to satisfy existing third-party alumina customer contracts. In June 2001, KACC wrote-off its investment of $2.8 in MetalSpectrum, LLC, a start-up, e-commerce entity in which KACC was a founding partner (in 2000). MetalSpectrum ceased operations during the second quarter of 2001. Summary of Combined Financial Position December 31, --------------------------- 2002 2001 - --------------------------------------------------------------------------- ----------- ----------- Current assets $ 199.1 $ 362.4 Non-current assets (primarily property, plant, and equipment, net) 409.5 345.7 ----------- ----------- Total assets $ 608.6 $ 708.1 =========== =========== Current liabilities $ 239.3 $ 237.6 Long-term liabilities (primarily long-term debt) 119.3 271.2 Stockholders' equity 250.0 199.3 ----------- ----------- Total liabilities and stockholders' equity $ 608.6 $ 708.1 =========== =========== Summary of Combined Operations Year Ended December 31, ----------------------------------- 2002 2001 2000 - ------------------------------------------------------------------- -------- -------- -------- Net sales $ 584.3 $ 633.5 $ 602.9 Costs and expenses (518.4) (621.5) (617.1) Provision for income taxes (3.0) (3.9) (4.5) -------- -------- -------- Net income (loss) $ 62.9 $ 8.1 $ (18.7) ======== ======== ======== Company's equity in income (loss) $ 14.0 $ 1.7 $ (4.8) ======== ======== ======== Dividends received $ 6.0 $ 2.8 $ 8.3 ======== ======== ======== The Company's equity in income of AKW was $2.5, $7.8, and $4.8 for the years ended December 31, 1999, 1998, and 1997, respectively. 39 43 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- SUMMARY OF COMBINED FINANCIAL POSITION
December 31, -------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------------------ Current assets $ 370.4 $ 356.0 Long-term assets (primarily property, plant, and equipment, net) 344.1 393.9 ---------- ---------- Total assets $ 714.5 $ 749.9 ========== ========== Current liabilities $ 120.4 $ 92.2 Long-term liabilities (primarily long-term debt) 368.3 396.6 Stockholders' equity 225.8 261.1 ---------- ---------- Total liabilities and stockholders' equity $ 714.5 $ 749.9 ========== ==========
SUMMARY OF COMBINED OPERATIONS
Year Ended December 31, ----------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ Net sales $ 594.9 $ 659.2 $ 644.1 Costs and expenses (582.9) (651.7) (637.8) Benefit (provision) for income taxes .8 (2.7) (8.2) ------- ------- ------- Net income (loss) $ 12.8 $ 4.8 $ (1.9) ======= ======= ======= Company's equity in income $ 4.9 $ 5.4 $ 2.9 ======= ======= ======= Dividends received $ - $ 5.5 $ 10.7 ======= ======= =======
The Company's equity in income differs from the summary net income (loss) due to varying percentage ownerships in the entities and equity method accounting adjustments. AtPrior to December 31, 1999,2000, KACC's investment in its unconsolidated affiliates exceeded its equity in their net assets by approximately $9.2. Amortization ofand such excess was being amortized to Depreciation and amortization. At December 31, 2000, the excess investment totaling $9.9,had been fully amortized. Such amortization was approximately $10.0 and $11.4 is included in Depreciation and amortization for the yearsyear ended December 31, 1999, 1998, and 1997, respectively.2000. The Company and its affiliates have interrelated operations. KACC provides some of its affiliates with services such as financing, management and engineering. Significant activities with affiliates include the acquisition and processing of bauxite, alumina, and primary aluminum. Purchases from these affiliates were $152.9, $235.1,$223.4, $266.0 and $245.2,$235.7, in the years ended December 31, 1999, 1998,2002, 2001 and 1997,2000, respectively. 40 44 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- 4.5. PROPERTY, PLANT, AND EQUIPMENT The major classes of property, plant, and equipment are as follows:
December 31, -------------------------- 1999 1998December 31, -------------------------- 2002 2001 - ------------------------------------------------------- ---------- ---------- Land and improvements $ 129.7 $ 130.9 Buildings 183.3 207.0 Machinery and equipment 1,735.2 1,881.3 Construction in progress 48.4 46.4 ---------- ---------- 2,096.6 2,265.6 Accumulated depreciation (1,086.7) (1,050.2) ---------- ---------- Property, plant, and equipment, net $ 1,009.9 $ 1,215.4 ========== ========== During the period from 2000 to 2002, the Company completed several acquisitions and dispositions and, based on changes in circumstances, recorded impairment charges as discussed below: 2002 - - - As previously disclosed, the Company was evaluating its options for minimizing the near-term negative cash flow at its Mead and Tacoma facilities and how to optimize the use and/or value of the facilities in connection with the development of a plan of reorganization. The Company conducted a study of the long-term competitive position of the Mead and Tacoma facilities and potential options for these facilities. Once the Company received the preliminary results of the study in the fourth quarter of 2002, it analyzed the findings and met with the USWA and other parties prior to making its determination as to the appropriate action(s). The outcome of the study and the Company's ongoing work on developing a plan of reorganization led the Company to indefinitely curtail the Mead facility in January 2003. The curtailment of the Mead facility was due to the continuing unfavorable market dynamics, specifically unattractive long-term power prices and weak primary aluminum prices - both of which are significant impediments for an older smelter with higher-than-average operating costs. The Mead facility is expected to remain completely curtailed unless and until an appropriate combination of reduced power prices, higher primary aluminum prices and other factors occurs. As a result of indefinite curtailment, KACC evaluated the recoverability of the December 31, 2002 carrying value of its Northwest smelters. The Company determined that the expected future undiscounted cash flows of the smelters was below their carrying value. Accordingly, KACC adjusted the carrying value of its Northwest smelting assets to their estimated fair value, which resulted in a fourth quarter 2002 non-cash impairment charge of approximately $138.5 (which amount was reflected in Non-recurring operating charges (benefits), net - see Note 6). The estimated fair value was based on anticipated future cash flows discounted at a rate commensurate with the risk involved. Additionally, during December 2002, the Company accrued approximately $58.8 of pension, postretirement benefit and related obligations for the hourly employees who had been on a laid-off status and under the terms of their labor contract are eligible for early retirement because of the indefinite curtailment (which amount was reflected in Non-recurring operating charges (benefits), net - see Note 6). The indefinite curtailment of the Mead facility also resulted in a $18.6 net realizable value charge and a $.9 LIFO inventory charge for certain of the inventories at the facility (see Notes 2 and 6). - - In December 2002, with Court approval, KACC sold its Oxnard, California aluminum forging facility because the Company had determined that the facility was not necessary for a successful operation and reorganization of its business. Net proceeds from the sale were approximately $7.4. The sale resulted in a net of loss of $.2 (included in Non-recurring operating charges (benefits) net - see Note 6) which included $1.1 of employee benefits and related costs associated with approximately 60 employees that were terminated in December 2002. - - In June 2002, with Court approval, the Company sold certain of the Trentwood facility equipment, previously associated with the lid and tab stock product lines discussed below, for total proceeds of $15.8, which amount approximated its previously estimated fair value. As a result, the sale did not have a material impact on the Company's operating results for the year ended December 31, 2002. - - In the ordinary course of business, KACC sold non-operating real estate and certain miscellaneous equipment for total proceeds of approximately $7.5 ($3.0 in the fourth quarter). These transactions resulted in pre-tax gains of $3.8 (included in Other income (expense) - see Note 2). 2001 - - - During 2001, as part of its ongoing initiatives to generate cash benefits, KACC sold certain non-operating real estate for net proceeds totaling approximately $7.9, resulting in a pre-tax gain of $6.9 (included in Other income (expense) - see Note 2). - - --------------------------------------------------------------------------------- Land and improvements $ 166.1 $ 164.1 Buildings 230.0 229.5 Machinery and equipment 1,519.7 1,549.5 Construction in progress 67.7 43.8 --------- --------- 1,983.5 1,986.9 Accumulated depreciation (929.8) (878.2) --------- --------- Property, plant, and equipment, net $ 1,053.7 $ 1,108.7 ========= =========
In the latter part of 1998,2001, the Company decided to seek a strategic partnerconcluded that the profitability of its Trentwood facility could be enhanced by further focusing resources on its core, heat-treat business and by exiting lid and tab stock product lines used in the beverage container market and brazing sheet for the further development and deploymentautomotive market. As a result of KACC's Micromill(TM) technology. This changethis decision, the Company concluded it would sell or idle several pieces of equipment resulting in strategic coursean impairment charge of approximately $17.7 at December 31, 2001 (which amount was based on management's conclusion that additional time and investment would be requiredreflected in Non-recurring operating charges (benefits), net - see Note 6). 2000 - - - KACC sold (a) its Pleasanton, California office complex, because the complex had become surplus to achieve a commercial success. Given the Company's other strategic priorities,needs, for net proceeds of approximately $51.6, which resulted in a net pre-tax gain of $22.0 (included in Other income (expense) - see Note 2); (b) certain non-operating properties, in the Company believed that introducing added commercial and financial resources was the appropriateordinary course of actionbusiness, for capturing the maximum long-term value. A numbertotal proceeds of third parties were contacted regarding joint ventures or other arrangements. In September 1999, based on negotiations with these third parties, KACC concluded that a sale ofapproximately $12.0; and (c) the Micromill assets and technology was more likely than a partnership. KACC ultimately signed an agreement to sell the Micromill assets and technology in January 2000 for a nominal payment at closing and possible future payments based on subsequent performance and profitability of the Micromill technology. AsThe sale of the non-operating properties and Micromill assets did not have a material impact on the Company's 2000 operating results. - - KACC evaluated the recoverability of the approximate $200.0 carrying value of its Northwest smelters, as a result of the changeschange in strategic coursethe economic environment of the Pacific Northwest associated with the reduced power availability and higher power costs for KACC's Northwest smelters under the terms of the contract with the BPA starting in 1999 and 1998,October 2001 (see Note 3). The Company determined that the expected future undiscounted cash flows of the Washington smelters were below their carrying value. Accordingly, KACC adjusted the carrying value of its Washington smelting assets to their estimated fair value, which resulted in a non-cash impairment charge of approximately $33.0 (which amount was reflected in Non-recurring operating charges (benefits), net - see Note 6). The estimated fair value was based on anticipated future cash flows discounted at a rate commensurate with the Micromillrisk involved. - - KACC acquired the assets of a drawn tube aluminum fabricating operation in Chandler, Arizona. Total consideration for the acquisition was reduced by recording$16.1 ($1.1 of property, plant and equipment $2.8 of accounts receivables, inventory and prepaid expenses and $12.2 of goodwill). 6. NON-RECURRING OPERATING CHARGES (BENEFITS), NET The income (loss) impact associated with Non-recurring operating (charges) benefits, net for 2002, 2001 and 2000, was as follows: Year Ended December 31, ---------------------------------------------- 2002 2001 2000 - ------------------------------------------------------------- -------------- ------------- -------------- Washington smelter impairment charges, including contractual labor costs (Primary Aluminum) (Notes 2 and 5) $ (219.6) $ (12.7) $ (33.0) Eliminations - Intersegment profit elimination on Primary Aluminum inventory charge (Note 2) 2.8 - - Net gains from power sales (Primary Aluminum) (Note 3) - 229.2 159.5 Restructuring charges: Bauxite & Alumina (2.0) (10.8) (.8) Primary Aluminum (2.7) (6.9) (3.1) Flat-Rolled Products (7.9) (10.7) - Corporate - (1.2) (5.5) Inventory and net realizable value charges - Product line exit charges (1.6) - (18.2) Bauxite & Alumina - Gramercy related LIFO charge (Note 2) - - (7.0) Operating supplies and repairs and maintenance parts (Note 2) - (5.6) - Impairment and similar charges - Corporate - Kaiser Center office complex (Note 12) (20.0) - - Flat-Rolled Products - equipment (Note 5) - (17.7) - Net loss on sale of $19.1Oxnard facility (Note 5) (.2) - - Labor settlement charge - See below - - (38.5) Incremental maintenance - Bauxite & Alumina - - (11.5) -------------- ------------- -------------- $ (251.2) $ 163.6 $ 41.9 ============== ============= ============== 2002. The product line exit charge in 2002 relates to a $1.6 LIFO inventory charge which resulted from the Flat-rolled products segment's exit from the lid and $45.0, respectively. 5.tab stock and brazing sheet product lines (see Note 2). Restructuring charges result from the Company's initiatives to increase cash flow, generate cash and improve the Company's financial flexibility. Restructuring charges for 2002 consist of $10.1 of employee benefit and related costs associated with 140 job eliminations (all of which had been eliminated prior to December 31, 2002) and $2.5 of third party costs associated with cost reduction initiatives. 2001 and 2000. The contractual labor costs related to smelter curtailments in 2001 consisted of certain compensation costs associated with laid-off USWA workers that KACC estimated would be required to operate the Northwest smelters at up to a 40% operating rate. The costs had been accrued through early 2003 because KACC did not expect to restart the Northwest smelters prior to that date. Restructuring charges for 2001 consist of $17.9 of employee benefit and related costs associated with 355 job eliminations (all of which have been eliminated) and $11.7 of third party costs associated with cost reduction initiatives. The 2000 restructuring charges were associated with the Primary aluminum and Corporate segments' ongoing cost reduction initiatives. During 2000, these initiatives resulted in restructuring charges for employee benefit and other costs for approximately 50 job eliminations at the Company's Tacoma facility and approximately 50 employee eliminations due to consolidation or elimination of certain corporate staff functions. All job eliminations associated with these initiatives have occurred. The Washington smelters impairment charge in 2000 included a charge of $33.0 to write-down the Washington smelting assets to their estimated fair value (see Note 5). Product line exit charges in 2000 included (a) a $12.6 impairment charge reflected by the Flat-rolled products segment which included a $11.1 LIFO inventory charge (see Note 2) and a $1.5 charge to reduce the carrying value of certain assets to their net realizable value as a result of the segment's decision to exit the can body stock product line; and (b) a $5.6 impairment charge recorded by the Engineered products segment which included a $.9 LIFO inventory charge (see Note 2) and a $4.7 charge to reduce the carrying value of certain machining facilities and assets, which were no longer required as a result of the segment's decision to exit a marginal product line, to their estimated net realizable value. From September 1998 through September 2000, KACC and the United Steelworkers of America ("USWA") were involved in a labor dispute as a result of the September 1998 USWA strike and the subsequent "lock-out" by KACC in February 1999. The labor dispute was settled in September 2000. Under the terms of the settlement, USWA members generally returned to the affected plants during October 2000. The Company recorded a one-time pre-tax charge of $38.5 in 2000 to reflect the incremental, non-recurring impacts of the labor settlement, including severance and other contractual obligations for non-returning workers. The allocation of the labor settlement charge to the business units was: Bauxite and alumina - $2.1, Primary aluminum - $15.9, Flat-rolled products - $18.2 and Engineered products - $2.3. At December 31, 2002, substantially all of such costs had been paid. The incremental maintenance charge in 2000 consisted of normal recurring maintenance expenditures for the Gramercy facility that otherwise would have been incurred in the ordinary course of business over a one to three year period. The Company chose to incur the expenditures prior to the restart of the facility to avoid normal operational outages that otherwise would have occurred once the facility resumed production. 7. LONG-TERM DEBT Long-term debt and its maturity schedule are as follows:
2005 December 31, ----------------- and 1999 1998 2000December 31, -------------------------------- 2002 2001 - ---------------------------------------------------------------------------------- -------------- -------------- Secured: Post-Petition Credit Agreement $ - $ - Alpart CARIFA Loans - (fixed and variable rates) due 2007, 2008 22.0 22.0 7.6% Solid Waste Disposal Revenue Bonds due 2027 19.0 19.0 Other borrowings (fixed rate) 2.6 2.7 Unsecured: 9 7/8% Senior Notes due 2002, net 172.8 172.8 10 7/8% Senior Notes due 2006, net 225.0 225.4 12 3/4% Senior Subordinated Notes due 2003 400.0 400.0 Other borrowings (fixed and variable rates) 32.4 32.4 -------------- -------------- Total 873.8 874.3 Less - Current portion .9 173.5 Pre-Filing Date claims included in subject to compromise (i.e. unsecured debt) (Note 1) 830.2 - -------------- -------------- Long-term debt $ 42.7 $ 700.8 ============== ============== DIP Facility. On February 12, 2002, 2003 2004 After Total Total - ---------------------------------------------------------------------------------------------------------------------------- Credit Agreement $ 10.4 $ 10.4 - 9-7/8% Senior Notes due 2002, net $ 224.6 224.6 $ 224.4 10-7/8% Senior Notes due 2006, net $ 225.6 225.6 225.7 12-3/4% Senior Subordinated Notes due 2003 $ 400.0 400.0 400.0 Alpart CARIFA Loans - (fixed and variable rates) due 2007, 2008 60.0 60.0 60.0 Other borrowings (fixed and variable rates) $ .3 .3 .3 .3 $ .2 50.8 52.2 52.9 ------ ------- ------- ------- ------- ------- ------- ------- Total $ .3 $ 10.7 $ 224.9 $ 400.3 $ .2 $ 336.4 972.8 963.0 ====== ======= ======= ======= ======= ======= Less current portion .3 .4 ------- ------- Long-term debt $ 972.5 $ 962.6 ======= =======
41 45 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- CREDIT AGREEMENT In February 1994, the Company and KACC entered into a post-petition credit agreement with a group of lenders for debtor-in-possession financing (the "DIP Facility"). The Court signed a final order approving the DIP Facility in March 2002. In March 2003, the Additional Debtors were added as amended, (the "Credit Agreement") whichco-guarantors and the DIP Facility lenders received super priority status with respect to certain of the Additional Debtors' assets. The DIP Facility provides for a $325.0 secured, revolving line of credit through August 2001.the earlier of February 12, 2004, the effective date of a plan of reorganization or voluntary termination by the Company. Under the DIP Facility, KACC is able to borrow under the facilityamounts by means of revolving credit advances and to have issued for its benefit letters of credit (up to $125.0) in an aggregate amount equal to the lesser of $325.0$300.0 or a borrowing base relating to eligible accounts receivable, eligible inventory and eligible inventory. As of February 29, 2000, $212.6 (of which $42.6 could have been used for letters of credit) was available to KACC underfixed assets reduced by certain reserves, as defined in the Credit Agreement.DIP Facility agreement. The Credit AgreementDIP Facility is unconditionally guaranteed by the Company and by certain significant subsidiaries of KACC. Interest on any outstanding balancesborrowings will bear a premium (which varies based on the results of a financial test)spread over either a base rate or LIBOR, at KACC's option. DEBT COVENANTS AND RESTRICTIONSThe DIP Facility requires KACC to comply with certain financial covenants and places restrictions on the Company's and KACC's ability to, among other things, incur debt and liens, make investments, pay dividends, undertake transactions with affiliates, make capital expenditures, and enter into unrelated lines of business. As of December 31, 2002, $147.0 was available to the Company under the DIP Facility (of which $79.2 could be used for additional letters of credit) and no borrowings were outstanding under the revolving credit facility. During March 2003, the Company obtained a waiver from the lenders in respect of its compliance with a financial covenant covering the four-quarter period ending March 31, 2003. The waiver is of limited duration and will lapse on June 29, 2003 unless otherwise incorporated into a formal amendment. The Company is working with the lenders to complete such amendment that would incorporate the limited waiver and also modify the financial covenant for periods subsequent to December 31, 2002. The Company believes that such an amendment will be agreed with the DIP Facility lenders not later than May 2003. While absolute assurances cannot be given in respect of the Company's ability to successfully obtain the necessary covenant modification, based on discussions with the DIP lenders and the fact that there are currently no outstanding borrowings and only a limited amount of letters of credit outstanding under the DIP facility, the Company believes that acceptable modifications are likely to be obtained. As part of this amendment, the Company also plans to request that the lenders extend the DIP Facility past its current February 2004 expiration. Credit Agreement. Prior to the February 12, 2002 Filing Date, the Company and KACC had a credit agreement, as amended (the "Credit Agreement"), which provided a secured, revolving line of credit. The Credit Agreement terminated on the Filing Date and was replaced by the DIP Facility discussed above. As of the Filing Date, outstanding letters of credit were approximately $43.3 (which were replaced by letters of credit under the DIP Facility) and there were no borrowings outstanding under the Credit Agreement. Alpart CARIFA Loans. In December 1991, Alumina Partners of Jamaica ("Alpart") entered into a loan agreement with the Caribbean Basin Projects Financing Authority ("CARIFA"). As of December 31, 2002, Alpart's obligations under the loan agreement were secured by two letters of credit aggregating $23.5. KACC was a party to one of the two letters of credit in the amount of $15.3 in respect of its 65% ownership interest in Alpart. Alpart has also agreed to indemnify bondholders of CARIFA for certain tax payments that could result from events, as defined, that adversely affect the tax treatment of the interest income on the bonds. 7.6% Solid Waste Disposal Revenue Bonds. The solid waste disposal revenue bonds are secured by a first mortgage on certain machinery at KACC's Mead smelter and a second lien on certain real property and improvements at such facility. 9 7/8% Notes, 10 7/8% Notes and 12 3/4% Notes. The obligations of KACC with respect to its 9 7/8% Senior Notes due 2002 (the "9 7/8% Notes"), its 10 7/8% Senior Notes due 2006 (the "10 7/8% Notes") and its 12 3/4% Senior Subordinated Notes due 2003 (the "12 3/4% Notes") are guaranteed, jointly and severally, by certain subsidiaries of KACC. During 2001, prior to concluding that, as a result of the events outlined in Note 1, the Company should file the Cases, KACC had purchased $52.2 of the 9 7/8% Notes. The net gain from the purchase of the notes was less than $1.1 and has been included in Other income (expense) in the accompanying statements of consolidated income (loss). Debt Covenants and Restrictions. The DIP Facility requires KACC to comply with certain financial covenants and places restrictions on the Company's and KACC's ability to, among other things, incur debt and liens, make investments, pay dividends, undertake transactions with affiliates, make capital expenditures, and enter into unrelated lines of business. The Credit AgreementDIP Facility is secured by, among other things, (i) mortgages on KACC's major domestic plants (excluding KACC's Gramercy alumina plant);plants; (ii) subject to certain exceptions, liens on the accounts receivable, inventory, equipment, domestic patents and trademarks, and substantially all other personal property of KACC and certain of its subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser;the Company; and (iv) pledges of all of the stock of a number of KACC's wholly owned domestic subsidiaries, pledges of a portion of the stock of certain foreign subsidiaries, and pledges of a portion of the stock of certain partially owned foreign affiliates. The obligations of KACC with respect to its 9-7/8% Notes, its 10-7/8% Notes and its 12-3/4% Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC. The indentures governing the 9-7/9 7/8% Notes, the 10-7/10 7/8% Notes and the 12-3/12 3/4% Notes (collectively, the "Indentures") restrict, among other things, KACC's ability to incur debt, undertake transactions with affiliates, and pay dividends. Further, the Indentures provide that KACC must offer to purchase the 9-7/9 7/8% Notes, the 10-7/10 7/8% Notes and the 12-3/12 3/4% Notes, respectively, upon the occurrence of a Change of Control (as defined therein), and. 8. INCIDENT AT GRAMERCY FACILITY General. From July 1999 until December 2000, KACC's Gramercy, Louisiana alumina refinery was completely curtailed as a result of extensive damage from an explosion in the Credit Agreement provides that the occurrence of a Change in Control (as defined therein) shall constitute an Event of Default thereunder. The Credit Agreement does not permit the Company, and significantly restricts KACC's ability, to pay dividends on their common stock. In December 1991, Alumina Partners of Jamaica ("Alpart") entered into a loan agreement with the Caribbean Basin Projects Financing Authority ("CARIFA"). Alpart's obligations under the loan agreement are secured by two letters of credit aggregating $64.2. KACC is a party to onedigestion area of the two lettersplant. Construction on the damaged part of creditthe facility began during the first quarter of 2000. However, construction was not substantially completed until the third quarter of 2001. During the first nine months of 2001, the plant operated at approximately 68% of its newly-rated estimated capacity of 1,250,000 tons. During the fourth quarter of 2001, the plant operated at approximately 90% of its newly-rated capacity. Since the end of February 2002, the plant has, except for normal operating variations, generally operated at approximately 100% of its newly-rated capacity. The facility is now focusing its efforts on achieving its full operating efficiency. During 2001, abnormal Gramercy-related start-up costs and litigation costs totaled approximately $64.9 and $6.5, respectively. These incremental costs for 2001 were offset by approximately $36.6 of additional insurance benefit (recorded as a reduction of Bauxite and alumina business unit's cost of products sold). The abnormal start-up costs in 2001 resulted from operating the plant in an interim mode pending completion of construction at well less than the expected production rate or full efficiency. During 2002, because the plant was operating at near full capacity, the amount of $41.7 in respectstart-up costs was substantially reduced compared to prior periods. Such costs were approximately $3.0 during the first quarter of its ownership interest in Alpart. Alpart has also agreed to indemnify bondholders2002 and were substantially eliminated during the balance of CARIFA2002. Property Damage. KACC's insurance policies provided that KACC would be reimbursed for certain tax payments that could result from events, as defined, that adversely affect the tax treatmentcosts of repairing or rebuilding the damaged portion of the interest income onfacility using new materials of like kind and quality with no deduction for depreciation. As a result of discussions with the bonds. RESTRICTED NET ASSETS OF SUBSIDIARIES Certain debt instruments restrictinsurance carriers, the abilityCompany received a reimbursement of $100.0 for property damage in 2000. Contingencies. The Gramercy incident resulted in a significant number of claims and individual and class action lawsuits being filed against KACC and others alleging, among other things, property damage, business interruption losses by other businesses and personal injury. KACC ultimately was able to transfer assets, make loans and advances, and pay dividendssettle all of these matters for amounts which, after the application of insurance, were not material to the Company. The restricted net assets of KACC totaled $15.7 and $124.4 at December 31, 1999 and 1998, respectively. CAPITALIZED INTEREST Interest capitalized in 1999, 1998, and 1997, was $3.4, $3.0, and $6.6, respectively. 42 46 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- 6.KACC. 9. INCOME TAXES Income (loss) before income taxes and minority interests by geographic area is as follows:
Year Ended December 31, ------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Domestic $ (81.8) $ (93.6) $ (112.6) Foreign (8.1) 77.7 172.9 --------- ---------- --------- Total $ (89.9) $ (15.9) $ 60.3 =========Year Ended December 31, ------------------------------------------- 2002 2001 2000 - ------------------------------------------------------- ---------- ----------- ---------- Domestic $ (481.1) $ (126.5) $ (96.6) Foreign 21.5 213.2 122.0 ---------- ----------- ---------- Total $ (459.6) $ 86.7 $ 25.4 ========== =========== ========== =========
Income taxes are classified as either domestic or foreign, based on whether payment is made or due to the United States or a foreign country. Certain income classified as foreign is also subject to domestic income taxes. The (provision) benefit (provision) for income taxes on income (loss) before income taxes and minority interests consists of:
Federal Foreign State Total - ---------------------------------------------------------------------------------------------- 1999 Current $ (.5) $ (23.1) $ (.3) $ (23.9) Deferred 43.8 7.1 5.7 56.6 ----------- ----------- ---------- --------- Total $ 43.3 $ (16.0) $ 5.4 $ 32.7Federal Foreign State Total - ------------------------------------------ ------------ ------------ ----------- ---------- 2002 Current $ (.2) $ (31.7) $ (.3) $ (32.2) Deferred 3.2 14.5 (.4) 17.3 ------------ ------------ ----------- ---------- Total $ 3.0 $ (17.2) $ (.7) $ (14.9) ============ ============ =========== ========== 2001 Current $ (1.1) $ (40.6) $ - $ (41.7) Deferred (484.3) .5 (24.7) (508.5) ------------ ------------ ----------- ---------- Total $ (485.4) $ (40.1) $ (24.7) $ (550.2) ============ ============ =========== ========== 2000 Current $ (1.9) $ (35.3) $ (.3) $ (37.5) Deferred 35.5 (8.9) (.7) 25.9 ------------ ------------ ----------- ---------- Total $ 33.6 $ (44.2) $ (1.0) $ (11.6) ============ ============ =========== ========== ========= 1998 Current $ (1.8) $ (16.5) $ (.2) $ (18.5) Deferred 44.4 (12.5) 3.0 34.9 ----------- ----------- ---------- --------- Total $ 42.6 $ (29.0) $ 2.8 $ 16.4 =========== =========== ========== ========= 1997 Current $ (2.0) $ (28.7) $ (.2) $ (30.9) Deferred 30.5 (7.0) (1.4) 22.1 ----------- ----------- ---------- --------- Total $ 28.5 $ (35.7) $ (1.6) $ (8.8) =========== =========== ========== =========
A reconciliation between the (provision) benefit (provision) for income taxes and the amount computed by applying the federal statutory income tax rate to income (loss) before income taxes and minority interests is as follows:
Year Ended December 31, ----------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Amount of federal income tax benefit (provision) based on the statutory rate $ 31.2 $ 5.6 $ (21.1) Revision of prior years' tax estimates and other changes in valuation allowances 1.1 8.3 12.5 Percentage depletion 2.8 3.2 4.2 Foreign taxes, net of federal tax benefit (3.2) (1.9) (3.1) Other .8 1.2 (1.3) ------- ------- ------- Benefit (provision) for income taxes $ 32.7 $ 16.4 $ (8.8) ======= ======= =======
43 47 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Year Ended December 31, --------------------------------------- 2002 2001 2000 - -------------------------------------------------------------------------------- (In millions---------------------------------------------------------------------------------- ------------ ------------ ----------- Amount of dollars, except share amounts) - --------------------------------------------------------------------------------
federal income tax (provision) benefit based on the statutory rate $ 160.9 $ (30.3) $ (8.9) Increase in valuation allowances and revision of prior years' tax estimates (151.6) (513.9) (1.8) Percentage depletion 7.6 4.9 3.0 Foreign taxes, net of federal tax benefit in 2000 (28.9) (9.6) (3.2) Other (2.9) (1.3) (.7) ------------ ------------ ----------- Provision for income taxes $ (14.9) $ (550.2) $ (11.6) ============ ============ =========== Included in increase in valuation allowances and revision of prior years' tax estimates for 2002 shown above include a benefit of $14.3 for revisions to prior years' estimates. Of this amount, approximately $8.8 relates to the resolution of certain prior year income tax matters. Deferred Income Taxes. The components of the Company's net deferred income tax assets are as follows: December 31, ----------------------------- 1999 1998 - ---------------------------------------------------------------------------------------- Deferred income tax assets: Postretirement benefits other than pensions $ 274.7 $ 279.4 Loss and credit carryforwards 119.3 92.0 Other liabilities 146.3 146.4 Other 193.9 132.8 Valuation allowances (125.6) (107.7) ----------- ---------- Total deferred income tax assets-net 608.6 542.9 ----------- ---------- Deferred income tax liabilities: Property, plant, and equipment (101.6) (109.9) Other (69.6) (54.8) ----------- ---------- Total deferred income tax liabilities (171.2) (164.7) ----------- ---------- Net deferred income tax assets $ 437.4 $ 378.2 =========== ==========
The principal component of the Company's net deferred income tax assets isare as follows: December 31, ----------------------------- 2002 2001 - ------------------------------------------------------------------- ------------ ----------- Deferred income tax assets: Postretirement benefits other than pensions $ 274.6 $ 264.0 Loss and credit carryforwards 278.0 150.0 Other liabilities 288.8 192.7 Other 121.7 170.5 Valuation allowances (861.8) (652.7) ------------ ----------- Total deferred income tax assets-net 101.3 124.5 ------------ ----------- Deferred income tax liabilities: Property, plant, and equipment (94.3) (122.3) Other (22.5) (41.6) ------------ ----------- Total deferred income tax liabilities (116.8) (163.9) ------------ ----------- Net deferred income tax assets (liabilities)(1) $ (15.5) $ (39.4) ============ =========== (1) Net deferred income tax liabilities of $15.5 and $39.4 are included in the Consolidated Balance Sheets as of December 31, 2002 and 2001, respectively, in the caption entitled Long-term liabilities. 2002. For the year ended December 31, 2002, as a result of the Cases, the Company did not recognize U.S. income tax benefits for the losses incurred from its domestic operations (including temporary differences) or any U.S. income tax benefits for foreign income taxes. Instead, the increases in federal and state deferred tax assets as a result of additional net operating losses and foreign tax credits generated in 2002 were fully offset by increases in valuation allowances. 2001 and 2000. Prior to 2001, the principal component of the Company's deferred income tax assets was the tax benefit net of certain valuation allowances, associated with the accrued liability for postretirement benefits other than pensions. The future tax deductions with respect to the turnaround of thisthat accrual will occur over a 30-to-40-year period. If such deductions were to create or increase a net operating loss, the Company hashad the ability to carry forward such loss for 20 taxable years. For these reasons,Accordingly, prior to the Cases, the Company believesbelieved that a long-term view of profitability iswas appropriate and hashad concluded that thisa substantial majority of the net deferred income tax asset willwould more likely than not be realized. AHowever, as a result of the Cases, the Company provided additional valuation allowances of $530.4 in 2001 of which $505.4 was recorded in Provision for income taxes in the accompanying statements of consolidated income (loss) and $25.0 was recorded in Other comprehensive income (loss) in the accompanying consolidated balance sheet. The additional valuation allowances were provided as the Company no longer believed that the "more likely than not" recognition criteria were appropriate given a combination of factors including: (a) the expiration date of the loss and credit carryforwards; (b) the possibility that all or a substantial portion of the valuation allowances provided by the Company relates to loss and credit carryforwards. To determine the proper amount of valuation allowances with respect to these carryforwards, the Company evaluated all appropriate factors, including any limitations concerning their use and the year the carryforwards expire, as well as the levels of taxable income necessary for utilization. With regard to future levels of income, the Company believes, based on the cyclical nature of its business, its history of operating earnings, and its expectations for future years, that it will more likely than not generate sufficient taxable income to realize the benefit attributable to the loss and credit carryforwards for whichand tax bases of assets could be reduced to the extent of cancellation of indebtedness occurring as a part of a reorganization plan; (c) the possibility that all or a substantial portion of the loss and credit carryforwards could become limited if a change of ownership occurs as a result of the Debtors reorganization; and (d) due to updated near-term expectations regarding near-term taxable income. The valuation allowances wereadjustment had no impact on the Company's or KACC's liquidity, operations or loan compliance and was not provided. Asintended, in any way, to be indicative of their long-term prospects or ability to successfully reorganize. Tax Attributes. At December 31, 1999 and 1998, $39.1 and $46.2, respectively, of2002, the net deferredCompany had certain tax attributes available to offset regular federal income tax assets listed above are included in the Consolidated Balance Sheets in the caption entitled Prepaid expensesrequirements, subject to certain limitations, including net operating loss and other current assets. Certain other portionsgeneral business credit carryforwards of the deferred$297.7 and $.7, respectively, which expire periodically through 2022 and 2011, respectively, FTC carryforwards of $133.2, which expire primarily from 2004 through 2007, and alternative minimum tax ("AMT") credit carryforwards of $27.1, which have an indefinite life. The Company also has AMT net operating loss and FTC carryforwards of $212.4 and $139.6, respectively, available, subject to certain limitations, to offset future alternative minimum taxable income, tax liabilities listed above are included in the Consolidated Balance Sheets in the captions entitled Other accrued liabilitieswhich expire periodically through 2022 and Long-term liabilities.2007, respectively. The Company and its domestic subsidiaries file consolidated federal income tax returns. During the period from October 28, 1988, through June 30, 1993, the Company and its domestic subsidiaries were included in the consolidated federal income tax returns of MAXXAM. The tax allocation agreements of the Company and KACC with MAXXAM terminated pursuant to their terms, effective for taxable periods beginning after June 30, 1993. During 1997, MAXXAM reached a settlement withDue to the Internal Revenue Service regardingresolution during the fourth quarter of 2002 of all remaining years where the Company and its subsidiaries were included in the MAXXAM consolidated federal income tax returns. As a result of this settlement, KACC paid $11.8 to MAXXAM during 1997, in respect of its liabilities pursuant to its tax allocation agreement with MAXXAM. Payments or refunds for periods prior to July 1, 1993 related to other jurisdictions could still be required pursuantmatters relating to the Company's and KACC's respectivetaxable periods covered by the tax allocation agreements, with MAXXAM. In accordance with the Credit Agreement, anyno further payments or refunds are required under such payments to MAXXAM by KACC would require lender approval, except in certain specific circumstances. 44 48 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- At December 31, 1999, the Company had certain tax attributes available to offset regular federal income tax requirements, subject to certain limitations, including net operating lossagreements. See Note 12 concerning commitments and general business credit carryforwards of $146.1 and $2.5, respectively, which expire periodically through 2019 and 2011, respectively, foreign tax credit ("FTC") carryforwards of $33.7, which expire periodically through 2004, and alternative minimum tax ("AMT") credit carryforwards of $24.0, which have an indefinite life. The Company also has AMT net operating loss and FTC carryforwards of $106.7 and $66.9, respectively, available, subject to certain limitations, to offset future alternative minimum taxable income, which expire periodically through 2019 and 2004, respectively. 7.contingencies. 10. EMPLOYEE BENEFIT AND INCENTIVE PLANS PENSION AND OTHER POSTRETIREMENT BENEFIT PLANSPension and Other Postretirement Benefit Plans. Retirement plans are generally non-contributory for salaried and hourly employees and generally provide for benefits based on a formulaformulas which considersconsider such items as length of service and earnings during years of service. TheThrough December 31, 2002, the Company's funding policies meetmet or exceedexceeded all regulatory requirements. However, as more fully discussed below, the Company failed to meet certain minimum funding requirements in early 2003. The Company does not currently intend to make any further contributions to its domestic retirement plans as it believes that virtually all of such amounts are pre-Filing Date obligations. As previously announced, the Company has met on several occasions with the PBGC, the government agency that guarantees annuity payments from defined pension plans, to discuss alternative solutions to the pension funding issue that would help the Company's emergence from bankruptcy. These options could include extended amortization periods for payments of unfunded liabilities or the potential termination of the plans. The Company and its subsidiaries provide postretirement health care and life insurance benefits to eligible retired employees and their dependents. Substantially all employees may become eligible for those benefits if they reach retirement age while still working for the Company or its subsidiaries. The Company has not funded the liability for these benefits, which are expected to be paid out of cash generated by operations. The Company reserves the right, subject to applicable collective bargaining agreements, to amend or terminate these benefits. Assumptions used to value obligations at year-end and to determine the net periodic benefit cost in the subsequent year are:
Pension Benefits Medical/Life Benefits -------------------------------- ------------------------------- 1999 1998 1997 1999 1998 1997 -------------------------------- ------------------------------- Weighted-average assumptions as of December 31, Discount rate 7.75% 7.00% 7.25% 7.75% 7.00% 7.25% Expected return on plan assets 9.50%Pension Benefits Medical/Life Benefits --------------------------------- -------------------------------- 2002 2001 2000 2002 2001 2000 ---------- ----------- ---------- ---------- ---------- ---------- Weighted-average assumptions as of December 31, Discount rate 6.75% 7.25% 7.75% 6.75% 7.25% 7.75% Expected return on plan assets 9.00% 9.50% 9.50% - - - Rate of compensation increase 4.00% 4.00% 4.00% 4.00% 5.00% 5.00% 4.00% 4.00% 5.00%
In 1999,2002, the average annual assumed ratesrate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 8.5% for non-HMO participants are 6.5% and 7.5% for HMO at all ages.participants. The assumed ratesrate of increase areis assumed to decline gradually to 5.0% in 20022010 for non-HMO participants and in 2004 for HMOall participants and remain at that level thereafter. 45 49 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- The following table presents the funded status of the Company's pension and other postretirement benefit plans as of December 31, 19992002 and 1998,2001, and the corresponding amounts that are included in the Company's Consolidated Balance Sheets:
Pension Benefits Medical/Life Benefits ------------------------------- ------------------------------- 1999 1998 1999 1998 ------------- ------------- ------------- ------------ Change in Benefit Obligation: Benefit obligation at beginning of year $ 872.5 $ 873.0 $ 616.8 $ 544.5 Service cost 14.6 14.2 5.2 4.2 Interest cost 59.7 59.7 41.5 37.5 Currency exchange rate change (5.7) (.4) - - Curtailments, settlements and amendments .4 (4.6) - 4.0 Actuarial (gain) loss (44.5) 15.2 .1 72.0 Benefits paid (91.0) (84.6) (48.2) (45.4) ------------- ------------- ------------- ------------ Benefit obligation at end of year 806.0 872.5 615.4 616.8 ------------- ------------- ------------- ------------ Change in Plan Assets: FMV of plan assets at beginning of year 801.8 756.9 - - Actual return on assets 133.0 106.8 - - Settlements - (5.5) - - Employer contributions 14.0 28.2 48.2 45.4 Benefits paid (91.0) (84.6) (48.2) (45.4) ------------- ------------- ------------- ------------ FMV of plan assets at end of year 857.8 801.8 - - ------------- ------------- ------------- ------------ Benefit obligations in excess of (less than) plan assets (51.8) 70.7 615.4 616.8 Unrecognized net actuarial gain 131.9 23.8 56.7 55.9 Unrecognized prior service costs (15.2) (18.5) 57.7 69.8 Adjustment required to recognize minimum liability 1.2 - - - Intangible asset and other 2.6 4.3 - - Accrued benefit liability ------------- ------------- ------------- ------------ $ 68.7 $ 80.3 $ 729.8 $ 742.5 ============= ============= ============= ============
Sheets. Pension Benefits Medical/Life Benefits -------------------------------- -------------------------------- 2002 2001 2002 2001 -------------- -------------- -------------- ------------- Change in Benefit Obligation: Obligation at beginning of year $ 915.6 $ 871.4 $ 868.2 $ 658.2 Service cost 48.6 38.6 37.8 12.1 Interest cost 62.0 63.6 56.2 48.7 Currency exchange rate change (2.1) (1.4) - - Plan participants contributions 1.8 2.0 - - Curtailments, settlements and amendments (87.2) .3 (94.2) (13.3) Actuarial (gain) loss 42.9 33.5 (22.4) 219.3 Benefits paid (68.2) (92.4) (55.5) (56.8) -------------- -------------- -------------- ------------- Obligation at end of year 913.4 915.6 790.1 868.2 -------------- -------------- -------------- ------------- Change in Plan Assets: FMV of plan assets at beginning of year 670.8 791.1 - - Actual return on assets (57.0) (48.5) - - Currency exchange rate change (1.9) (1.1) - - Employer contributions 9.8 21.7 55.5 56.8 Benefits paid (including lump sum payments of $87.4 in 2002) (155.6) (92.4) (55.5) (56.8) -------------- -------------- -------------- ------------- FMV of plan assets at end of year 466.1 670.8 - - -------------- -------------- -------------- ------------- Obligation in excess of plan assets 447.3 244.8 790.1 868.2 Unrecognized net actuarial loss (257.7) (128.4) (205.3) (240.5) Unrecognized prior service costs (36.9) (39.9) 147.7 76.5 Adjustment required to recognize minimum liability 242.1 105.5 - - Intangible asset and other 36.8 40.3 - - -------------- -------------- -------------- ------------- Accrued benefit liability $ 431.6 $ 222.3 $ 732.5 $ 704.2 ============== ============== ============== ============= (1) The aggregate accumulated benefit obligation and fair value of plan assets and accumulated benefit obligation for pension plans with plan assetsaccumulated benefit obligation in excess of accumulated benefit obligationsplan assets were $778.1$854.7 and $679.0,$424.6, respectively, as of December 31, 1999,2002 and $293.0$856.1 and $280.7,$634.7, respectively, as of December 31, 1998.
Pension Benefits Medical/Life Benefits ------------------------------------------------------------------- 1999 1998 1997 1999 1998 1997 --------- ---------- --------- --------- --------- --------- Components of Net Periodic Benefit Costs: Service cost $ 14.6 $ 14.2 $ 13.4 $ 5.2 $ 4.2 $ 6.1 Interest cost 59.7 59.7 61.6 41.5 37.5 44.8 Expected return on assets (72.9) (69.4) (61.8) - - - Amortization of prior service cost 3.3 3.2 3.4 (12.1) (12.4) (12.4) Recognized net actuarial (gain) loss .7 1.4 2.6 - (7.1) (.9) --------- ---------- --------- --------- --------- --------- Net periodic benefit cost 5.4 9.1 19.2 34.6 22.2 37.6 Curtailments, settlements, etc. .4 3.2 3.7 - - - --------- ---------- --------- --------- --------- --------- Adjusted net periodic benefit costs $ 5.8 $ 12.3 $ 22.9 $ 34.6 $ 22.2 $ 37.6 ========= ========== ========= ========= ========= =========
46 50 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)2001. The assets of the Company-sponsored pension plans, like numerous other companies' plans, are, to a substantial degree, invested in the capital markets and managed by a third party. Given: (1) the performance of the stock market during 2002 and the resulting declines in the value of the assets held by the Company's pension plans and (2) the declining interests rates, which cause the discounted value of the projected liabilities to increase, the Company was required to reflect an increase in its additional minimum pension liabilities of $133.1 in its December 31, 2002 balance sheet. Similar circumstances had resulted in a $64.5 (net of income tax benefit of $38.0) increase in additional minimum pension liabilities in its December 31, 2001 balance sheet. Minimum pension liability adjustments are non-cash adjustments that are reflected as an increase in pension liability and an offsetting charge to stockholders' equity through Other comprehensive income (rather than Net income). Additionally, 2003 operating results are expected to be adversely impacted by higher pension costs resulting from the decline in the value of the pension plans' assets and increased liabilities due to lower interest rates, restructuring activities and the incurrence of additional full early retirement obligations in respect of KACC's Washington smelters. Pension Benefits(1) Medical/Life Benefits(2) --------------------------------- -------------------------------- 2002 2001 2000 2002 2001 2000 ---------- ----------- ---------- ---------- ---------- ---------- Components of Net Periodic Benefit Costs: Service cost $ 47.9 $ 38.6 $ 20.6 $ 37.8 $ 12.1 $ 5.3 Interest cost 62.0 63.6 63.4 56.2 48.7 45.0 Expected return on assets (58.0) (70.9) (80.8) - -------------------------------------------------------------------------------- (In millions- - Amortization of dollars, except share amounts)prior service cost 3.8 5.5 3.9 (23.0) (15.1) (12.8) Recognized net actuarial (gain) loss 6.5 (.5) (1.9) 11.8 - --------------------------------------------------------------------------------- ---------- ----------- ---------- ---------- ---------- ---------- Net periodic benefit cost 62.2 36.3 5.2 82.8 45.7 37.5 Curtailments, settlements, etc. 26.4 - .1 - - - ---------- ----------- ---------- ---------- ---------- ---------- Adjusted net periodic benefit costs(1) $ 88.6 $ 36.3 $ 5.3 $ 82.8 $ 45.7 $ 37.5 ========== =========== ========== ========== ========== ========== (1) Approximately $60.9 of the $88.6 adjusted net periodic benefit costs in 2002, $24.5 of the $36.3 adjusted net periodic benefit costs in 2001 and $6.1 of the $5.3 adjusted net periodic benefit costs in 2000 related to pension benefit accruals that were provided in respect of non-recurring items and/or restructuring activities (see Note 3 and 6). (2) Approximately $30.7 of the $82.8 adjusted net periodic benefit costs in 2002 related to medical/life benefit accruals that were provided in respect of non-recurring restructuring activities (see Notes 3 and 6). Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1% Increase 1% Decrease ------------- ------------- Increase (decrease) to total of service and interest cost $ 6.3 $ (4.6) Increase (decrease) to the postretirement benefit obligation $ 62.9 $ (44.0)
POSTEMPLOYMENT BENEFITS1% Increase 1% Decrease ------------- ------------- Increase (decrease) to total of service and interest cost $ 8.6 $ (6.3) Increase (decrease) to the postretirement benefit obligation 86.4 (61.5) Changes Impacting Existing Plans. The foregoing medical benefit liability and cost data reflects the fact that in February 2002, KACC notified its salaried retirees that, given the significant escalation in medical costs and the increased burden it was creating, KACC was going to require such retirees to fund a portion of their medical costs beginning May 1, 2002. The impact of such charges reduced the estimated cash payments by the Company by approximately $10.0 per year. The financial statement benefits of this change will, however, be reflected over the remaining employment period of the Company's employees in accordance with generally accepted accounting principles. During 2002, approximately 230 salaried employees retired. These retirements resulted in lump sum payments which triggered a special provision under the Employee Retirement Income Security Act ("ERISA") that required the Company to make a $17.0 accelerated contribution to its salaried employee pension plan on January 15, 2003. However, because substantially all of the amount would have been classified as a pre-Filing Date obligation requiring Court approval before payment and represented a small portion of the legacy liabilities that must be addressed in the Company's reorganization, the Company did not make the payment. Since the Company did not make the payment, it is no longer in compliance with ERISA's minimum funding requirements and, in turn, is prohibited by ERISA from making lump-sum distributions from the salaried employee pension plan to employees who retire after December 31, 2002. Special Charges in 2002. During 2002, the Company's Corporate segment recorded charges of $24.1 ($9.5 in the fourth quarter - included in Corporate selling, administrative, research and development, and general expense), for additional pension expense. The charges were recorded because: (1) The lump sum payments from the assets of KACC's salaried employee pension plan exceeded a stipulated level prescribed by GAAP. Accordingly, a partial "settlement," as defined by GAAP, was deemed to have occurred. Under GAAP, if a partial "settlement" occurs, a charge must be recorded for a portion of any unrecognized net actuarial losses not reflected in the consolidated balance sheet. The portion of the total unrecognized actuarial losses of the plan ($75.0 at December 31, 2001) that had to be recorded as a charge was the relative percentage of the total projected benefit obligation of the plan ($300.0 at December 31, 2001) settled by the lump sum payments totaling $75.0 in 2002; and (2) During the first quarter of 2002, KACC also paid $4.2 into a trust fund in respect of certain obligations attributable to certain non-qualified pension benefits under management compensation agreements. These payments also represented a "settlement" and resulted in a charge of $4.2. In addition to the foregoing, during the fourth quarter of 2002, the Primary aluminum segment reflected approximately $58.8 of charges for pension, postretirement medical benefits and related obligations in respect of the indefinite curtailment of the Mead facility. This amount consisted of approximately $29.0 of incremental pension charges and $29.8 of incremental postretirement medical and related charges. Postemployment Benefits. The Company provides certain benefits to former or inactive employees after employment but before retirement. INCENTIVE PLANSRestricted Common Stock. The Company has a restricted stock plan, which is one of its stock incentive compensation plans, for its officers and other employees. During January 2002, approximately 95,000 restricted shares of the Company's Common Stock were issued to officers and other employees. The fair value of the restricted shares issued is being amortized to expense over the terms of the applicable restriction periods. The restricted shares issued in 2001 included an exchange with certain employees who held stock options to purchase the Company's Common Stock whereby a total of approximately 3,617,000 options were exchanged (on a fair value basis) for approximately 1,086,000 restricted shares. During 2002, approximately 406,000 of the restricted shares, all of which had not been vested, were cancelled, including approximately 338,000 restricted shares that were voluntarily forfeited by certain employees. Incentive Plans. The Company has an unfunded incentive compensation program, which provides incentive compensation based on performance against annual plans and over rolling three-year periods. In addition, the Company has a "nonqualified" stock option plan and KACC has a defined contribution plan for salaried employees.employees which provides for matching contributions by the Company at the discretion of the board of directors. Given the challenging business environment encountered during 2002 and the disappointing results of operations for the year, only modest incentive payments were made and no matching contribution awarded in respect of 2002. The Company's expense for all of these plans was $6.0, $7.5,$1.0, $4.5 and $8.3$5.7 for the years ended December 31, 1999, 1998,2002, 2001 and 1997,2000, respectively. Up to 8,000,000 shares of the Company's Common Stock were initially reserved for issuance under its stock incentive compensation plans. At December 31, 1999, 2,192,7132002, 3,295,156 shares of Common Stock remained available for issuance under those plans. Stock options granted pursuant to the Company's nonqualified stock option program are to be granted at or above the prevailing market price, generally vest at a rate of 20-33%20 - 33% per year, and have a five or ten year term. Information concerning nonqualified stock option plan activity is shown below. The weighted average price per share for each year is shown parenthetically.
1999 1998 1997 - ------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ------------------------------------------------------------------------ ------------- -------------- ------------- Outstanding at beginning of year ($9.98, $10.45, and $10.33) 3,049,122 819,752 890,395 Granted ($11.15, $9.79 and $10.06) 1,218,068 2,263,170 15,092 Exercised ($7.25, $7.25, and $8.33) (7,920) (10,640) (48,410) Expired or forfeited ($11.02, $9.60, and $10.12) (20,060) (23,160) (37,325) --------- --------- ------- Outstanding at end of year ($10.24, $9.98, and $10.45) 4,239,210 3,049,122 819,752 ========= ========= ======= Exercisable at end of year ($10.17, $10.09, and $10.53) 1,763,852 1,261,262 601,115 ========= ========= =======
In accordance with Statement of Financial Accounting Standards No. 123, Accounting foryear ($8.37, $10.24 and $10.24, respectively) 1,560,707 4,375,947 4,239,210 Granted ($2.89 and $10.23 in 2001 and 2000, respectively) - 874,280 757,335 Expired or forfeited ($5.71, $10.39 and $11.08, respectively) (105,846) (3,689,520) (620,598) ------------- -------------- ------------- Outstanding at end of year ($5.63, $8.37 and $10.24, respectively) 1,454,861 1,560,707 4,375,947 ============= ============== ============= Exercisable at end of year ($6.84, $9.09 and $10.18, respectively) 987,306 695,183 2,380,491 ============= ============== ============= Options exercisable at December 31, 2002 had exercisable prices ranging from $1.72 to $12.75 and a weighted average remaining contractual life of 3.8 years. Given that the average sales price of the Company's Common Stock Based Compensation ("SFAS No. 123"),is currently in the $.05 per share range, the Company believes it is required to calculate pro forma compensation cost for allunlikely any of the stock options granted subsequent to December 31, 1994. For SFAS No. 123 purposes,will be exercised. Further, as a part of a plan of reorganization, it is possible that the fair valueinterests of the 1999, 1998, and 1997 stock option grants were estimated using a Black-Scholes option pricing model. The pro forma after-tax effectholders of the estimated fair value of the grants wouldoutstanding options could be to increase the net loss in 1999 by $1.8 and reduce net income in 1998 and 1997 by $1.5 and $.1, respectively. 47 51 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- 8. STOCKHOLDERS' EQUITY, COMPREHENSIVE INCOME ANDdiluted or cancelled. 11. MINORITY INTERESTS ChangesMinority Interests in stockholders' equity and comprehensive income were:
Accumulated Accu- Other Preferred Common Additional mulated Comprehensive Stock Stock Capital Deficit Income Total - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 $ .4 $ .7 $ 531.1 $ (460.1) $ (2.8) $ 69.3 Net income 48.0 48.0 Minimum pension liability adjustment, net of tax 2.8 2.8 --------- Comprehensive income 50.8 Common stock issued upon redemption and conversion of preferred stock (.4) .1 1.7 1.4 Stock options exercised .4 .4 Dividends on preferred stock (5.5) (5.5) Incentive plan accretion .6 .6 --------- --------- ---------- --------- ------------- --------- BALANCE, DECEMBER 31, 1997 - .8 533.8 (417.6) - 117.0 Net income/Comprehensive income .6 .6 Stock options exercised .1 .1 Incentive plan accretion 1.5 1.5 --------- --------- ---------- --------- ------------- --------- BALANCE, DECEMBER 31, 1998 - .8 535.4 (417.0) - 119.2 Net income (loss)/Comprehensive income (54.1) (54.1) Minimum pension liability adjustment, net of tax (1.2) (1.2) --------- Comprehensive income (55.3) Stock options exercised .1 .1 Incentive plan accretion 1.3 1.3 --------- --------- ---------- --------- ------------- --------- BALANCE, DECEMBER 31, 1999 $ - $ .8 $ 536.8 $ (471.1) $ (1.2) $ 65.3 ========= ========= ========== ========= ============= =========
ChangesConsolidated Affiliates. The Company owns a 90% interest in minority interest were:
1999 1998 1997 -------------------------- -------------------------- -------------------------- Redeemable Redeemable Redeemable Preference Preference Preference Stock Other Stock Other Stock Other - --------------------------------------------------------------------------------------------------------------------------- Beginning of period balance $ 20.1 $ 103.4 $ 27.7 $ 100.0 $ 27.5 $ 94.2 Redeemable preference stock Accretion 1.0 1.1 2.3 Stock redemption (1.6) (8.7) (2.1) Minority interests (5.2) 3.4 5.8 ------------- --------- ------------- ---------- ------------- --------- End of period balance $ 19.5 $ 98.2 $ 20.1 $ 103.4 $ 27.7 $ 100.0 ============= ========= ============= ========== ============= =========
COMMON STOCK In January 2000, theVolta Aluminium Company increased the number of authorized shares of Common Stock to 125,000,000 from 100,000,000. 48 52 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- REDEEMABLE PREFERENCE STOCK In 1985, KACC issued its Cumulative (1985 Series A) Preference Stock and its Cumulative (1985 Series B) Preference Stock (together, the "Redeemable Preference Stock"Limited ("Valco") each of which has a par value of $1 per share and a liquidation and redemption value of $50 per share plus accrued dividends, if any. No additional Redeemable65% interest in Alpart. These companies' financial statements are fully consolidated into the Company's consolidated financial statements because they are majority-owned. KACC Preference Stock is expected to be issued. Holders of the Redeemable Preference Stock are entitled to an annual cash dividend of $5 per share, or an amount based on a formula tied to KACC's pre-tax income from aluminum operations, when and as declared by the Board of Directors. The carrying values of the Redeemable Preference Stock are increased each year to recognize accretion between the fair value (at which the Redeemable Preference Stock was originally issued) and the redemption value. Changes in Redeemable Preference Stock are shown below.
1999 1998 1997 - ------------------------------------------------------------------------------------ Shares: Beginning of year 421,575 595,053 634,684 Redeemed (31,322) (173,478) (39,631) ------- ------- ------- End of year 390,253 421,575 595,053 ======= ======= =======
Redemption fund agreements require KACC to make annual payments by March 31 of the subsequent year based on a formula tied to consolidated net income until the redemption funds are sufficient to redeem all of the Redeemable Preference Stock. On an annual basis, the minimum payment is $4.3 and the maximum payment is $7.3. At December 31, 1999, the balance in the redemption fund was $12.5 (included in Other Assets). KACC also has certain additional repurchase requirements which are, among other things, based upon profitability tests. The Redeemable Preference Stock is entitled to the same voting rights as KACC common stock and to certain additional voting rights under certain circumstances, including the right to elect, along with other KACC preference stockholders, two directors whenever accrued dividends have not been paid on two annual dividend payment dates or when accrued dividends in an amount equivalent to six full quarterly dividends are in arrears. The Redeemable Preference Stock restricts the ability of KACC to redeem or pay dividends on its common stock if KACC is in default on any dividends payable on Redeemable Preference Stock. PREFERENCE STOCK KACC has four series of $100 par value Cumulative Convertible Preference Stock ("$100 Preference Stock") outstanding with annual dividend requirements of between 41/4 1/8% and 4 3/4%. included in "Other" in 2000 in the table above. KACC has the option to redeem the $100 Preference Stock at par value plus accrued dividends. KACC does not intend to issue any additional shares of the $100 Preference Stock. TheBy its terms, the $100 Preference Stock can be exchanged for per share cash amounts between $69 - $80. KACC records the $100 Preference Stock at their exchange amounts for financial statement presentation and the Company includes such amounts in minority interests. At December 31, 19992002 and 1998,2001, outstanding shares of $100 Preference Stock were 19,5388,669 and 19,963,8,969, respectively. PREFERRED STOCK PRIDES Convertible - During August 1997, the remaining 8,673,850 outstanding shares of PRIDES were converted into 7,227,848 shares of Common Stock pursuant to the terms of the PRIDES Certificate of Designations. Further inIn accordance with the PRIDES CertificateCode and DIP Facility, KACC is not permitted to repurchase any of Designations, no dividends were paid or payable for the period June 30, 1997, to, but not including, the date of conversion. However, in accordance with generally accepted accounting principles, the $1.3 of accrued dividends attributable to the period June 30, 1997, to, but not including, the conversion date were treated as an increase in Additional capital at the date of conversion and were reflectedits stock. Further, as a reductionpart of Net income available to common shareholders. PLEDGED SHARES From time to time MAXXAMa plan of reorganization, it is likely that the interests of the holders of the $100 Preference Stock will be diluted or cancelled. In 1985, KACC issued certain of its subsidiaries which ownRedeemable Preference Stock with a par value of $1 per share and a liquidation and redemption value of $50 per share plus accrued dividends, if any. In connection with the Company's Common Stock may use such stock as collateral under various financing arrangements. At December 31, 1999, 27,938,250 sharesUSWA settlement agreement in September 2000, KACC redeemed all of the Company's Commonremaining Redeemable Preference Stock beneficially owned by MAXXAM Group Holdings Inc. ("MGHI"), a wholly owned subsidiary of MAXXAM, were pledged as 49 53 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- security for $130.0 principal amount of 12% Senior Secured Notes due 2003 issued in December 1996 by MGHI. An additional 8,915,000(350,872 shares of the Company's Common Stock were pledged by MAXXAM under a separate agreement under which $18.5 had been borrowed by MAXXAM at December 31, 1999. In addition to the foregoing, MAXXAM has agreed to secure each $1.0 of borrowings with 400,000 shares of the Company's Common Stock under the terms of another $25.0 credit facility ($2.5 outstanding at December 31, 1999). 9. RESTRUCTURING OF OPERATIONS2000) during March 2001. The net cash impact of the redemption on KACC was only approximately $5.5 because approximately $12.0 of the total redemption amount of $17.5 had previously been funded into redemption funds. 12. COMMITMENTS AND CONTINGENCIES Impact of Reorganization Proceedings. During the second quarter of 1997, the Company recorded a $19.7 restructuring charge to reflect actions taken and plans initiated to achieve reduced production costs, decreased corporate selling, general and administrative expenses, and enhanced product mix. The significant componentspendency of the restructuring charge were: (i)Cases, substantially all pending litigation, except certain environmental claims and litigation, against the Debtors is stayed. Generally, claims against a net loss of approximately $1.4 as a result of the contribution of certain net assets of KACC's Erie, Pennsylvania, fabrication plantDebtor arising from actions or omissions prior to its Filing Date will be settled in connection with the formationplan of AKW and the subsequent decision to close the remainder of the Erie plant in order to consolidate its forging operations into two other facilities; (ii) a charge of $15.6 associated with asset dispositions regarding product rationalization and geographical optimization; and (iii) a charge of approximately $2.7 for benefit and other costs associated with the consolidation or elimination of certain corporate and other staff functions. 10. COMMITMENTS AND CONTINGENCIES COMMITMENTSreorganization. Commitments. KACC has a variety of financial commitments, including purchase agreements, tolling arrangements, forward foreign exchange and forward sales contracts (see Note 11)13), letters of credit, and guarantees. Such purchase agreements and tolling arrangements include long-term agreements for the purchase and tolling of bauxite into alumina in Australia by QAL. These obligations are scheduled to expire in 2008. Under the agreements, KACC is unconditionally obligated to pay its proportional share of debt, operating costs, and certain other costs of QAL. KACC's share of the aggregate minimum amount of required future principal payments at December 31, 1999,2002, is $103.6$49.0 which matures as follows: $11.3$32.0 in 2000, $14.12003 and $17.0 in 2001, $43.0 in2006. During July 2002, and $35.2 in 2003.KACC made payments of approximately $29.5 to QAL to fund KACC's share of QAL's scheduled debt maturities. KACC's share of payments, including operating costs and certain other expenses under the agreements, has ranged between $92.0$95.0 - - $100.0$103.0 over the past three years. KACC also has agreements to supply alumina to and to purchase aluminum from Anglesey. Minimum rental commitments under operating leases at December 31, 1999,2002, are as follows: years ending December 31, 2000 - $36.0; 2001 - $33.6; 2002 - $29.3; 2003 - $26.2;$15.2; 2004 - $24.7;$6.2; 2005 - $5.4; 2006 - - $3.1; 2007 - $2.4; thereafter - $88.7. The future minimum rentals receivable under noncancelable subleases was $82.3 at December 31, 1999.$3.7. Pursuant to the Code, the Debtors may elect to reject or assume unexpired pre-petition leases. At this time, no decisions have been made as to which significant leases will be accepted or rejected (see Note 1). Rental expenses were $41.1, $34.5,$38.3, $41.0 and $30.4,$42.5, for the years ended December 31, 1999, 1998,2002, 2001 and 1997,2000, respectively. ENVIRONMENTAL CONTINGENCIESKACC has a long-term liability, net of estimated subleases income (included in Long-term liabilities), on the Kaiser Center office complex in Oakland, California, in which KACC has not maintained offices for a number of years, but for which it is responsible for lease payments as master tenant through 2008 under a sale-and-leaseback agreement. During 2000, KACC reduced its net lease obligation by $17.0 (see Note 2) to reflect new third-party sublease agreements which resulted in occupancy and lease rates above those previously projected. In October 2002, the Company entered into a contract to sell its interests in the office complex. As the contract amount was less than the asset's net carrying value (included in Other assets), the Company recorded a non-cash impairment charge in 2002 of approximately $20.0 (which amount was reflected in Non-recurring operating charges (benefits), net - see Note 6). The sale was approved by the Court in February 2003 and closed in March 2003. Net cash proceeds were approximately $61.0. Environmental Contingencies. The Company and KACC are subject to a number of environmental laws, to fines or penalties assessed for alleged breaches of the environmental laws, and to claims and litigation based upon such laws. KACC currently is subject to a number of claims under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based on the Company's evaluation of these and other environmental matters, the Company has established environmental accruals, primarily related to potential solid waste disposal and soil and groundwater remediation matters. During the year ended December 31, 2001, KACC's ongoing assessment process resulted in KACC recording charges of $13.5 included in Other income (expense) - see Note 2) to increase its environmental accrual. Additionally, KACC's environmental accruals were increased during the year ended December 31, 2001, by approximately $6.0 in connection with purchase of certain property. The following table presents the changes in such accruals, which are primarily included in Long-term liabilities, for the years ended December 31, 1999, 1998,2002, 2001 and 1997: 50 54 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)2000: 2002 2001 2000 - -------------------------------------------------------------------------------- (In millions---------------------------------------------- ------- ------- ------- Balance at beginning of dollars, except share amounts) - --------------------------------------------------------------------------------
1999 1998 1997 - ----------------------------------------------------------------------------------------- Balance at beginning of period $ 50.7 $ 29.7 $ 33.3 Additional accruals 1.6 24.5 2.0 Less expenditures (3.4) (3.5) (5.6) ------ ------ ------ Balance at end of period $ 48.9 $ 50.7 $ 29.7 ====== ====== ======
period $ 61.2 $ 46.1 $ 48.9 Additional accruals 1.5 23.1 2.6 Less expenditures (3.6) (8.0) (5.4) ------- ------- ------- Balance at end of period(1) $ 59.1 $ 61.2 $ 46.1 ======= ======= ======= (1) As of December 31, 2002, $21.7 of the environmental accrual was included in Liabilities subject to compromise (see Note 1) and the balance was included in Long-term liabilities. As of December 31, 2001 and 2000, the environmental accrual was primarily included in Long-term liabilities. These environmental accruals represent the Company's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology, and the Company's assessment of the likely remediation action to be taken. The Company expects that these remediation actions will be taken over the next several years and estimates that annual expenditures to be charged to these environmental accruals will be approximately $3.0$.6 to $9.0$12.3 for the years 20002003 through 20042007 and an aggregate of approximately $23.0$33.3 thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. The Company believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $30.0. As the resolution of these matters is subject to further regulatory review and approval, no specific assurance can be given as to when the factors upon which a substantial portion of this estimate is based can be expected to be resolved. However, the Company is currently working to resolve certain of these matters. The Company believes that KACC has insurance coverage available to recover certain incurred and future environmental costs and is pursuing claims in this regard. During December 1998, KACC received recoveries totaling approximately $35.0 from certain of its insurers related to current and future claims. Based on the Company's analysis, a total of $12.0 of such recoveries was allocable to previouslyHowever, no amounts have been accrued (expensed) items and, therefore, was reflected in earnings during 1998. The remaining recoveries were offset against increases in the total amount of environmental reserves. No assurances can be given that the Company will be successful in other attemptsfinancial statements with respect to recover incurred or future costs from other insurers or that the amount of recoveries received will ultimately be adequate to cover costs incurred.such potential recoveries. 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 CONTINGENCIESAsbestos Contingencies. KACC is a defendanthas been one of many defendants 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 leastmore than 20 years. The lawsuits are currently stayed by the Cases. The following table presents the changes in number of such claims pending for the years ended December 31, 1999, 1998,2002 (through the initial Filing Date), 2001 and 1997.
1999 1998 1997 - ------------------------------------------------------------------------------------------- Number of claims at beginning of period 86,400 77,400 71,100 Claims received 29,300 22,900 15,600 Claims settled or dismissed (15,700) (13,900) (9,300) ------ ------ ------ Number of claims at end of period 100,000 86,400 77,400 ======= ====== ======
51 55 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- The foregoing claims and settlement figures as of2000. January 1, 2002 Year Ended through December 31, 1999, do not reflectFebruary 12, ---------------------- 2002 2001 2000 - -------------------------------------------------------------------------- ------------------- --------- -------- Number of claims at beginning of period 112,800 110,800 100,000 Claims received 5,300 34,000 30,600 Claims settled or dismissed (6,100) (32,000) (19,800) ------------------- --------- -------- Number of claims at end of period 112,000 112,800 110,800 =================== ========= ======== Due to the fact that KACC has reached agreements under which it expectsCases, holders of asbestos claims are stayed from continuing to settle approximately 31,900prosecute pending litigation and from commencing new lawsuits against the Debtors. However, during the pendency of the pending asbestos-relatedCases, KACC expects additional asbestos claims over an extended period.will be filed as part of the claims process. A separate creditors' committee representing the interests of the asbestos claimants has been appointed. The Debtors' obligations with respect to present and future asbestos claims will be resolved pursuant to a plan of reorganization. The Company maintains a liability for estimated asbestos-related costs for claims filed to date and an estimate of claims to be filed over a 10 year period (i.e., through 2009)2011. At December 31, 2002, the balance of such accrual was $610.1, all of which was included in Liabilities subject to compromise (see Note 1). The Company's estimate is based on the Company's view, at each balance sheet date, of the current and anticipated number of asbestos-related claims, the timing and amounts of asbestos-related payments, the status of ongoing litigation and settlement initiatives, and the advice of Wharton Levin Ehrmantraut Klein & Nash,Klein, P.A., with respect to the current state of the law related to asbestos claims. However, there are inherent uncertainties involved in estimating asbestos- relatedasbestos-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 20092011 and, accordingly, no accrual has been recorded for any costs which may be incurred beyond 2009,2011, the Company expects that such coststhe plan of reorganization process may continuerequire an estimation of KACC's entire asbestos-related liability, which may go beyond 2009,2011, and that such costs could be substantial. As of December 31, 1999, an estimated asbestos-related cost accrual of $387.8, before consideration of insurance recoveries, has been reflected in the accompanying financial statements primarily in Long-term liabilities. The Company estimates that annual future cash payments for asbestos-related costs will range from approximately $75.0 to $85.0 in the years 2000 to 2002, approximately $35.0 to $55.0 for each of the years 2003 and 2004, and an aggregate of approximately $58.0 thereafter. The Company believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. Although the Company has settled asbestos-related coverage matters with certain of its insurance carriers, other carriers have not yet agreed to settlements. KACC has reached preliminary agreementssettlements and disputes with certain insurance carriers under which it expects to collect a substantial portion of its 2000 asbestos-related payments.exist. The timing and amount of future recoveries from these and other insurance carriers will depend on the pacependency of claims review and processing by such carriersthe Cases and on the resolution of any disputes regarding coverage under suchthe applicable insurance policies. The Company believes that substantial recoveries from the insurance carriers are probable.probable and additional amounts may be recoverable in the future if additional claims are added. The Company reached this conclusion after considering its prior insurance-related recoveries in respect of asbestos- relatedasbestos-related claims, existing insurance policies, and the advice of Heller Ehrman White & McAuliffe LLP with respect to applicable insurance coverage law relating to the terms and conditions of those policies. Accordingly,During 2000, KACC filed suit in San Francisco Superior Court against a group of its insurers, which suit was thereafter split into two related actions. Additional insurers were added to the litigation in 2000 and 2002. During October 2001, the court ruled favorably on a number of policy interpretation issues, one of which was affirmed in February 2002 by an estimated aggregateintermediate appellate court in response to a petition from the insurers. The rulings did not result in any changes to the Company's estimates of its current or future asbestos-related insurance recoveryrecoveries. The trial court is scheduled to decide certain policy interpretation issues in Spring 2003 and may hear additional issues from time to time. Given the expected significance of $315.5,probable future asbestos-related payments, the receipt of timely and appropriate payments from its insurers is critical to a successful plan of reorganization and KACC's long-term liquidity. The following tables present historical information regarding KACC's asbestos-related balances and cash flows: December 31, -------------------------------- 2002 2001 - -------------------------------------------------------------- -------------- -------------- Liability (current portion of $130.0 in 2001) $ 610.1 $ 621.3 Receivable (included in Other assets)(1) 484.0 501.2 -------------- -------------- $ 126.1 $ 120.1 ============== ============== (1) The asbestos-related receivable was determined on the same basis as the asbestos-related cost accrual, is recorded primarily in Other assets at December 31, 1999.accrual. However, no assurances can be given that KACC will be able to project similar recovery percentages for future asbestos-related claims or that the amounts related to future asbestos-related claims will not exceed KACC's aggregate insurance coverage. As of December 31, 2002 and 2001, $24.7 and $33.0, respectively, of the receivable amounts relate to costs paid. The remaining receivable amounts relate to costs that are expected to be paid by KACC in the future. Year Ended December 31, Inception ------------------------------------------- 2002 2001 2000 To Date ------------ ------------ ------------- --------------- Payments made, including related legal costs $ 17.1 $ 118.1 $ 99.5 $ 355.7 Insurance recoveries 23.3 90.3 62.8 244.9 ------------ ------------ ------------- --------------- $ (6.2) $ 27.8 $ 36.7 $ 110.8 ============ ============ ============= =============== During the pendency of the Cases, all asbestos litigation is stayed. As a result, the Company does not expect to make any asbestos payments in the near term. Despite the Cases, the Company continues to pursue insurance collections in respect of asbestos-related amounts paid prior to its Filing Date. Management continues to monitor claims activity, the status of lawsuits (including settlement initiatives), legislative developments, and costs incurred in order to ascertain whether an adjustment to the existing accruals should be made to the extent that historical experience may differ significantly from the Company's underlying assumptions. This process resulted in the Company reflecting charges of $53.2, $12.7,$57.2 and $8.8$43.0 (included in Other income(expense)) - see Note 2) in the years ended December 31, 1999, 1998,2001 and 1997,2000, respectively, for asbestos-related claims, net of expected insurance recoveries, based on recent cost and other trends experienced by KACC and other companies. While uncertaintiesAdditional asbestos-related claims are inherent inlikely to be asserted as a part of the final outcomeChapter 11 process. Management cannot reasonably predict the ultimate number of these asbestos matters andsuch claims or the amount of the associated liability. However, it is presently impossible to determinelikely that such amounts could exceed, perhaps significantly, the actual costs that ultimately may be incurred and insurance recoveries that will be received, management currently believes that, based on the factors discussedliability amounts reflected 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,statements, which (as previously stated) is only reflective of an estimate of claims through 2011. KACC's obligations in respect of the currently pending and future asbestos-related claims will ultimately be determined (and resolved) as a part of the overall Chapter 11 proceedings. It is anticipated that resolution of these matters will be a lengthy process. Management will continue to periodically reassess its asbestos-related liabilities and estimated insurance recoveries as the Cases proceed. However, absent unanticipated developments such as asbestos-related legislation, material developments in other asbestos-related proceedings or in the Company's estimates are periodically re- evaluated, additional charges mayor KACC's Chapter 11 proceedings, it is not anticipated that the Company will have sufficient information to reevaluate its asbestos-related obligations and estimated insurance recoveries until much later in the Cases. Any adjustments ultimately deemed to be necessary and such charges could be material to the resultsrequired as a result of the period in which they are recorded. LABOR MATTERSreevaluation of KACC's asbestos-related liabilities or estimated insurance recoveries could have a material impact on the Company's future financial statements. Labor Matters. In connection with the USWA strike and subsequent lock-out by KACC, which was settled in September 2000, certain allegations of unfair labor practices ("ULPs") were filed with the National Labor Relations Board ("NLRB") by the USWA. As previously disclosed, KACC has responded to all such allegations and believedbelieves that they were without merit. In July 1999,Twenty-two of twenty-four allegations of ULPs previously brought against KACC by the Oakland, California, regional office of the NLRB dismissed all material charges filed against KACC. In September 1999, the union filed an appeal of this ruling with the NLRB general counsel's office in Washington, D.C. If the original decision were to be reversed, the matter would be referred toUSWA have been dismissed. A trial before an administrative law judge for the two remaining allegations concluded in September 2001. In May 2002, the administrative law judge ruled against KACC in respect of the two remaining ULP allegations and recommended that the NLRB award back wages, plus interest, less any earnings of the workers during the period of the lockout. The administrative law judge's ruling did not contain any specific amount of proposed award and is not self-executing. The USWA has filed a hearing whoseproof of claim for $240.0 in the Cases in respect of this matter. The NLRB also filed a proof of claim in respect of this matter. The NLRB claim was for $117.0, including interest of approximately $18.0. Depending on the ultimate amount of any interest due and amount of offsetting employee earnings and other factors, if the USWA ultimately were to prevail it is possible that the amount of the award could exceed $100.0. It is also possible that the Company may ultimately prevail on appeal and that no loss will occur. The Company continues to believe that the allegations are without merit and will vigorously defend its position. KACC has appealed the ruling of the administrative law judge to the full NLRB. The general counsel of NLRB and the USWA have cross-appealed. Any outcome from the NLRB appeal would be subject to an additional appeal eitherappeals in a United States Circuit Court of Appeals by the general counsel of the NLRB, the USWA or KACC. 52 56 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- This process could take months orseveral years. If these proceedings eventually resulted in a definitive ruling against KACC, it could be obligated to provide back pay to USWA members at the five plants and such amount could be significant. However, while uncertainties are inherent in the final outcome of such matters,Because the Company believes that it may prevail in the resolutionappeals process, the Company has not recognized a charge in response to the adverse ruling. However, it is possible that, if the Company's appeal(s) are not ultimately successful, a charge in respect of this matter may be required in one or more future periods and the amount of such charge(s) could be significant. This matter is not currently stayed by the Cases. However, as previously stated, seeing this matter to its ultimate outcome could take several years. Further, any amounts ultimately determined by a court to be payable in this matter will be dealt with in the overall context of the alleged ULPs should not resultDebtors' plan of reorganization and will be subject to compromise. Accordingly, any payments that may ultimately be required in a material adverse effect onrespect of this matter would only be paid upon or after the Company's consolidated financial position, resultsemergence from the Cases. Dispute with MAXXAM. In March 2002, MAXXAM filed a declaratory action with the Court asking the Court to find that it had no further obligations to Debtors under certain tax allocation agreements discussed in Note 9. At December 31, 2001, the Company had a receivable from MAXXAM of operations, or liquidity. OTHER CONTINGENCIES$35.0 (included in Other Assets) outstanding under the tax allocation agreement in respect to various tax contingencies in an equal amount (reflected in Long-term liabilities). As this matter to which the MAXXAM receivable has now been resolved with no amounts coming due from MAXXAM, both the receivable and the equal and offsetting payable were reversed in December 2002. The resolution between MAXXAM and KACC was approved by the Court in February 2003. Other Contingencies. The Company or KACC is involved in various other claims, lawsuits, and other proceedings relating to a wide variety of matters.matters related to past or present operations. While uncertainties are inherent in the final outcome of such matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. 11.13. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS At December 31, 1999,In conducting its business, KACC uses various instruments, including forward contracts and options, to manage the net unrealized loss on KACC's positionrisks arising from fluctuations in aluminum forwardprices, energy prices and exchange rates. KACC enters into hedging transactions from time to time to limit its exposure resulting from (1) its anticipated sales of alumina, primary aluminum, and option contracts (excludingfabricated aluminum products, net of expected purchase costs for items that fluctuate with aluminum prices, (2) the impact of those contracts discussed below which have been markedenergy price risk from fluctuating prices for natural gas, fuel oil and diesel oil used in its production process, and (3) foreign currency requirements with respect to market), energy forward purchaseits cash commitments with foreign subsidiaries and option contracts, and forward foreign exchange contracts, was approximately $73.9 (based on comparisons to applicable year-end published market prices).affiliates. 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 thesethe hedging activities will be(except the impact of those contracts discussed below which have been marked to market) generally offset byat least a portion of any losses or gains, respectively, on the transactions being hedged. ALUMINA AND ALUMINUM2002. Because the agreements underlying KACC's hedging positions provided that the counterparties to the hedging contracts could liquidate KACC's hedging positions if KACC filed for reorganization, KACC chose to liquidate these positions in advance of the Filing Date. Proceeds from the liquidation totaled approximately $42.2. A net gain of $23.3 associated with these liquidated positions was deferred and is being recognized over the period during which the underlying transactions to which the hedges related are expected to occur. The Company's earnings are sensitive to changes innet gain upon liquidation consisted of: gains of $30.2 for aluminum contracts and losses of $5.0 for Australian dollars and $1.9 for energy contracts. As of December 31, 2002, the pricesremaining unamortized amount was approximately a net loss of alumina, primary aluminum$1.3. During December 2002 and fabricated aluminum products, and also depend to a significant degree upon the volume and mixfirst quarter 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 in2003, 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 entersCompany entered into hedging transactions (included in Prepaid expenses and other current assets) with respect to provide price risk management in respecta portion of the net exposureits 2003 fuel oil requirements. As 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 salesJanuary 31, 2003, KACC held option contracts are used by KACC to effectively fixwhich cap the price that KACC will receivewould have to pay for its shipments. KACC also uses1.8 million barrels of fuel oil in 2003. This amount of fuel oil represents substantially all of KACC's exposure to fuel oil requirements in the second half of 2003 and 40% of KACC's exposure to fuel oil requirements in the first half of 2003. The carrying/market value of the option contracts (i)was $.9 at December 31, 2002. The Company anticipates that, subject to establish a minimum price forprevailing economic conditions, it may enter into additional hedging transactions with respect to primary aluminum prices, natural gas and fuel oil prices and foreign currency values to protect the interests of its product shipments, (ii)constituents. However, no assurance can be given as to establish a "collar"when or range of prices for KACC's anticipated sales, and/or (iii) to permit KACC to realize possible upside price movements.if the Company will enter into such additional hedging activities. As of December 31, 1999, KACC had entered into option contracts that established a price range for 341,000 and 317,000 tons of primary aluminum with respect to 2000 and 2001, respectively. Additionally, through December 31, 1999, KACC had also entered a series of transactions with a counterparty that will provide KACC with a premium over the forward market prices at the date of the transaction for 2,000 tons of primary aluminum per month during the period January 2000 through June 2001. KACC also contracted with the counterparty to receive certain fixed prices (also above the forward market prices at the date of the transaction) on 4,000 tons of primary aluminum per month over a three year period commencing October 2001, unless market prices during certain periods decline below a stipulated "floor" price, in which case the fixed price sales portion of the transactions terminate. The price at which the October 2001 and after transactions terminate is well below current market prices. While the Company believes that the October 2001 and after transactions are consistent with its stated hedging objectives, these positions do not qualify for treatment as a "hedge" under current accounting guidelines. Accordingly, these positions will be "marked-to-market" each period. For the year ended December 31, 1999, the Company recorded mark-to-market pre-tax charges of $32.8 in Other income (expense) associated with the transactions described in this paragraph. As of December 31, 1999,2002, KACC had sold forward virtuallysubstantially all of the alumina available to it in excess of its projected internal smelting requirements for 20002003 and 20012004, respectively, at prices indexed to future prices of primary aluminum. 53 57 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions2001 and 2000. During the first quarter of dollars, except share amounts) - -------------------------------------------------------------------------------- ENERGY KACC is exposed2001, the Company recorded a mark-to-market benefit of $6.8 (included in Other income (expense)) related to energy price risk from fluctuating prices for fuel oil and diesel oil consumedthe application of SFAS No. 133. However, starting in the production process. KACCsecond quarter of 2001, the income statement impact of mark-to-market changes was essentially eliminated as unrealized gains or losses resulting from time to timechanges in the ordinary coursevalue of business entersthese hedges began being recorded in Other comprehensive income (see Note 2) based on changes in SFAS No. 133 enacted in April 2001. During late 1999 and early 2000, KACC entered into certain aluminum contracts with a counterparty. While the Company believed that the transactions were consistent with its stated hedging transactionsobjectives, these positions did not qualify for treatment as a "hedge" under accounting guidelines. Accordingly, the positions were marked-to-market each period. A recap of mark-to-market pre-tax gains (losses) for these positions, together with major suppliersthe amount discussed in the paragraph above, is provided in Note 2. During the fourth quarter of energy2001, KACC liquidated all of the remaining positions. This resulted in the recognition of approximately $3.3 of additional mark-to-market income during 2001. 14. KEY EMPLOYEE RETENTION PROGRAM In June 2002, the Company adopted a key employee retention program (the "KERP"), which was approved by the Court in September 2002. The KERP is a comprehensive program that is designed to provide financial incentives sufficient to retain certain key employees during the Cases. The KERP includes six key elements: a retention plan, a severance plan, a change in control plan, a completion incentive plan, the continuation for certain participants of an existing supplemental employee retirement plan ("SERP") and energya long-term incentive plan. The retention plan is expected to have a total cost of up to approximately $7.3 per year. The total cost of the KERP will vary depending on the level of continuing participation in each period. Under the KERP, retention payments commenced in September 2002 and will be paid every six months through March 31, 2004, except that 50% of the amounts payable to certain senior officers will be withheld until the Debtors emerge from the Cases or as otherwise agreed pursuant to the KERP. The severance and change in control plans, which are similar to the provisions of previous arrangements that existed for certain key employees, generally provide for severance payments of between six months and three years of salary and certain benefits, depending on the facts and circumstances and the level of employee involved. The completion incentive plan generally provides for payments of up to an aggregate of approximately $1.2 to certain senior officers provided that the Debtors emerge from the Cases in 30 months or less from the initial Filing Date. If the Debtors emerge from the Cases after 30 months from the initial Filing Date, the amount of the payments will be reduced accordingly. The SERP generally provides additional non-qualified pension benefits for certain active employees at the time that the KERP was approved, who would suffer a loss of benefits based on Internal Revenue Code limitations, so long as such employees are not subsequently terminated for cause or voluntarily terminate prior to reaching their retirement age. The long-term incentive plan generally provides for incentive awards to key employees based on an annual cost reduction target. Payment of such awards generally will be made: (a) 50% when the Debtors emerge from the Cases and (b) 50% one year from the date the Debtors emerge from the Cases. During 2002, the Company has recorded charges of $5.1, of which $1.5 were recorded in the fourth quarter of 2002 (included in Selling, administrative, research and development, and general), related to the KERP. 15. SUBSEQUENT EVENTS In January 2003, the Court approved the sale of the Tacoma facility to the Port of Tacoma (the "Port") for $12.1 and the assumption by the Port of all environmental remediation obligations. The sale closed in February 2003. An additional $4.0 of proceeds are being held in escrow pending the resolution of certain environmental and other issues. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), the operations of the Tacoma facility will be reported in discontinued operations in the Company's future financial instruments. As ofstatements. Income statement information for the Tacoma facility for the years ended December 31, 1999, KACC held2002, 2001 and 2000 were as follows: (Unaudited) ---------------------------- 2002 2001 2000 - ------------------------------------- ------------- ------------ -------------- Net sales $ .1 $ 33.3 $ 106.6 Operating loss (5.8) (26.5) (48.4) Loss before income tax benefit (5.8) (26.4) (48.4) During January 2003, as a combinationresult of fixed price purchasereduced power availability from the Volta River Authority ("VRA"), the Company's 90% owned Volta Aluminum Company Limited ("Valco") curtailed two of its three operating potlines. In connection with such curtailments, $5.5 of end-of-service benefits were paid resulting in a $3.2 charge to earnings in January 2003. Additional curtailments and option contracts for an averageend-of-service payments and charges are possible. During March 2003, the Company paid approximately $22.0 in settlement of 232,000 barrels per month of fuel oil for 2000. FOREIGN CURRENCY KACC enters into forward exchange contracts to hedge material cash commitments tocertain foreign subsidiaries or affiliates. At December 31, 1999, KACC had net forward foreign exchange contracts totaling approximately $88.5 for the purchase of 133.0 Australian dollars from January 2000 through May 2001,tax matters in respect of a number of prior periods. Also, as more fully discussed in Note 12, during March 2003, the Company completed the sale of its Australian dollar denominated commitments from January 2000 through May 2001. In addition, KACC has entered intointerests in an option contract to purchase 42.0 Australian dollars for the period from January 2000 through June 2001. 12.office building complex in Oakland, California, netting approximately $61.0 in sale proceeds. 16. SEGMENT AND GEOGRAPHICAL AREA INFORMATION The Company's operations are located in many foreign countries, including Australia, Canada, Ghana, Jamaica, and the United Kingdom. Foreign operations in general may be more vulnerable than domestic operations due to a variety of political and other risks. Sales and transfers among geographic areas are made on a basis intended to reflect the market value of products. The Company's operations are organized and managed by product type. The Company operates inoperations include four operating segments of the aluminum industry:industry and its commodities marketing and corporate segments. The aluminum industry segments include: Alumina and bauxite, Primary aluminum, Flat-rolled products and Engineered products. The Alumina and bauxite business unit's principal products are smelter grade alumina and chemical grade alumina hydrate, a value-added product, for which the Company receives a premium over smelter grade market prices. The Primary aluminum business unit produces commodity grade products as well as value-added products such as rod and billet, for which the Company receives a premium over normal commodity market prices. The Flat-rolled products group sells to the beverage container and specialty coil markets as well as value-added products such as heat treat aluminum sheet and plate which are used in the aerospace and general engineering markets. The Engineered products business unit serves a wide range of industrial segments including the automotive, distribution, aerospace and general engineering markets. The Company uses a portion of its bauxite, alumina and primary aluminum production for additional processing at its downstream facilities. Transfers between business units are made at estimated market prices. The Commodities marketing segment includes the results of KACC's alumina and aluminum hedging activities (see Note 13). The accounting policies of the segments are the same as those described in Note 1.2. Business unit results are evaluated internally by management before any allocation of corporate overhead and without any charge for income taxes, interest expense or interest expense. 54 58 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - --------------------------------------------------------------------------------non-recurring charges. Financial information by operating segment at December 31, 1999, 1998,2001, 2000 and 19971999 is as follows:
Year Ended December 31, ---------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------- Net Sales: Bauxite and Alumina: Net sales to unaffiliated customers $ 397.9 (1) $ 472.7 $ 411.7 Intersegment sales 129.0 (1) 135.8 201.7 --------- ---------- ---------- 526.9 608.5 613.4 --------- ---------- ----------Year Ended December 31, ----------------------------------------- 2002 2001 2000 - -------------------------------------------------------------- ----------- ----------- ----------- Net Sales: Bauxite and Alumina: Net sales to unaffiliated customers $ 458.1 $ 508.3 $ 442.2 Intersegment sales 58.6 77.9 148.3 ----------- ----------- ----------- 516.7 586.2 590.5 ----------- ----------- ----------- Primary Aluminum: Net sales to unaffiliated customers 439.1 409.8 543.4 Intersegment sales 240.6 233.5 273.8 --------- ---------- ---------- 679.7 643.3 817.2 --------- ---------- ---------- Flat-Rolled Products 576.2 714.6 743.3 Engineered Products 542.6 581.3 581.0 Minority interests 88.5 78.0 93.8 Eliminations (369.6) (369.3) (475.5) --------- ---------- ---------- $ 2,044.3 $ 2,256.4 $ 2,373.2 ========= ========== ========== Equity in income (loss) of unconsolidated affiliates: Bauxite and Alumina $ 3.4 $ (3.2) $ (7.0) Primary Aluminum (1.0) 1.2 5.1 Engineered Products 2.5 7.8 4.8 Corporate and Other - (.4) - --------- ---------- ---------- $ 4.9 $ 5.4 $ 2.9 ========= ========== ========== Operating income (loss): Bauxite and Alumina $ (6.0)(2) $ 42.0 (6) $ 54.2 Primary Aluminum 8.0 (3) 49.9 (6) 148.3 Flat-Rolled Products 17.1 70.8 (6) 28.2 (7) Engineered Products 38.6 47.5 (6) 42.3 (7) Micromill (30.7)(4) (63.4)(4) (24.5) Eliminations 6.9 8.9 (5.9) Corporate and Other (62.8) (65.1) (74.6)(7) --------- ---------- ---------- $ (28.9) $ 90.6 $ 168.0 ========= ========== ========== Depreciation and amortization: Bauxite and Alumina $ 29.7 (5) $ 36.4 $ 39.4 Primary Aluminum 27.8 29.9 30.4 Flat-Rolled Products 16.2 16.1 16.0 Engineered Products 10.7 10.8 11.2 Micromill 2.3 3.6 3.2 Corporate and Other 2.8 2.3 2.3 --------- ---------- ---------- $ 89.5 $ 99.1 $ 102.5 ========= ========== ========== Capital expenditures: Bauxite and Alumina $ 30.4 $ 26.9 $ 27.8 Primary Aluminum 12.8 20.7 42.6 Flat-Rolled Products 16.6 20.4 16.8 Engineered Products 7.8 8.4 31.2 Micromill - .2 8.3 Corporate and Other .8 1.0 1.8 --------- ---------- ---------- $ 68.4 $ 77.6 $ 128.5 ========= ========== ==========
(1) Net sales for 1999 include approximately 264 tons of alumina purchased from third parties and resold to certain unaffiliated customers 265.3 358.9 563.7 Intersegment sales 2.5 3.8 242.3 ----------- ----------- ----------- 267.8 362.7 806.0 ----------- ----------- ----------- Flat-Rolled Products 183.6 308.0 521.0 Engineered Products 425.0 429.5 564.9 Commodities Marketing(2) 39.1 22.9 (25.4) Minority Interests 98.5 105.1 103.4 Eliminations (61.1) (81.7) (390.6) ----------- ----------- ----------- $ 1,469.6 $ 1,732.7 $ 2,169.8 =========== =========== =========== Equity in income (loss) of the Gramercy facilityunconsolidated affiliates: Bauxite and 131 tons of alumina purchased from third parties and resold to the Company's primary business unit. 55 59 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - -------------------------------------------------------------------------------- (2)Alumina $ 10.4 $ (2.3) $ (8.4) Primary Aluminum 3.6 4.0 3.6 ----------- ----------- ----------- $ 14.0 $ 1.7 $ (4.8) =========== =========== =========== Operating income (loss) for 1999 included estimated business interruption insurance recoveries: Bauxite and Alumina(3) $ (48.5) $ (46.9) $ 57.2 Primary Aluminum(4) (23.1) 5.1 100.1 Flat-Rolled Products(4)(5) (30.7) .4 16.6 Engineered Products(4)(5) 8.5 4.6 34.1 Commodities Marketing 36.2 5.6 (48.7) Eliminations 1.7 1.0 .1 Corporate and Other(6) (98.9) (68.5) (61.4) Non-Recurring Operating (Charges) Benefits, Net - Note 6 (251.2) 163.6 41.3 ----------- ----------- ----------- $ (406.0) $ 64.9 $ 139.3 =========== =========== =========== (1) Beginning in the first quarter of $41.0. (3) Operating income (loss) for 1999 included potline preparation and restart costs of $12.8. (4) Operating income (loss) for 1999 and 1998 included impairment charges of $19.1 and $45.0, respectively. (5) Depreciation was suspended for the Gramercy facility for the last six months of 19992001, as a result of the July 5, 1999, incident. Depreciation expense for the Gramercy facility for the six months ended June 30, 1999, was approximately $6.0. (6) Operating income (loss) for 1998 for the Bauxite and alumina, Primary aluminum, Flat-rolled products and Engineered products segments included unfavorable strike-related impactscontinuing curtailment of approximately $11.0, $29.0, $16.0, and $4.0, respectively. (7) Operating income (loss) for 1997 included pre-tax charge of $2.6, $12.5 and $4.6 related to the restructuring of operations forKACC's Northwest smelters, the Flat-rolled products business unit began purchasing its own primary aluminum rather than relying on the Primary aluminum business unit to supply its aluminum requirements through production or third party purchases. The Engineered products business unit was already responsible for purchasing the majority of its primary aluminum requirements. (2) Net sales in 2002 primarily represent partial recognition of deferred gains from hedges closed prior to the commencement of the Cases (see Note 13). Net sales in 2001 and 2000 represent net settlements with counterparties for maturing derivative positions. (3) Operating results for 2002 include $4.4 of charges resulting from an increase in the allowance for doubtful receivables and a LIFO inventory charge of $.5. Operating results for 2001 include abnormal Gramercy-related start-up and litigation costs, net of business interruption-related insurance accruals, of $34.8 and a LIFO inventory charge of $3.7. (4) Operating results for 2002 include LIFO inventory charges of: Primary Aluminum - $2.1, Flat-Rolled Products - $2.0 and Engineered Products - $1.5. (5) Operating results for 2001 include LIFO inventory charges of: Flat-Rolled Products - $3.0 and Engineered Products - $1.5. (6) Operating results for 2002 include special pension charges of $24.1 and key employee retention program charges of $5.1. Year Ended December 31, ----------------------------------------- 2002 2001 2000 - --------------------------------------------------- ----------- ----------- ----------- Depreciation and amortization: Bauxite and Alumina $ 39.2 $ 37.8 $ 22.2 Primary Aluminum 21.6 21.6 24.8 Flat-Rolled Products 15.0 16.9 16.7 Engineered Products 12.0 12.8 11.5 Corporate segments, respectively.
December 31, ------------------------------- 1999 1998 - --------------------------------------------------------------------------------------------------- Investments in and advances to unconsolidated affiliates: Bauxite and Alumina $ 71.6 $ 76.8 Primary Aluminum 25.3 27.6 Engineered Products - 23.9 ------------- ------------- $ 96.9 $ 128.3 ============= ============= Segment assets: Bauxite and Alumina $ 777.7 $ 669.0 Primary Aluminum 560.8 580.8 Flat-Rolled Products 423.2 431.2 Engineered Products 253.1 294.5 Micromill 3.0 25.3 Corporate and Other 1,181.0 990.1 ------------- ------------- $ 3,198.8 $ 2,990.9 ============= =============
and Other 3.7 1.1 1.7 ----------- ----------- ----------- $ 91.5 $ 90.2 $ 76.9 =========== =========== =========== Capital expenditures: Bauxite and Alumina $ 28.3 $ 117.8 $ 254.6 Primary Aluminum 8.4 8.7 9.6 Flat-Rolled Products 5.1 1.5 7.6 Engineered Products 5.1 19.9 23.6 Corporate and Other .7 .8 1.1 ----------- ----------- ----------- $ 47.6 $ 148.7 $ 296.5 =========== =========== =========== December 31, -------------------------------- 2002 2001 - ------------------------------------------------------------------- -------------- -------------- Investments in and advances to unconsolidated affiliates: Bauxite and Alumina $ 54.3 $ 43.9 Primary Aluminum 15.1 18.8 Corporate and Other .3 .3 -------------- -------------- $ 69.7 $ 63.0 ============== ============== Segment assets: Bauxite and Alumina $ 887.1 $ 922.5 Primary Aluminum - Note 5 271.0 467.0 Flat-Rolled Products 202.0 261.5 Engineered Products 222.9 233.8 Commodities Marketing (3.3) 48.4 Corporate and Other 645.7 810.5 -------------- -------------- $ 2,225.4 $ 2,743.7 ============== ============== Geographical information for net sales, based on country of origin, and long-lived assets follows:
Year Ended December 31, --------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------- Net sales to unaffiliated customers: United States $ 1,401.8 $ 1,698.0 $ 1,720.3 Jamaica 233.1 237.0 204.6 Ghana 153.2 89.8 234.2 Other Foreign 256.2 231.6 214.1 ------------ ------------- ------------ $ 2,044.3 $ 2,256.4 $ 2,373.2Year Ended December 31, --------------------------------------------- 2002 2001 2000 - -------------------------------------------------------- ------------ ------------- ------------ Net sales to unaffiliated customers: United States $ 828.1 $ 1,017.3 $ 1,350.1 Jamaica 189.7 219.4 298.5 Ghana 171.7 221.3 237.5 Other Foreign 280.1 274.7 283.7 ------------ ------------- ------------ $ 1,469.6 $ 1,732.7 $ 2,169.8 ============ ============= ============
December 31, ----------------------------- 1999 1998 - ----------------------------------------------------------------------- Long-lived assets: (1) United States $ 688.1 $ 757.9 Jamaica 288.2 289.2 Ghana 84.1 90.2 Other Foreign 90.2 99.7 ------------- ------------ $ 1,150.6 $ 1,237.0December 31, ----------------------------- 2002 2001 - -------------------------------------------- ------------ ------------- Long-lived assets: (1) United States - Note 5 $ 616.9 $ 832.5 Jamaica 313.4 303.8 Ghana 84.7 83.3 Other Foreign 64.6 58.8 ------------ ------------- $ 1,079.6 $ 1,278.4 ============ ============= ============
(1) Long-lived assets include Property, plant, and equipment, net and Investments in and advances to unconsolidated affiliates. 56 60 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Prepared on a going-concern basis - -------------------------------------------------------------------------------- (In millions of dollars, except share amounts) - --------------------------------------------------------------------------------see Note 2. The aggregate foreign currency gain included in determining net income was immaterial for the years ended December 31, 1999, 1998,2002, 2001 and 1997.2000. No single customer accounted for sales in excess of 10% of total revenue in 1999, 1998,2002, 2001 and 1997.2000. Export sales were less than 10% of total revenue during the years ended December 31, 1999, 1998,2002, 2001 and 1997. 57 61 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES2000. QUARTERLY FINANCIAL DATA (UNAUDITED) - -------------------------------------------------------------------------------
Quarter Ended ------------------------------------------------------- (In millions of dollars, except share amounts) March 31, June 30, September 30, December 31, - ----------------------------------------------------------------------------------------------------------- 1999 Net sales $ 479.4 $ 525.0 $ 520.3 $ 519.6 Operating income (loss) (33.0) .7 (12.1) 15.5 Net income (loss) (38.2) (15.7)(1) (39.2)(2) 39.0(3) Earnings (loss) per share: Basic/Diluted (.48) (.20) (.49)(2) .49 Common stock market price: High 6 7/8 10 1/8 9 3/4 8 1/4 Low 4 3/4 5 6 5/8 6 1998 Net sales $ 597.0 $ 614.8 $ 541.6 $ 503.0 Operating income (loss) 44.8 55.3 30.8 (40.3) Net income (loss) 12.0 16.7 10.8(4) (38.9)(5) Earnings per share: Basic/Diluted .15 .21 .14 (.49)(5) Common stock market price: High 11 11 5/8 9 5/8 7 3/4 Low 8 1/8 8 7/8 5 5/8 4 5/8 1997 Net sales $ 547.4 $ 597.1 $ 634.1 $ 594.6 Operating income 31.3 35.3 54.5 46.9 Net income 2.6 13.7(6) 17.5(3) 14.2 Earnings per share: Basic/Diluted .01 .16 .22 .18 Common stock market price: High 13 5/8 12 1/4 16 14 7/8 Low 10 7/8 10 1/8 11 5/8 8 3/8
-------------------------------------------------------------------------------- Quarter Ended ------------------------------------------------------------- (In millions of dollars, except share amounts) March 31, June 30, September 30, December 31, - -------------------------------------------------------- -------------- ---------- -------------- -------------- (1) Includes three essentially offsetting(1) (1) 2002 Net sales $ 370.6 $ 386.3 $ 348.0 $ 364.7 Operating income (loss) (36.7) (36.7) (65.7) (266.9) Net income (loss) (64.1) (50.4) (83.4) (270.8)(2) Basic/Diluted Earnings (loss) per share(5) (.79) (.63) (1.04) (3.37)(2) Common stock market price:(5) High 1.76 .34 .11 .09 Low .21 .04 .03 .06 2001 Net sales $ 480.3 $ 446.8 $ 430.3 $ 375.3 Operating income (loss) 215.4 (27.6) (36.1) (86.8) Net income (loss) 119.6 (64.1) 68.4 (583.3)(3) Basic/Diluted Earnings per share(5) 1.50 (.80) .85 (7.23)(3) Common stock market price:(5) High 4.44 4.90 4.45 3.34 Low 3.23 3.25 2.57 1.56 2000 Net sales $ 575.7 $ 552.8 $ 545.2 $ 496.1 Operating income 36.9 51.5 2.8 48.1 Net income (loss) 11.7 11.0 (16.8) 10.9 (4) Basic/Diluted Earnings (loss) per share(5) .15 .14 (.21) .14 (4) Common stock market price:(5) High 8.88 5.13 6.06 5.94 Low 4.13 2.94 3.50 3.50 (1) Quarterly results include a number of non-recurring and unusual items a pre-tax gain of $50.5 on the salethat may cause an individual quarter's results not to be indicative of the Company's interests in AKW,underlying operating performance. See the applicable quarterly report on Form 10-Q for a non-cash pre-tax chargerecap of $38.0 for asbestos-related claims and a pre-tax charge of $13.5 to reflect a mark-to-market adjustment on certain primary aluminum hedging transactions.such items. (2) Includes a non-cashthe following pre-tax chargeitems: non-recurring impairment charges of $19.1$215.4, non-recurring restructuring charges of $2.6 and LIFO inventory charges of $3.1 (see Notes 2 and 6 of Notes to reduce the carrying value of the Company's Micromill assets, a non-cash pre-tax charge of $15.2 for asbestos-related claims and a pre-tax charge of $5.9 to reflect a mark-to-market adjustment on certain primary aluminum hedging transactions.Consolidated Financial Statements). Excluding these items,charges, results would have been a basic loss per share of approximately $.62. (3) Includes increase in valuation allowances for net deferred income tax assets of $505.4 and the following pre-tax items: charges for restructuring of $8.2, abnormal Gramercy start-up and other costs of $16.5, contract labor costs related to smelter curtailment of $9.4, impairment charges related to Trentwood equipment of $17.7 and certain other net non-recurring charges totaling $9.6 (see Notes 2 and 6 of Notes to Consolidated Financial Statements). Excluding these items, results would have been basic loss per share of approximately $.16. (3)$.43. (4) Includes the following pre-tax items: a pre-tax gain of $85.0 on involuntary conversion at Gramercy facility, which amount represents the difference between the minimum expected property damage reimbursement amount for the Gramercy alumina refinery and the net carrying value of the damaged property. (4) Includes two essentially offsetting non-recurring items, a favorable $8.3 non-cash tax provision benefit resulting$103.2 from the resolutionsale of certain matters and an approximate $10.0 unfavorable gross profit impact of preparing forpower offset by a strike by employees represented by the USWA at five locations. (5) Includes an unfavorable pre-tax strike-related gross profit impactnon-cash impairment loss of approximately $50.0, and$33.0, a non-cash pre-tax charge of $45.0 related$26.2 for operating profit foregone as a result of power sales and certain other net non-operating charges totaling $10.9 (see Notes 2 and 6 of Notes to impairmentConsolidated Financial Statements). Excluding these items, but giving effect to operating profit foregone as a result of these power sales, results would have been basic loss per share of approximately $.19. (5) Earnings (loss) per share and market price may not be meaningful because, as part of a plan of reorganization, it is likely that the interests of the Company's Micromill assets. Excluding these items, basic earnings per share would have been approximately $.29. (6) Includes a $19.7 pre-tax charge for restructuring of operations, an offsetting after-tax benefit of $12.5 related to the settlement of certain tax matters and a $5.8 pre-tax charge for litigation matters. 58 62 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIESexisting stockholders will be diluted or cancelled. FIVE-YEAR FINANCIAL DATA CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------- December 31, -------------------------------------------------- (In millions of dollars) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 21.2 $ 98.3 $ 15.8 $ 81.3 $ 21.9 Receivables 261.0 282.7 340.2 252.4 308.6 Inventories 546.1 543.5 568.3 562.2 525.7 Prepaid expenses and other current assets 145.6 105.5 121.3 127.8 76.6 -------- -------- -------- -------- -------- Total current assets 973.9 1,030.0 1,045.6 1,023.7 932.8 Investments in and advances to unconsolidated affiliates 96.9 128.3 148.6 168.4 178.2 Property, plant, and equipment - net 1,053.7 1,108.7 1,171.8 1,168.7 1,109.6 Deferred income taxes 440.0 377.9 330.6 264.5 269.1 Other assets 634.3 346.0 317.3 308.7 323.5 -------- -------- -------- -------- -------- Total $3,198.8 $2,990.9 $3,013.9 $2,934.0 $2,813.2 ======== ======== ======== ======== ========- -------------------------------------------------------------------------------- December 31, ------------------------------------------------------------ (In millions of dollars) 2002 2001 2000 1999 1998 - ----------------------------------------------------------- ----------- ----------- ---------- ----------- ---------- ASSETS (1) Current assets: Cash and cash equivalents $ 78.7 $ 153.3 $ 23.4 $ 21.2 $ 98.3 Receivables 149.5 206.4 429.8 261.0 282.7 Inventories 254.9 313.3 396.2 546.1 543.5 Prepaid expenses and other current assets 33.5 86.2 162.7 145.6 105.5 ----------- ----------- ---------- ----------- ---------- Total current assets 516.6 759.2 1,012.1 973.9 1,030.0 Investments in and advances to unconsolidated affiliates 69.7 63.0 77.8 96.9 128.3 Property, plant, and equipment - net 1,009.9 1,215.4 1,176.1 1,053.7 1,108.7 Deferred income taxes - - 454.2 440.0 377.9 Other assets 629.2 706.1 622.9 634.3 346.0 ----------- ----------- ---------- ----------- ---------- Total $ 2,225.4 $ 2,743.7 $ 3,343.1 $ 3,198.8 $ 2,990.9 =========== =========== ========== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities not subject to compromise - Current liabilities: Accounts payable and accruals $ 244.4 $ 515.0 $ 673.5 $ 500.3 $ 432.7 $ 457.3 $ 453.4 $ 451.2 Accrued postretirement medical benefit obligation - current portion 60.2 62.0 58.0 51.5 48.2 45.3 50.1 46.8 Payable to affiliates 28.1 52.9 78.3 85.8 77.1 82.7 97.0 94.2 Long-term debt - current portion .3 .4 8.8 8.9 8.9 -------- -------- -------- -------- -------- Total current liabilities 637.9 558.4 594.1 609.4 601.1 Long-term liabilities 727.1 532.9 491.9 458.1 548.5 Accrued postretirement medical benefit obligation 678.3 694.3 720.3 722.5 734.0 Long-term debt 972.5 962.6 962.9 953.0 749.2 Minority interests 117.7 123.5 127.7 121.7 122.7 Stockholders' equity: Preferred stock - - - .4 .4 Common stock .8 .8 .8 .7 .7 Additional capital 536.8 535.4 533.8 531.1 530.3 Retained earnings (accumulated deficit) (471.1) (417.0) (417.6) (460.1) (459.9) Accumulated other comprehensive income - additional minimum pension liability (1.2) - - (2.8) (13.8) -------- -------- -------- -------- -------- Total stockholders' equity 65.3 119.2 117.0 69.3 57.7 -------- -------- -------- -------- -------- Total $3,198.8 $2,990.9 $3,013.9 $2,934.0 $2,813.2 ======== ======== ======== ======== ======== Debt-to-capital ratio(1) 81.2 76.9 77.8 81.2 78.1
(1) Total of long-term debt - current portion .9 173.5 31.6 .3 .4 ----------- ----------- ---------- ----------- ---------- Total current liabilities 333.6 803.4 841.4 637.9 558.4 Long-term liabilities 86.9 919.9 703.7 727.1 532.9 Accrued postretirement medical benefit obligation - 642.2 656.9 678.3 694.3 Long-term debt 42.7 700.8 957.8 972.5 962.6 ----------- ----------- ---------- ----------- ---------- 463.2 3,066.3 3,159.8 3,015.8 2,748.2 Liabilities subject to compromise 2,726.0 - - - - Minority interests 121.8 118.5 101.1 117.7 123.5 Stockholders' equity: Common stock .8 .8 .8 .8 .8 Additional capital 539.9 539.1 537.5 536.8 535.4 Retained earnings (accumulated deficit) (1,382.4) (913.7) (454.3) (471.1) (417.0) Accumulated other comprehensive income (loss) (243.9) (67.3) (1.8) (1.2) - ----------- ----------- ---------- ----------- ---------- Total stockholders' equity (1,085.6) (441.1) 82.2 65.3 119.2 ----------- ----------- ---------- ----------- ---------- Total $ 2,225.4 $ 2,743.7 $ 3,343.1 $ 3,198.8 $ 2,990.9 =========== =========== ========== =========== ========== (1) Prepared on a "going concern" basis. See Notes 1 and long-term debt (collectively "total debt") as2 of Notes to Consolidated Financial Statements for a ratiodiscussion of total debt, deferred income tax liabilities, minority interests, and stockholders' equity. 59 63 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIESthe possible impact of the Cases. FIVE-YEAR FINANCIAL DATA STATEMENTS OF CONSOLIDATED INCOME (LOSS)
- ------------------------------------------------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------- (In millions of dollars, except share amounts) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Net sales $2,044.3 $2,256.4 $2,373.2 $2,190.5 $2,237.8 -------- -------- -------- -------- -------- Costs and expenses: Cost of products sold 1,859.2 1,906.2 1,951.2 1,857.5 1,787.0 Depreciation and amortization 89.5 99.1 102.5 107.6 105.7 Selling, administrative, research and development, and general 105.4 115.5 131.8 127.6 134.5 Impairment of Micromill(TM) assets/restructuring of operations 19.1 45.0 19.7 -- -- -------- -------- -------- -------- -------- Total costs and expenses 2,073.2 2,165.8 2,205.2 2,092.7 2,027.2 -------- -------- -------- -------- -------- Operating income (loss) (2) (28.9) 90.6 168.0 97.8 210.6 Other income (expense): Interest expense (110.1) (110.0) (110.7) (93.4) (93.9) Gain on involuntary conversion at Gramercy facility 85.0 -- -- -- -- Other - net (1) (35.9) 3.5 3.0 (2.7) (14.1) -------- -------- -------- -------- --------- -------------------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------- (In millions of dollars, except share amounts) 2002 2001 2000 1999 1998 - ----------------------------------------------------- ------------ ----------- ----------- ----------- ----------- (1) Net sales $ 1,469.6 $ 1,732.7 $ 2,169.8 $ 2,083.6 $ 2,302.4 ------------ ----------- ----------- ----------- ----------- Costs and expenses: Cost of products sold 1,408.2 1,638.4 1,891.4 1,893.5 1,892.2 Depreciation and amortization 91.5 90.2 76.9 89.5 99.1 Selling, administrative, research and development, and general 124.7 102.8 104.1 105.4 115.5 Non-recurring operating charges (benefits), net 251.2 (163.6) (41.9) 24.1 105.0 ------------ ----------- ----------- ----------- ----------- Total costs and expenses 1,875.6 1,667.8 2,030.5 2,112.5 2,211.8 ------------ ----------- ----------- ----------- ----------- Operating income (loss) (406.0) 64.9 139.3 (28.9) 90.6 Other income (expense): Interest expense (excluding unrecorded contractual interest expense of $84.0 in 2002) (20.7) (109.0) (109.6) (110.1) (110.0) Reorganization items (33.3) - - - - Gain on sale of interest in QAL - 163.6 - - - Gain on involuntary conversion at Gramercy facility - - - 85.0 - Other - net .4 (32.8) (4.3) (35.9) 3.5 ------------ ----------- ----------- ----------- ----------- Income (loss) before income taxes, minority interests (459.6) 86.7 25.4 (89.9) (15.9) (Provision) benefit for income taxes (14.9) (550.2) (11.6) 32.7 16.4 Minority interests 5.8 4.1 3.0 3.1 .1 ------------ ----------- ----------- ----------- ----------- Net income (loss) $ (468.7) $ (459.4) $ 16.8 $ (54.1) $ .6 ============ =========== =========== =========== =========== Earnings (loss) per share(2): Basic/Diluted $ (5.82) $ (5.73) $ .21 $ (.68) $ .01 ============ =========== =========== =========== =========== Dividends per common share $ - $ - $ - $ - $ - ============ =========== =========== =========== =========== Weighted average shares outstanding (000): Basic 80,578 80,235 79,520 79,336 79,115 Diluted 80,578 80,235 79,523 79,336 79,156 (1) Prepared on a "going concern" basis. See Notes 1 and 2 of Notes to Consolidated Financial Statements for a discussion of the possible impact of the Cases. (2) Earnings (loss) per share may not be meaningful because, as a part of a plan of reorganization, it is likely that the interests (89.9) (15.9) 60.3 1.7 102.6 Benefit (provision) for income taxes 32.7 16.4 (8.8) 9.3 (37.2) Minority interests 3.1 .1 (3.5) (2.8) (5.1) -------- -------- -------- -------- -------- Net income (loss) (54.1) .6 48.0 8.2 60.3 Preferred stock dividends -- -- (5.5) (8.4) (17.6) -------- -------- -------- -------- -------- Net income (loss) available to common shareholders (54.1) $ .6 $ 42.5 $ (.2) $ 42.7 ======== ======== ======== ======== ======== Earnings (loss) per share: Basic/Diluted $ (.68) $ .01 $ .57 $ .00 $ .69 Weighted average shares outstanding (000): Basic 79,336 79,115 74,221 71,644 62,000 Diluted 79,336 79,156 74,382 71,644 62,264
(1) 1999 includes a gain of $50.5 on the sale of the Company's interests in AKW, non-cash charges of $53.2 for asbestos-related claims and charges of $32.8 to reflect mark-to-market adjustments on certain primary aluminum hedging transactions. (2) 1998 includes an adverse strike-related impact of approximately $60.0. 60 64 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES - -------------------------------------------------------------------------------existing stockholders will be diluted or cancelled. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information, as of March 28, 2003, with respect to the executive officers and directors of the Company and KACC. All officers and directors hold office until their respective successors are elected and qualified or until their earlier death, resignation or removal. NAME POSITIONS AND OFFICES WITH THE COMPANY AND KACC* - ----------------------------------- ------------------------------------------------------------------------ Jack A. Hockema President, Chief Executive Officer and Director Joseph A. Bonn Executive Vice President, Corporate Development John T. La Duc Executive Vice President and Chief Financial Officer John Barneson Senior Vice President and Chief Administrative Officer Kris S. Vasan Senior Vice President, Strategic Risk Management Edward F. Houff Vice President, Secretary and General Counsel Edward A. Kaplan Vice President of Taxes W. Scott Lamb Vice President, Investor Relations and Corporate Communications Daniel D. Maddox Vice President and Controller Daniel J. Rinkenberger Vice President of Economic Analysis and Planning Kerry A. Shiba Vice President and Treasurer Robert J. Cruikshank Director James T. Hackett Director George T. Haymaker, Jr. Chairman of the Board and Director Charles E. Hurwitz Director Ezra G. Levin Director John D. Roach Director - --------------------------- * All named individuals hold the same positions and offices with both the Company and KACC. Jack A. Hockema. Mr. Hockema, age 56, was elected to the position of President and Chief Executive Officer and as a director of the Company and KACC in October 2001. He previously served as Executive Vice President and President of Kaiser Fabricated Products of KACC from January 2000 until October 2001, and Executive Vice President of the Company from May 2000 until October 2001. He served as Vice President of the Company from May 1997 until May 2000. Mr. Hockema was Vice President of KACC and President of Kaiser Engineered Products from March 1997 until January 2000. He served as President of Kaiser Extruded Products and Engineered Components from September 1996 to March 1997. Mr. Hockema served as a consultant to KACC and acting President of Kaiser Engineered Components from September 1995 until September 1996. Mr. Hockema was an employee of KACC from 1977 to 1982, working at KACC's Trentwood facility, and serving as plant manager of its former Union City, California, can plant and as operations manager for Kaiser Extruded Products. In 1982, Mr. Hockema left KACC to become Vice President and General Manager of Bohn Extruded Products, a division of Gulf+Western, and later served as Group Vice President of American Brass Specialty Products until June 1992. From June 1992 until September 1996, Mr. Hockema provided consulting and investment advisory services to individuals and companies in the metals industry. Joseph A. Bonn. Mr. Bonn, age 59, was elected to the position of Executive Vice President, Corporate Development of the Company and KACC effective August 2001. He previously served as Vice President, Commodities Marketing, Corporate Planning and Development of the Company from May 2000 through August 2001, and of KACC from September 1999 through August 2001. He served as Vice President, Planning and Development of KACC from March 1997 through September 1999, and as Vice President of the Company from May 1997 through May 2000. He served as Vice President, Planning and Administration of the Company from February 1992 through May 1997, and of KACC from July 1989 through July 1997. Mr. Bonn was first elected a Vice President of KACC in April 1987. He served as Senior Vice President--Administration of MAXXAM from September 1991 through December 1992. He was also KACC's Director of Strategic Planning from April 1987 until July 1989. From September 1982 to April 1987, Mr. Bonn served as General Manager of various aluminum fabricating divisions of KACC. John T. La Duc. Mr. La Duc, age 60, was elected Executive Vice President and Chief Financial Officer of the Company effective September 1998, and of KACC effective July 1998. Mr. La Duc served as Vice President and Chief Financial Officer of the Company from June 1989 and May 1990, and was Treasurer of the Company from August 1995 until February 1996 and from January 1993 until April 1993. He also was Treasurer of KACC from June 1995 until February 1996, and served as Vice President and Chief Financial Officer of KACC from June 1989 and January 1990, respectively. He previously served as Senior Vice President of MAXXAM from September 1990 through December 2001. Prior to December 2001, Mr. La Duc also served as a Vice President and a director of MAXXAM Group Holdings Inc., a wholly owned subsidiary of MAXXAM and parent of MAXXAM's forest products operations ("MGHI"), as a Vice President and manager on the Board of Managers of Scotia Pacific Company LLC ("Scopac LLC"), a wholly owned subsidiary of MAXXAM engaged in forest product operations and successor by merger in July 1998 to Scotia Pacific Holding Company, and as a director and Vice President of The Pacific Lumber Company, the parent of Scopac LLC ("Pacific Lumber"). John Barneson. Mr. Barneson, age 52, was elected to the position of Senior Vice President and Chief Administrative Officer of the Company and KACC effective August 2001. He previously served as Vice President and Chief Administrative Officer of the Company and KACC from December 1999 through August 2001. He served as Engineered Products Vice President of Business Development and Planning from September 1997 until December 1999. Mr. Barneson served as Flat-Rolled Products Vice President of Business Development and Planning from April 1996 until September 1997. Mr. Barneson has been an employee of KACC since September 1975 and has held a number of staff and operation management positions within the Flat-Rolled and Engineered Products business units. Kris S. Vasan. Mr. Vasan, age 53, was elected to the position of Senior Vice President, Strategic Risk Management of the Company and KACC effective August 2001. In March 2002, he also was appointed Senior Vice President of Strategic Planning, Energy and Hedging of KACC's Commodities business unit. Mr. Vasan previously served as Vice President, Strategic Risk Management of KACC from June 2000 through August 2001, and of the Company from August 2000 through August 2001. He served as Vice President, Financial Risk Management of KACC from June 1995 through June 2000. Mr. Vasan served as Treasurer of the Company from April 1993 until August 1995, and as Treasurer of KACC from April 1993 until June 1995. Prior to that, Mr. Vasan served the Company and KACC as Corporate Director of Financial Planning and Analysis from June 1990 until April 1993. From October 1987 until June 1990, he served as Associate Director of Financial Planning and Analysis. Edward F. Houff. Mr. Houff, age 56, was elected to the position of Vice President and General Counsel of the Company and KACC effective April 2002. He was elected Secretary of the Company and KACC effective October 15, 2002. He served as Acting General Counsel of the Company and KACC from February 2002 until April 2002, and Deputy General Counsel for Litigation of the Company and KACC from October 2001 until February 2002. Mr. Houff was President and Managing Shareholder of the law firm Church & Houff, P.A. in Baltimore, Maryland from April 1989 through September 2001. Edward A. Kaplan. Mr. Kaplan, age 44, was elected to the position of Vice President of Taxes of the Company and KACC effective March 2001. Mr. Kaplan previously served as Director of Taxes of the Company and KACC from October 1999 through February 2001. From July 1997 to September 1999, he served as Director of Tax Planning of the Company and KACC, and from January 1995 through June 1997, he served as Associate Director of Tax Planning of the Company and KACC. W. Scott Lamb. Mr. Lamb, age 48, was elected Vice President, Investor Relations and Corporate Communications of the Company effective September 1998, and of KACC effective July 1998. Mr. Lamb previously served as Director of Investor Relations and Corporate Communications of the Company and KACC from June 1997 through July 1998. From July 1995 through June 1997, he served as Director of Investor Relations of the Company and KACC, and from January 1995 through July 1995, he served as Director of Public Relations of the Company and KACC. Daniel D. Maddox. Mr. Maddox, age 43, was elected to the position of Vice President and Controller of the Company effective September 1998, and of KACC effective July 1998. He served as Controller, Corporate Consolidation and Reporting of the Company and KACC from October 1997 through September 1998 and July 1998, respectively. Mr. Maddox previously served as Assistant Corporate Controller of the Company from May 1997 to September 1997, and of KACC from June 1997 to September 1997, and Director--External Reporting of KACC from June 1996 to May 1997. Mr. Maddox was with Arthur Andersen LLP from 1982 until joining KACC in June 1996. Daniel J. Rinkenberger. Mr. Rinkenberger, age 44, was elected to the position of Vice President of Economic Analysis and Planning of the Company and KACC effective February 2002. Mr. Rinkenberger previously served as Vice President, Planning and Business Development of Kaiser Fabricated Products of KACC from June 2000 through February 2002. Prior to that, he served as Vice President, Finance and Business Planning of Kaiser Flat-Rolled Products of KACC from February 1998 to February 2000, and as Assistant Treasurer of the Company and KACC from January 1995 through February 1998. Kerry A. Shiba. Mr. Shiba, age 48, was elected to the position of Vice President and Treasurer of the Company and KACC effective February 2002. Mr. Shiba previously served as Vice President, Controller and Information Technology of Kaiser Fabricated Products of KACC from January 2000 to February 2002, and as Vice President and Controller of Kaiser Engineered Products of KACC from June 1998 through January 2000. Prior to joining the Company, Mr. Shiba was with the BF Goodrich Company for 16 years, holding various financial positions. Robert J. Cruikshank. Mr. Cruikshank, age 72, has served as a director of the Company and KACC since January 1994. In addition, Mr. Cruikshank has been a director of MAXXAM since May 1993. Mr. Cruikshank was a Senior Partner in the international public accounting firm of Deloitte & Touche from December 1989 until his retirement in March 1993. Mr. Cruikshank served on the board of directors of Deloitte Haskins & Sells from 1981 to 1985 and as Managing Partner of the Houston office from June 1974 until its merger with Touche Ross & Co. in December 1989. Mr. Cruikshank also serves as a director of CenterPoint Energy, Inc. (formerly Reliant Energy Incorporated), a public utility holding company with interests in electric and natural gas utilities, coal and transportation businesses; a director of Texas Biotechnology Incorporated; a trust manager of Weingarten Realty Investors; and as advisory director of Compass Bank--Houston. James T. Hackett. Mr. Hackett, age 49, has been a director of the Company since May 2000, and of KACC since June 2000. Since January 2000, Mr. Hackett has been Chairman, President and Chief Executive Officer of Ocean Energy, Inc., a company engaged in oil and natural gas exploration and production worldwide. From 1990 through 1995, Mr. Hackett worked for NGC Corporation, now known as Dynegy, Inc., serving as Senior Vice President and President of the Trident Division in 1995. From January 1996 until June 1997, Mr. Hackett served as Executive Vice President of PanEnergy Corporation and was responsible for integrated international energy development, domestic power operations, and various corporate staff functions. PanEnergy Corporation merged with Duke Energy Corporation in June 1997. From June 1997 until September 1998, Mr. Hackett served as President-Energy Services Group of Duke Energy Corporation, and was responsible for the non-regulated operations of Duke Energy, including energy trading, risk management, and international midstream energy infrastructure development and engineering services. From September 1998 through December 1998, Mr. Hackett was Chief Executive Officer of Seagull Energy Corporation, which was engaged primarily in exploration and production of oil and natural gas. From January 1999 through March 1999, Mr. Hackett assumed the additional title of Chairman of Seagull Energy Corporation, and when Seagull Energy Corporation merged with Ocean Energy, Inc. in March 1999, he was appointed President and Chief Executive Officer of Ocean Energy, Inc. Mr. Hackett also serves as a director of Fluor Corporation, a worldwide engineering services company; New Jersey Resources Corporation, a holding company engaged in retail and wholesale energy services; and Temple Inland Inc., a holding company engaged in wood, pulp, paper and fiber products, and financial services. George T. Haymaker, Jr. Mr. Haymaker, age 65, has been a director of the Company since May 1993, and of KACC since June 1993. He was named as non-executive Chairman of the Board of the Company and KACC effective October 2001. Mr. Haymaker served as Chairman of the Board and Chief Executive Officer of the Company and KACC from January 1994 until January 2000, and as non-executive Chairman of the Board of the Company and KACC from January 2000 through May 2001. He served as President of the Company from May 1996 through July 1997, and of KACC from June 1996 through July 1997. From May 1993 to December 1993, Mr. Haymaker served as President and Chief Operating Officer of the Company and KACC. Mr. Haymaker also is a director of 360networks Corporation, a provider of broadband network services; Flowserve Corporation, a provider of valves, pumps and seals; a director of CII Carbon, LLC., a producer of calcined coke; and non-executive Chairman of the Board of Directors of Safelite Glass Corp., a provider of automotive replacement glass. Since July 1987, Mr. Haymaker has been a director, and from February 1992 through March 1993 was President, of Mid-America Holdings, Ltd. (formerly Metalmark Corporation), which is in the business of semi-fabrication of aluminum extrusions. Charles E. Hurwitz. Mr. Hurwitz, age 62, has served as a director of the Company since October 1988, and of KACC since November 1988. From December 1994 until April 2002, he served as Vice Chairman of KACC. Mr. Hurwitz also has served as a member of the Board of Directors and the Executive Committee of MAXXAM since August 1978 and was elected Chairman of the Board and Chief Executive Officer of MAXXAM in March 1980. From January 1993 to January 1998, he also served MAXXAM as President. Mr. Hurwitz was Chairman of the Board and Chief Executive Officer of Federated Development Company, a Texas corporation, from January 1974 until its merger in February 2002 into Federated Development, LLC ("FDLLC"), a wholly owned subsidiary of Giddeon Holdings, Inc. ("Giddeon Holdings"). Mr. Hurwitz is the President and Director of Giddeon Holdings, a principal stockholder of MAXXAM, which is primarily engaged in the management of investments. Mr. Hurwitz also has been, since its formation in November 1996, Chairman of the Board, President and Chief Executive Officer of MGHI. Ezra G. Levin. Mr. Levin, age 69, has been a director of the Company since July 1991. He has been a director of KACC since November 1988, and a director of MAXXAM since May 1978. Mr. Levin also served as a director of the Company from April 1988 to May 1990. Mr. Levin has served as a director of Pacific Lumber since February 1993, and as a manager on the Board of Managers of Scopac LLC since June 1998. Mr. Levin is a member of the law firm of Kramer Levin Naftalis & Frankel LLP. He has held leadership roles in various legal and philanthropic capacities and also has served as visiting professor at the University of Wisconsin Law School and Columbia College. John D. Roach. Mr. Roach, age 59, has been a director of the Company and KACC since April 30, 2002. Since August 2001, Mr. Roach has been the Chairman and Chief Executive Officer of Stonegate International, Inc., a private investment and advisory services firm. From March 1998 to September 2001, Mr. Roach was the Chairman, President and Chief Executive Officer of Builders FirstSource, Inc., a distributor of building products to production homebuilders. From July 1991 to July 1997, Mr. Roach served as Chairman, President and Chief Executive Officer of Fibreboard Corporation. From 1988 to July 1991, he was Executive Vice President of Manville Corporation. Mr. Roach also serves as a director of Material Sciences Corp., a provider of materials-based solutions; PMI Group, Inc., a provider of credit enhancement products and lender services; and URS Corporation, an engineering firm. He also is a director of the Dallas Symphony Association. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based solely upon a review of the copies of the Forms 3, 4 and 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, and written representations from reporting persons that no other Forms 5 were required, the Company believes that all filing requirements that were applicable to its officers, directors and greater than 10% beneficial owners were complied with. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE Although certain plans or programs in which executive officers of the Company participate are jointly sponsored by the Company and KACC, executive officers of the Company generally are directly employed and compensated by KACC. The following table sets forth compensation information, cash and non-cash, for each of the Company's last three completed fiscal years with respect to the Company's Chief Executive Officer during 2002 and the four most highly compensated executive officers other than the Chief Executive Officer for the year 2002 (collectively referred to as the "Named Executive Officers"). ANNUAL COMPENSATION -------------------------------------- (A) (B) (C) (D) (E) OTHER ANNUAL NAME AND SALARY BONUS COMPENSATION PRINCIPAL POSITION YEAR ($) ($) ($)(1) - -------------------------- ------ --------- -------------- ------------- Jack A. Hockema 2002 730,000 -0- - President and Chief 2001 455,390 159,135 - Executive Officer 2000 315,000 250,000 - Edward F. Houff(7) 2002 400,000 125,000 - Vice President, Secretary 2001 100,000 62,500 - and General Counsel John T. La Duc 2002 400,592 -0- - Executive Vice President 2001 387,393 171,000 - and Chief Financial 2000 372,493 435,000 - Officer Harvey L. Perry(7) 2002 375,000 -0- - Former Executive Vice 2001 137,500 87,500 - President and President Global Commodities Joseph A. Bonn 2002 333,333 -0- - Executive Vice President, 2001 322,350 126,464 - Corporate Development 2000 296,250 290,716 - LONG-TERM COMPENSATION ----------------------------------- AWARDS PAYOUTS ----------------------- ----------- (A) (F) (G) (H) (I) SECURITIES RESTRICTED UNDERLYING STOCK OPTIONS/ LTIP ALL OTHER NAME AND AWARD(S) SARS PAYOUTS COMPENSATION PRINCIPAL POSITION ($) # ($)(2) ($) - -------------------------- ------------ ---------- ----------- --------------- Jack A. Hockema 116,495(3) -0- 236,200(4) 346,750(5)(6) President and Chief 467,104(3) 375,770 887,600(4) 22,770(6) Executive Officer -0- 28,184 235,600(4) 15,750(6) Edward F. Houff(7) -0- -0- -0- 168,909(5)(6)(8) Vice President, Secretary 524,573(9) 222,772 -0- 2,865(8) and General Counsel John T. La Duc -0- -0- -0- 189,958(5)(6) Executive Vice President -0-(10) -0- 4,628(11) 19,370(6) and Chief Financial -0- -0- 59,065(12) 18,625(6) Officer Harvey L. Perry(7) -0- -0- -0- 184,849(5)(6)(8) Former Executive Vice 89,867(9) 31,809 -0- -0- President and President Global Commodities Joseph A. Bonn -0- -0- -0- 158,060(5)(6) Executive Vice President, -0-(10) -0- 148,829(11) 16,118(6) Corporate Development -0- -0- 44,747(12) 164,813(6)(8) - ------------------------------------ (1) Excludes perquisites and other personal benefits, which in the aggregate amount do not exceed the lesser of either $50,000 or 10% of the total of annual salary and bonus reported for the Named Executive Officer. (2) Amounts reflect the value of payments actually received during the year indicated in connection with awards under the Company's long-term incentive plan. The value of shares included in column (h) was determined by multiplying the number of shares paid by the average of the high and low market price of a share of Company Common Stock on the New York Stock Exchange on the date of payment. (3) As part of his annual long-term incentive, effective as of June 28, 2001, Mr. Hockema was granted 53,552 restricted shares of Company Common Stock, vesting at the rate of 33 1/3% per year, beginning on December 31, 2001. In connection with Mr. Hockema's promotion to President and Chief Executive Officer, he also was granted 146,448 restricted shares of Company Common Stock effective as of October 31, 2001, and 95,488 restricted shares of Company Common Stock effective as of January 25, 2002, each such grant vesting at the rate of 33 1/3% per year, beginning October 11, 2002. The restrictions on 33 1/3% of the shares granted to Mr. Hockema in June 2001 lapsed and the shares vested on December 31, 2001. Prior to the scheduled vesting dates, Mr. Hockema elected to cancel all of his restricted shares of Company Common Stock otherwise scheduled to vest during 2002. Vesting of Mr. Hockema's remaining restricted shares is subject to his being an employee of the Company, KACC or an affiliate or subsidiary of the Company or KACC as of the applicable vesting date. Vesting may be accelerated under certain circumstances. Any dividends payable on the shares prior to the lapse of the restrictions are payable to Mr. Hockema. The above table includes, for the respective year, the value of the restricted shares granted to Mr. Hockema in 2001 and 2002, in each case determined by multiplying the number of shares in the grant by the closing market price of a share of Company Common Stock on the New York Stock Exchange on the effective date of the grant. As of December 31, 2002, Mr. Hockema owned 196,991 restricted shares of Company Common Stock valued at $11,425, based on the closing price on the OTC Bulletin Board of $0.058 per share. (4) Amounts reflect the cash awards actually received by Mr. Hockema during the year indicated under the Company's long-term incentive plan for the rolling three-year performance periods 1997-1999, 1998-2000, and 1999-2001. In each case, such awards were paid in the year immediately following the end of the applicable three-year performance period. Mr. Hockema's award for the performance period 1997-1999 was paid in cash during 2000 pursuant to the terms of his employment agreement. Mr. Hockema's 1998-2000 award includes a special "growing the business" bonus for the period 1999-2000 in the amount of $601,200. (5) Includes retention payments made during 2002 under KACC's key employee retention plans in the amount of $346,750 for Mr. Hockema, $160,000 for Mr. Houff, $189,958 for Mr. La Duc, $178,125 for Mr. Perry, and $158,060 for Mr. Bonn. In addition to such retention amounts, Messrs. Hockema, Houff, La Duc and Bonn may in the future receive up to $273,750, $150,000, $152,063 and $126,525, respectively, of additional retention payments with respect to the year 2002, which pursuant to the terms of the Kaiser Aluminum & Chemical Corporation Key Employee Retention Plan, have been withheld by KACC and for which payment is subject to, among other conditions, KACC's emergence from chapter 11 and the timing thereof. For additional information, see discussion under "Employment Contracts, Retention Plan and Agreements and Termination of Employment and Change-in-Control Arrangements - Kaiser Retention Plan and Agreements" below. (6) Includes contributions by KACC of $22,770 and $15,750 for Mr. Hockema, $19,370 and $18,625 for Mr. La Duc, and $16,118 and $14,813 for Mr. Bonn under KACC's Supplemental Savings and Retirement Plan and Supplemental Benefits Plan for 2001 and 2000, respectively. KACC did not contribute any amounts under such plans for the Named Executive Officers for 2002. (7) Messrs. Houff and Perry became employees of KACC during 2001. Accordingly, no compensation is reflected for either of them in the Summary Compensation Table for the year 2000. Mr. Perry voluntarily terminated his employment with KACC as of January 31, 2003. (8) Includes moving-related items of $8,909 and $2,685 for Mr. Houff for 2002 and 2001, respectively, $6,724 for Mr. Perry for 2002, and $150,000 for Mr. Bonn for 2000. (9) Effective as of October 9, 2001, Mr. Houff was granted 171,429 restricted shares of Company Common Stock, vesting at the rate of 33 1/3% per year, beginning on October 1, 2002. Effective as of August 27, 2001, Mr. Perry was granted 24,621 restricted shares of Company Common Stock, vesting at the rate of 33 1/3% per year, beginning on August 1, 2002. Prior to the scheduled vesting dates, Messrs. Houff and Perry each elected to cancel all of their respective restricted shares of Company Common Stock otherwise scheduled to vest during 2002. In accordance with the terms of Mr. Perry's Restricted Stock Agreement, the balance of his restricted shares were cancelled as of January 31, 2003, in connection with his resignation. Vesting of Mr. Houff's remaining restricted shares is subject to his being an employee of the Company, KACC or an affiliate or subsidiary of the Company or KACC as of the applicable vesting dates. Vesting may be accelerated under certain circumstances. Any dividends payable on the shares prior to the lapse of the restrictions are payable to Mr. Houff. The above table includes for the year 2001 the value of the restricted shares granted to Messrs. Houff and Perry, in each case determined by multiplying the number of shares in the grant by the closing market price of a share of Company Common Stock on the New York Stock Exchange on the effective date of the grant. As of December 31, 2002, Messrs. Houff and Perry owned 114,286 and 16,414 restricted shares of Company Common Stock, respectively, valued at $6,629 and $952, respectively, based on the closing price on the OTC Bulletin Board of $0.058 per share. (10) In April 2001, the Company and KACC made an offer to current employees and directors to exchange their outstanding options to acquire shares of the Company's Common Stock for restricted shares of Company Common Stock (the "Exchange Offer"), vesting at the rate of 33 1/3% per year beginning March 5, 2002. Pursuant to the Exchange Offer, Mr. La Duc exchanged approximately 51% (i.e., options to purchase 243,575 shares) of his then outstanding options to acquire Company Common Stock for 34,511 restricted shares of Company Common Stock, and Mr. Bonn exchanged all of his then outstanding options (i.e., options to purchase 171,690 shares) to acquire Company Common Stock for 91,133 restricted shares of Company Common Stock. Prior to the March 2002 and March 2003 vesting dates, Messrs. La Duc and Bonn elected to cancel all of their respective restricted shares otherwise scheduled to vest on such dates. Vesting of Messrs. La Duc's and Bonn's respective remaining restricted shares is subject to their being an employee of the Company, KACC or an affiliate or subsidiary of the Company or KACC as of the applicable vesting dates. Vesting may be accelerated under certain circumstances. Any dividends payable on the shares prior to the lapse of the restrictions are payable to Messrs. La Duc and Bonn. The restricted shares issued to Messrs. La Duc and Bonn in connection with the Exchange Offer are not reflected in the above table. As of December 31, 2002, Messrs. La Duc and Bonn owned 158,822 and 84,703 restricted shares of Company Common Stock, respectively, valued at $9,212 and $4,913, respectively, based on the closing price on the OTC Bulletin Board of $0.058 per share. (11) Amounts reflect the value of shares of Company Common Stock actually received in 2001 under the Company's long-term incentive plan for the rolling three-year performance period 1997-1999. For Mr. Bonn, the amount also reflects the cash award actually received by him in 2001for the rolling three-year performance period 1998-2000. The awards for the 1997-1999 performance period generally were paid in two equal installments, with the first during the year following the end of the three-year performance period and the second during the next following year. Such awards generally were made entirely in shares of Company Common Stock (based on the average closing price of the Company's Common Stock during the last December of such performance period for one-half of the award and on a target price of $15.00 per share for the other half). (12) Amounts reflect the value of payments actually received in 2000 under the Company's long-term incentive plan for the rolling three-year performance periods 1996-1998 and 1997-1999. The awards for the 1996-1998 period generally were paid in two equal installments, with the first paid during the year following the end of the three-year performance period and the second during the next following year. Such awards generally were made 57% in shares of Company Common Stock (based on the average closing price of the Company's Common Stock during the last December of each performance period) and 43% in cash. See Note 11 above for information with respect to the awards for the 1997-1999 performance period. OPTION/SAR GRANTS IN LAST FISCAL YEAR The Company did not issue any stock options or SARs during the year 2002. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES The table below provides information on an aggregated basis concerning each exercise of stock options during the fiscal year ended December 31, 2002, by each of the Company's Named Executive Officers, and the 2002 fiscal year-end value of unexercised options. During 2002, the Company did not have any SARs outstanding. (A) (B) (C) (D) (E) VALUE OF UNEXERCISED NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS/SARS OPTIONS/SARS AT FISCAL YEAR END (#) AT FISCAL YEAR-END ($) ----------------------------- -------------------------------- SHARES ACQUIRED ON VALUE NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------- -------------- -------------- ------------- -------------- -------------- -------------- Jack A. Hockema -0- -0- 148,473(1) 255,481(1) --(2) --(2) Edward F. Houff -0- -0- 74,258(1) 148,514(1) --(2) --(2) John T. La Duc -0- -0- 234,375(1) -0- --(2) -0- Harvey L. Perry -0- -0- 10,103(1) 21,206(1) --(2) --(2) - ------------------------------------ (1) Represents shares of Company Common Stock underlying stock options. (2) No value is shown because the exercise price is higher than the closing price of $0.058 per share of the Company's Common Stock on the OTC Bulletin Board on December 31, 2002. LONG-TERM INCENTIVE PLAN AWARDS TABLE During 2002, the Company adopted, and the Court approved as part of the Kaiser Employee Retention Program discussed below, a new cash-based long-term incentive program under which participants became eligible to receive an award based on the attainment by the Company of sustained cost reductions above a stipulated threshold for the period 2002 through emergence from chapter 11. The following table and accompanying footnotes further describe the awards made in 2002 to the Named Executive Officers under such program. ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS ----------------------------------------------- (A) (B) (C) (D) (E) (F) PERFORMANCE OR NUMBER OF OTHER PERIODS UNTIL SHARES, UNITS OR MATURATION NAME OTHER RIGHTS OR PAYOUT THRESHOLD TARGET MAXIMUM - ------------------------------ ------------------- ------------------ -------------- --------------- -------------- Jack A. Hockema N/A (1) (2) $1,500,000(2) (2) Edward F. Houff N/A (1) (2) 300,000(2) (2) John T. La Duc N/A (1) (2) 523,000(2) (2) Harvey L. Perry N/A (1) (2) 575,000(2) (2) Joseph A. Bonn N/A (1) (2) 338,000(2) (2) - ------------------------------------ (1) Any awards earned under the program shall be payable in two equal installments - the first on the date that the Company emerges from bankruptcy and the second on the one year anniversary of such date. Any awards earned under the program are forfeited if the participant voluntarily terminates his or her employment (other than at normal retirement) or is terminated for cause prior to the scheduled payment date. (2) The amount, if any, that may be paid under the program shall not be determinable until the end of the performance period. Based on performance during 2002, assuming that (i) the cost reductions made in 2002 are maintained, (ii) no additional cost savings are attained during the balance of the performance period, and (iii) there are no changes to the participants in the program or in the amount of any participant's award based on individual performance, Messrs. Hockema, Houff, La Duc and Bonn would receive a total of approximately $300,000, $60,000, $104,600, and $67,600, respectively under the program, subject to the conditions of payment described in Note 2 above. Because Mr. Perry voluntarily terminated his employment with the Company in January 2003, he will not be entitled to any payment under the program. The maximum award that may be earned by any participant will not exceed three times his or her target. DEFINED BENEFIT PLANS Kaiser Retirement Plan. KACC maintains a qualified, defined-benefit retirement plan (the "Kaiser Retirement Plan") for salaried employees of KACC and co-sponsoring subsidiaries who meet certain eligibility requirements. The table below shows estimated annual retirement benefits payable under the terms of the Kaiser Retirement Plan to participants with the indicated years of credited service. These benefits are reflected without reduction for the limitations imposed by the Internal Revenue Code of 1986, as amended (the "Tax Code") on qualified plans and before adjustment for the Social Security offset, thereby reflecting aggregate benefits to be received, subject to Social Security offsets, under the Kaiser Retirement Plan and the Kaiser Supplemental Benefits Plan (as defined below). YEARS OF SERVICE AVERAGE ANNUAL ------------------------------------------------------------------------------------ REMUNERATION 15 20 25 30 35 - ------------------ ------------- --------------- ---------------- ---------------- --------------- $ 250,000 $ 56,250 $ 75,000 $ 93,750 $ 112,500 $ 131,250 350,000 78,750 105,000 131,250 157,500 183,750 450,000 101,250 135,000 168,750 202,500 236,250 550,000 123,750 165,000 206,250 247,500 288,750 650,000 146,250 195,000 243,750 292,500 341,250 750,000 168,750 225,000 281,250 337,500 393,750 850,000 191,250 255,000 318,750 382,500 446,250 950,000 213,750 285,000 356,250 427,500 498,750 1,050,000 236,250 315,000 393,750 472,500 551,250 The estimated annual retirement benefits shown are based upon the assumptions that current Kaiser Retirement Plan and Kaiser Supplemental Benefits Plan provisions remain in effect, that the participant retires at age 65, and that the retiree receives payments based on a straight-life annuity for his lifetime. Messrs. Hockema, Houff, La Duc, Perry and Bonn had 10.9, 1.25, 33.3, 1.42 and 35.5 years of credited service, respectively, on December 31, 2002. Monthly retirement benefits, except for certain minimum benefits, are determined by multiplying years of credited service (not in excess of 40) by the difference between 1.50% of average monthly compensation for the highest base period (of 36, 48 or 60 consecutive months, depending upon compensation level) in the last 10 years of employment and 1.25% of monthly primary Social Security benefits. Pension compensation covered by the Kaiser Retirement Plan and the Kaiser Supplemental Benefits Plan consists of salary and bonus amounts set forth in the Summary Compensation Table (column (c) plus column (d) thereof). Participants are entitled to retire and receive pension benefits, unreduced for age, upon reaching age 62 or after 30 years of credited service. Full early pension benefits (without adjustment for Social Security offset prior to age 62) are payable to participants who are at least 55 years of age and have completed 10 or more years of pension service (or whose age and years of pension service total 70) and who have been terminated by KACC or an affiliate for reasons of job elimination or partial disability. Participants electing to retire prior to age 62 who are at least 55 years of age and who have completed 10 or more years of pension service (or whose age and years of pension service total at least 70) may receive pension benefits, unreduced for age, payable at age 62 or reduced benefits payable earlier. Participants who terminate their employment after five years or more of pension service, or after age 55 but prior to age 62, are entitled to pension benefits, unreduced for age, commencing at age 62 or, if they have completed 10 or more years of pension service, actuarially reduced benefits payable earlier. For participants with five or more years of pension service or who have reached age 55 and who die, the Kaiser Retirement Plan provides a pension to their eligible surviving spouses. Upon retirement, participants may elect among several payment alternatives including, for most types of retirement, a lump-sum payment. Because of a liquidity shortfall under the funding provisions of the Tax Code, lump-sum payments for retirements after 2002 have been suspended. Kaiser Supplemental Benefits Plan. KACC maintains an unfunded, non-qualified Supplemental Benefits Plan (the "Kaiser Supplemental Benefits Plan"), the purpose of which is to restore benefits that would otherwise be paid from the Kaiser Retirement Plan or the Supplemental Savings and Retirement Plan, a qualified Section 401(k) plan (the "Kaiser Savings Plan"), were it not for the Section 401(a)(17) and Section 415 limitations imposed by the Tax Code. Participation in the Kaiser Supplemental Benefits Plan includes all employees of KACC and its subsidiaries whose benefits under the Kaiser Retirement Plan and Kaiser Savings Plan are likely to be affected by such limitations imposed by the Tax Code. Eligible participants are entitled to receive the equivalent of the Kaiser Retirement Plan and Kaiser Savings Plan benefits that they may be prevented from receiving under those plans because of such Tax Code limitations. Pursuant to the Kaiser Key Employee Retention Program discussed below, payments under the Kaiser Supplemental Benefits Plan may be made only to participants (including Messrs. Hockema and Houff) whose voluntary termination of employment with KACC does not occur until after KACC emerges from bankruptcy (other than normal retirement at age 62), and Messrs. Bonn and La Duc if their retirement occurs on or after February 12, 2004. See "Employment Contracts, Retention Plan and Agreements and Termination of Employment and Change-in-Control Arrangements - - Kaiser Retention Plan and Agreements" below for a discussion of the trust created and funded by the Company and KACC to pay Messrs. Bonn and La Duc their benefits under the Kaiser Supplemental Benefits Plan under certain conditions. Any claims by participants with respect to amounts not paid under the Kaiser Supplemental Benefits Plan will be resolved in the overall context of a plan of reorganization. Kaiser Termination Payment Policy. Most full-time salaried employees of KACC are eligible for benefits under an unfunded termination policy if their employment is involuntarily terminated, subject to a number of exclusions. The policy provides for lump-sum payments after termination ranging from one-half month's salary for less than one year of service graduating to eight months' salary for 30 or more years of service. As a result of the filing of the Cases, payments under the policy in respect of periods prior to the Filing Date generally cannot be made by KACC. Any claims for such pre-petition amounts will be resolved in the overall context of a plan of reorganization. The Named Executive Officers and certain other participants in the Kaiser Key Employee Retention Plan waived their rights to any payments under the termination policy in connection with their participation in the Kaiser Key Employee Retention Plan. DIRECTOR COMPENSATION Each of the directors who is not an employee of the Company or KACC generally receives an annual base fee for services as a director. The base fee for the year 2002 was $50,000. Prior to May 2002, a portion of such fee was payable in the form of options to purchase Company Common Stock. Effective as of May 2002, the base fee was made payable entirely in cash. During 2002, in respect of base compensation, Messrs. Cruikshank, Hackett and Levin each received $43,334; Mr. Roach, who was elected to the Board of Directors in April 2002, received $33,334; and Mr. Hurwitz, who began receiving compensation as a director as of October 1, 2002, received $12,500. Mr. Haymaker's compensation for 2002 was covered by a separate agreement with the Company and KACC, which is discussed below. For the year 2002, non-employee directors of the Company and KACC who were directors of MAXXAM, also received director or committee fees from MAXXAM. In addition, the non-employee Chairman of each of the Company's and KACC's committees was paid a fee of $3,000 per year for services as Chairman. Effective as of February 2003, such fee was increased to $10,000 per year for the Chairman of the Audit Committees. All non-employee directors also generally received a fee of $1,500 per day per Board meeting attended in person, $1,500 per day per committee meeting held in person on a date other than a Board meeting, and $500 (increased to $1,500 effective as of May 2002) per formal telephonic meeting of the Board or a committee. In respect of 2002, Messrs. Cruikshank, Hackett, Hurwitz, Levin and Roach received an aggregate of $32,000, $30,000, $4,500, $35,500, and $20,500, respectively, in such fees from the Company and KACC in the form of cash payments. Each of Messrs. Cruikshank, Hackett and Levin also have a pre-petition claim against the Company and KACC for $500 with respect to 2002 meeting attendance fees. Non-employee directors are eligible to participate in the Kaiser 1997 Omnibus Stock Incentive Plan (the "1997 Omnibus Plan"). During 2002, no awards were made to non-employee directors under such plan. Directors are reimbursed for travel and other disbursements relating to Board and committee meetings, and non-employee directors are provided accident insurance in respect of Company-related business travel. Subject to the approval of the Chairman of the Board, directors also generally may be paid ad hoc fees in the amount of $750 per one-half day or $1,500 per day for services other than attending Board and committee meetings that require travel in excess of 100 miles. During 2002, Mr. Roach received $9,750 in such fees with respect to his services as Chairman of the Audit Committees and attendance at strategic planning meetings. Effective January 2002, the Boards of Directors of the Company and KACC approved a supplemental compensation arrangement with Mr. Levin for certain advisory services to be provided to the President and the Boards of the Company and KACC. Any such supplemental compensation is payable at Mr. Levin's usual hourly rate as a member of Kramer Levin Naftalis & Frankel LLP, and would be in addition to amounts otherwise payable to Mr. Levin as a member of the Executive Committees of the Boards. No amounts were paid to Mr. Levin under this arrangement during 2002. The Company and KACC have a deferred compensation program in which all non-employee directors are eligible to participate. By executing a deferred fee agreement, a non-employee director may defer all or part of the fees from the Company and KACC for services in such capacity for any calendar year. The deferred fees are credited to a book account and are deemed "invested," in 25% increments, in two investment choices: in phantom shares of Company Common Stock and/or in an account bearing interest calculated using one-twelfth of the sum of the prime rate plus 2% on the first day of each month. If deferred, fees, including all earnings credited to the book account, are paid in cash to the director or beneficiary as soon as practicable following the date the director ceases for any reason to be a member of the Board, either in a lump sum or in a specified number of annual installments not to exceed ten, at the director's election. With the exception of Mr. Haymaker, who deferred his fees in 2000 and 2001, no deferral elections have been made under this program. Mr. Haymaker revoked his deferral election effective January 1, 2002, for services rendered on or after that date. Fees to directors who also are employees of KACC are deemed to be included in their salary. Directors of the Company were also directors of KACC and received the foregoing compensation for acting in both capacities. On October 11, 2001, Mr. Haymaker, the Company and KACC entered into an agreement concerning the terms upon which he would serves as a director and non-executive Chairman of the Boards of the Company and KACC through December 31, 2002. Under the agreement, Mr. Haymaker provided consulting services to the Company and KACC, in addition to acting as a director. For the year 2002, Mr. Haymaker received base compensation under the agreement in the amount of $27,115 for services as a director, and $365,000 for services as non-executive Chairman of the Boards of the Company and KACC, inclusive of any Board and committee fees otherwise payable. Mr. Haymaker also has a pre-petition claim against the Company and KACC for an additional $2,885 with respect to 2002 base director compensation. No options to purchase shares of Company Common Stock were granted to Mr. Haymaker during 2002. Under the agreement, Mr. Haymaker would have been entitled to an incentive bonus of $105,000 upon the achievement of certain goals. Because of the chapter 11 filings by the Company and KACC, such goals were not attained and the incentive bonus was not paid. On November 4, 2002, Mr. Haymaker, the Company and KACC entered into a new agreement concerning the terms upon which Mr. Haymaker would continue to serve as a director and non-executive Chairman of the Boards of the Company and KACC through December 31, 2003. For the year 2003, Mr. Haymaker's base compensation under the agreement will be $50,000 for services as a director and $73,000 for services as non-executive Chairman of the Boards of the Company and KACC, inclusive of any Board and committee fees otherwise payable. All compensation under the agreement is payable in cash. Mr. Haymaker may elect to defer receipt of the Director fee portion of the compensation in accordance with the deferred compensation program discussed above. EMPLOYMENT CONTRACTS, RETENTION PLAN AND AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Jack A. Hockema. Effective January 24, 2000, in connection with Mr. Hockema's election as Executive Vice President, and President of Kaiser Fabricated Products, the Section 162(m) Compensation Committee of the Board approved compensation arrangements for Mr. Hockema for 2000 and 2001 comprised of three components: base pay, short-term incentive and long-term incentive. The long-term incentive covered the period 2000-2002 and had two components. The first component had a target amount of $200,000, with any award under such component to be made based on that target amount and on the performance of the Engineered Products business unit for the period 2000-2002. The second component, which was valued at the time of grant at $135,000, was made during 2000 in the form of a grant of a stock option to purchase 28,184 shares of the Company's Common Stock at $6.0938 per share. The options generally were scheduled to vest at the rate of 33 1/3% per year, beginning on February 3, 2001, with an additional 33 1/3% vesting each February 3 thereafter until fully vested, provided that as of any such vesting date the Company's Common Stock had traded at $10.00 or more per share for at least 20 consecutive trading days during the option period. Such condition not having occurred, the options are scheduled to vest on the date such condition has been met or February 3, 2009, whichever is earlier. Vesting may be accelerated in certain circumstances. Mr. Hockema also would have qualified for a cash bonus of $500,000 in the event of the sale of a specified portion of the business units under his management on or before July 1, 2002. Such transaction did not occur and such bonus was not paid. Effective October 9, 2001, in connection with Mr. Hockema's election as President and Chief Executive Officer, Mr. Hockema and KACC entered into an employment agreement for the period October 9, 2001 through December 31, 2002. Under the terms of the agreement, Mr. Hockema's compensation continued to be comprised of base pay, short-term incentive and long-term incentive. His base pay for 2002 was $730,000. His short-term incentive target for 2002 was $500,000, with payment to be from 50% to 300% of target based upon attainment of objectives established by the Board of Directors. Mr. Hockema did not receive any short-term incentive payment for 2002. Mr. Hockema's long-term incentive bonus for the term of the agreement was valued at the time of grant at $1,500,000 and was composed one-half in the form of 241,936 restricted shares of Company Common Stock and one-half in the form of options to purchase 306,122 shares of Company Common Stock at $3.10 per share. The options were granted as of October 11, 2001 and generally vest at the rate of 33 1/3% per year, beginning on October 11, 2002, with an additional 33 1/3% vesting on each October 11 thereafter until fully vested. Vesting of the options may be accelerated under certain circumstances. The restricted stock was granted in two awards, one for 146,448 shares issued effective October 31, 2001, and the second for 95,488 shares issued effective January 25, 2002. See Note 3 to the Summary Compensation Table above for additional information with respect to Mr. Hockema's restricted shares. John T. La Duc. Effective January 1, 1998, Mr. La Duc and KACC entered into a five-year employment agreement, which expired December 31, 2002. Pursuant to the terms of the agreement, Mr. La Duc's base salary for 2002 was $400,592. During the term of the agreement, the amount was reviewed annually to evaluate Mr. La Duc's performance and to reflect adjustments for inflation consistent with the general program of increases for other executives and management employees. Mr. La Duc's agreement established an annual target bonus of $200,000 (subject to adjustment for inflation) payable upon KACC's achieving short-term objectives under its executive bonus plan, which were to be agreed upon annually and otherwise be consistent with KACC's business plan. Mr. La Duc did not receive any short-term incentive payment for 2002. Pursuant to the terms of the agreement, in 1998 Mr. La Duc received a grant under the 1997 Omnibus Plan of options to purchase 468,750 shares of the Company's Common Stock at an exercise price of $9.3125 per share. This grant was intended to have a value at the date of grant equivalent to a value of five times Mr. La Duc's annual long-term incentive target of $465,000 and to be in lieu of any payment of long-term incentive compensation under KACC's executive bonus plan for the five-year period beginning January 1, 1998, although Mr. La Duc remained eligible for additional option grants. One-half of the options granted to Mr. La Duc under this agreement were among those exchanged by him for restricted shares of Company Common Stock in connection with the Exchange Offer. See Note 10 to the Summary Compensation Table above for additional information with respect to the Exchange Offer and Mr. La Duc's restricted shares. Mr. La Duc's agreement provided that if his employment were to be terminated for any reason other than termination for cause, his acceptance of any offer of employment with an affiliate of KACC, or a voluntary termination by Mr. La Duc for other than good reason, or if Mr. La Duc's employment terminated by the expiration of the employment period under the agreement without an offer for continued employment by KACC for a position of responsibility comparable to that held by Mr. La Duc at the beginning of the employment period and on substantially the same or improved terms and conditions, then Mr. La Duc would be entitled to receive the following benefits: (A) an early retirement lump sum payment equal to the excess, if any, of the sum of (i) the lump sum benefit from the Kaiser Retirement Plan that Mr. La Duc would have been entitled to as of the date of his actual termination based upon the terms of the Kaiser Retirement Plan as in effect on January 1, 1998, and as if he qualified for a full early retirement pension, and (ii) the lump sum benefit from the Kaiser Supplemental Benefits Plan based upon the terms of that Plan as in effect on January 1, 1998, and as if he qualified for a Kaiser Retirement Plan full early retirement pension, over (iii) an amount equal to the lump sum actuarial equivalent of Mr. La Duc's actual benefit payable from the Kaiser Retirement Plan on account of his actual termination, plus the actual benefit payable from the Kaiser Supplemental Benefits Plan on account of his actual termination; (B) full health benefits as if Mr. La Duc had qualified for an early retirement pension; (C) a lump sum equal to Mr. La Duc's base salary as of the date of his termination for a period equal to the greater of (x) the number of months remaining in the employment period, or (y) two years, plus an amount equal to Mr. La Duc's target annual bonus for the year of termination (but no less than $200,000); and (D) all unvested stock options held by Mr. La Duc on the date of such termination that would have vested during his employment period would immediately vest and become exercisable in full for the remaining portion of the period of five years from the date of grant. The agreement also provided that in the event of a change in control, the terms and conditions of Mr. La Duc's agreement would continue in full force and effect during the period that he would continue to provide services; provided, in the event of a termination of his employment by KACC other than for cause, or in the event Mr. La Duc would terminate his employment for any reason within twelve (12) months following a change in control, the foregoing benefits would become due and payable. Edward F. Houff. Effective October 1, 2001, Mr. Houff and KACC entered into an employment agreement for the period October 1, 2001 through September 30, 2004. Under the terms of the agreement,. Mr. Houff's annual salary is $400,000. The agreement also provides for a guaranteed cash bonus of $125,000, plus an annual incentive bonus of up to $125,000. Pursuant to the agreement, in 2001 Mr. Houff received a grant under the 1997 Omnibus Plan of options, valued at the time of grant at $450,000, to purchase 222,772 shares of Company Common Stock at an exercise price of $2.625 per share, plus 171,429 restricted shares of Company Common Stock, also valued at $450,000 at the time of grant. The options generally vest at the rate of 33 1/3% per year, beginning October 1, 2002, with an additional 33 1/3% vesting on each of October 2, 2003 and September 30, 2004. Vesting of the options may be accelerated under certain circumstances. See Note 9 to the Summary Compensation Table above for additional information with respect to Mr. Houff's restricted shares. Mr. Houff's agreement provides that if his employment is terminated by KACC for any reason other than cause, death or disability, he shall be entitled to receive all of the remaining base salary and guaranteed bonus to the end of the term of the agreement, but in no event less than six month's base salary. The agreement also provides that if Mr. Houff's employment is not retained beyond the term of the agreement, he shall be entitled to six months' base salary as severance and up to $25,000 in relocation expenses. If Mr. Houff terminates his employment as a result of a breach by KACC of its contractual duties or KACC's material and unilateral alteration of his duties, the agreement provides that he shall be paid his base salary and guaranteed bonus for the balance of the agreement. If Mr. Houff's employment terminates as a result of death or disability, the agreement also provides that he or his estate, as applicable, shall receive any base salary, guaranteed bonus and unpaid vacation accrued through the date of death or disability and any other benefits payable under KACC's then existing benefit plans and policies. The foregoing severance arrangements are superseded by the terms of Mr. Houff's severance agreements discussed below. Pursuant to the Code, as debtor-in-possession, KACC may have the right, subject to Court approval, to assume or reject Mr. Houff's employment agreement. See "Business--Reorganization Proceedings" for a discussion of assumption or rejection of executory contracts. Kaiser Key Employee Retention Program. On September 3, 2002, the Court approved a Key Employee Retention Program, consisting of the long-term incentive program discussed above and the Kaiser Retention Plan, the Kaiser Severance Plan, and the Kaiser Change in Control Severance Program discussed below. Kaiser Retention Plan and Agreements. Effective September 3, 2002, KACC adopted the Kaiser Aluminum & Chemical Corporation Key Employee Retention Plan (the "Retention Plan") and in connection therewith entered into retention agreements with certain key employees, including each of the Named Executive Officers. The Retention Plan replaced the Kaiser Aluminum & Chemical Corporation Retention Plan adopted on January 15, 2002 (the "Prior Plan"). As described below, each of Messrs. Hockema, Houff, La Duc, Bonn and Perry received a basic award under the Retention Plan and Messrs. La Duc and Bonn also received a special award under the Retention Plan. Basic awards under the Retention Plan generally vest on September 30, 2002, March 31, 2003, September 30, 2003 and March 31, 2004, provided that if a participant's employment is terminated within 90 days following the payment of any award for any reason other than death, disability, retirement on or after age 62, or termination without cause (as defined in the Retention Plan), the participant must return such payment to KACC. For each of Messrs. Hockema, Houff, La Duc and Bonn (and prior to his resignation, Mr. Perry), the amount earned on each vesting date is equal to 62.5% of his base salary at the time of grant. If the Named Executive Officer is employed by KACC on a vesting date, 40% of the amount earned on such date is paid to him in a lump sum on such date. The remaining 60% of such amount (the "Withheld Amount") is paid to the Named Executive Officer as follows: (i) 33 1/3% of each Withheld Amount is paid to the Named Executive Officer in a lump sum on the date of KACC's emergence from bankruptcy if the Named Executive Officer is employed by KACC on that date, (ii) 33 1/3% of each Withheld Amount is paid to the Named Executive Officer in a lump sum on the first anniversary of the date of KACC's emergence from bankruptcy if the Named Executive Officer is employed by KACC on that date, and (iii) 33 1/3% of the remaining portion of each Withheld Amount (the "Emergence Amount") is only payable as follows: (A) 100% of the Emergence Amount is paid on the date of KACC's emergence from bankruptcy if the emergence occurs on or prior to August 12, 2004 and the Named Executive Officer is employed by KACC on that date, (B) 50% of the Emergence Amount is paid on the date of KACC's emergence from bankruptcy if the emergence occurs on or prior to August 12, 2005 but after August 12, 2004, and the Named Executive Officer is employed by KACC on that date (the remaining 50% of the Emergence Amount is forfeited by the Named Executive Officer to KACC), and (C) 100% of the Emergence Amount is forfeited by the Named Executive Officer to KACC if the date of KACC's emergence from bankruptcy occurs after August 12, 2005. In general, if a Named Executive Officer's employment with KACC is terminated prior to any vesting date for any reason, the portion of the basic award that would have become vested and payable on such vesting date, all subsequent portions of the award, if any, that would have become payable following such vesting date and any Withheld Amounts are forfeited by the Named Executive Officer. However, if the Named Executive Officer's employment with KACC is terminated as a result of the Named Executive Officer's death, disability, retirement from KACC on or after age 62 or KACC's termination of the Named Executive Officer's employment without cause, the Named Executive Officer is entitled to receive (a) a prorated portion of the amount due on the vesting date immediately following the termination of employment, (b) all Withheld Amounts, and (c) the Emergence Amount, if such amount is earned based on the date of KACC's emergence from bankruptcy, as described above. A portion of the basic awards under the Retention Plan vested and was paid on September 30, 2002. The amount paid pursuant to awards under the Retention Plan on September 30, 2002 to Messrs. Hockema, Houff, La Duc, Bonn and Perry was $182,500, $100,000, $101,375, $84,350, and $93,750, respectively. Mr. Perry resigned on January 31, 2003 and therefore will not be eligible for further payments under the Retention Plan. Assuming KACC's emergence from bankruptcy prior to August 12, 2004, the maximum amount that may be received in the future pursuant to the Retention Plan by Messrs. Hockema, Houff, La Duc and Bonn would be $1,642,500, $900,000, $912,375, and $759,150, respectively. In addition, awards under the Prior Plan were paid on January 15, 2002. The total amount paid to Messrs. Hockema, Houff, La Duc, Bonn and Perry under the Prior Plan was $164,250, $60,000, $88,583, $73,710, and $84,375, respectively. In addition to the basic awards described above, Messrs. La Duc and Bonn received a special award under the Retention Plan. Because Messrs. La Duc and Bonn received this special award, neither is eligible to participate in the Kaiser Aluminum & Chemical Corporation Severance Plan and neither was eligible to enter into a Kaiser Aluminum & Chemical Corporation Change in Control Severance Agreement, as discussed below. Messrs. La Duc and Bonn also agreed to forego any claims under the Enhanced Severance Protection and Change in Control Benefits Program adopted in 2000, as discussed below. The special award entitles each of Messrs. La Duc and Bonn to a lump sum payment upon his termination of employment with KACC if his employment is terminated as a result of death, disability, retirement on or after February 12, 2004, or is terminated without cause. For each of Messrs. La Duc and Bonn, the amount of the special award is equal to his benefit under the Kaiser Supplemental Benefits Plan, discussed above. If Messr. La Duc's or Bonn's employment is terminated by KACC prior to February 14, 2004 for any reason other than death, disability, retirement or termination without cause, he will forfeit any benefit available under the Kaiser Supplemental Benefits Plan. In connection with the establishment of the Prior Plan, the Company and KACC created and funded an irrevocable grantor trust for the purpose of paying the special awards to Messrs. La Duc and Bonn when due. Kaiser Severance Plan and Agreements. Effective September 3, 2002, KACC adopted the Kaiser Aluminum & Chemical Corporation Severance Plan (the "Severance Plan") in order to provide selected executive officers, including Messrs. Hockema and Houff (and prior to his resignation, Mr. Perry), and other key employees of KACC with appropriate protection in the event of certain terminations of employment. The Severance Plan, along with the Kaiser Aluminum & Chemical Corporation Change in Control Severance Agreements described below, replaced for participants in such plans, the Enhanced Severance Protection and Change in Control Benefits Program implemented in 2000. The Severance Plan terminates on the first anniversary of the date KACC emerges from bankruptcy. The Severance Plan provides for payment of a severance benefit and continuation of welfare benefits in the event of certain terminations of employment. Participants are eligible for the severance payment and continuation of benefits in the event the participant's employment is terminated without cause (as defined in the Severance Plan) or the participant terminates employment with good reason (as defined in the Severance Plan). The severance payment and continuation of benefits are not available if (i) the participant receives severance compensation or benefit continuation pursuant to a Kaiser Aluminum & Chemical Corporation Change in Control Severance Agreement (as described below), (ii) the participant's employment is terminated other than without cause or by the participant for good reason, or (iii) the participant declines to sign, or subsequently revokes, a designated form of release. In addition, in consideration for the severance payment and continuation of benefits, a participant will be subject to noncompetition, nonsolicitation and confidentiality restrictions following the participant's termination of employment with KACC. The severance payment payable under the Severance Plan to each of Messrs. Hockema and Houff consists of a lump sum cash payment equal to two times his base salary. Each of Messrs. Hockema and Houff also will be entitled to continued medical, dental, vision, life insurance and disability benefits for a period of two years following termination of employment. Due to his resignation, Mr. Perry no longer participates in the Severance Plan and did not receive any benefits under it upon his resignation. Severance payments payable under the Severance Plan are in lieu of any severance or other termination payments provided for under any plan of KACC or any other agreement between the participant and KACC. Kaiser Change in Control Severance Program. In 2002, KACC entered into Kaiser Aluminum & Chemical Corporation Change in Control Severance Agreements (the "Change in Control Agreements") with certain key executives, including Messrs. Hockema and Houff (and prior to his resignation, Mr. Perry), in order to provide them with appropriate protection in the event of a termination of employment in connection with a change in control (as defined in the Change in Control Agreements) of KACC. In connection with the Severance Plan, these Change in Control Agreements replaced the Enhanced Severance Protection and Change in Control Benefits Program implemented in 2000. The Change in Control Agreements terminate on the second anniversary of a change in control of KACC. The Change in Control Agreements provide for severance payments and continuation of benefits in the event of certain terminations of employment. The participants are eligible for severance benefits if their employment terminates or constructively terminates due to a change in control during a period that commences ninety (90) days prior to the change in control and ends on the second anniversary of the change in control. These benefits are not available if (i) the participant voluntarily resigns or retires, other than for good reason (as defined in the Change in Control Agreements), (ii) the participant is discharged for cause (as defined in the Change in Control Agreements), (iii) the participant's employment terminates as the result of death or disability, (iv) the participant declines to sign, or subsequently revokes, a designated form of release, or (v) the participant receives severance compensation or benefit continuation pursuant to the Kaiser Aluminum & Chemical Corporation Severance Plan or any other prior agreement. In addition, in consideration for the severance payment and continuation of benefits, a participant will be subject to noncompetition, nonsolicitation and confidentiality restrictions following his or her termination of employment with KACC. Upon a qualifying termination of employment, each of Messrs. Hockema and Houff are entitled to receive the following: (i) three times the sum of his base pay and most recent short-term incentive target, (ii) a pro-rated portion of his short-term incentive target for the year of termination, and (iii) a pro-rated portion of his long-term incentive target in effect for the year of his termination, provided that such target was achieved. Each of Messrs. Hockema and Houff also are entitled to continued medical, dental, life insurance, disability benefits and perquisites for a period of three years after termination of employment with KACC. Each of Messrs. Hockema and Houff are also entitled to a payment in an amount sufficient, after the payment of taxes, to pay any excise tax due by him under Section 4999 of the Tax Code or any similar state or local tax. Mr. Perry's Change in Control Agreement terminated immediately upon his resignation and no payments were made thereunder. Severance payments payable under the Change in Control Agreements are in lieu of any severance or other termination payments provided for under any plan of KACC or any other agreement between the Named Executive Officer and KACC. Except as otherwise noted, there are no employment contracts between the Company or any of its subsidiaries and any of the Company's Named Executive Officers. Similarly, except as otherwise noted, there are not any compensatory plans or arrangements that include payments from the Company or any of its subsidiaries to any of the Company's Named Executive Officers in the event of any such officer's resignation, retirement or any other termination of employment with the Company and its subsidiaries or from a change in control of the Company or a change in the Named Executive Officer's responsibilities following a change in control. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of the Compensation Policy Committee or the Section 162(m) Compensation Committee of the Board was, during the 2002 fiscal year, an officer or employee of the Company or any of its subsidiaries, or was formerly an officer of the Company or any of its subsidiaries or, other than Mr. Levin, had any relationships requiring disclosure by the Company under Item 404 of Regulation S-K. Mr. Levin served on the Company's Compensation Policy Committee and Board of Directors during 2002 and is also a member of the law firm of Kramer Levin Naftalis & Frankel LLP, which provided legal services to the Company and its subsidiaries during 2002. During the Company's 2002 fiscal year, no executive officer of the Company served as (i) a member of the compensation committee (or other board committee performing equivalent functions) of another entity, one of whose executive officers served on the Compensation Policy Committee or Section 162(m) Compensation Committee of the Company, (ii) a director of another entity, one of whose executive officers served on any of such committees, or (iii) a member of the compensation committee (or other board committee performing equivalent functions) of another entity, one of whose executive officers served as a director of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OWNERSHIP OF THE COMPANY The following table sets forth, as of March 28, 2003, unless otherwise indicated, the beneficial ownership of the Company's Common Stock by (i) those persons known by the Company to own beneficially more than 5% of the shares of the Company's Common Stock then outstanding, (ii) each of the directors of the Company, (iii) each of the Named Executive Officers, and (iv) all directors and executive officers of the Company and KACC as a group. NAME OF BENEFICIAL OWNER TITLE OF CLASS # OF SHARES(1) % OF CLASS - ------------------------------------------------------ ----------------------- ----------------------- ------------- MAXXAM Inc. Common Stock 50,000,000(2) 62.4 Dimensional Fund Advisors Inc. Common Stock 4,069,015(3) 5.1 Joseph A. Bonn Common Stock 54,325(4)(5) * Robert J. Cruikshank Common Stock 16,808(5)(6) * James T. Hackett Common Stock 13,676(5)(6) * George T. Haymaker, Jr. Common Stock 57,059(5)(6) * Jack A. Hockema Common Stock 345,464(5)(6) * Edward F. Houff Common Stock 188,544(5)(6) * Charles E. Hurwitz Common Stock 17,490(5)(7) * John T. La Duc Common Stock 381,693(5)(6) * Ezra G. Levin Common Stock 14,808(5)(6) * Harvey L. Perry Common Stock 10,603(6) * John D. Roach Common Stock -0- * All directors and executive officers of the Company Common Stock 1,259,587(4)(8) 1.6 as a group (17 persons) - ------------------------------------ * Less than 1%. (1) Unless otherwise indicated, the beneficial owners have sole voting and investment power with respect to the shares listed in the table. Also includes options exercisable within 60 days of March 28, 2003, to acquire such shares. (2) Includes 27,938,250 shares beneficially owned by MGHI. The address of MAXXAM is 5847 San Felipe, Suite 2600, Houston, Texas 77057. (3) Information is based solely on a Schedule 13G filed with the SEC dated February 3, 2003, by Dimensional Fund Advisors Inc. ("DFA"), a registered investment advisor, reporting its ownership interest in the Company's shares at December 31, 2002. The Schedule 13G indicates that DFA has sole voting and sole dispositive value as to all of such shares, that all such shares are owned by advisory clients and that DFA disclaims beneficial ownership to all such shares. DFA's address is 1299 Ocean Avenue, 11th Floor, Santa Monica, California 90401. (4) Includes 23,948 shares of Company Common Stock held in trust with respect to which Mr. Bonn possesses shared voting and investment power with his spouse. (5) Includes restricted shares of Company Common Stock owned as follows: Mr. Bonn - 30,377; Mr. Cruikshank - 1,799; Mr. Hackett - 667; Mr. Haymaker - 47,374; Mr. Hockema - 179,140; Mr. Houff - 114,286; Mr. Hurwitz - 17,490; Mr. La Duc - 11,504, and Mr. Levin - 1,799. (6) Includes options exercisable within 60 days of March 28, 2003 to acquire shares of Company Common Stock as follows: Mr. Cruikshank - 13,009; Mr. Hackett - 13,009; Mr. Haymaker - 7,143; Mr. Hockema - 148,473; Mr. Houff - 74,258; Mr. La Duc - 234,375; Mr. Levin - 13,009; and Mr. Perry - 10,603. (7) Excludes shares owned by MAXXAM. Mr. Hurwitz may be deemed to hold beneficial ownership in the Company as a result of his beneficial ownership in MAXXAM. (8) Excludes shares beneficially owned by Mr. Perry, who was not an executive officer of the Company or KACC as of March 28, 2003. Includes 450,155 restricted shares of Company Common Stock. Also includes options exercisable within 60 days of March 28, 2003, to acquire 584,469 shares of Company Common Stock. OWNERSHIP OF MAXXAM As of March 28, 2003, MAXXAM owned, directly and indirectly, approximately 62.4% of the issued and outstanding Common Stock of the Company. The following table sets forth, as of March 28, 2003, unless otherwise indicated, the beneficial ownership of the common stock and Class A $.05 Non-Cumulative Participating Convertible Preferred Stock ("MAXXAM Preferred Stock") of MAXXAM by the directors of the Company, each of the Named Executive Officers, and by the directors and the executive officers of the Company and KACC as a group: NAME OF % % OF COMBINED BENEFICIAL OWNER TITLE OF CLASS # OF SHARES(1) OF CLASS VOTING POWER (2) - ------------------------------------- -------------------- --------------------- ---------- ----------------- Charles E. Hurwitz Common Stock 3,061,104(3)(4) 45.6 74.0 Preferred Stock 752,441(4)(5)(6) (99.2) Robert J. Cruikshank Common Stock 4,800(7) * * Ezra G. Levin Common Stock 4,800(7) * * All directors and executive officers Common Stock 3,074,144(3)(4)(8) 45.6 74.0 as a group (17 persons) Preferred Stock 752,441(4)(5)(6) 99.2 - ------------------------------------ * Less than 1%. (1) Unless otherwise indicated, beneficial owners have sole voting and investment power with respect to the shares listed in the table. Includes the number of shares such persons would have received on March 28, 2003, if any, for their exercisable SARs (excluding SARs payable in cash only) exercisable within 60 days of such date if such rights had been paid solely in shares of MAXXAM common stock. (2) MAXXAM Preferred Stock is generally entitled to ten votes per share on matters presented to a vote of MAXXAM's stockholders. (3) Includes 1,669,451 shares of MAXXAM common stock owned by Gilda Investments, LLC ("Gilda"), a wholly owned subsidiary of Giddeon Holdings, as to which Mr. Hurwitz indirectly possesses voting and investment power. Mr. Hurwitz serves as the sole director of Giddeon Holdings, and together with members of his immediate family and trusts for the benefit thereof, owns all of the voting shares of Giddeon Holdings. Also includes (a) 78,784 shares of MAXXAM common stock separately owned by Mr. Hurwitz's spouse and as to which Mr. Hurwitz disclaims beneficial ownership, (b) 46,500 shares of MAXXAM common stock owned by the Hurwitz Investment Partnership L.P., a limited partnership controlled by Mr. Hurwitz and his spouse, 23,250 of which shares were separately owned by Mr. Hurwitz's spouse prior to their transfer to such limited partnership and as to which Mr. Hurwitz disclaims beneficial ownership, (c) 4,049 shares of MAXXAM common stock owned by the 1992 Hurwitz Investment Partnership L.P., of which 2,025 shares are owned by Mr. Hurwitz's spouse as separate property and as to which Mr. Hurwitz disclaims beneficial ownership, (d) 1,001,391 shares of MAXXAM common stock held directly by Mr. Hurwitz, including 256,808 shares of MAXXAM common stock with respect to which Mr. Hurwitz possesses sole voting power and which have certain transfer and other restrictions that generally lapse in December 2014, (e) 60,000 shares of MAXXAM common stock owned by Giddeon Portfolio, LLC, which is owned 79% by Gilda and 21% by Mr. Hurwitz, and of which Gilda is the managing member ("Giddeon Portfolio"), (f) options to purchase 21,029 shares of MAXXAM common stock held by Gilda, and (g) options held by Mr. Hurwitz to purchase 179,900 shares of MAXXAM common stock exercisable within 60 days of March 28, 2003. (4) Gilda, Giddeon Holdings, Giddeon Portfolio, the Hurwitz Investment Partnership L.P., the 1992 Hurwitz Investment Partnership L.P. and Mr. Hurwitz may be deemed a "group" (the "Stockholder Group") within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended. As of March 28, 2003, in the aggregate, the members of the Stockholder Group owned 3,061,104 shares of MAXXAM common stock and 752,441 shares of MAXXAM Preferred Stock, aggregating approximately 74.0% of the total voting power of MAXXAM. By reason of his relationship with the members of the Stockholder Group, Mr. Hurwitz may be deemed to possess shared voting and investment power with respect to the shares held by the Stockholder Group. The address of Gilda is 5847 San Felipe, Suite 2600, Houston, Texas 77057. The address of the Stockholder Group is c/o Timothy J. Neumann, Esq., Giddeon Holdings, Inc., 5847 San Felipe, Suite 2600, Houston, Texas 77057. (5) Includes 661,377 shares of MAXXAM Preferred Stock owned by Gilda as to which Mr. Hurwitz possesses voting and investment power and 1,064 shares of MAXXAM Preferred Stock held directly. (6) Includes options exercisable by Mr. Hurwitz within 60 days of March 28, 2003, to acquire 90,000 shares of MAXXAM Preferred Stock. (7) Includes options exercisable within 60 days of March 28, 2003, to acquire 3,800 shares of MAXXAM common stock. (8) Includes options exercisable within 60 days of March 28, 2003, to acquire 9,040 shares of MAXXAM common stock, held by directors and executive officers not in the Stockholder Group. EQUITY COMPENSATION PLAN INFORMATION PLAN CATEGORY NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE NUMBER OF SECURITIES ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING OPTION REMAINING AVAILABLE FOR FUTURE OUTSTANDING OPTIONS, WARRANTS AND RIGHTS ISSUANCE UNDER EQUITY WARRANTS, RIGHTS COMPENSATION PLANS (EXCLUDING SECURITIES REFLECTED IN COLUMN (A)) PLAN CATEGORY (A) (B) (C) - -------------------------------- ----------------------------- --------------------------- -------------------------- EQUITY COMPENSATION PLANS APPROVED BY SECURITY HOLDERS 1,454,861(1) $5.63 3,295,156(2) EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS - - - Total 1,454,861 $5.63 3,295,156 - --------------------------- (1) Represents shares of Company Common Stock underlying outstanding stock options. (2) Shares are issuable under the 1997 Omnibus Plan. Stock-based awards made under the 1997 Omnibus Plan may be in the form of stock options, stock appreciation rights, restricted stock, performance shares or performance units. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the period from October 28, 1988 through June 30, 1993, the Company and its domestic subsidiaries were included in the federal consolidated income tax returns of MAXXAM. The tax allocation agreements of the Company and KACC with MAXXAM terminated pursuant to their terms, effective for taxable periods beginning after June 30, 1993. At December 31, 2001, the Company had a receivable from MAXXAM of $35,000,000 under the tax allocation agreements in respect of various tax contingencies in an equal amount. In March 2002, MAXXAM filed a declaratory action with the Court asking the Court to find that MAXXAM had no further obligations to the Company or the other Debtors under the tax allocation agreements. During the fourth quarter of 2002, the Company and MAXXAM resolved their dispute with respect to the receivable from MAXXAM, with no amounts coming due from MAXXAM, and agreed that no further payments or refunds are required under PART III (Items 10, 11, 12,the tax allocation agreements. The Court approved such resolution in February 2003. KACC and 13) hasMAXXAM have an arrangement pursuant to which they reimburse each other for certain allocable costs associated with the performance of services by their respective employees. KACC paid MAXXAM $153,440 under the shared services arrangement during 2002. Additionally, as of December 31, 2002, KACC owed MAXXAM $376,660, and MAXXAM owed KACC $572,811 under the arrangement. KACC and MAXXAM generally have endeavored to minimize the need for reimbursement by ensuring that employees are employed by the entity to which the majority of their services are rendered. The vast majority of intercompany services between KACC and MAXXAM have now been omitted from this Report sinceterminated and therefore charges for such services in the future should be modest. Mr. Levin, a director of the Company intendsand KACC, is a member of the law firm of Kramer Levin Naftalis & Frankel LLP, which provides legal services to file with the SecuritiesCompany and Exchange Commission, not later than 120 days after the close of its fiscal year, a definitive proxy statement pursuant to Regulation 14A which involves the election of directors, and such information is incorporated by reference from such definitive proxy statement.subsidiaries, including KACC. PART IV ITEM 14. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. An evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures was performed within 90 days of the filing of this Report under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective. Changes in Internal Control. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Index toINDEX TO FINANCIAL STATEMENTS AND SCHEDULES 1. Financial Statements Independent Auditors' Report Copy of Report of Independent Public Accountants Consolidated Balance Sheets Statements of Consolidated Income (Loss) Statements of Consolidated Stockholders' Equity (Deficit) and Comprehensive Income (Loss) Statements of Consolidated Cash Flows Notes to Consolidated Financial Statements Quarterly Financial Data (Unaudited) Five-Year Financial Data 2. Financial Statement Schedules
1. Financial Statements....................................................................Page Report of Independent Public Accountants.......................................................31 Consolidated Balance Sheets....................................................................32 Statements of Consolidated Income (Loss).......................................................33 Statements of Consolidated Cash Flows..........................................................34 Notes to Consolidated Financial Statements.....................................................35 Quarterly Financial Data (Unaudited)...........................................................58 Five-Year Financial Data.......................................................................59 2. Financial Statement Schedules...........................................................Page Report of Independent Public Accountants..................................................63 Schedule I - Condensed Balance Sheets - Parent Company, Condensed Statements of Income - Parent Company, Condensed Statements of Cash Flows - Parent Company, and Notes to Condensed Financial Statements - Parent Company.............64-67 All other schedules are inapplicable or the required information is included in the Consolidated Financial Statements or the Notes thereto. 3. Exhibits Reference is made to the Index of Exhibits immediately preceding the exhibits hereto (beginning on page 69)Independent Auditors' Report Copy of Report of Independent Public Accountants Schedule I - Condensed Balance Sheets - Parent Company, Condensed Statements of Income - Parent Company, Condensed Statements of Cash Flows - Parent Company, and Notes to Condensed Financial Statements - Parent Company All other schedules are inapplicable or the required information is included in the Consolidated Financial Statements or the Notes thereto. 3. Exhibits Reference is made to the Index of Exhibits immediately preceding the exhibits hereto (beginning on page 97), which index is incorporated herein by reference.
(b) REPORTS ON FORM 8-K NoOn October 24, 2002, under Item 5. "Other Events" of Form 8-K, the Company filed a Current Report on Form 8-K wasreporting the Company intended to seek discussions with the Pension Benefit Guaranty Corporation regarding alternatives to minimum pension funding requirements. On December 19, 2002, under Item 5, "Other Events" of Form 8-K, the Company filed a Current Report on Form 8-K reporting that the Company had determined that recent lump-sum distributions from the Kaiser Salaried Employee Retirement Plan had triggered a special provision under ERISA (Employee Retirement Income Security Act) that required the Company to make a pension contribution by January 15, 2003. However, since most of the payment would be classified as a pre-bankruptcy obligation, represented only a small percentage of KACC's legacy liabilities that must be addressed in the Company's reorganization, and since the Bankruptcy Code generally does not permit payment of pre-petition obligations without Court approval, the Company did not plan to seek such approval. No other reports on Form 8-K were filed by the Company during the last quarter of the period covered by this Report. 61 65 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES - -------------------------------------------------------------------------------Report, however, on January 14, 2003, under Item 5, "Other Events" of Form 8-K, the Company filed a Current Report on Form 8-K reporting that its Mead, Washington, aluminum smelter had been indefinitely curtailed. Also, on January 14, 2003, under Item 5, "Other Events" of Form 8-K, the Company filed a Current Report on Form 8-K reporting that nine additional wholly owned subsidiaries of KACC had filed voluntary petitions with the U.S. Bankruptcy Court for the District of Delaware under Chapter 11 of the Federal Bankruptcy Code. (c) EXHIBITS Reference is made to the Index of Exhibits immediately preceding the exhibits hereto (beginning on page 69)97), which index is incorporated herein by reference. 62 66 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES - -------------------------------------------------------------------------------INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Kaiser Aluminum Corporation: We have audited the consolidated financial statements of Kaiser Aluminum Corporation (Debtor-in-Possession) and subsidiaries as of December 31, 2002 and for the year then ended, and have issued our report thereon dated March 28, 2003, which report includes an explanatory paragraph as to the bankruptcy proceedings and an explanatory paragraph as to the uncertainty about the Company's ability to continue as a going concern; such financial statements and report are included elsewhere in this 10-K. Our audit also included the 2002 financial statement schedule of Kaiser Aluminum Corporation. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, the 2002 financial statement schedule, when considered in relation to the 2002 basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The financial statement schedule for the years ended December 31, 2001 and 2000 was audited by other auditors who have ceased operations. In their report, dated April 10, 2002, those auditors expressed an opinion that such 2001 and 2000 financial statement schedule, when considered in relation to the 2001 and 2000 basic consolidated financial statements taken as a whole, presented fairly, in all material respects, the information set forth therein. DELOITTE & TOUCHE LLP Houston, Texas March 28, 2003 COPY OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Kaiser Aluminum Corporation dismissed Arthur Andersen on April 30, 2002 and subsequently engaged Deloitte & Touche LLP as its independent auditors. The predecessor auditors' report appearing below is a copy of Arthur Andersen's previously issued opinion dated April 10, 2002. Since Kaiser Aluminum Corporation is unable to obtain a manually signed audit report, a copy of Arthur Andersen's most recent signed and dated report has been included to satisfy filing requirements, as permitted under Rule 2-02(e) of Regulation S-X. To the Stockholders and Board of Directors of Kaiser Aluminum Corporation: We have audited in accordance with auditing standards generally accepted in the United States, the financial statements included in Kaiser Aluminum Corporation and Subsidiary Companies' annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated March 7, 2000.April 10, 2002. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule I listed in the index at Item 14(a)2. above is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Schedule I has been prepared in accordance with generally accepted accounting principles applicable to a going concern which contemplate among other things, realization of assets and payment of liabilities in the normal course of business. As discussed in Note 1 to Schedule I, on February 12, 2002, the Company, its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC") and certain of KACC's subsidiaries filed for reorganization under Chapter 11 of the United States Bankruptcy Code. This action raises substantial doubt about the Company's ability to continue as a going concern. Schedule I does not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or the effects on existing stockholders' equity that may result from any plans, arrangements or other actions arising from the aforementioned proceedings, or the possible inability of the Company to continue in existence. ARTHUR ANDERSEN LLP Houston, Texas March 7, 2000 63 67 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES - -------------------------------------------------------------------------------April 10, 2002 SCHEDULE I CONDENSED BALANCE SHEETS - PARENT COMPANY (In millions of dollars, except share amounts)
December 31, -------------------------- 1999 1998 ---------- ---------- ASSETS Investment in KACC $ 1,978.2 $ 1,913.3 ---------- ---------- Total $ 1,978.2 $ 1,913.3December 31, ------------------------- 2002 2001 ----------- ---------- ASSETS Investment in KACC $ 1,106.1 $ 1,734.0 ----------- ---------- Total $ 1,106.1 $ 1,734.0 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities $ - $ - Intercompany note payable to KACC, including accrued interest (Note 3) 2,191.7 2,175.1 Stockholders' equity (deficit): Common stock, par value $.01, authorized 125,000,000 shares; issued and outstanding 80,386,563 and 80,698,066 shares .8 .8 Additional capital 539.9 539.1 Accumulated deficit (1,382.4) (913.7) Accumulated other comprehensive income (loss) (243.9) (67.3) ----------- ---------- Total stockholders' equity (1,085.6) (441.1) ----------- ---------- Total $ 1,106.1 $ 1,734.0 =========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $ -- $ -- Intercompany note payable to KACC, including accrued interest 1,912.9 1,794.1 Stockholders' equity: Common stock, par value $.01, authorized 125,000,000 shares; issued and outstanding 79,405,333 and 79,153,543 in 1999 and 1998 .8 .8 Additional capital 536.8 535.4 Accumulated deficit (471.1) (417.0) Accumulated other comprehensive income - additional minimum pension liability (1.2) -- ---------- ---------- Total stockholders' equity 65.3 119.2 ---------- ---------- Total $ 1,978.2 $ 1,913.3 ========== ==========
The accompanying notes to condensed financial statements are an integral part of these statements. 64 68 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES - ------------------------------------------------------------------------------- SCHEDULE I CONDENSED STATEMENTS OF INCOME (LOSS) - PARENT COMPANY (In millions of dollars)
December 31, ------------------------------------------ 1999 1998 1997 ---------- ---------- ---------- Equity in income of KACC $ 65.1 $ 112.5 $ 154.2 Administrative and general expense (.3) (.4) (1.7) Interest expense (118.9) (111.5) (104.5) ---------- ---------- ---------- Net income (loss) $ (54.1) $ .6 $ 48.0 ========== ========== ==========
December 31, ----------------------------------------- 2002 2001 2000 --------- --------- --------- Equity in (loss) income of KACC $ (452.1) $ (324.0) $ 144.3 Administrative and general expense (.1) (.3) (.4) Interest expense on intercompany note (excluding unrecorded contractual interest expense of $127.6 in 2002 - Note 3) (16.5) (135.1) (127.1) --------- --------- --------- Net income (loss) $ (468.7) $ (459.4) $ 16.8 ========= ========= ========= The accompanying notes to condensed financial statements are an integral part of these statements. 65 69 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES - ------------------------------------------------------------------------------- SCHEDULE I CONDENSED STATEMENTS OF CASH FLOWS - PARENT COMPANY (In millions of dollars)
December 31, ------------------------------------------ 1999 1998 1997 ---------- ---------- ---------- Cash flows from operating activities: Net income (loss) $ (54.1) $ .6 $ 48.0 Adjustments to reconcile net income to net cash used for operating activities: Equity in income of KACC (65.1) (112.5) (154.2) Accrued interest on intercompany note payable to KACC 118.9 111.5 104.5 Accrued taxes paid -- (3.3) (1.8) ---------- ---------- ---------- Net cash used by operating activities (.3) (3.7) (3.5) ---------- ---------- ---------- Cash flows from investing activities: Investment in KACC (.1) (.1) (.3) ---------- ---------- ---------- Net cash used by investing activities (.1) (.1) (.3) ---------- ---------- ---------- Cash flows from financing activities: Dividends paid -- -- (4.2) Capital stock issued .1 .1 .4 Payments from KACC on intercompany note receivable -- -- 4.2 Tax allocation payments from KACC -- 3.3 1.8 Operating cost advances from KACC .3 4 1.6 ---------- ---------- ---------- Net cash provided by financing activities .4 3.8 3.8 ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents during the year -- -- -- Cash and cash equivalents at beginning of year -- -- -- ---------- ---------- ---------- Cash and cash equivalents at end of year $ -- $ -- $ -- ========== ========== ========== Supplemental disclosure of non-cash investing activities: Non-cash (decrease) increase in investment in KACC $ (.1) $ (1.7) $ 4.4
December 31, ------------------------------------------ 2002 2001 2000 ----------- ----------- ---------- Cash flows from operating activities: Net income (loss) $ (468.7) $ (459.4) $ 16.8 Adjustments to reconcile net income to net cash used for operating activities: Equity in loss (income) of KACC 452.1 324.0 (144.3) Accrued interest on intercompany note payable to KACC 16.5 135.1 127.1 ----------- ----------- ---------- Net cash used by operating activities (.1) (.3) (.4) ----------- ----------- ---------- Cash flows from investing activities: Investment in KACC - - - ----------- ----------- ---------- Net cash used by investing activities - - - ----------- ----------- ---------- Cash flows from financing activities: Capital stock issued - Operating cost advances from KACC .1 .3 .4 ----------- ----------- ---------- Net cash provided by financing activities .1 .3 .4 ----------- ----------- ---------- Net (decrease) increase in cash and cash equivalents during the year - - - Cash and cash equivalents at beginning of year - - - ----------- ----------- ---------- Cash and cash equivalents at end of year $ - $ - $ - =========== =========== ========== Supplemental disclosure of non-cash investing activities: Non-cash (decrease) increase in investment in KACC $ - $ - $ - The accompanying notes to condensed financial statements are an integral part of these statements. 66 70 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES - ------------------------------------------------------------------------------- SCHEDULE I NOTES TO CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY 1. REORGANIZATION PROCEEDINGS The Company and 25 of its subsidiaries have filed separate voluntary petitions in the United States Bankruptcy Court for the District of Delaware (the "Court") for reorganization under Chapter 11 of the United States Bankruptcy Code (the "Code"); the Company and 16 subsidiaries (the "Original Debtors") filed in the first quarter of 2002 and nine additional subsidiaries (the "Additional Debtors") filed in the first quarter of 2003. The Original Debtors and Additional Debtors are collectively referred to herein as the "Debtors" and the Chapter 11 proceedings of these entities are collectively referred to herein as the "Cases." For purposes of this Report, the term "Filing Date" shall mean, with respect to any particular Debtor, the date on which such Debtor filed its Case. None of KACC's non-U.S. joint ventures are included in the Cases. The Cases are being jointly administered. The Debtors are managing their businesses in the ordinary course as debtors-in-possession subject to the control and administration of the Court. The necessity for filing the Cases by the Original Debtors was attributable to the liquidity and cash flow problems of the Company arising in late 2001 and early 2002. The Company was facing significant near-term debt maturities at a time of unusually weak aluminum industry business conditions, depressed aluminum prices and a broad economic slowdown that was further exacerbated by the events of September 11, 2001. In addition, the Company had become increasingly burdened by the asbestos litigation and growing legacy obligations for retiree medical and pension costs. The confluence of these factors has created the prospect of continuing operating losses and negative cash flow, resulting in lower credit ratings and an inability to access the capital markets. The Cases filed by the Additional Debtors were commenced, among other reasons, to protect the assets held by these Debtors against possible statutory liens that may arise and be enforced by the PBGC as a result of the Company's failure to make an accelerated funding requirement to its salaried employee retirement plan in January 2003. From an operating perspective, the filing of the Cases by the additional Debtors was a non-event and had no impact on the Company's day-to-day operations. The Debtors' objective is to achieve the highest possible recoveries for all creditors and stockholders, consistent with the Debtors' abilities to pay and the continuation of their businesses. However, there can be no assurance that the Debtors will be able to attain these objectives or achieve a successful reorganization. While valuation of the Debtors' assets and pre-Filing Date claims at this stage of the Cases is subject to inherent uncertainties, the Debtors currently believe that it is likely that their liabilities will be found in the Cases to exceed the fair value of their assets. Therefore, the Debtors currently believe that it is likely that pre-Filing Date claims will be paid at less than 100% of their face value and the equity of the Company's stockholders will be diluted or cancelled. Because of such possibility, the value of the Common Stock is speculative and any investment in the Common Stock would pose a high degree of risk. For additional information on the reorganization proceedings, see Note 1 of Kaiser's Consolidated Financial Statements. 2. BASIS OF PRESENTATION Kaiser Aluminum Corporation (the " Company")The Company is a holding company and conducts its operations through its wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"),KACC, which is reported herein using the equity method of accounting. The accompanying parent company condensed financial statements of the Company should be read in conjunction with the 1999 consolidatedKaiser's 2002 Consolidated Financial Statements. The accompanying parent company condensed financial statements have been prepared on a "going concern" basis which contemplates the realization of Kaiser Aluminum Corporationassets and Subsidiary Companies ("Kaiser"). Certain reclassificationsthe liquidation of prior-year information wereliabilities in the ordinary course of business; however, as a result of the commencement of the Cases, such realization of assets and liquidation of liabilities are subject to a significant number of uncertainties. Specifically, the condensed financial statements do not present: (a) the realizable value of assets on a liquidation basis or the availability of such assets to satisfy liability, (b) the amount which will ultimately be paid to settle liabilities and contingencies which may be allowed in the Cases, or (c) the effect of any changes which may be made in connection with the Debtors' capitalizations or operations as a result of a plan of reorganization. Because of the ongoing nature of the Cases, the parent company condensed financial statements are subject to conform to the current presentation. 2.material uncertainties. 3. INTERCOMPANY NOTE PAYABLE The Intercompany Note to KACC, as amended, provides for a fixed interest rate of 65/6 5/8%. Interest and principal payments are payable over a 15-year term pursuant to a predetermined schedule startingmatures on December 31, 2000.21, 2020. However, since the Intercompany Note is unsecured, the accrual of interest was discontinued as of the Company has both the ability and intent to amend theFiling Date. The payment terms so that no amounts come due during 2000, a portion of the Intercompany Note has not been reflected as a current maturity. 3.and accrued interest, which are liabilities subject to compromise, will be resolved in connection with the Cases. 4. RESTRICTED NET ASSETS The investment in KACC is substantially unavailable to the Company pursuant to the terms of certain debt instruments. The obligations of KACC in respect of the credit facilities under the Credit AgreementDIP Facility are guaranteed by the Company and by certain significant subsidiaries of KACC. See Note 57 of Notes to Kaiser's Consolidated Financial Statements. 67 71 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES - ------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KAISER ALUMINUM CORPORATION Date: March 10, 200028, 2003 By Raymond J. Milchovich ---------------------------------------- Raymond J. Milchovich/s/ Jack A. Hockema Jack A. Hockema President and Chief Executive Officer Chief Operating Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 10, 2000 Raymond J. Milchovich ---------------------------------------- Raymond J. Milchovich.28, 2003 /s/ Jack A. Hockema Jack A. Hockema President, Chief Executive Officer, Chief Operating Officer and Director (Principal Executive Officer) Date: March 10, 200028, 2003 /s/ John T. La Duc ---------------------------------------- John T. La Duc Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: March 10, 200028, 2003 /s/ Daniel D. Maddox ---------------------------------------- Daniel D. Maddox Vice President and Controller (Principal Accounting Officer) Date: March 10, 200028, 2003 /s/ George T. Haymaker, Jr. ---------------------------------------- George T. Haymaker, Jr. Chairman of the Board and Director Date: March 10, 200028, 2003 /s/ Robert J. Cruikshank ---------------------------------------- Robert J. Cruikshank Director Date: March 10, 200028, 2003 /s/ James T. Hackett James T. Hackett Director Date: March 28, 2003 /s/ Charles E. Hurwitz ---------------------------------------- Charles E. Hurwitz Director Date: March 10, 200028, 2003 /s/ Ezra G. Levin ---------------------------------------- Ezra G. Levin Director Date: March 10, 2000 James28, 2003 /s/ John D. Woods ---------------------------------------- JamesRoach John D. WoodsRoach Director 68 72 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES - -------------------------------------------------------------------------------CERTIFICATIONS I, Jack A. Hockema, certify that: 1. I have reviewed this annual report on Form 10-K of Kaiser Aluminum Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Jack A. Hockema Jack A. Hockema Chief Executive Officer I, John T. La Duc, certify that: 1. I have reviewed this annual report on Form 10-K of Kaiser Aluminum Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13 a- 14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ John T. La Duc John T. La Duc Chief Financial Officer INDEX OF EXHIBITS
Exhibit Number Description ------ ----------- *3.1 Restated Certificate of Incorporation of Kaiser Aluminum Corporation (the "Company" or "KAC"), dated February 18, 2000. 3.2 Certificate of Retirement of KAC, dated October 24, 1995 (incorporated by reference to Exhibit 3.2 to the Report on Form 10-K for the period ended December 31, 1995, filed by KAC, File No. 1-9447). 3.3 Certificate of Retirement of Kaiser Aluminum Corporation, dated February 12, 1998 (incorporated by reference to Exhibit 3.3 to the Report on From 10-K for the period ended December 31, 1997, filed by KAC, File No. 1-9447). 3.4 Certificate of Elimination of KAC, dated July 1, 1998 (incorporated by reference to Exhibit 3.4 to the Report on Form 10-Q for the quarterly period ended June 30, 1999, filed by KAC, File No. 1-9447). *3.5 Certificate of Amendment of the Restated Certificate of Incorporation of Kaiser Aluminum Corporation, dated January 10, 2000. 3.6 Amended and Restated By-Laws of Kaiser Aluminum Corporation, dated October 1, 1997 (incorporated by reference to Exhibit 3.3 to the Report on Form 10-Q for the quarterly period ended September 30, 1997, filed by KAC, File No. 1-9447). 4.1 Indenture, dated as of February 1, 1993, among Kaiser Aluminum & Chemical Corporation ("KACC"), as Issuer, Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., and Kaiser Jamaica Corporation, as Subsidiary Guarantors, and The First National Bank of Boston, as Trustee, regarding KACC's 12 3/4% Senior Subordinated Notes Due 2003 (incorporated by reference to Exhibit 4.1 to Form 10-K for the period ended December 31, 1992, filed by KACC, File No. 1-3605). 4.2 First Supplemental Indenture, dated as of May 1, 1993, to the Indenture, dated as of February 1, 1993 (incorporated by reference to Exhibit 4.2 to the Report on Form 10-Q for the quarterly period ended June 30, 1993, filed by KACC, File No. 1-3605). 4.3 Second Supplemental Indenture, dated as of February 1, 1996, to the Indenture, dated as of February 1, 1993 (incorporated by reference to Exhibit 4.3 to the Report on Form 10-K for the period ended December 31, 1995, filed by KAC, File No. 1-9447). 4.4 Third Supplemental Indenture, dated as of July 15, 1997, to the Indenture, dated as of February 1, 1993 (incorporated by reference to Exhibit 4.1 to the Report on Form 10-Q for the quarterly period ended June 30, 1997, filed by KAC, File No. 1-9447). 4.5 Fourth Supplemental Indenture, dated as of March 31, 1999, to the Indenture, dated as of February 1, 1993, (incorporated by reference to Exhibit 4.1 to the Report on Form 10-Q for the quarterly period ended March 31, 1999, filed by KAC, File No. 1-9447). 4.6 Indenture, dated as of February 17, 1994, among KACC, as Issuer, Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser Jamaica Corporation, and Kaiser Finance Corporation, as Subsidiary Guarantors, and First Trust National Association, as Trustee, regarding KACC's 97/Exhibit Number Description 3.1 Restated Certificate of Incorporation of Kaiser Aluminum Corporation ("KAC"), dated February 18, 2000 (incorporated by reference to Exhibit 3.1 to the Report on Form 10-K for the period ended December 31, 1999, filed by KAC, File No. 1-9447). 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). 3.4 Certificate of Elimination of KAC, dated July 1, 1998 (incorporated by reference to Exhibit 3.4 to the Report on Form 10-Q for the quarterly period ended June 30, 1999, filed by KAC, File No. 1-9447). 3.5 Certificate of Amendment of the Restated Certificate of Incorporation of KAC, dated January 10, 2000 (incorporated by reference to Exhibit 3.5 to the Report on Form 10-K for the period ended December 31, 1999, filed by KAC, File No. 1-9447). 3.6 Amended and Restated By-Laws 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). 4.1 Indenture, dated as of February 1, 1993, among Kaiser Aluminum & Chemical Corporation ("KACC"), as Issuer, Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., and Kaiser Jamaica Corporation, as Subsidiary Guarantors, and The First National Bank of Boston, as Trustee, regarding KACC's 12 3/4% Senior Subordinated Notes Due 2003 (incorporated by reference to Exhibit 4.1 to the Report on Form 10-K for the period ended December 31, 1992, filed by KACC, File No. 1-3605). 4.2 First Supplemental Indenture, dated as of May 1, 1993, to the Indenture, dated as of February 1, 1993 (incorporated by reference to Exhibit 4.2 to the Report on Form 10-Q for the quarterly period ended June 30, 1993, filed by KACC, File No. 1-3605). 4.3 Second Supplemental Indenture, dated as of February 1, 1996, to the Indenture, dated as of February 1, 1993 (incorporated by reference to Exhibit 4.3 to the Report on Form 10-K for the period ended December 31, 1995, filed by KAC, File No. 1-9447). 4.4 Third Supplemental Indenture, dated as of July 15, 1997, to the Indenture, dated as of February 1, 1993 (incorporated by reference to Exhibit 4.1 to the Report on Form 10-Q for the quarterly period ended June 30, 1997, filed by KAC, File No. 1-9447). 4.5 Fourth Supplemental Indenture, dated as of March 31, 1999, to the Indenture, dated as of February 1, 1993, (incorporated by reference to Exhibit 4.1 to the Report on Form 10-Q for the quarterly period ended March 31, 1999, filed by KAC, File No. 1-9447). 4.6 Indenture, dated as of February 17, 1994, among KACC, as Issuer, Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser Jamaica Corporation, and Kaiser Finance Corporation, as Subsidiary Guarantors, and First Trust National Association, as Trustee, regarding KACC's 9 7/8% Senior Notes Due 2002 (incorporated by reference to Exhibit 4.3 to the Report on Form 10-K for the period ended December 31, 1993, filed by KAC, File No. 1-9447).
69 73 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES - -------------------------------------------------------------------------------
Exhibit Number Description ------ ----------- 4.7 First Supplemental Indenture, dated as of February 1, 1996, to the Indenture, dated as of February 17, 1994 (incorporated by reference to Exhibit 4.5 to the Report on Form 10-K for the period ended December 31, 1995, filed by KAC, File No. 1-9447). 4.8 Second Supplemental Indenture, dated as of July 15, 1997, to the Indenture, dated as of February 17, 1994 (incorporated by reference to Exhibit 4.2 to the Report on Form 10-Q for the quarterly period ended June 30, 1997, filed by KAC, File No. 1-9447). 4.9 Third Supplemental Indenture, dated as of March 31, 1999, to the Indenture, dated as of February 17, 1994 (incorporated by reference to Exhibit 4.2 to the Report on Form 10-Q for the quarterly period ended March 31, 1999, filed by KAC, File No. 1-9447). 4.10 Indenture, dated as of October 23, 1996, among KACC, as Issuer, Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill Holdings, LLC and Kaiser Texas Sierra Micromills, LLC, as Subsidiary Guarantors, and First Trust National Association, as Trustee, regarding KACC's 107/8% Series B Senior Notes Due 2006 (incorporated by reference to Exhibit 4.2 to the Report on Form 10-Q for the quarterly period ended September 30, 1996, filed by KAC, File No. 1-9447). 4.11 First Supplemental Indenture, dated as of July 15, 1997, to the Indenture, dated as of October 23, 1996 (incorporated by reference to Exhibit 4.3 to the Report on Form 10-Q for the quarterly period ended June 30, 1997, filed by KAC, File No. 1-9447). 4.12 Second Supplemental Indenture, dated as of March 31, 1999, to the Indenture, dated as of October 23, 1996 (incorporated by reference to Exhibit 4.3 to the Report on Form 10-Q for the quarterly period ended March 31, 1999, filed by KAC, File No. 1-9447). 4.13 Indenture, dated as of December 23, 1996, among KACC, as Issuer, Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill Holdings, LLC, and Kaiser Texas Sierra Micromills, LLC, as Subsidiary Guarantors, and First Trust National Association, as Trustee, regarding KACC's 10 7/8% Series D Senior Notes due 2006 (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-4, dated January 2, 1997, filed by KACC, Registration No. 333-19143). 4.14 First Supplemental Indenture, dated as of July 15, 1997, to the Indenture, dated as of December 23, 1996 (incorporated by reference to Exhibit 4.4 to the Report on Form 10-Q for the quarterly period ended June 30, 1997, filed by KAC, File No. 1-9447). 4.15 Second Supplemental Indenture, dated as of March 31, 1999, to the Indenture, dated as of December 23, 1996 (incorporated by reference to Exhibit 4.4 to the Report on Form 10-Q for the quarterly period ended March 31, 1999, filed by KAC, File No. 1-9447). 4.16 Credit Agreement, dated as of February 15, 1994, among KAC, KACC, the financial institutions a party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.4 to the Report on Form 10-K for the period ended December 31, 1993, filed by KAC, File No. 1-9447). 4.17 First Amendment to Credit Agreement, dated as of July 21, 1994, amending the Credit Agreement, dated as of February 15, 1994, among KAC, KACC, the financial institutions party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.1 to the Report on Form 10-Q for the quarterly period ended June 30, 1994, filed by KAC, File No. 1-9447).
70 74 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES - -------------------------------------------------------------------------------
Exhibit Number Description ------ ----------- 4.18 Second Amendment to Credit Agreement, dated as of March 10, 1995, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KAC, KACC, the financial institutions party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.6 to the Report on Form 10-K for the period ended December 31, 1994, filed by KAC, File No. 1-9447). 4.19 Third Amendment to Credit Agreement, dated as of July 20, 1995, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KAC, KACC, the financial institutions a party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.1 to the Report on Form 10-Q for the quarterly period ended June 30, 1995, filed by KAC, File No. 1-9447). 4.20 Fourth Amendment to Credit Agreement, dated as of October 17, 1995, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KAC, KACC, the financial institutions a party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.1 to the Report on Form 10-Q for the quarterly period ended September 30, 1995, filed by KAC, File No. 1-9447). 4.21 Fifth Amendment to Credit Agreement, dated as of December 11, 1995, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KAC, KACC, the financial institutions a party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.11 to the Report on Form 10-K for the period ended December 31, 1995, filed by KAC, File No. 1-9447). 4.22 Sixth Amendment to Credit Agreement, dated as of October 1, 1996, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KAC, KACC, the financial institutions a party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.1 to the Report on Form 10-Q for the quarterly period ended September 30, 1996, filed by KAC, File No. 1-9447). 4.23 Seventh Amendment to Credit Agreement, dated as of December 17, 1996, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KAC, KACC, the financial institutions a party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.18 to the Registration Statement on Form S-4, dated January 2, 1997, filed by KACC, Registration No. 333-19143). 4.24 Eighth Amendment to Credit Agreement, dated as of February 24, 1997, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KACC, Kaiser, the financial institutions a party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.16 to the Report on Form 10-K for the period ended December 31, 1996, filed by KAC, File No. 1-9447). 4.25 Ninth Amendment to Credit Agreement, dated as of April 21, 1997, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KACC, KAC, the financial institutions a party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.5 to the Report on From 10-Q for the quarterly period ended June 30, 1997, filed by KAC, File No. 1-9447). 4.26 Tenth amendment to Credit Agreement, dated as of June 25, 1997, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KACC, KAC, the financial institutions a party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.6 to the Report on Form 10-Q for the quarterly period ended June 30, 1997, filed by KAC, File No. 1-9447). 4.27 Eleventh Amendment to Credit Agreement, dated as of October 20, 1997, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KACC, KAC, the financial institutions a party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.7 to the Report on Form 10-Q for the quarterly period ended September 30, 1997, filed by KAC, File No. 1-9447).
71 75 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES - -------------------------------------------------------------------------------
Exhibit Number Description ------ ----------- 4.28 Twelfth Amendment to Credit Agreement, dated as of January 13, 1998, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KACC, KAC, the financial institutions a party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.24 to the Report on Form 10-K for the period ended December 31, 1997, filed by KAC, File No. 1-9447). 4.29 Thirteenth Amendment to Credit Agreement, dated as of July 20, 1998, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KACC, KAC, the financial institutions party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4 to the Report on Form 10-Q for the quarterly period ended June 30, 1998, filed by KAC, File No. 1-9447). 4.30 Fourteenth Amendment to Credit Agreement, dated as of December 11, 1998, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KACC, KAC, the financial institutions party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.26 to the Report on Form 10-K for the period ended December 31, 1998, filed by KAC, File No. 1-9447). 4.31 Fifteenth Amendment to Credit Agreement, dated as of February 23, 1999, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KACC, KAC, the financial institutions party thereto, and BankAmerica Business Credit,4.9 Third Supplemental Indenture, dated as of March 31, 1999, to the Indenture, dated as of February 17, 1994 (incorporated by reference to Exhibit 4.2 to the Report on Form 10-Q for the quarterly period ended March 31, 1999, filed by KAC, File No. 1-9447). 4.10 Indenture, dated as of October 23, 1996, among KACC, as Issuer, Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill Holdings, LLC and Kaiser Texas Sierra Micromills, LLC, as Subsidiary Guarantors, and First Trust National Association, as Trustee, regarding KACC's 10 7/8% Series B Senior Notes Due 2006 (incorporated by reference to Exhibit 4.2 to the Report on Form 10-Q for the quarterly period ended September 30, 1996, filed by KAC, File No. 1-9447). 4.11 First Supplemental Indenture, dated as of July 15, 1997, to the Indenture, dated as of October 23, 1996 (incorporated by reference to Exhibit 4.3 to the Report on Form 10-Q for the quarterly period ended June 30, 1997, filed by KAC, File No. 1-9447). 4.12 Second Supplemental Indenture, dated as of March 31, 1999, to the Indenture, dated as of October 23, 1996 (incorporated by reference to Exhibit 4.3 to the Report on Form 10-Q for the quarterly period ended March 31, 1999, filed by KAC, File No. 1-9447). 4.13 Indenture, dated as of December 23, 1996, among KACC, as Issuer, Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas Micromill Holdings, LLC, and Kaiser Texas Sierra Micromills, LLC, as Subsidiary Guarantors, and First Trust National Association, as Trustee, regarding KACC's 10 7/8% Series D Senior Notes due 2006 (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-4, dated January 2, 1997, filed by KACC, Registration No. 333-19143). 4.14 First Supplemental Indenture, dated as of July 15, 1997, to the Indenture, dated as of December 23, 1996 (incorporated by reference to Exhibit 4.4 to the Report on Form 10-Q for the quarterly period ended June 30, 1997, filed by KAC, File No. 1-9447). 4.15 Second Supplemental Indenture, dated as of March 31, 1999, to the Indenture, dated as of December 23, 1996 (incorporated by reference to Exhibit 4.4 to the Report on Form 10-Q for the quarterly period ended March 31, 1999, filed by KAC, File No. 1-9447). 4.16 Post-Petition Credit Agreement, dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.44 to the Report on Form 10-K for the year ended December 31, 2001, filed by KAC, File No. 1-9447). 4.17 First Amendment to Post-Petition Credit Agreement and Post-Petition Pledge and Security Agreement and Consent of Guarantors, dated as of March 21, 2002, amending the Post-Petition Credit Agreement dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent, and amending a Post-Petition Pledge and Security Agreement dated as of February 12, 2002, among KACC, KAC, certain subsidiaries of KAC and KACC, and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.45 to the Report on Form 10-K for the year ended December 31, 2001, filed by KAC, File No. 1-9447). 4.18 Second Amendment to Post-Petition Credit Agreement and Consent of Guarantors, dated as of March 21, 2002, amending the Post-Petition Credit Agreement dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 4.46 to the Report on Form 10-K for the year ended December 31, 2001, filed by KAC, File No. 1-9447). *4.19 Third Amendment to Post-Petition Credit Agreement, Second Amendment to Post-Petition Pledge and Security Agreement and Consent of Guarantors, dated as of December 19, 2002, amending the Post-Petition Credit Agreement dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent. *4.20 Fourth Amendment to Post-Petition Credit Agreement and Consent of Guarantors, dated as of March 17, 2003, amending the Post-Petition Credit Agreement dated as of February 12, 2002, among KACC, KAC, certain financial institutions and Bank of America, N.A., as Agent. *4.21 Waiver and Consent with Respect to Post-Petition Credit Agreement, dated October 9, 2002, among KAC, KACC, the financial institutions party to the Post-Petition Credit Agreement, dated as of February 12, 2002, as amended, and Bank of America, N.A., as Agent. *4.22 Second Waiver and Consent with respect to Post-Petition Credit Agreement, dated January 13, 2003, among KACC, KACC, the financial institutions party to the Post-Petition Credit Agreement, dated as of February 12, 2002, as amended, and Bank of America, N.A., as Agent. 4.23 Intercompany Note between KAC and KACC (incorporated by reference to Exhibit 10.10 to the Report on Form 10-K for the period ended December 31, 1996, filed by MAXXAM Inc. ("MAXXAM"), File No. 1-3924). 4.24 Confirmation of Amendment of Non-Negotiable Intercompany Note, dated as of October 6, 1993, between KAC and KACC (incorporated by reference to Exhibit 10.11 to the Report on Form 10-K for the period ended December 31, 1996, filed by MAXXAM, File No. 1-3924). 4.25 Amendment to Non-Negotiable Intercompany Note, dated as of December 11, 2000, between KAC and KACC (incorporated by reference to Exhibit 4.41 to the Report on Form 10-K for the period ended December 31, 2000, filed by KAC, File No. 1-9447). 4.26 Senior Subordinated Intercompany Note between KAC and KACC dated February 15, 1994 (incorporated by reference to Exhibit 4.22 to the Report on Form 10-K for the period ended December 31, 1993, filed by KAC, File No. 1-9447). 4.27 to the Report on Form 10-K for the period ended December 31, 1998, filed by KAC, File No., 1-9447.) 4.32 Sixteenth Amendment to Credit Agreement, dated as of March 26, 1999, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KACC, KAC, the financial institutions party thereto, and BankAmerica Business Credit, Inc., as Agent (incorporated by reference to Exhibit 4.28 to the Report on Form 10-K for the period ended December 31, 1998, filed by KAC, File No. 1-9447). 4.33 Seventeenth Amendment to Credit Agreement, dated as of September 24, 1999, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KACC, KAC, the financial institutions party thereto, and Bank of America, N.A. (successor to BankAmerica Business Credit, Inc.), as Agent (incorporated by reference to Exhibit 4.1 to the Report on Form 10-Q for the quarterly period ended September 30, 1999, filed by KAC, File No. 1-9447). *4.34 Eighteenth Amendment to Credit Agreement, dated as of February 11, 2000, amending the Credit Agreement, dated as of February 15, 1994, as amended, among KACC, KAC, the financial institutions party thereto, and Bank of America, N.A. (successor to BankAmerica Business Credit, Inc.), as Agent. *4.35 Limited Waiver Regarding Repayment of CARIFA Bonds, dated February 17, 2000, among KAC, KACC, the financial institutions party thereto and Bank of America, N.A., as Agent. 4.36 Intercompany Note between KAC and KACC (incorporated by reference to Exhibit 10.11 to the Report on Form 10-K for the period ended December 31, 1996, filed by MAXXAM Inc. ("MAXXAM"), File No. 1-3924). 4.37 Confirmation of Amendment of Non-Negotiable Intercompany Note, dated as of October 6, 1993, between KAC and KACC (incorporated by reference to Exhibit 10.12 to the Report on Form 10-K for the period ended December 31, 1996, filed by MAXXAM, File No. 1-3924). 4.38 Senior Subordinated Intercompany Note between KAC and KACC dated February 15, 1994 (incorporated by reference to Exhibit 4.22 to the Report on Form 10-K for the period ended December 31, 1993, filed by KAC, File No. 1-9447). 4.39 Senior Subordinated Intercompany Note between KAC and KACC dated March 17, 1994 (incorporated by reference to Exhibit 4.23 to the Report on Form 10-K for the period ended December 31, 1993, filed by KAC, File No. 1-9447).
72 76 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES - -------------------------------------------------------------------------------
Exhibit Number Description ------ ----------- KAC has not filed certain long-term debt instruments not being registered with the Securities and Exchange Commission where the total amount of indebtedness authorized under any such instrument does not exceed 10% of the total assets of KAC and its subsidiaries on a consolidated basis. KAC agrees and undertakes to furnish a copy of any such instrument to the Securities and Exchange Commission upon its request. 10.1 Form of indemnification agreement with officers and directors (incorporated by reference to Exhibit (10)(b) to the Registration Statement of KAC on Form S-4, File No. 33-12836). 10.2 Tax Allocation Agreement, dated as of December 21, 1989, between MAXXAM and KACC (incorporated by reference to Exhibit 10.21 to Amendment No. 6 to the Registration Statement on Form S-1, dated December 14, 1989, filed by KACC, Registration No. 33-30645). 10.3 Tax Allocation Agreement, dated as of February 26, 1991, between KAC and MAXXAM (incorporated by reference to Exhibit 10.23 to Amendment No. 2 to the Registration Statement on Form S-1, dated June 11, 1991, filed by KAC, Registration No. 33-37895). 10.4 Tax Allocation Agreement, dated as of June 30, 1993, between KACC and KAC (incorporated by reference to Exhibit 10.3 to the Report on Form 10-Q for the quarterly period ended June 30, 1993, filed by KACC, File No. 1-3605). Executive Compensation Plans and Arrangements [Exhibits 10.5 - 10.30, inclusive] 10.5 KACC's Bonus Plan (incorporated by reference to Exhibit 10.25 to Amendment No. 6 to the Registration Statement on Form S-1, dated December 14, 1989, filed by KACC, Registration No. 33-30645). 10.3 Amendment of Tax Allocation Agreement, dated as of March 12, 2001, between MAXXAM and KACC, amending the Tax Allocation Agreement dated as of December 21, 1989 (incorporated by reference to Exhibit 10.3 to the Report on Form 10-K for the period ended December 31, 2000, filed by KAC, File No. 1-9447). 10.4 Tax Allocation Agreement, dated as of February 26, 1991, between KAC and MAXXAM (incorporated by reference to Exhibit 10.23 to Amendment No. 2 to the Registration Statement on Form S-1, dated June 11, 1991, filed by KAC, Registration No. 33-37895). 10.5 Tax Allocation Agreement, dated as of June 30, 1993, between KACC and KAC (incorporated by reference to Exhibit 10.3 to the Report on Form 10-Q for the quarterly period ended June 30, 1993, filed by KACC, File No. 1-3605). Executive Compensation Plans and Arrangements [Exhibits 10.6 - 10.33, inclusive] 10.6 Kaiser 1993 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Report on Form 10-Q for the quarterly period ended June 30, 1993, filed by KACC, File No. 1-3605). 10.7 Kaiser 1995 Employee Incentive Compensation Program (incorporated by reference to Exhibit 10.1 to the Report on Form 10-Q for the quarterly period ended March 31, 1995, filed by KAC, File No. 1-9447). 10.8 Kaiser 1995 Executive Incentive Compensation Program (incorporated by reference to Exhibit 99 to the Proxy Statement, dated April 26, 1995, filed by KAC, File No. 1-9447). 10.9 Kaiser 1997 Omnibus Stock Incentive Plan (incorporated by reference to Appendix A to the Proxy Statement, dated April 29, 1997, filed by KAC, File No. 1-9447). 10.10 Employment Agreement, dated April 1, 1993, among KAC, KACC, and George T. Haymaker, Jr. (incorporated by reference to Exhibit 10.2 to the Report on Form 10-Q for the quarterly period ended March 31, 1993, filed by KAC, File No. 1-9447). 10.11 First Amendment to Employment Agreement by and between KACC, KAC and George T. Haymaker, Jr. (incorporated by reference to Exhibit 10 to the Report on Form 10-Q for the quarterly period ended June 30, 1996, filed by KAC, File No. 1-9447). 10.12 Second Amendment to Employment Agreement, dated as of December 10, 1997, by and between KAC, KACC, and George T. Haymaker, Jr. (incorporated by reference to Exhibit 10.12 to the Report on Form 10-K for the period ended December 31, 1997, filed by KAC, File No. 1-9447).
73 77 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES - -------------------------------------------------------------------------------
Exhibit Number Description ------ ----------- *10.13 Director and Non-Executive Chairman Agreement, dated January 1, 2000, among KAC, KACC and George T. Haymaker, Jr. 10.14 Letter Agreement, dated January 1995, between KAC and Charles E. Hurwitz, granting Mr. Hurwitz stock options under the Kaiser 1993 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.17 to the Report on Form 10-K for the period ended December 31, 1994, filed by KAC, File No. 1-9447). 10.15 Employment Agreement between KACC and Raymond J. Milchovich made effective for the period from January 1, 1998, to December 31, 2002 (incorporated by reference to Exhibit 10.310.8 Employment Agreement between KACC and John T. La Duc made effective for the period from January 1, 1998, to December 31, 2002 (incorporated by reference to Exhibit 10.5 to the Report on Form 10-Q for the quarterly period ended September 30, 1998, filed by KAC, File No. 1-9447). 10.16 Employment Agreement, dated as of June 1, 1999, between KACC and Raymond J. Milchovich (incorporated by reference to Exhibit 10.1 to the Report on Form 10-Q for the quarterly period ended June 30, 1999, filed by KAC, File No. 1-9447). 10.17 Time-Based Stock Option Grant Pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan to Raymond J. Milchovich, effective July 2, 1998 (incorporated by reference to Exhibit 10.4 to the Report on Form 10-Q for the quarterly period ended September 30, 1998, filed by KAC, File No. 1-9447). 10.18 Restated Promissory Note, dated June 14, 1999, from Raymond J. Milchovich to KACC (incorporated by reference to Exhibit 10.2 to the Report on Form 10-Q for the quarterly period ended June 30, 1999, filed by KAC, File No. 1-9447). 10-19 Employment Agreement between KACC and John T. La Duc made effective for the period from January 1, 1998, to December 31, 2002 (incorporated by reference to Exhibit 10.5 to the Report on From 10-Q for the quarterly period ended September 30, 1998, filed by KAC, File No. 1-9447). 10.20 Time-Based Stock Option Grant Pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan to John T. La Duc, effective July 10, 1998 (incorporated by reference to Exhibit 10.6 to the Report on Form 10-Q for the quarterly period ended September 30, 1998, filed by KAC, File No. 1-9447). 10.21 Time-Based Stock Option Grant Pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan to George T. Haymaker, Jr., effective January 1, 1998 (incorporated by reference to Exhibit 10.18 to the Report on Form 10-K for the period ended December 31, 1998, filed by KAC, File No. 1-9447). 10.22 Performance-Accelerated Stock Option Grant Pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan to George T. Haymaker, Jr., effective January 1, 1998 (incorporated by reference to Exhibit 10.19 to the Report on Form 10-K for the period ended December 31, 1998, filed by KAC, File No. 1-9447). 10.23 Letter Agreement, dated July 27, 1998, between KACC and John H. Walker (incorporated by reference to Exhibit 10.20 to the Report on Form 10-K for the period ended December 31, 1998, filed by KAC, File No. 1-9447). 10.24 Executive Employment Agreement, effective December 1, 1999, between MAXXAM and J. Kent Friedman (incorporated by reference to Exhibit 10.52 to the Report on Form 10-K for the period ended December 31, 1999, filed by MAXXAM, File No. 1-3924). 10.25 Employment Agreement made and entered into as of September 1, 1996, by and between KACC and Jack A. Hockema (incorporated by reference to Exhibit 10 to the Report on Form 10-Q for the quarterly period ended September 30, 1996, filed by KAC, File No. 1-9447).
74 78 KAISER ALUMINUM CORPORATION AND SUBISIARY COMPANIES10.9 Time-Based Stock Option Grant pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan to John T. La Duc, effective July 10, 1998 (incorporated by reference to Exhibit 10.6 to the Report on Form 10-Q for the quarterly period ended September 30, 1998, filed by KAC, File No. 1-9447). 10.10 Chief Executive Officer Agreement made and entered into as of October 11, 2001, by and between KACC and Jack A. Hockema (incorporated by reference to Exhibit 10.24 to the Report on Form 10-K for the period ended December 31, 2001, filed by KAC, File No. 1-9447). 10.11 Non-Executive Chairman of the Boards Agreement, dated October 11, 2001, among KAC, KACC and George T. Haymaker, Jr. (incorporated by reference to Exhibit 10.25 to the Report on Form 10-K for the period ended December 31, 2001, filed by KAC, File No. 1-9447). *10.12 Non-Executive Chairman of the Boards Agreement, dated November 4, 2002, among KAC, KACC and George T. Haymaker, Jr. *10.13 Employment Agreement, dated October 1, 2001, between KACC and Edward F. Houff. 10.14 Description of compensation arrangements among KACC, KAC, and Jack A. Hockema (incorporated by reference to Exhibit 10.27 to the Report on Form 10-K for the period ended December 31, 1999, filed by KAC, File No. 1-9447). 10.15 Stock Option Grant pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan to Jack A. Hockema (incorporated by reference to Exhibit 10.1 to the Report on Form 10-Q for the quarterly period ended September 30, 2000, filed by KAC, File No. 1-9447). 10.16 Form of letter agreement with persons granted stock options under the Kaiser 1993 Omnibus Stock Incentive Plan to acquire shares of KAC Common Stock (incorporated by reference to Exhibit 10.18 to the Report on Form 10-K for the period ended December 31, 1994, filed by KAC, File No. 1-9447). 10.17 Form of Enhanced Severance Agreement between KACC and key executive personnel (incorporated by reference to Exhibit 10.3 to the Report on Form 10-Q for the quarterly period ended September 30, 2000, filed by KAC, File No. 1-9447). 10.18 Form of Deferred Fee Agreement between KAC, KACC, and directors of KAC and KACC (incorporated by reference to Exhibit 10 to the Report on Form 10-Q for the quarterly period ended March 31, 1998, filed by KAC, File No. 1-9447). 10.19 Form of Non-Employee Director Stock Option Grant for options issued commencing January 1, 2001 under the 1997 Kaiser Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Report on Form 10-Q for the quarterly period ended June 30, 2001, filed by KAC, File No. 1-9447). 10.20 Form of Stock Option Grant for options issued commencing January 1, 2001 under the 1997 Kaiser Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Report on Form 10-Q for the quarterly period ended June 30, 2001, filed by KAC, File No. 1-9447). 10.21 Form of Restricted Stock Agreement for restricted shares issued commencing January 1, 2001 under the 1997 Kaiser Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Report on Form 10-Q for the quarterly period ended June 30, 2001, filed by KAC, File No. 1-9447). 10.22 The Kaiser Aluminum & Chemical Corporation Retention Plan, dated January 15, 2002 (the "January 2002 Retention Plan") (incorporated by reference to Exhibit 10.35 to the Report on Form 10-K for the year ended December 31, 2001, filed by KAC, File No. 1-9447). 10.23 Form of Retention Agreement for the Kaiser Aluminum & Chemical Corporation Retention Plan (incorporated by reference to Exhibit 10.36 to the Report on Form 10-K for the year ended December 31, 2001, filed by KAC, File No. 1-9447). 10.24 Retention Agreement for the January 2002 Retention Plan, dated January 15, 2002, between KACC and Joseph A. Bonn (incorporated by reference to Exhibit 10.37 to the Report on Form 10-K for the year ended December 31, 2001, filed by KAC, File No. 1-9447). 10.25 Retention Agreement for the January 2002 Retention Plan, dated January 15, 2002, between KACC and John T. La Duc (incorporated by reference to Exhibit 10.38 to the Report on Form 10-K for the year ended December 31, 2001, filed by KAC, File No. 1-9447). *10.26 The Kaiser Aluminum & Chemical Corporation Key Employee Retention Plan (effective September 3, 2002). *10.27 Form of Retention Agreement for the Kaiser Aluminum & Chemical Corporation Key Employee Retention Plan (effective September 3, 2002) for Jack A. Hockema, Edward F. Houff, Harvey L. Perry and one other Executive Officer. *10.28 Form of Retention Agreement for the Kaiser Aluminum & Chemical Corporation Key Employee Retention Plan (effective September 3, 2002) for Joseph A. Bonn and John T. La Duc. *10.29 Form of Retention Agreement for the Kaiser Aluminum & Chemical Corporation Key Employee Retention Plan (effective September 3, 2002) for Certain Executive Officers. *10.30 Kaiser Aluminum & Chemical Corporation Severance Plan (effective September 3, 2002). *10.31 Form of Severance Agreement for the Kaiser Aluminum & Chemical Corporation Severance Plan (effective September 3, 2002) for Jack A. Hockema, Edward F. Houff, Harvey L. Perry and Certain Other Executive Officers. *10.32 Form of Kaiser Aluminum & Chemical Corporation Change in Control Severance Agreement for Jack A. Hockema, Edward F. Houff and one other Executive Officer. *10.33 Form of Kaiser Aluminum & Chemical Corporation Change in Control Severance Agreement for Harvey L. Perry and Certain Other Executive Officers. *21 Significant Subsidiaries of KAC. *23.1 Independent Auditors' Consent. *23.2 Consent of Wharton Levin Ehrmantraut & Klein, P.A. *23.3 Consent of Heller Ehrman White & McAuliffe LLP. *99.1 Confirmation of Jack A. Hockema pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *99.2 Confirmation of John T. La Duc pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - -------------------------------------------------------------------------------
Exhibit Number Description ------ ----------- *10.26 Letter Agreement, dated April 15, 1999, amending the Employment Agreement made and entered into as of September 1, 1996, by and between KACC and Jack A. Hockema. *10.27 Description of compensation arrangements among KACC, KAC, and Jack A. Hockema. 10.28 Description of Kaiser Severance Protection and Change of Control Benefits Program (incorporated by reference to Exhibit 10.21 to the Report on Form 10-K for the period ended December 31, 1998, filed by KAC, File No. 1-9447). 10.29 Form of letter agreement with persons granted stock options under the Kaiser 1993 Omnibus Stock Incentive Plan to acquire shares of KAC Common Stock (incorporated by reference to Exhibit 10.18 to the Report on Form 10-K for the period ended December 31, 1994, filed by KAC, File No. 1-9447). 10.30 Form of Deferred Fee Agreement between KAC, KACC, and directors of KAC and KACC (incorporated by reference to Exhibit 10 to the Report on Form 10-Q for the quarterly period ended March 31, 1998, filed by KAC, File No. 1-9447). *21 Significant Subsidiaries of KAC. *23.1 Consent of Independent Public Accountants. *23.2 Consent of Wharton Levin Ehrmantraut Klein & Nash, P.A. *23.3 Consent of Heller Ehrman White & McAuliffe LLP. *27 Financial Data Schedule.
- ---------------------------------------- * Filed herewith 75Principal Arizona Domestic Chandler Operations Engineered Products and California ---------- Administrative Laguna Niguel Offices Administrative Offices (Partial List) Los Angeles (City of Commerce) Engineered Products Louisiana Baton Rouge Alumina Business Unit Offices Gramercy Alumina Michigan Detroit (Southfield) Automotive Product Development and Sales Ohio Newark Engineered Products Oklahoma Tulsa Engineered Products South Carolina Greenwood Engineered Products Tennessee Jackson Engineered Products Texas Houston Corporate Headquarters Sherman Engineered Products Virginia Richmond Engineered Products Washington Mead Primary Aluminum Richland Engineered Products Trentwood Flat-Rolled Products Principal Australia Worldwide Queensland Alumina Limited (20%) Operations Alumina (Partial List) Canada Kaiser Aluminum & Chemical of Canada Limited (100%) Engineered Products Ghana Volta Aluminium Company Limited (90%) Primary Aluminum Jamaica Alumina Partners of Jamaica (65%) Bauxite, Alumina Kaiser Jamaica Bauxite Company (49%) Bauxite Wales, United Kingdom Anglesey Aluminium Limited (49%) Primary Aluminum