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                     SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C.  20549


                                 FORM 10-Q


          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                      SECURITIES EXCHANGE ACT OF 1934

             FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 19961997

                       Commission file number 1-9447




                        KAISER ALUMINUM CORPORATION
           (Exact name of registrant as specified in its charter)


              DELAWARE                               94-3030279
      (State of incorporation)            (I.R.S. Employer Identification 
                                             No.)


          5847 SAN FELIPE, SUITE 2600, HOUSTON, TEXAS  77057-3010
            (Address of principal executive offices)   (Zip Code)


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





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

     At October 31, 1996,1997, the registrant had 71,646,38978,980,881 shares of common
stockCommon
Stock outstanding.





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            KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES

                       PART I - FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS
         --------------------

                        CONSOLIDATED BALANCE SHEETS
                          (In millions of dollars)
September 30, December 31, 1997 1996 1995 -------------------------------- ASSETS (Unaudited)------------------------------ ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 21.626.3 $ 21.981.3 Receivables 261.6 308.6305.0 252.4 Inventories 545.5 525.7553.3 562.2 Prepaid expenses and other current assets 111.7 76.6125.1 127.8 ------------------------------ Total current assets 940.4 932.81,009.7 1,023.7 Investments in and advances to unconsolidated affiliates 174.6 178.2158.1 168.4 Property, plant, and equipment - net 1,126.4 1,109.61,162.9 1,168.7 Deferred income taxes 284.7 269.1298.0 264.5 Other assets 343.1 323.5335.6 308.7 ------------------------------ Total $ 2,869.22,964.3 $ 2,813.22,934.0 ============================== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 160.5161.1 $ 184.5189.7 Accrued interest 13.6 32.024.8 35.6 Accrued salaries, wages, and related expenses 64.9 105.376.7 95.4 Accrued postretirement medical benefit obligation - current portion 46.8 46.850.1 50.1 Other accrued liabilities 151.7 129.4121.4 132.7 Payable to affiliates 95.6 94.2103.1 97.0 Long-term debt - current portion 8.92.7 8.9 ------------------------------ Total current liabilities 542.0 601.1539.9 609.4 Long-term liabilities 558.3 548.5515.8 458.1 Accrued postretirement medical benefit obligation 727.7 734.0714.6 722.5 Long-term debt 858.4 749.2969.3 953.0 Minority interests 119.4 122.7124.7 121.7 Commitments and contingencies Stockholders' equity: Preferred stock .4 .4 Common stock .7.8 .7 Additional capital 530.8 530.3534.0 531.1 Accumulated deficit (454.7) (459.9)(432.0) (460.1) Additional minimum pension liability (13.8) (13.8)(2.8) (2.8) ------------------------------ Total stockholders' equity 63.4 57.7100.0 69.3 ------------------------------ Total $ 2,869.22,964.3 $ 2,813.22,934.0 ==============================
The accompanying notes to interim consolidated financial statements are an integral part of these statements. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED INCOME (LOSS) (Unaudited) (In millions of dollars, except per share amounts)
Quarter Ended Nine Months Ended September 30, September 30, ----------------------------- ------------------------------ ------------------------------ 1997 1996 19951997 1996 1995 ------------------------------ ------------------------------ Net sales $ 634.1 $ 553.4 $ 550.31,778.6 $ 1,652.1 $ 1,646.7 ------------------------------ ------------------------------ Costs and expenses: Cost of products sold 523.7 485.0 439.31,473.7 1,394.8 1,329.8 Depreciation 22.9 24.3 23.768.8 72.5 71.1 Selling, administrative, research and development, and general 33.0 33.6 34.195.3 97.4 96.4Restructuring of operations 19.7 ------------------------------ ------------------------------ Total costs and expenses 579.6 542.9 497.11,657.5 1,564.7 1,497.3 ------------------------------ ------------------------------ Operating income 54.5 10.5 53.2121.1 87.4 149.4 Other income (expense): Interest expense (27.5) (22.6) (23.9)(83.3) (68.3) (71.3) Other - net 2.1 (7.7)2.1 1.7 3.0 (9.8) ------------------------------ ------------------------------ Income (loss) before income taxes and minority interests 29.1 (10.0) 21.639.5 22.1 68.3 Credit (provision)(Provision) benefit for income taxes (11.0) 3.8 (7.8)(2.4) (8.4) (24.6) Minority interests (.6) (.4) (1.3)(3.3) (2.2) (4.4) ------------------------------ ------------------------------ Net income (loss) 17.5 (6.6) 12.533.8 11.5 39.3 Dividends on preferred stock (1.3) (2.1) (4.9)(5.5) (6.3) (15.5) ------------------------------ ------------------------------ Net income (loss) available to common shareholders $ 16.2 $ (8.7) $ 7.628.3 $ 5.2 $ 23.8 ============================== ============================== Earnings (loss) per common and common equivalent share: Primary $ .22 $ (.12) $ .13.39 $ .07 $ .40 ============================== ============================== Fully diluted $ .14.22 $ .46.43 ============== ============== Weighted average common and common equivalent shares outstanding (000): Primary 74,663 71,646 60,22572,775 71,843 59,015 Fully diluted 71,782 71,61379,193 79,164
The accompanying notes to interim consolidated financial statements are an integral part of these statements. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (In millions of dollars)
Nine Months Ended September 30, ------------------------------ 1997 1996 1995 ------------------------------ Cash flows from operating activities: Net income $ 11.533.8 $ 39.311.5 Adjustments to reconcile net income to net cash provided (used) by (used for) operating activities: Depreciation 68.8 72.5 71.1Restructuring of operations 19.7 Non-cash benefit for income taxes (12.5) Amortization of excess investment over equity in net assets of unconsolidated affiliates 8.7 8.7 Amortization of deferred financing costs and net discount on long-term debt 4.5 4.1 4.1 EquityUndistributed equity in income(income) loss of unconsolidated affiliates, net of distributions 16.7 (7.5) (17.2) Minority interests 3.3 2.2 4.4 Decrease (increase)(Increase) decrease in receivables (59.5) 41.0 (86.6) Increase(Increase) decrease in inventories 5.7 (19.8) (62.6) (Increase) decrease in prepaid expenses and other assets 1.1 (38.1) 70.5 Decrease in accounts payable (28.6) (24.1) (5.2) Decrease in accrued interest (10.8) (18.4) (18.0) (Decrease) increaseDecrease in payable to affiliates and accrued liabilities (29.8) (23.1) 12.3 Decrease in accrued and deferred income taxes (2.1) (18.6) (8.5) Other 3.6 4.6 7.8 ------------------------------ Net cash (used for) provided (used) by operating activities 22.6 (5.0) 20.1 ------------------------------ Cash flows from investing activities: Net proceeds from disposition of property and investments 22.2 1.6 6.9 Expenditures for property, plant, and equipment (90.8) (44.2) Investments in unconsolidated affiliates (.3) (9.0) Redemption fund for minority interests' preference stockCapital expenditures (94.7) (91.1) Other (2.6) (1.3) (.2) ------------------------------ Net cash used forby investing activities (75.1) (90.8) (46.5) ------------------------------ Cash flows from financing activities: Borrowings (repayments) under revolving credit facility, net 118.1 55.6Borrowings of long-term debt 19.0 Repayments of long-term debt (8.6) (9.0) (8.5)Increase in restricted cash, net (6.5) Incurrence of financing costs (.8)(0.6) Dividends paid (4.2) (8.4) (18.7) Capital stock issued 1.2.4 Redemption of minority interests' preference stock (2.0) (5.2) (8.8) ------------------------------ Net cash provided (used) by financing activities (2.5) 95.5 20.0 ------------------------------ Net decrease in cash and cash equivalents during the period (55.0) (.3) (6.4) Cash and cash equivalents at beginning of period 81.3 21.9 17.6 ------------------------------ Cash and cash equivalents at end of period $ 21.626.3 $ 11.221.6 ============================== Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest $ 82.789.5 $ 85.282.7 Income taxes paid 14.8 22.4 26.6 Tax allocation payments to MAXXAM Inc. 1.1
The accompanying notes to interim consolidated financial statements are an integral part of these statements. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (In millions of dollars, except prices and per share amounts) 1. GENERAL Kaiser Aluminum Corporation (the "Company") is a subsidiary of MAXXAM Inc. ("MAXXAM"). MAXXAM ownsand one of its wholly owned subsidiaries together own approximately 62%63% of the Company's common stock, assuming the conversion of each outstanding share of 8.255% PRIDES, Convertible PreferredCommon Stock (the "PRIDES"), into one share of the Company's common stock, with the remaining approximately 38%37% publicly held. The Company operates through its subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). The foregoing unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 1995.1996. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of the Company's consolidated financial position and results of operations. Operating results for the quarter and the nine month period ended September 30, 1996,1997, are not necessarily indicative of the results that may be expected for the year ending December 31, 1996.1997. 2. INVENTORIES The classification of inventories is as follows:
September 30, December 31, 1997 1996 1995 ----------------------------------------------------------- Finished fabricated aluminum products $ 108.495.4 $ 91.5113.5 Primary aluminum and work in process 190.0 195.9220.7 200.3 Bauxite and alumina 122.5 119.6110.5 110.2 Operating supplies and repair and maintenance parts 124.6 118.7 -----------------------------126.7 138.2 ------------------------------ Total $ 545.5553.3 $ 525.7 =============================562.2 ==============================
Substantially all product inventories are stated at last-in, first-out (LIFO) cost, not in excess of market. Replacement cost is not in excess of LIFO cost. 3. SOLID WASTE DISPOSAL REVENUE BONDS In March 1997, KACC entered into an agreement (the "Loan Agreement") with the Industrial Development Corporation of Spokane County, Washington (the "IDC") in connection with which the IDC issued $19.0 of 7.6% Solid Waste Disposal Revenue Bonds due 2027 (the "Bonds") and loaned the proceeds to KACC to finance the construction of certain qualifying expenditures at its Mead smelter, which are part of the previously announced modernization and expansion of Mead's carbon baking furnace. The net proceeds from the sale of the Bonds of approximately $18.6 were deposited into a restricted construction account (the balance of which is included in Other assets) and may be withdrawn from time to time by KACC, pursuant to the Loan Agreement and Bond indenture. The Loan Agreement requires KACC to make payments on the dates and in the amounts required to permit the IDC to satisfy all of its payment obligations under the Bonds and related indenture. 4. EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE Primary -PRIMARY Earnings (loss) per common and common equivalent share are computed by deducting preferred stock dividends on the 8.255% PRIDES, Convertible Preferred Stock (the "PRIDES") 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 and common equivalent shares outstanding during the period. The weighted average number of common and common equivalent shares for the quarter ended September 30, 1996, excludes the impact of outstanding stock options since they were antidilutive. The impactthe number of outstanding stock options on the weighted average number of common and common equivalent shares for the quarters and nine month periods ended September 30, 1997, and 1996, was immaterial. FULLY DILUTED For the quarter and nine months ended September 30, 1995,1997, fully diluted earnings per share are presented even though the results are antidilutive as a result of the August 1997 conversion of the PRIDES. The fully diluted computations for these periods assume that the conversion of the PRIDES had occurred at the beginning of each period. Accordingly, the dividend amounts for the quarter and the nine monthsnine-month period ended September 30, 1996, was immaterial. Fully Diluted -1997, of $1.3 and $5.5, respectively, have not been deducted from net income and the weighted average number of common and common equivalent shares has been adjusted to reflect the 7,227,848 shares of the Company's Common Stock issued upon conversion of the PRIDES in August 1997 as if they had been outstanding from the beginning of each period. The PRIDES were excluded from the calculation of the weighted average number of common and common equivalent shares outstanding for all periods presentedthe quarter and nine-months ended September 30, 1996, because they were antidilutive. ForNEW ACCOUNTING PRONOUNCEMENT In February 1997, the quarterFinancial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). Under SFAS No. 128, primary earnings per share ("Primary EPS") will be replaced by basic earnings per share ("Basic EPS"), and nine months ended September 30, 1995, dividends of $2.8 and $9.1, respectively, attributable to the Company's Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares") which were exchanged for approximately 13.1 million shares of the Company's common stock and certain cash payments on September 19, 1995, have not been deducted from net income and the weighted average number of common and common equivalent shares outstanding have been adjusted to reflect the shares of common stock issued in the exchange as if they had been outstanding for the entire periods. As a result of the conversion of the Series A Shares, fully diluted earnings per share for("Fully Diluted EPS") will be replaced with diluted earnings per share ("Diluted EPS"). Basic EPS differs from Primary EPS in that it only includes the 1995 periods are presented even thoughweighted average impact of outstanding shares of the results are antidilutive. 4.Company's Common Stock (i.e., it excludes common stock equivalents and the dilutive effect of options, etc.) Diluted EPS is substantially similar to Fully Diluted EPS as previously reported. The provisions of SFAS No. 128 will result in the retroactive restatement of previously reported Primary EPS and Fully Diluted EPS figures, but SFAS No. 128 prohibits such restatement prior to December 31, 1997. Based on the Company's computations, the adoption of SFAS No. 128 is not expected to impact earnings per share amounts reported during the current quarter or any recent prior period. 5. CONTINGENCIES Environmental Contingencies -ENVIRONMENTAL CONTINGENCIES The Company and KACC are subject to a number of environmental laws, to fines or penalties assessed for alleged breaches of thesuch environmental laws, and to claims and litigation based upon such laws. KACC currently is subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based uponon the Company's evaluation of these and other environmental matters, the Company has established environmental accruals primarily related to potential solid waste disposal and soil and groundwater remediation matters. At September 30, 1996,1997, the balance of such accruals, which isare primarily included in Long-term liabilities, was $32.9.$30.8. 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 actionactions 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 $2.0$3.0 to $10.0$8.0 for the years 19961997 through 20002001 and an aggregate of approximately $7.0 thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. The Company believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $26.5$19.0. As the resolution of these matters is subject to further regulatory review and thatapproval, no specific assurance can be given as to when the factors upon which a substantial portion of this estimate is based arecan be expected to be resolved in early 1997.resolved. However, the Company is currently working to resolve certain of these matters. While uncertainties are inherent in the final outcome of these environmental matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. Asbestos Contingencies -ASBESTOS CONTINGENCIES KACC is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 1520 years. At September 30, 1996,1997, the number of such lawsuitsclaims pending was approximately 75,900,71,200, as compared to 59,700with 71,100 at December 31, 1995. During the year 1995,1996. In 1996, approximately 41,70021,100 of such claims were received and 7,2009,700 were settled or dismissed. During the quarter and nine months ended September 30, 1996,1997, approximately 4,6003,400 and 20,0009,000 of such claims were received and 6006,500 and 3,8008,900 of such claims were settled or dismissed, respectively. Based on past experience and reasonably anticipated future activity, the Company has established an accrual for estimated asbestos-related costs for claims filed and estimated to be filed and settled through 2008. There are inherent uncertainties involved in estimating asbestos-related costs, and the Company's actual costs could exceed or be less than these estimates. The Company's accrual was calculated based on the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, and the advice of Wharton Levin Ehrmantraut Klein & Nash, P.A. with respect to the current state of the law related to asbestos claims. Accordingly, an estimated asbestos-related cost accrual of $160.0,$156.8, before consideration of insurance recoveries, is included primarily in Long-term liabilities at September 30, 1996. The Company estimates that annual future cash payments in connection with such litigation will be approximately $13.0 to $20.0 for each of the years 1996 through 2000, and an aggregate of approximately $78.0 thereafter through 2008.1997. While the Company does not presently believe there is a reasonable basis for estimating such costs beyond 2008 and, accordingly, no accrual has been recorded for such costs which may be incurred beyond 2008, there is a reasonable possibility that such costs may continue beyond 2008, and such costs may be substantial. A substantial portionThe Company estimates that annual future cash payments in connection with such litigation will be approximately $13.0 to $20.0 for each of the asbestos-related claims that were filedyears 1997 through 2001, and served on KACC during 1995 and 1996 were filed in Texas. KACC has been advised by its counsel that, although there can be no assurance, the increase in pending claims may have been attributable in part to tort reform legislation in Texas. Although asbestos-related claims are currently exempt from certain aspectsan aggregate of the Texas tort reform legislation, management has been advised that efforts to remove the asbestos-related exemption in the tort reform legislation, relating to the doctrine of forum non conveniens, as well as other developments in the legislative and legal environment in Texas, may be responsible for the accelerated pace of new claims experienced in late 1995 and its continuance in 1996, albeit at a somewhat reduced rate.approximately $86.0 thereafter. The Company believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. Claims for recovery from some of KACC's insurance carriers are currently subject to pending litigation and other carriers have raised certain defenses, which have resulted in delays in recovering costs from the insurance carriers. The timing and amount of ultimate recoveries from these insurance carriers are dependent upon the resolution of these disputes. The Company believes, based on prior insurance-related recoveries in respect of asbestos-related claims, existing insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges LLP with respect to applicable insurance coverage law relating to the terms and conditions of those policies, that substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recovery of $142.3,$127.9, determined on the same basis as the asbestos-related cost accrual, is recorded primarily in Other assets at September 30, 1996.1997. Management continues to monitor claims activity, the status of the lawsuits (including settlement initiatives), legislative progress, and costs incurred in order to ascertain whether an adjustment to the existing accruals should be made to the extent that historical experience may differ significantly from the Company's underlying assumptions. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and insurance recoveries that will be received, management currently believes that, based on the factors discussed in the preceding paragraphs, the resolution of the asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. Other Contingencies -OTHER CONTINGENCIES The Company and KACC are involved in various other claims, lawsuits, and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. 5.See Note 8 of the Notes to Consolidated Financial Statements for the year ended December 31, 1996. 6. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS At September 30, 1997, the net unrealized loss, including unamortized net option premiums, on KACC's position in aluminum forward sales and option contracts, (based on an average price of $1,647 per ton* ($.75 per pound) of primary aluminum), natural gas and fuel oil forward purchase and option contracts, and forward foreign exchange contracts, was approximately $11.6. ALUMINA AND ALUMINUM The Company's earnings are sensitive to changes in the prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold. KACC enters intoPrimary aluminum prices have historically been subject to significant cyclical fluctuations. During the period from January 1, 1993, through - ------------ *All references to tons in this report refer to metric tons of 2,204.6 pounds. September 30, 1997, the Average Midwest United States transaction price for primary aluminum hedging transactionshas ranged from approximately $.50 to $1.00 per pound. Alumina prices as well as fabricated aluminum product prices (which vary considerably among products) are significantly influenced by changes in the price of primary aluminum but generally lag behind primary aluminum price changes by up to three months. From time to time in the normalordinary course of business. Primary aluminumbusiness, KACC enters into hedging transactions are designed to mitigateprovide price risk management in respect of the Company'snet exposure to declines inof 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 market price of primary aluminum, while retainingaluminum. Forward sales contracts are used by KACC to effectively lock-in or fix the abilityprice that KACC will receive for its shipments. KACC also uses option contracts (i) to participate in favorable environments that may materialize.establish a minimum price for its product shipments, (ii) to establish a "collar" or range of prices for KACC's anticipated sales, and/or (iii) to permit KACC has employed strategies which include forward sales and purchasesto realize possible upside price movements. As of primary aluminum at fixed prices and the purchase or sale of options for primary aluminum. At September 30, 1996,1997, KACC had sold forward, at fixed prices, approximately 69,00017,300, 93,600 and 93,600 tons*24,000 tons of primary aluminum in excesswith respect to 1997, 1998 and 1999, respectively. As of its projected internal fabrication requirements forSeptember 30, 1997, and 1998, respectively, andKACC had also purchased put options to establish a minimum price for 66,000approximately 42,100 and 45,000 tons of such 1997 and 1998 surplus, respectively. During October 1996, KACC purchased put options to establish a minimum price for an additional 126,00052,000 tons of primary aluminum in excess of its projectedwith respect to 1997 internal fabrication requirements and 1998, respectively, and had entered into optionsoption contracts that established a price range for an additional 48,00051,000, 231,600 and 124,500 tons of the Company'sfor 1997, 1998 surplus. In addition, atand 1999, respectively. As of September 30, 1996,1997, KACC had sold forward approximately 73% and 85%virtually all of the alumina available to it in excess of its projected internal smelting requirements for 1997, 1998 and 1998, respectively. Virtually all of such 1997 and 1998 sales were made1999 at prices indexed to future prices of primary aluminum. FromENERGY KACC is exposed to energy price risk from fluctuating prices for fuel oil and natural gas consumed in the production process. Accordingly, KACC from time to time KACC alsoin the ordinary course of business enters into forward purchasehedging transactions with major suppliers of energy and option transactions to limit its exposure to increases in natural gas and fuel oil costs.energy related financial instruments. As of September 30, 1996,1997, KACC had option contracts for the purchase of approximately 40,000 MMBtu of natural gas per day during the first quarter of 1997, and a combination of fixed price purchase and option contracts for 20,000the purchase of approximately 44,000 MMBtu of natural gas per day during the remainder of 1997, and for 41,000 MMBtu of natural gas per day for the period April 1997 to December 1998. AtAs of September 30, 1996,1997, KACC also held a combination of fixed price purchase and option contracts for 54,000an average of 228,000, 232,000 and 25,000 barrels of fuel oil per month for the period January 1997, through December 1998.1998, and 1999, respectively. FOREIGN CURRENCY KACC also enters into hedging transactions in the normal course of business that are designedforward exchange contracts to reduce its exposurehedge material cash commitments to fluctuations in foreign exchange rates.subsidiaries or affiliates. At September 30, 1996,1997, KACC had net forward foreign exchange contracts totaling approximately $81.6$135.0 for the purchase of 110.0175.5 Australian dollars from JanuaryOctober 1997 through JuneDecember 1998, in respect of its commitments for 1997 and 1998 expenditures denominated in Australian dollars. At September 30, 1996,1997, KACC also held options to purchase approximately 10.0 Australian dollars over the net unrealized gain on KACC's position in aluminum forward sales and option contracts, based on an average pricelast three months of $1,481 per ton ($.67 per pound) of primary aluminum, natural gas and fuel oil forward purchase and option contracts, and forward foreign exchange contracts, was approximately $46.4. - ------------------ *All references to tons in this report refer to metric tons of 2,204.6 pounds.1997. See Note 9 of the Notes to Consolidated Financial Statements for the year ended December 31, 1995. 6. SUBSEQUENT EVENTS On October 23,1996. 7. RESTRUCTURING OF OPERATIONS The Company has previously disclosed that it set a goal of achieving significant cost reductions and other profit improvements, with the full effect planned to be realized in 1998 and beyond, measured against 1996 (the "Issuance Date"),results. The initiative is based on the Company's conclusion that the level of performance of its existing facilities and businesses would not achieve the level of profits the Company considers satisfactory based upon historic long-term average prices for primary aluminum and alumina. During the second quarter of 1997, the Company recorded a $19.7 restructuring charge to reflect actions taken and plans initiated to achieve the reduced production costs, decreased corporate selling, general and administrative expenses, and enhanced product mix intended to achieve this goal. The significant components of the restructuring charge are enumerated below. ERIE PLANT DISPOSITION During the second quarter of 1997, the Company formed a joint venture with a third party related to the assets and liabilities associated with the wheel manufacturing operations at its Erie, Pennsylvania, fabrication plant. Management subsequently decided to close the remainder of the Erie plant in order to consolidate its aluminum forgings operations at two other facilities for increased efficiency. As a result of the joint venture formation and plant closure, the Company recognized a net pre-tax loss of approximately $1.4. OTHER ASSET DISPOSITIONS As a part of the Company's profit enhancement and cost reduction initiative, management made decisions regarding product rationalization and geographical optimization, which led management to decide to dispose of certain assets which had nominal operating contribution. These strategic decisions resulted in the Company recognizing a pre-tax charge for approximately $15.6 associated with such asset dispositions. EMPLOYEE AND OTHER COSTS As a part of the Company's profit enhancement and cost reduction initiative, management concluded that certain corporate and other staff functions could be consolidated or eliminated resulting in a second quarter pre-tax charge of approximately $2.7 for benefit and other costs. 8. COMPLETED ACQUISITION During June 1997, Kaiser Bellwood Corporation, a newly formed, wholly owned subsidiary of KACC, completed an offering (the "Offering")the acquisition of $175.0 principal amountReynolds Metals Company's Bellwood, Virginia, extrusion plant and its existing inventories for a total purchase price (after post-closing adjustments) of 10 7/8% Senior Notes due 2006 (the "10 7/8% Senior Notes") at 99.5%$41.6, consisting of their principal amount to yield 10.96% at maturity. The 10 7/8% Senior Notes were not registeredcash payments of $38.4 and the assumption of approximately $3.2 of employee related and other liabilities. Upon completion of the transaction, Kaiser Bellwood Corporation became a subsidiary guarantor under the Securities Actindentures in respect of 1933, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The 10 7/8% Senior Notes rank pari passu with outstanding indebtedness under KACC's Credit Agreement dated as of February 15, 1994, as amended (the "Credit Agreement") and KACC's 9 7/9-7/8% Senior Notes due 2002, (the 9-7/10-7/8% Series B and Series D Senior Notes) in rightNotes due 2006, and priority12-3/4% Senior Subordinated Notes due 2003. 9. CONVERSION OF PRIDES TO COMMON STOCK During August 1997, the 8,673,850 outstanding shares of payment and are guaranteed on a senior, unsecured basis by certainPRIDES were converted into 7,227,848 shares of Common Stock pursuant to the terms of the Company's subsidiaries (the "Subsidiary Guarantors"). Net proceeds from the Offering on the Issuance Date, after estimated expenses, were approximately $168.9,PRIDES Certificate of which $91.7 were utilized to reduce the outstanding borrowings under the revolving credit facility of the Credit Agreement to zero. The remaining net proceeds (approximately $77.2) were investedDesignations. Further, in short-term investments pending their application for working capital and general corporate purposes, including capital projects. Pursuant to an agreementaccordance with the initial purchasersPRIDES Certificate of Designations, no dividends were paid or payable for the 10 7/8% Senior Notes, KACC andperiod June 30, 1997, to, but not including, the Subsidiary Guarantors agreed to file a registration statement (the "Registration Statement")date of conversion. However, in accordance with generally accepted accounting principles, the Securities & Exchange Commission within 30 days$1.3 of the Issuance Date with respect to a registered offer to exchange the 10 7/8% Senior Notes for new notes with substantially identical terms (the "Exchange Offer"), and to use their reasonable best efforts to have the Registration Statement declared effective within 90 days of the Issuance Date and the Exchange Offer consummated within 130 days of the Issuance Date. The Exchange Offer will be made only by means of a prospectus. On a pro forma basis, at September 30, 1996, after giving effectaccrued dividends attributable to the Offeringperiod June 30, 1997, to, but not including, the conversion date is treated as an increase in Additional capital at the date of conversion and the applicationmust still be reflected as a reduction of proceeds therefrom, the Company's total consolidated indebtedness would have increased from $867.3Net income (loss) available to $910.2, borrowing capacity of $273.1 would have been available for use under the Credit Agreement and the Company would have had available additional cash proceeds from the Offering of $37.7. During October 1996, the Credit Agreement was amended to, among other things, provide for the Offering of the 10 7/8% Senior Notes discussed above and to modify certain of the financial covenants contained in the Credit Agreement.common shareholders. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------------------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- The followingThis section should be read in conjunction with the response to Item 1, Part I, of this Report. Management's Discussion & Analysis of Financial Condition and Results of Operations, ("MD&A")This section contains statements which constitute forward looking statements"forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this section (see, for example, "Profit Enhancement and Cost Reduction Initiative," "Results of Operations," and "Liquidity and Capital Resources"). Such statements can be identified by the MD&A and include statements regardinguse of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the intent, beliefnegative thereof or current expectationsother variations thereon or comparable terminology, or by discussions of the Company, its directors or its officers primarily with respect to the future operating performance of the Company.strategy. Readers are cautioned that any such forward lookingforward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differvary materially from those in the forward lookingforward-looking statements as a result of various factors. The accompanying MD&A identifies importantThese factors include the effectiveness of management's strategies and decisions, general economic and business conditions, developments in technology, new or modified statutory or regulatory requirements, and changing prices and market conditions. This section and the Company's Annual Report on Form 10-K for the year ended December 31, 1996, each identify other factors that could cause such differences. RESULTS OF OPERATIONSNo assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. RECENT EVENTS AND DEVELOPMENTS The Company has previously disclosed that it has a goal of achieving significant cost reductions and other profit improvements, with the full effect planned to be realized in 1998 and beyond, measured against 1996 results. The initiative is based on the Company's operating results are sensitive to changes inconclusion that the level of performance of its existing facilities and businesses would not achieve the level of profits the Company considers satisfactory based upon historic long-term average prices of alumina,for primary aluminum and fabricated aluminum products,alumina. During the second quarter of 1997, the Company recorded a $19.7 million restructuring charge to reflect actions taken and also dependplans initiated to a significant degree onachieve the volumereduced production costs, decreased corporate selling, general and administrative expenses, and enhanced product mix of all products sold and on KACC's hedging strategies.intended to achieve this goal. See Note 57 of the Notes to Interim Consolidated Financial StatementsStatements. During June 1997, Kaiser Bellwood Corporation, a newly formed, wholly owned subsidiary of the Company, completed the acquisition of Reynolds Metals Company's Bellwood, Virginia, extrusion plant and its existing inventories for an explanationa total purchase price of KACC's hedging strategies.$41.6 million. See Note 8 of Notes to Interim Consolidated Financial Statements. During August 1997, the 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. The Company currently anticipates that the Volta River Authority may partially reduce its electric power allocation to the Company's 90% owned Volta Aluminium Company Limited ("Valco") smelter facility in Ghana in 1998. Informal discussions with local officials suggest that regional rainfall has been insufficient to raise the level of the lake, from which the facility receives its hydroelectric power, to maintain the current level of power for the coming year. Formal notice of Valco's 1998 power allocation is expected on or about November 15, 1997. Meetings are planned with local officials for early November to discuss the situation. RESULTS OF OPERATIONS The table on the following page provides selected operational and financial information on a consolidated basis with respect to the Company for the quarters and nine month periods ended September 30, 19961997, and 1995.1996. As an integrated aluminum producer, the Company uses a portion of its bauxite, alumina, and primary aluminum production for additional processing at certain of its other facilities. Intracompany shipments and sales are excluded from the information set forth on the following page. Interim results are not necessarily indicative of those for a full year. SELECTED OPERATIONAL AND FINANCIAL INFORMATION (Unaudited) (In millions of dollars, except shipments and prices)
Quarter Ended Nine Months Ended September 30, September 30, -------------------------------- -------------------------------------------------------------- ------------------------------ 1997 1996 19951997 1996 1995 -------------------------------- -------------------------------- (In millions of dollars, except shipments, prices, and per share amounts)------------------------------ ------------------------------ Shipments: (1) Alumina 579.2 598.6 471.51,457.0 1,506.7 1,494.6 Aluminum products: Primary aluminum 86.4 88.1 73.0246.9 262.9 184.5 Fabricated aluminum products 105.2 83.1 90.4299.5 245.4 284.3 -------------------------------- -------------------------------------------------------------- ------------------------------ Total aluminum products 191.6 171.2 163.4546.4 508.3 468.8 ================================ ============================================================== ============================== Average realized sales price: Alumina (per ton) $ 200 $ 187 $ 206196 $ 199 $ 203 Primary aluminum (per pound) .76 .67 .83.75 .69 .82 Net sales: Bauxite and alumina: Alumina $ 115.9 $ 111.7 $ 97.2285.6 $ 300.2 $ 303.8 Other (2) (3) 27.1 25.8 22.380.2 77.2 65.3 -------------------------------- -------------------------------------------------------------- ------------------------------ Total bauxite and alumina 143.0 137.5 119.5365.8 377.4 369.1 -------------------------------- -------------------------------------------------------------- ------------------------------ Aluminum processing: Primary aluminum 145.0 130.6 133.4409.5 402.8 335.0 Fabricated aluminum products 341.7 282.4 293.0990.6 861.4 929.0 Other (3) 4.4 2.9 4.412.7 10.5 13.6 -------------------------------- -------------------------------------------------------------- ------------------------------ Total aluminum processing 491.1 415.9 430.81,412.8 1,274.7 1,277.6 -------------------------------- -------------------------------------------------------------- ------------------------------ Total net sales $ 634.1 $ 553.4 $ 550.31,778.6 $ 1,652.1 $ 1,646.7 ================================ ============================================================== ============================== Operating income (loss): Bauxite and alumina $ 8.8 $ (2.1) $ 14.8 $ 8.8 $ 36.4 Aluminum processing (4) 64.1 29.1 58.9161.6 127.8 170.9 Corporate (5) (18.4) (16.5) (20.5)(55.3) (49.2) (57.9) -------------------------------- -------------------------------------------------------------- ------------------------------ Total operating income $ 54.5 $ 10.5 $ 53.2121.1 $ 87.4 $ 149.4 ================================ ============================================================== ============================== Net income (loss) $ 17.5 $ (6.6) $ 12.533.8 $ 11.5 ============================== ============================== Capital expenditures $ 39.3 ================================ ================================ Capital expenditures: Property, plant, and equipment $ 39.1 $ 17.1 $ 90.8 $ 44.2 Investments in unconsolidated affiliates .1 9.0 .3 9.0 -------------------------------- -------------------------------- Total capital expenditures25.9 $ 39.2 $ 26.194.7 $ 91.1 $ 53.2 ================================ ================================ ____________________________________============================== ==============================
[FN] - --------------------------------- (1) In thousands of metric tons. (2) Includes net sales of bauxite. (3) Includes the portion of net sales attributable to minority interests in consolidated subsidiaries. Recent Trends(4) Operating income for the nine months ended September 30, 1997 includes a pre-tax charge of $15.1 related to restructuring of operations recorded in the quarter ended June 30, 1997. (5) Operating income for the nine months ended September 30, 1997 includes a pre-tax charge of $4.6 related to restructuring of operations recorded in the quarter ended June 30, 1997. OVERVIEW The Company's operating results are sensitive to changes in prices of alumina, primary aluminum, and Developmentsfabricated 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 fluctuations. Alumina prices as well as fabricated aluminum product prices (which vary considerably among products) are significantly influenced by changes in the price of primary aluminum but generally lag behind primary aluminum price changes by up to three months. During 1995, the averagefirst nine months of 1997, the Average Midwest U.S.United States transaction price (the "AMT("AMT Price") for primary aluminum was approximately $.86remained relatively stable generally in the $.75 - $.80 per pound compared to $.72 and $.54 per pound in 1994 and 1993, respectively. The significant improvement in prices during 1994 and 1995 resulted from strong growth in Western world consumption of aluminum and the curtailment of production in response to lower prices in prior periods by many producers worldwide. In 1995, production of primary aluminum increased and consumption of aluminum continued to grow, but at a much lower rate than in 1994. In general, the overall aluminum market was strongest in the first half of 1995. By the second half of 1995, orders and shipments for certain products had softened and the rate of decline in London Metal Exchange ("LME") inventories had leveled off. By the end of 1995, some small increases in LME inventories occurred, and prices of aluminum weakened from first-half levels. This trend has continued throughout the first ten months of 1996 as the supply of primary aluminum exceeded demand during this period. Net reported primary aluminum inventories have increased by approximately 230,000 tons in 1996 based upon recent reports of the LME (through November 1, 1996) and the International Primary Aluminum Institute (through August 31, 1996), following substantial declines of 764,000 and 1,153,000 tons in 1994 and 1995, respectively.range. The AMT Price for primary aluminum for the week ended November 1, 1996,October 31, 1997, was approximately $.68$.77 per pound. Increased production of primary aluminum dueThis compares favorably to restarts of certain previously idled capacity,1996 when the commissioning of a major new smelterAMT Price remained fairly stable generally in South Africa,the $.70 - $.75 range through June and then declined during the continued high level of exports from the Commonwealth of Independent States have contributed to increased supplies of primary aluminum to the Western world in 1996. While the economiessecond half of the major aluminum consuming regions -year, reaching a low of approximately $.65 per pound for October 1996, before recovering late in the United States, Japan, Western Europe, and Asia - are performing relatively well,year. See Note 6 of the Company believes that the reductionNotes to Interim Consolidated Financial Statements for a discussion of aluminum inventories by consumers, as prices have continued to decline, has suppressed the growth in primary aluminum demand that normally accompanies growth in economic and industrial activity. In addition to these supply/demand dynamics, the Company believes the recent decline in primary aluminum prices may have been influenced by a recent major decline in copper prices on the LME. Fourth Quarter ResultsKACC's hedging activities. QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997, COMPARED TO QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996 SUMMARY The Company expects to continue to sustainreported net losses in the fourth quarterincome of 1996 due principally to lower average realized prices for alumina$17.5 million, or $.22 per common and primary aluminum, as compared to prices realized in the fourth quarter of 1995, and due to increased raw material, energy, and operational costs associated with the production of alumina at the Company's Gramercy alumina refinery and 65% owned Alpart alumina refinery in Jamaica, as compared to amounts incurred in the fourth quarter of 1995. Such losses could substantially exceed the losscommon equivalent share, for the third quarter of 1996 if the price of primary aluminum does not increase from current levels. Profit Enhancement and Cost Cutting Initiative The Company has set a goal of achieving significant cost reductions and other profit improvements during 1997, with the full effect plannedcompared to be realized in 1998. The initiative is based on the Company's conclusion that the current level of performance of its existing facilities and businesses will not achieve the level of profits the Company considers satisfactory based upon historic long-term average prices for primary aluminum and alumina. To achieve this goal, the Company plans reductions in production costs, improvements in operating efficiencies, decreases in corporate selling, general and administrative expenses, and enhancements to product mix. There can be no assurance that the initiative will result in the desired cost reductions and other profit improvements. Quarter and Nine Months Ended September 30, 1996 Compared to Quarter and Nine Months Ended September 30, 1995 Summary - The Company reported a net loss of $6.6 million, or $.12 per common share, for the third quarter of 1996, compared to net income of $12.5 million, or $.13 perand common equivalent share, for the same period of 1995.1996. Net sales in the third quarter of 19961997 totaled $553.4$634.1 million compared to $550.3$553.4 million in the third quarter of 1995.1996. For the first nine months of 1996, the Company'snine-month period ended September 30, 1997, net income was $11.5$33.8 million, or $.07$.39 per common and common equivalent share compared to net income of $39.3$11.5 million, or $.40$.07 per common and common equivalent per share infor the firstnine-month period ended September 30, 1996. Net sales for the nine months of 1995. Net salesended September 30, 1997, were $1,778.6 million compared to $1,652.1 million for the first nine months of 1996 were $1,652.1 million, compared to $1,646.7 million for the same period in 1995.1996. Results for the third quarter and nine monthsnine-month period ended September 30, 1996, reflect1997, include the substantial reduction in market prices for primary aluminum more fully discussed above. Alumina prices, which are significantly influenced by changes in primary aluminum prices, also declined from periodeffect of certain non-recurring items including a $19.7 million restructuring charge (discussed above), an approximate $12.5 million non- cash tax benefit related to period. The decrease in product prices more than offset the positive impactsettlement of increases in shipments in several segments of the Company's business, as more fully discussed below. Resultscertain matters and a $5.8 million charge related to additional litigation reserves. Excluding these items, net income for the first nine months of 1995 includenine-month period ended September 30, 1997, would have been approximately $17.0$37.1 million, of first-quarter 1995 pre-tax expenses associated with an eight-day strike at five major U.S. locations, a six-day strike atand primary earnings per common and common equivalent share for the Company's Alpart alumina refinery, and a four-day disruptionperiod would have been $.43. BAUXITE AND ALUMINA Net sales of alumina production at Alpart caused by a boiler failure. Bauxite and Alumina - Net sales for this segment increased by 15%4% for the quarter ended September 30, 1996,1997, from the comparable period in the prior year, as increased shipmentsa result of alumina (27%) more than offset a 9% decline7% increase in average realized prices realized from the sale of alumina. Net segment sales foralumina, offset by a 3% decline in alumina shipments. Shipment volumes were down as compared to the nine monthsquarter ended September 30, 1996, were basically unchangedprimarily as a result of the timing of shipments. For the nine-month period ended September 30, 1997, net segment sales declined by 3% from the samecomparable period in 1995 as, onthe prior year. This change was due to a year to date basis, nominal alumina price declines were offset by2% decrease in average realized prices between periods and a modest increase3% reduction in alumina shipments. The reductionSegment operating income improved substantially on a quarter to quarter basis and, to a lesser extent, for the comparative nine month periods as well. On a quarterly basis, the improvement resulted primarily from improvements in average realized prices and operating efficiencies and reduced raw material and energy prices. On a year-to-date basis, these improvements were somewhat offset by the impact of reductions in both the average realized particularlyalumina price and alumina shipments as discussed above. ALUMINUM PROCESSING Net sales of primary aluminum for the quarter ended September 30, 1997, increased by 11% from the comparable prior year period as a result of a 13% increase in average realized prices offset by a 2% decrease in shipments. Net sales of fabricated aluminum products for the quarter ended September 30, 1997, were up 21% as compared to the prior year period as a result of a 27% increase in shipments offset by a 4% decrease in average realized prices. The increase in fabricated aluminum product shipments over the third quarter of 1996 reflectswas the substantial declineresult of the Company's June 1997 acquisition of an extrusion facility in primary aluminum prices experienced in 1996 discussed above,Bellwood, Virginia, as well as the impact of certain short termincreased international sales of previously uncommitted alumina production. Operating income (loss)can sheet and increased shipments of heat- treated products. For the nine-month period ended September 30, 1997, net sales for thisthe aluminum processing segment ofincreased by approximately 11% from the Company's business declined significantly fromcomparable prior year periodsperiod primarily as a result of: (1) reduced gross margins from aluminaof a 15% increase in fabricated aluminum product net sales. The increase in fabricated product net sales resultingresulted from the previouslysame shipment and price factors discussed price declines; (2) high operating costs associated with disruptions in the power supply atpreceding paragraph. Net sales of primary aluminum for the Company's Alpart alumina refinery;nine-month period ended September 30, 1997, were basically flat as compared to the prior year as reduced shipments for the period were offset by an increase in the average realized price. In addition to being affected by the price and (3) increased natural gas costs atvolume factors discussed above, the Company's Gramercy, Louisiana alumina refinery. Operatingaluminum processing segment's operating income for the nine months ended September 30, 1996, was1997, also unfavorably impacted by a temporarybenefited from reduced power, raw material quality problem experienced atand supply costs as well as improved operating efficiencies. In addition, the Company's Gramercy facility during the second quarter of 1996. Aluminum Processing - Net sales of primary aluminum declined by only 2% for the quarter ended September 30, 1996, from the comparable prior year period as a 19% reduction in prices realized was substantially offset by a 21% increase in shipments. For the first nine months of 1996 increases in shipments of 42.5% more than offset a 16% decline in product prices from period to period. The increases in shipments during the quarter and the nine months ended September 30, 1996, are the result of increased shipments of primary aluminum to third parties as a result of a decline in intracompany transfers. Net sales of fabricated aluminum products were down 4% and 7% for the quarter and the nine months ended September 30, 1996, respectively, as compared to prior year periods as a result of a decrease in shipments (primarily related to can sheet activities) resulting from reduced growth in demand and the reduction of consumer inventories The impact of reducedproduct shipments was to a limited degree offset by 5% and 7% increases in prices realized from the sale of fabricated aluminum productssegment's operating income for the quarter and nine monthsmonth period ended September 30, 1996, respectively,1997, includes approximately $2.7 million and $7.5 million of operating income realized during the periods, related to the settlement of certain issues related to energy service contracts. Operating income for the nine-month period ended September 30, 1997, also includes a $15.1 million second quarter charge resulting from a shift in product mix (to higher-end value added products), due to reduced can sheet shipments. Corporate -the restructuring of operations. CORPORATE Corporate operating expenses represent normal and recurring corporate general and administrative expenses, which are not allocated to the Company's business segments. Operating results for the nine-month period ended September 30, 1997, includes a pre-tax charge of approximately $4.6 million associated with the Company's restructuring of operations. LIQUIDITY AND CAPITAL RESOURCES Capital Structure In April 1996,CAPITAL STRUCTURE MAXXAM Inc. ("MAXXAM") and MAXXAM Group Holdings Inc. ("MGHI"), a wholly owned subsidiary of MAXXAM, collectively own approximately 63% of the Company's Common Stock, par value $.01 per share. The remaining approximately 37% of the Company's Common Stock is publicly held. MGHI has pledged 27,938,250 shares of the Company's Common Stock beneficially owned by it (the "Pledged Shares") as security for $225.7 million of debt securities of one of its wholly owned subsidiaries. Additionally, MGHI has agreed to pledge up to 16,055,000 of such Pledged Shares as security for $130.0 million of its debt securities should the security pledge related to the $225.7 million of debt securities be released due to an early retirement of the related debt (other than by a refinancing). The Company filed a shelf-registrationhas an effective "shelf" registration statement with the Securities and Exchange Commission (the "SEC") covering the sale by MAXXAMoffering of up to 10 million10,000,000 shares of the Company's Common Stock that are owned by MAXXAM. ThereAny such offering would only be made by means of a prospectus. The Company will not receive any of the net proceeds from any transaction initiated by MAXXAM pursuant to this registration statement. The Company also has an effective "shelf" registration statement covering the offering from time to time of up to $150.0 million of equity securities. Any such offering will only be no proceeds tomade by means of a prospectus. The Credit Agreement does not permit the Company fromor KACC to pay any such sale. The registration has been declared effective by the SEC. The Company's Board of Directors had approved a proposed recapitalization (the "Proposed Recapitalization") which would, among other things, (i) provide for two classes ofdividends on their common stock: Class A Common Shares with one vote per share ("Class A Common Shares") and a new, lesser-voting class designated as Common Stock with 1/10 vote per share ("Recap Common Stock"); (ii) redesignate as Class A Common Shares the 100 million currently authorized shares of the Company's existing Common Stock and authorize an additional 250 million shares of Recap Common Stock; and (iii) reclassify each issued share of the Company's existing Common Stock into (a) .33 of a Class A Common Share and (b) .67 of a share of Recap Common Stock. On May 1, 1996, the Company's stockholders approved the Proposed Recapitalization, but it was not implemented at that time due to a preliminary injunction issued by the Delaware Court of Chancery. The preliminary injunction was upheld on appeal by the Delaware Supreme Court on August 29, 1996. The Company's Board of Directors subsequently adopted a resolution abandoning the Proposed Recapitalization. The Company has filed a motion with the Delaware Court of Chancery to dismiss the shareholder litigation relating to the Proposed Recapitalization on the ground of mootness and has filed a response to plaintiffs' motion for entry of a permanent injunction. The Court has not ruled on either motion. See Part II, Item 1. "LEGAL PROCEEDINGS - Matheson et al v. Kaiser Aluminum Corporation et al" for information regarding a pending lawsuit with respect to the Proposed Recapitalization. The decision to abandon the Proposed Recapitalization does not preclude a recapitalization from being proposed to the Company's stockholders in the future, including a substantially identical recapitalization structure after the redemption or conversion of the PRIDES. In the event that such a recapitalization were implemented in the future, MAXXAM could retain a majority of the voting power of the Company even if it substantially reduced its total holdings of the Company's equity securities by more than two-thirds. On October 23, 1996, KACC completed the Offering of $175.0 million principal amount of the 10-7/8% Senior Notes at 99.5% of their principal amount to yield 10.96% at maturity. The 10-7/8% Senior Notes rank pari passu with outstanding indebtedness under the Credit Agreement and the 9-7/8% Senior Notes in right and priority of payment and are guaranteed on a senior, unsecured basis by certain of the Company's subsidiaries. Net proceeds from the Offering on the Issuance Date, after estimated expenses, were approximately $168.9 million, of which $91.7 million were utilized to reduce the outstanding borrowings under the revolving credit facility of the Credit Agreement to zero. The remaining net proceeds (approximately $77.2 million) were invested in short-term investments pending their application for working capital and general corporate purposes, including capital projects. Operating Activitiesstock. OPERATING ACTIVITIES At September 30, 1996,1997, the Company had working capital of $398.4$469.8 million, compared with working capital of $331.7$414.3 million at December 31, 1995.1996. The increase in working capital was due primarily to an increase in Inventories and Prepaid expenses and other current assetsReceivables and a decrease in Accounts payable and Accrued salaries, wages, and related expenses, partially offset by a decrease in ReceivablesCash and an increase in Other accrued liabilities. Investing Activitiescash equivalents. INVESTING ACTIVITIES Capital expenditures during the firstquarter and nine months of 1996ended September 30, 1997, were $91.1$25.9 million whichand $94.7 million, respectively, and were used primarily to acquire the Bellwood extrusion facility from Reynolds, improve production efficiency, reduce operating costs, expand capacity at existing facilities, and construct new facilities, including thefacilities. The Company's first micromillMicromill(TM) facility, which is nearing completionwas constructed in Nevada during 1996 as a full-scale demonstration and production facility.facility, achieved operational start-up by year-end 1996. The facility remained in a start-up mode during the first nine months of 1997 as the Company continued its efforts to implement the Micromill(TM) technology on a full scale basis. While the Micromill(TM) technology has not yet been fully implemented or commercialized, and no assurances can be given that the Company will ultimately be successful in this regards, the Company currently expects to commence limited product shipments to customers in the fourth quarter of 1997. Total consolidated capital expenditures (of which approximately 6%7% is expected to be funded by the Company's minority partners in certain foreign joint ventures) are expected to be between $130.0$70.0 and $160.0$140.0 million per annum in each of 19961997 through 1998.1999. Management continues to evaluate numerous projects, all of which require substantial capital, including the Company's micromillMicromill project, and other potential opportunities both in the United States and overseas. In responseSubsequent to lowerSeptember 30, 1997, a joint decision was made by a KACC subsidiary and its joint venture partner to terminate and dissolve the Sino-foreign aluminum and alumina prices, management may consider deferring certain non-essential capital expenditures and/or raising investment capital (including through joint ventures),venture in order to conserve a portionwhich the subsidiary had invested approximately $9.0 million in 1995. Under the terms of the Company's available cash resourcesjoint venture agreement and Chinese law, a distribution of the joint venture's net assets is to meet incremental capitalbe made to each of the parties in respect of their individual ownership interests. The amount that will ultimately be received upon dissolution and operating requirementsthe associated terms of any payments are the subject of ongoing negotiations and is subject to take advantage of new investment opportunities. During July 1996, the directors of Yellow River Aluminum Industry Company Limited (the "Joint Venture"), a Sino-foreign joint equity enterprise organized under the lawcertain governmental approvals by officials of the People's Republic of China between Kaiser Yellow River Investment Limited ("KYRIL"), a subsidiary of KACC, and Lanzhou Aluminum Smelters ("LAS") of the China National Nonferrous Metal Industry Corporation, KYRIL and LAS reached an agreement (i) that extended until early 1997 the time for KYRIL to make a second capital contribution to the Joint Venture, and (ii) that KYRIL would continue to explore various methods of financing any future capital contributions to the Joint Venture, including financing that could be obtained from third-party investors. Financing Activities and LiquidityChina. FINANCING ACTIVITIES AND LIQUIDITY At September 30, 1996,1997, the Company had long-term debt of $858.4$972.0 million, compared with $749.2$961.9 million at December 31, 1995.1996. The change in long-term debt between periods is primarily the result of $19.0 million of proceeds from the Spokane County, Washington, Solid Waste Disposal Revenue Bonds, which were loaned to KACC to finance certain qualifying capital expenditures at its Mead smelter, offset by scheduled payments of the current portion of long-term debt. At September 30, 1996, $141.91997, $273.8 million (of which $73.1$73.8 million could have been used for letters of credit) was available to KACC under the Credit Agreement. On a pro forma basis, after giving effect to the Offering and the application of proceeds therefrom, as of September 30, 1996, the Company would have had long-term debt of $901.3 million, $273.1 million of borrowing capacity would have been available for use under the Credit Agreement, and the Company would have had additional available cash proceeds from the Offering of $37.7 million. During the nine months ended September 30, 1996, total borrowings and repayments under the revolving credit facility of the Credit Agreement were $468.7 million and $350.6 million, respectively. During the nine months ended September 30, 1995, total borrowing and repayments under the revolving credit facility of the Credit Agreement were $481.9 million and $426.3 million, respectively. Loans under the Credit Agreement bear interest at a spread (which varies based on the results of a financial test) over either a base rate or LIBOR at the Company's option. During the quarter and nine month period ended September 30, 1997, the average per annum at KACC's election, equal to a Reference Rate (as defined) plus a margin of 0% to 1.50% or LIBO Rate (Reserve Adjusted) (as defined) plus a margin of 1.75% to 3.25%. The interest rate margins applicable to borrowingsrates on loans outstanding under the Credit Agreement are based on a financial test, determined quarterly. During the first two quarters of 1996, the Company paid interest at a rate per annumwere approximately 9.0% and 9.5%, respectively. Upon completion of the Reference Rate plus 0% or LIBO Rate plus 1.75%. Duringacquisition of the third quarter of 1996, the per annum interest rates increased by .5% to the Reference Rate plus .5% or LIBO Rate plus 2.25%. Effective October 1, 1996, the margin applicable to loansBellwood facility, Kaiser Bellwood Corporation became a subsidiary guarantor under the Credit Agreement increased by an additional.5% per annum based on the financial test.indentures in respect of KACC's 9-7/8% Senior Notes due 2002, 10-7/8% Series B and Series D Senior Notes due 2006, and 12-3/4% Senior Subordinated Notes due 2003. Management believes that the Company's existing cash resources, together with cash flows from operations and borrowings under the Credit Agreement, will be sufficient to meet its working capital and capital expenditure requirements for the next year. Additionally, with respect to long-term liquidity, management believes that operating cash flows,flow, together with the ability to obtain both short and long-term financing, should provide sufficient funds to meet the Company's working capital and capital expenditure requirements. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Environmental Proceedings Aberdeen Pesticide Dumps Site Matter In May 1996, the Environmental Protection Agency (the "EPA") urged KACC to rejoin the respondents who are parties to a PRP Participation Agreement (the "Group") and indicated that it would consider seeking penalties against KACC if it did not. On October 10, 1996, the EPA notified KACC that it deems KACC to be in violation of Administrative Orders issued by the EPA under Section 106(a) of CERCLA ordering the respondents, including KACC, to perform the soil remedial design and remedial action described in the Record of Decision for the Aberdeen Pesticide Dumps Site (the "Sites"). KACC and certain members of the Group have entered into an agreement with the United States Department of Justice to engage in a mediation process regarding an appropriate allocation of responsibility for response costs at the Sites. KACC has also agreed to fund a portion of the costs associated with certain work at the Sites during the mediation process. See Part I, Item 3. "LEGAL PROCEEDINGS - Aberdeen Pesticide Dumps Site Matter" in the Company's Report on Form 10-K for the year ended December 31, 1995 (the "Form 10-K"). Catellus Development Corporation v. Kaiser Aluminum & Chemical Corporation and James L. Ferry & Son Inc. On July 8, 1996, the United States District Court for the Northern District of California issued an order awarding the City of Richmond, et al. (the "Plaintiffs") nominal costs, which amount has been paid. The order also awarded Catellus Development Corporation ("Catellus") de minimis costs. Catellus has filed a notice of appeal. On August 12, 1996, the Court issued an order granting the Catellus motion for attorneys' fees in the amount of approximately $.9 million. KACC and Catellus have filed notices of appeal with respect to the attorneys' fees award. Based on KACC's estimate of future costs of cleanup, resolution of the Catellus matter is not expected to have a material adverse effect on the Company's consolidated financial condition, results of operations, or liquidity. See Part I, Item 3. "LEGAL PROCEEDINGS - Catellus Development Corporation v. Kaiser Aluminum & Chemical Corporation and James L. Ferry & Son Inc." in the Company's Form 10-K and Part II, Item 1. "LEGAL PROCEEDINGS - Catellus Development Corporation v. Kaiser Aluminum & Chemical Corporation and James L. Ferry & Son Inc." in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 (the "First Quarter 10-Q"). Waste Inc. Superfund Site KACC has now entered into a Participation Agreement with thirteen of the respondents to perform the work required under the unilateral Administrative Order for Remedial Design and Remedial Action issued by the EPA under CERCLA to thirty-two respondents, including KACC, for remedial design and action at the Waste Inc. Superfund Site at Michigan City, Indiana. See Part I, Item 3. "LEGAL PROCEEDINGS - Waste Inc. Superfund Site" in the Company's Form 10-K. Other Proceedings Matheson et al v. Kaiser Aluminum Corporation et al. On August 29, 1996, the Delaware Supreme Court upheld the preliminary injunction and remanded the case to the Court of Chancery. On September 24, 1996, the plaintiffs filed a motion to make permanent the temporary injunction issued on April 8, 1996. On September 27, 1996, the Company's Board of Directors adopted a resolution abandoning the Proposed Recapitalization. On October 2, 1996, the Company filed a motion in the Delaware Court of Chancery to dismiss the shareholder litigation relating to the Proposed Recapitalization on the ground of mootness and filed a response to plaintiffs' motion for entry of a permanent injunction. The Court has not ruled on either motion. See Part I, Item 2. "MD&A - Liquidity and Capital Resources - Capital Structure" of this Report and Part I, Item 3. "LEGAL PROCEEDINGS - Matheson et al v. Kaiser Aluminum Corporation et al" in the Company's Form 10-K, Part II, Item 1. "LEGAL PROCEEDINGS - Matheson et al v. Kaiser Aluminum Corporation et al" in the Company's First Quarter 10-Q and Part II, Item 1. "LEGAL PROCEEDINGS - Matheson et al v. Kaiser Aluminum Corporation et al" in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (the "Second Quarter 10-Q"). Hammons v. Alcan Aluminum Corp. et al On July 18, 1996, the plaintiff filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit appealing the summary judgement granted by the United States District Court for the Central District of California in favor of KACC and other defendants and the Court's dismissal of the complaint as to all defendants. See Part I, Item 3. "LEGAL PROCEEDINGS - Hammons v. Alcan Aluminum Corp. et al" in the Company's Form 10-K, Part II, Item 1. "LEGAL PROCEEDINGS - Hammons v. Alcan Aluminum Corp. et al" in the Company's First Quarter 10-Q and Part II, Item 1. "LEGAL PROCEEDINGS - Hammons v. Alcan Aluminum Corp. et al" in the Company's Second Quarter 10-Q.----------------- Asbestos-related Litigation KACC is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with KACC or exposure to products containing asbestos produced or sold by KACC. The portion of Note 45 of the Notes to Interim Consolidated Financial Statements contained in this report under the heading "Asbestos Contingencies" is incorporated herein by reference. See Part I, Item 3. "LEGAL PROCEEDINGS - - Asbestos-related Litigation" in the Company's Form 10-K.10-K for the year ended December 31, 1996. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits. Exhibit No. Exhibit ----------- ------- 4.1 Sixth3.1 Restated Certificate of Incorporation of Kaiser Aluminum Corporation (the "Company" or "KAC"), dated February 21, 1991 (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Registration Statement on Form S-1, dated June 11, 1991, filed by KAC, Registration No. 33-37895). 3.2 Certificate of Retirement of KAC, dated October 24, 1995 (incorporated by reference to Exhibit 3.2 to the Report on Form 10-K for the period ended December 31, 1995, filed by KAC, File No. 1-9447). *3.3 Amended and Restated Bylaws of KAC, dated October 1, 1997. *4.7 Eleventh Amendment to Credit Agreement and Limited Waivers, dated as of October 1, 1996,20, 1997, amending the Credit Agreement, dated as of February 15, 1994, as amended, among the Company, KACC, KAC, the financial institutions a party thereto, and BankAmerica Business Credit, Inc., as Agent. 4.2 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 (the "Subsidiary Guarantors"), and First Trust National Association, as Trustee regarding KACC's 10 7/8% Senior Notes due 2006. 4.3 Registration Rights Agreement, dated as of October 23, 1996, among KACC, the Subsidiary Guarantors and the initial purchasers of KACC's 10 7/8% Senior Notes due 2006. 10 Employment Agreement made and entered into as of September 1, 1996, by and between KACC and Jack A. Hockema. 27*27 Financial Data Schedule. (b) Reports on Form 8-K. No reportA Current Report on Form 8-K was filed by the Company during(under Item 5.) on August 15, 1997, announcing the quarter ended September 30, 1996.Company's intention to redeem its 8.255% PRIDES, Convertible Preferred Stock, par value $.05 per share ("PRIDES"), on August 29, 1997, pursuant to the PRIDES Certificate of Designations. - --------------- * Filed herewith SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, who hashave signed this report on behalf of the registrant and as the principal financial officer and principal accounting officer of the registrant.registrant, respectively. KAISER ALUMINUM CORPORATION /s/ John T. La Duc By:________________________ ---------------------------- John T. La Duc Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Arthur S. DonaldsonDaniel D. Maddox By:________________________ Arthur S. Donaldson ---------------------------- Daniel D. Maddox Controller - Corporate Consolidation and Reporting (Principal Accounting Officer) Dated: November 7, 19965, 1997