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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, 1994
Commission file number 1-3605
KAISER ALUMINUM & CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-0928288
(State of Incorporation) (I.R.S. Employer Identification No.)
6177 Sunol Boulevard, Pleasanton, California 94566-7769
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 462-1122
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Cumulative Convertible Preference Stock
(par value $100)
4 1/8% Series None
4 3/4% (1957 Series) None
4 3/4% (1959 Series) None
4 3/4% (1966 Series) None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Cumulative (1985 Series A) Preference Stock
Cumulative (1985 Series B) Preference Stock
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes X
___
No_____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ___
As of March 15, 1995, there were 46,171,365 shares of the common stock
of the registrant outstanding, all of which were owned by Kaiser
Aluminum Corporation, the parent corporation of the registrant. As of
March 15, 1995, non-affiliates of the registrant held 726,889 shares
of Cumulative (1985 Series A) Preference Stock and 124,209 shares of
Cumulative (1985 Series B) Preference Stock of the registrant. The
aggregate value of the Cumulative (1985 Series A) Preference Stock and
the Cumulative (1985 Series B) Preference Stock, based upon the
redemption price for such stock, is $42.6 million.
Certain portions of the registrant's definitive proxy statement to be
filed not later than 120 days after the close of the registrant's
fiscal year are incorporated by reference into Part III of this Report
on Form 10-K.
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NOTE
Kaiser Aluminum & Chemical Corporation's Report on Form 10-K filed
with the Securities and Exchange Commission includes all exhibits
required to be filed with the Report. Copies of this Report on Form
10-K, including only Exhibit 21 of the exhibits listed on pages 59-62
of this Report, are available without charge upon written request.
The registrant will furnish copies of the other exhibits to this
Report on Form 10-K upon payment of a fee of 25 cents per page.
Please contact the office set forth below to request copies of this
Report on Form 10-K and for information as to the number of pages
contained in each of the other exhibits and to request copies of such
exhibits:
Corporate Secretary
Kaiser Aluminum & Chemical Corporation
6177 Sunol Boulevard
Pleasanton, California 94566-7769
(i)
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
TABLE OF CONTENTS
Page
----
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . 15
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . 15
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . 57
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . 57
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . 57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . . . 57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . 57
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K. . . . . . . . . . . . . . . . . . . . 57
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
INDEX OF EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . 59
EXHIBIT 21 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . 63
(ii)
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
PART I
ITEM 1. BUSINESS
Industry Overview
-----------------
Primary aluminum is produced by the refining of bauxite (the major
aluminum-bearing ore) into alumina (the intermediate material) and the
reduction of alumina into primary aluminum. Approximately two pounds
of bauxite are required to produce one pound of alumina, and
approximately two pounds of alumina are required to produce one pound
of primary aluminum. Aluminum's valuable physical properties include
its light weight, corrosion resistance, thermal and electrical
conductivity, and high tensile strength.
Demand
The packaging and transportation industries are the principal
consumers of aluminum in the United States, Japan, and Western Europe.
In the packaging industry, which accounted for approximately 22% of
consumption in 1993, aluminum's recyclability and weight advantages
have enabled it to gain market share from steel and glass, primarily
in the beverage container area. Nearly all beer cans and
approximately 95% of the soft drink cans manufactured for the United
States market are made of aluminum. Growth in the packaging area is
generally expected to continue in the 1990s due to general population
increase and to further penetration of the beverage can market in Asia
and Latin America, where aluminum cans are a substantially lower
percentage of the total beverage container market than in the United
States.
In the transportation industry, which accounted for approximately 29%
of aluminum consumption in the United States, Japan, and Western
Europe in 1993, automotive manufacturers use aluminum instead of steel
or copper for an increasing number of components, including radiators,
wheels, and engines, in order to meet more stringent environmental and
fuel efficiency requirements through vehicle weight reduction.
Management believes that sales of aluminum to the transportation
industry have considerable growth potential due to projected increases
in the use of aluminum in automobiles.
Supply
As of year-end 1994, Western world aluminum capacity from 108 smelting
facilities was approximately 16.3 million tons* per year. Net exports
of aluminum from the former Sino Soviet bloc increased approximately
threefold from 1990 levels during the period from 1991 through 1994 to
approximately two million tons per year. These exports contributed to
a significant increase in London Metal Exchange stocks of primary
aluminum which peaked in mid-1994. See "-Recent Industry Trends."
Government officials from the European Union, the United States,
Canada, Norway, Australia, and the Russian Federation have ratified
as a trade agreement a Memorandum of Understanding (the "Memorandum")
which provided, in part, for (i) a reduction in Russian Federation
primary aluminum production by 300,000 tons per year within three
months of the date of ratification of the Memorandum and an additional
200,000 tons within the following three months, (ii) improved
availability of comprehensive data on Russian aluminum production, and
(iii) certain assistance to the Russian aluminum industry. The
Memorandum did not require specific levels of production cutbacks by
other producing nations. The Memorandum was finalized in February
1994 and is scheduled to remain in effect through the end of 1995.
--------------------------------
* All references to tons in this Report refer to metric tons of
2,204.6 pounds.
1
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
Based upon information currently available, management believes that
only moderate additions will be made during 1995-1996 to Western world
alumina and primary aluminum production capacity. The increases in
alumina capacity during 1995-1996 are expected to come from one new
refinery and incremental expansions of existing refineries.
Recent Industry Trends
The aluminum industry environment improved significantly in 1994
compared to 1993. Prices of primary aluminum were at historic lows in
real terms near the beginning of 1994, but nearly doubled by the end
of 1994. In response to low prices of primary aluminum in 1993 and
the first part of 1994, a number of smelting facilities were partially
or fully curtailed. Western world production of primary aluminum
declined in 1994 to approximately 14.5 million tons from approximately
15.1 million tons in 1993. Demand for aluminum products was relatively
weak in 1993, but became very strong in the United States and became firm
in Europe in 1994. Primary aluminum prices improved not only because
of improved demand, but also because the inventories of primary
aluminum on the London Metal Exchange were substantially reduced in
the second half of 1994. However, significant amounts of inventory
remained at the end of 1994, and some reduction of prices from year-
end 1994 occurred in the first quarter of 1995 to reflect that
circumstance.
When previously curtailed smelting capacity is restarted, it will
result in an increase in the demand for alumina to supply those
operations. In addition, in the last several years, large amounts of
alumina have been imported into the Commonwealth of Independent
States. Consequently, management believes that alumina demand and
prices will strengthen as smelters are restarted.
Supply and demand fundamentals for the flat-rolled aluminum products
business, particularly in the can sheet business, improved in 1994
because of higher demand and a reduction of supply. Management
believes that supply and demand for these products will move toward
being in balance. The demand for aluminum extrusions and forgings in
1994 also improved compared to 1993, and supply and demand for these
products also is expected to move toward being in balance.
Overall, management believes that there will be relatively strong
demand for aluminum for the near future, barring an economic
recession. This demand is expected to come both from continued growth
in the developed markets through increased penetration of the
automotive sector, and from general uses in emerging markets.
The Company
-----------
General
Kaiser Aluminum & Chemical Corporation ("the Company") is a direct
subsidiary of Kaiser Aluminum Corporation ("Kaiser") and is an
indirect subsidiary of MAXXAM Inc. ("MAXXAM"). The Company operates
in all principal aspects of the aluminum industry - the mining of
bauxite, the refining of bauxite into alumina, the production of
primary aluminum from alumina, and the manufacture of fabricated
(including semi-fabricated) aluminum products. In addition to the
production utilized by the Company in its operations, the Company
sells significant amounts of alumina and primary aluminum in domestic
and international markets. In 1994, the Company produced
approximately 2,928,500 tons of alumina, of which approximately 71%
was sold to third parties, and produced 415,000 tons of primary
aluminum, of which approximately 54% was sold to third parties. The
Company is also a major domestic supplier of fabricated aluminum
products. In 1994, the Company shipped approximately 399,000 tons of
fabricated aluminum products to third parties, which accounted for
approximately 6% of the total tonnage of United States domestic
shipments in 1994. A majority of the Company's fabricated products
are used by customers as components in the manufacture and assembly of
finished end-use products. Note 12 of the Notes to Consolidated
Financial Statements is incorporated herein by reference.
2
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
The following table sets forth total shipments and intracompany
transfers of the Company's alumina, primary aluminum, and fabricated
aluminum operations:
Year Ended December 31,
------------------------------
1994 1993 1992
------- ------- -------
(in thousands of tons)
ALUMINA:
Shipments to Third Parties 2,086.7 1,997.5 2,001.3
Intracompany Transfers 820.9 807.5 878.2
PRIMARY ALUMINUM:
Shipments to Third Parties 224.0 242.5 355.4
Intracompany Transfers 225.1 233.6 224.4
FABRICATED ALUMINUM PRODUCTS:
Shipments to Third Parties 399.0 373.2 343.6
Sensitivity to Prices and Hedging Programs
The Company's operating results are sensitive to changes in the prices
of alumina, primary aluminum, and fabricated aluminum products, and
also depend to a significant degree upon the volume and mix of all
products sold and on its hedging strategies. Through its variable
cost structures, forward sales, and hedging programs, the Company has
attempted to mitigate its exposure to possible declines in the market
prices of alumina, primary aluminum, and fabricated aluminum products
while retaining the ability to participate in favorable pricing
environments that may materialize. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Trends -
Sensitivity to Prices and Hedging Programs."
Production Operations
The Company's operations are conducted through decentralized business
units which compete throughout the aluminum industry.
O The alumina business unit, which mines bauxite and obtains
additional bauxite tonnage under long-term contracts, produced
approximately 8% of Western world alumina in 1994. During 1994,
the Company utilized approximately 80% of its bauxite production
at its alumina refineries and the remainder was either sold to
third parties or tolled into alumina by a third party. In
addition, during 1994 the Company utilized approximately 29% of
its alumina for internal purposes and sold the remainder to third
parties. The Company's share of total Western world alumina
capacity was approximately 8% in 1994.
O The primary aluminum products business unit operates two domestic
smelters wholly owned by the Company and two foreign smelters in
which the Company holds significant ownership interests. In
1994, the Company utilized approximately 46% of its primary
aluminum for internal purposes and sold the remainder to third
parties. The Company's share of total Western world primary
aluminum capacity was approximately 3% in 1994.
O Fabricated aluminum products are manufactured by three business
units - flat-rolled products, extruded products, and forgings -
which manufacture a variety of fabricated products (including
body, lid, and tab stock for beverage containers, sheet and plate
products, screw machine stock, redraw rod, forging stock, truck
wheels and hubs, air bag canisters, and other forgings and
extruded products) and operate plants located in principal
marketing areas of the United States and Canada. Substantially
all of the primary aluminum utilized in the Company's fabricated
products operations is obtained internally, with the balance of
the metal utilized in its fabricated products operations obtained
from scrap metal purchases.
3
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
Alumina
-------
The following table lists the Company's bauxite mining and alumina
refining facilities as of December 31, 1994:
Annual
Production Total
Capacity Annual
Company Available to Production
Activity Facility Location Ownership the Company Capacity
-------- -------- -------- --------- ------------ ----------
(tons) (tons)
Bauxite Mining KJBC <F1> Jamaica 49% 4,500,000 4,500,000
Alpart <F2> Jamaica 65% 2,275,000 3,500,000
--------- ---------
6,775,000 8,000,000
========= =========
Alumina Refining Gramercy Louisiana 100% 1,000,000 1,000,000
Alpart Jamaica 65% 943,000 1,450,000
QAL Australia 28.3% 934,000 3,300,000
--------- ---------
2,877,000 5,750,000
========= =========
<FN>
-------------------------
<F1>
Although the Company owns 49% of Kaiser Jamaica Bauxite Company, it
has the right to receive all of such entity's output.
<F2>
Alpart bauxite is refined into alumina at the Alpart refinery.
</FN>
Bauxite mined in Jamaica by Kaiser Jamaica Bauxite Company ("KJBC") is
refined into alumina at the Company's plant at Gramercy, Louisiana, or
is sold to third parties. In 1979, the Government of Jamaica granted
the Company a mining lease for the mining of bauxite sufficient to
supply the Company's then-existing Louisiana alumina refineries at
their annual capacities of 1,656,000 tons per year until January 31,
2020. Alumina from the Gramercy plant is sold to third parties. The
Company has entered into a series of medium-term contracts for the
supply of natural gas to the Gramercy plant. The price of such gas
varies based upon certain spot natural gas prices. For 1995 the
Company has, however, established a fixed price for a portion of the
delivered gas through a hedging program.
Alumina Partners of Jamaica ("Alpart") holds bauxite reserves and owns
a 1,450,000 tons per year alumina plant located in Jamaica. The
Company has a 65% interest in Alpart and Hydro Aluminium a.s ("Hydro")
owns the remaining 35% interest. The Company has management
responsibility for the facility on a fee basis. The Company and Hydro
have agreed to be responsible for their proportionate shares of
Alpart's costs and expenses. The Government of Jamaica has granted
Alpart a mining lease and has entered into other agreements with
Alpart designed to assure that sufficient reserves of bauxite will be
available to Alpart to operate its refinery as it may be expanded to a
capacity of 2,000,000 tons per year through the year 2024.
Alpart has entered into an agreement for the supply of substantially
all of its fuel oil through 1996. The balance of Alpart's fuel oil
requirements through 1996 will be purchased in the spot market.
The Company holds a 28.3% interest in Queensland Alumina Limited
("QAL"), which owns the largest and one of the most efficient alumina
refineries in the world, located in Queensland, Australia. QAL
refines bauxite into alumina, essentially on a cost basis, for the
account of its stockholders pursuant to long-term tolling contracts.
The stockholders, including the Company, purchase bauxite from another
QAL stockholder pursuant to long-term supply contracts. The Company
has contracted to take approximately 751,000 tons per year of capacity
or pay standby charges. The Company is unconditionally obligated to
pay amounts calculated to service its share ($78.7 million at December
31, 1994) of certain debt of QAL, as well as other QAL costs and
expenses, including bauxite shipping costs. QAL's annual production
capacity is approximately 3,300,000 tons, of which approximately
934,000 tons are available to the Company.
4
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
The Company's principal customers for bauxite and alumina consist of
large and small domestic and international aluminum producers that
purchase bauxite and reduction-grade alumina for use in their internal
refining and smelting operations and trading intermediaries who resell
raw materials to end-users. In 1994, the Company sold all of its
bauxite to one customer, and sold alumina to 12 customers, the largest
and top five of which accounted for approximately 19% and 82% of such
sales, respectively. Among alumina producers, the Company believes it
is now the world's second largest seller of alumina to third parties.
The Company's strategy is to sell a substantial portion of the bauxite
and alumina available to it in excess of its internal refining and
smelting requirements pursuant to multi-year sales contracts.
Marketing and sales efforts are conducted by executives of the alumina
business unit and the Company. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Trends -
Sensitivity to Prices and Hedging Programs."
Primary Aluminum Products
-------------------------
The following table lists the Company's primary aluminum smelting
facilities as of December 31, 1994:
Annual Total
Capacity Annual 1994
Company Available to Rated Operating
Location Facility Ownership the Company Capacity Rate
-------- --------- --------- ------------ -------- ---------
(tons) (tons)
Domestic
Washington Mead 100% 200,000 200,000 80%
Washington Tacoma 100% 73,000 73,000 76%
------- -------
Subtotal 273,000 273,000
------- -------
International
Ghana Valco 90% 180,000 200,000 70%
Wales, United Kingdom Anglesey 49% 55,000 112,000 113%
------- -------
Subtotal 235,000 312,000
------- -------
Total 508,000 585,000
======= =======
The Company owns two smelters located at Mead and Tacoma, Washington,
where alumina is processed into primary aluminum. The Mead facility
uses pre-bake technology and produces primary aluminum, almost all of
which is used at the Company's Trentwood fabricating facility and the
balance of which is sold to third parties. The Tacoma plant 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 in recent years through
retrofit technology, cost controls, and semi-variable wage and power
contracts, leading to increases in production volume and enhancing
their ability to compete with newer smelters. At the Mead plant, the
Company has converted to welded anode assemblies to increase energy
efficiency, extended the anode life-cycle in the smelting process,
changed from pencil to liquid pitch to produce carbon anodes which
achieved environmental and operating savings, and engaged in efforts
to increase production through the use of improved, higher-efficiency
reduction cells.
Electrical power represents an important production cost for the
Company at its Mead and Tacoma smelters. The basic electricity supply
contract between the Bonneville Power Administration (the "BPA") and
the Company expires in 2001. The electricity contracts between the
BPA and its direct service industry customers (which consist of 15
energy intensive companies, principally aluminum producers, including
the Company) permit the BPA to interrupt up to 25% of the amount of
power which it normally supplies to such customers. The Company has
operated its Mead and Tacoma smelters in Washington at approximately
75% of their full capacity since January 1993, when three reduction
potlines were removed from production (two at its Mead smelter and one
at its Tacoma smelter) in response to a power reduction imposed by the
5
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
BPA. Although full BPA power was restored as of April 1, 1994, a 25%
power reduction was imposed again by the BPA as of August 1, 1994,
which reduction continued through November 30, 1994. Full BPA power
was restored on December 1, 1994, and the BPA has stated that it
expects to be able to provide full service through November 30, 1995.
The Company has operated its Trentwood fabrication facility without
curtailment of its production.
Through June 1996, the Company pays for power on a basis which varies,
within certain limits, with the market price of primary aluminum, and
thereafter the Company will pay for power at rates to be negotiated.
Effective October 1, 1993, an increase in the base rate the BPA
charged to its direct service industry customers for electricity was
adopted, and that rate is expected to remain in effect through
September 1995. In February 1995, the BPA issued an initial rate
increase announcement which proposed a 5.4% increase to the direct
service industry customers. If the proposed increase becomes
effective, it would increase production costs at the Mead and Tacoma
smelters by approximately $5.0 million per year based on the current
operating rate of those smelters. A rate increase could take effect
as early as October 1995; however, there is no certainty that the
proposed rate increase, or any rate increase, will become effective in
October 1995 or at any later time.
The Company manages, and holds a 90% interest in, the Volta Aluminium
Company Limited ("Valco") aluminum smelter in Ghana. The Valco
smelter uses pre-bake technology and processes alumina supplied by the
Company and the other participant into primary aluminum under long-
term tolling contracts which provide for proportionate payments by the
participants in amounts intended to pay not less than all of Valco's
operating and financing costs. The Company's share of the primary
aluminum is sold to third parties. Power for the Valco smelter is
supplied under an agreement which expires in 2017. The agreement
indexes two-thirds of the price of the contract quantity to the market
price of primary aluminum. The agreement also provides for a review
and adjustment of the base power rate and the price index every five
years. The most recent review was completed in April 1994 for the
1994-1998 period. Valco has entered into an agreement with the
government of Ghana under which Valco has been assured (except in
cases of force majeure) that it will receive sufficient electric power
to operate at its current level of three and one-half potlines through
December 31, 1996. Management believes that with normal rainfall
during 1995 and 1996, Valco should have available sufficient electric
power to operate at its current level during 1995 and 1996.
The Company has a 49% interest in the Anglesey Aluminium Limited
("Anglesey") aluminum smelter and port facility at Holyhead, Wales.
The Anglesey smelter uses pre-bake technology. The Company supplies
49% of Anglesey's alumina requirements and purchases 49% of Anglesey's
aluminum output. The Company sells its share of Anglesey's output to
third parties. Power for the Anglesey aluminum smelter is supplied
under an agreement which expires in 2001.
The Company has developed and installed proprietary retrofit
technology in all of its smelters. This technology - which includes
the redesign of the cathodes and anodes that conduct electricity
through reduction cells, improved "feed" systems that add alumina to
the cells, and a computerized system that controls energy flow in the
cells - enhances the Company's ability to compete more effectively
with the industry's newer smelters. The Company is actively engaged
in efforts to license this technology and sell technical and
managerial assistance to other producers worldwide, and may
participate in joint ventures or similar business partnerships which
employ the Company's technical and managerial knowledge. See "-
Research and Development."
The Company's principal primary aluminum customers consist of large
trading intermediaries and metal brokers, who resell primary aluminum
to fabricated product manufacturers, and large and small international
aluminum fabricators. In 1994, the Company sold its primary aluminum
production not utilized for internal purposes to approximately 35
customers, the largest and top five of which accounted for
approximately 25% and 68% of such sales, respectively. Marketing and
sales efforts are conducted by a small staff located at the business
unit's headquarters in Pleasanton, California, and by senior
executives of the Company who participate in the structuring of major
sales transactions. A majority of the business unit's sales are based
upon long-term relationships with metal merchants and end-users. See
"MANAGEMENT'S DISCUSSION
6
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Trends
- Sensitivity to Prices and Hedging Programs."
Fabricated Aluminum Products
-----------------------------
The Company manufactures and markets fabricated aluminum products for
the packaging, transportation, construction, and consumer durables
markets in the United States and abroad. Sales in these markets are
made directly and through distributors to a large number of customers,
both domestic and foreign. In 1994, seven domestic beverage container
manufacturers constituted the leading customers for the Company's
fabricated products and accounted for approximately 17% of the
Company's sales revenue.
The Company's fabricated products compete with those of numerous
domestic and foreign producers and with products made with steel,
copper, glass, plastic, and other materials. Product quality, price,
and availability are the principal competitive factors in the market
for fabricated aluminum products. The Company has refocused its
fabricated products operations to concentrate on selected products in
which the Company has production expertise, high quality capability,
and geographic and other competitive advantages. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Trends - Sensitivity to Prices and Hedging Programs."
Flat-Rolled Products - The flat-rolled products business unit, the
largest of the Company's fabricated products businesses, operates the
Trentwood sheet and plate mill at Spokane, Washington. The Trentwood
facility is the Company's largest fabricating plant and accounted for
substantially more than one-half of the Company's 1994 fabricated
aluminum products shipments. The business unit supplies the beverage
container market (producing body, lid, and tab stock), the aerospace
market, and the tooling plate, heat-treated alloy and common alloy
coil markets, both directly and through distributors. The Company
announced in October 1993 that it was restructuring its flat-rolled
products operation at its Trentwood plant to reduce that facility's
annual operating costs. The Trentwood restructuring is expected to
result in annual cost savings of at least $50.0 million after it has
been fully implemented (which is expected to occur by the end of
1995).
The Company's flat-rolled products are sold primarily to beverage
container manufacturers located in the western United States and in
the Asian Pacific Rim countries where the Trentwood plant's location
provides the Company with a transportation advantage. Quality of
products for the beverage container industry and timeliness of
delivery are the primary bases on which the Company competes.
Management believes that the Company's capital improvements at
Trentwood have enhanced the quality of the Company's products for the
beverage container industry and the capacity and efficiency of the
Company's manufacturing operations, and that the Company is one of the
highest quality producers of aluminum beverage can stock in the world.
In 1994, the flat-rolled products business unit had 25 foreign and
domestic can stock customers, the majority of which were beverage can
manufacturers (including five of the six major domestic beverage can
manufacturers) and the balance of which were brewers. The largest and
top five of such customers accounted for approximately 26% and 51%,
respectively, of the business unit's sales revenue. In 1994, the
business unit shipped products to over 200 customers in the aerospace,
transportation, and industrial ("ATI") markets, most of which were
distributors who sell to a variety of industrial end-users. The top
five customers in the ATI markets for flat-rolled products accounted
for approximately 13% of the business unit's sales revenue. The
marketing staff for the flat-rolled products business unit is located
at the Trentwood facility and in Pleasanton, California. Sales are
made directly to customers (including distributors) from eight sales
offices located throughout the United States. International customers
are served by sales offices in the Netherlands and Japan and by
independent sales agents in Asia and Latin America.
Extruded Products - The extruded products business unit is
headquartered in Dallas, Texas, and operates soft-alloy extrusion
facilities in Los Angeles, California; Santa Fe Springs, California;
Sherman, Texas; and London, Ontario, Canada; a cathodic protection
business located in Tulsa, Oklahoma, that also extrudes both aluminum
and magnesium; rod and bar facilities
7
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
in Newark, Ohio, a facility in Jackson, Tennessee, which produce screw
machine stock, redraw rod, forging stock, and billet, and a facility
in Richland, Washington, which is expected to be in full operation in
the second quarter of 1995 and which will produce seamless tubing in
both hard and soft alloys for the automotive, other transportation,
export, recreation, agriculture, and other industrial markets. Each
of the soft-alloy extrusion facilities has fabricating capabilities
and provides finishing services.
The extruded products business unit's major markets are in the
transportation industry, to which it provides extruded shapes for
automobiles, trucks, trailers, cabs, and shipping containers, and
distribution, durable goods, defense, building and construction,
ordnance, and electrical markets. In 1994, the extruded products
business unit had over 950 customers for its products, the largest and
top five of which accounted for approximately 6% and 20%,
respectively, of its sales revenue. Sales are made directly from
plants as well as marketing locations across the United States.
Forgings - The forgings business unit operates forging facilities at
Erie, Pennsylvania; Oxnard, California; and Greenwood, South Carolina;
and a machine shop at Greenwood, South Carolina. The forgings
business unit is one of the largest producers of aluminum forgings in
the United States and is a major supplier of high-quality forged parts
to customers in the automotive, commercial vehicle, and ordnance
markets. The high strength-to-weight properties of forged aluminum
make it particularly well suited for automotive applications.
In 1994, the forgings business unit had over 300 customers for its
products, the largest and top five of which accounted for
approximately 30% and 69%, respectively, of the forgings business
unit's sales revenue. The forgings business unit's headquarters is
located in Erie, Pennsylvania, and additional sales, marketing, and
engineering groups are located in the midwestern and western United
States.
Competition
Aluminum products compete in many markets with steel, copper, glass,
plastic, and numerous other materials. Within the aluminum business,
the Company competes with both domestic and foreign producers of
bauxite, alumina, and primary aluminum, and with domestic and foreign
fabricators. Many of the Company's competitors have greater financial
resources than the Company. The Company's principal competitors in
the sale of alumina include Alcoa of Australia Ltd., Glencore Ltd.,
and Pechiney S.A. The Company competes with most aluminum producers
in the sale of primary aluminum.
Primary aluminum and, to some degree, alumina are commodities with
generally standard qualities, and competition in the sale of these
commodities is based primarily upon price, quality, and availability.
The Company also competes with a wide range of domestic and
international fabricators in the sale of fabricated aluminum products.
Competition in the sale of fabricated products is based upon quality,
availability, price, and service, including delivery performance. The
Company concentrates its fabricating operations on selected products
in which it has production expertise, high quality capability, and
geographic and other competitive advantages. Management 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 the Company's customers, including
intermediaries, would not have a material adverse effect on the
Company's business or operations.
Research and Development
The Company conducts research and development activities principally
at four facilities - the Center for Technology ("CFT") in Pleasanton,
California; the Primary Aluminum Products Division Technology Center
("DTC") adjacent to the Mead smelter in Washington; the Alumina
Development Laboratory ("ADL") at the Gramercy, Louisiana refinery,
which is a part of Kaiser Alumina Technical Services ("KATS"), and the
Automotive Product Development Office located near Detroit, Michigan.
Net expenditures for Company-sponsored research and development
activities were $16.7 million in 1994, $18.5 million in 1993, and
$13.5 million in 1992. The Company's research staff totaled 166 at
December 31, 1994. The
8
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
Company estimates that research and development net expenditures will
be in the range of approximately $20.0 - $22.0 million in 1995.
CFT performs research and development across a range of aluminum
process and product technologies to support the Company's business
units and new business opportunities. It also selectively offers
technical services to third parties. A significant effort is directed
at the automotive market. One project directed at automotive sheet
development is carried out cooperatively with Furukawa Electric Co.,
Ltd. of Japan, Pechiney Rhenalu of France, and Kawasaki Steel
Corporation of Japan. The largest and most notable single project
being developed at CFT is a "micromill" process for producing can body
sheet. A pilot facility has been constructed and operated at CFT.
Based on the results achieved so far, the Company hopes to finalize in
1995 plans for construction of a full-scale commercial micromill.
DTC maintains specialized laboratories and a miniature carbon plant
where experiments with new anode and cathode technology are performed.
DTC supports the Company's primary aluminum smelters, and concentrates
on the development of cost-effective technical innovations such as
equipment and process improvements. KATS, including ADL, provides
improved alumina process technology to the Company's facilities and
technical support to new business ventures in cooperation with the
Company's international business development group. The Automotive
Product Development Office is a sales and application engineering
facility located near Detroit-area carmakers and works with customers,
CFT and plant personnel to create new automotive component designs and
improve existing products.
The Company is actively engaged in efforts to license its technology
and sell technical and managerial assistance to other producers
worldwide. Pursuant to various arrangements, the Company's technology
has been installed in alumina refineries, aluminum smelters and
rolling mills located in the United States, Jamaica, Sweden, Germany,
Russia, India, Australia, Korea, New Zealand, Ghana, Europe, and the
United Kingdom. The Company's technology sales and revenue from
technical assistance to third parties were $10.0 million in 1994,
$12.8 million in 1993, and $14.1 million in 1992.
The Company has entered into agreements with respect to the
Krasnoyarsk smelter located in Russia pursuant to which the Company
has licensed certain of its technology for use in such facility and
agreed to provide purchasing services in obtaining Western-sourced
technology and equipment to be used in such facility. These
agreements were entered into in November 1990, and the services under
them are expected to be completed in 1996. In addition, the Company
has entered into agreements with respect to the Nadvoitsy smelter
located in Russia and the Korba smelter of the Bharat Aluminum Co.
Ltd., located in India, pursuant to which the Company has licensed
certain of its technology for use in such facilities. The agreements
relating to the Nadvoitsy and Korba smelters were entered into in 1993
and the services under such agreements are expected to be completed in
1995.
Employees
During 1994, the Company employed an average of 9,744 persons,
compared with an average of 10,220 employees in 1993, and 10,130
employees in 1992. At December 31, 1994, the Company's work force was
9,468, including a domestic work force of 5,812, of whom 3,978 were
paid at an hourly rate. Most hourly paid domestic employees are
covered by collective bargaining agreements with various labor unions.
Approximately 71% of such employees are covered by a master agreement
(the "Labor Contract") with the United Steelworkers of America
("USWA") which expires on September 30, 1998. The Labor Contract
covers the Company's plants in Spokane (Trentwood and Mead) and
Tacoma, Washington; Gramercy, Louisiana; and Newark, Ohio.
The Labor Contract provides for base wages at all covered plants. In
addition, workers covered by the Labor Contract may receive quarterly
bonus payments based on various indices of profitability,
productivity, efficiency, and other aspects of specific plant
performance, as well as, in certain cases, the price of alumina or
primary aluminum. Pursuant to the Labor Contract, base wage rates
were raised effective January 2, 1995, and will be raised an
additional amount effective November 6, 1995, and November 3, 1997,
and an amount in respect of the cost of living adjustment under the
previous master
9
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
agreement will be phased into base wages during the term of the Labor
Contract. In the second quarter of 1995, the Company will acquire up
to $2,000 of preference stock held in a stock plan for the benefit of
each of approximately 82% of the employees covered by the Labor
Contract and in the first half of 1998 up to an additional $4,000 of
such preference stock held in such plan for the benefit of
substantially the same employees. In addition, if a profitability
test is satisfied, the Company will acquire during 1996 or 1997 up to
an additional $1,000 of such preference stock held in such plan for
the benefit of substantially the same employees. The Company will
make comparable acquisitions of preference stock held for the benefit
of each of certain salaried employees. Management considers the
Company's employee relations to be satisfactory.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Trends - Labor Matter."
Environmental Matters
The Company is subject to a wide variety of international, state, and
local environmental laws and regulations ("Environmental Laws") which
continue to be adopted and amended. The Environmental Laws regulate,
among other things, air and water emissions and discharges; the
generation, storage, treatment, transportation, and disposal of solid
and hazardous waste; the release of hazardous or toxic substances,
pollutants and contaminants into the environment; and, in certain
instances, the environmental condition of industrial property prior to
transfer or sale. In addition, the Company is subject to various
federal, state, and local workplace health and safety laws and
regulations ("Health Laws").
From time to time, the Company is subject, with respect to its current
and former operations, to fines or penalties assessed for alleged
breaches of the Environmental and Health Laws and to claims and
litigation brought by federal, state or local agencies and by private
parties seeking remedial or other enforcement action under the
Environmental and Health Laws or damages related to alleged injuries
to health or to the environment, including claims with respect to
certain waste disposal sites and the remediation of sites presently or
formerly operated by the Company. See "LEGAL PROCEEDINGS." The
Company currently is subject to a number of lawsuits under the
Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended by the Superfund Amendments and Reauthorization
Act of 1986 ("CERCLA"). The Company, along with certain other
entities, has been named as a Potentially Responsible Party ("PRP")
for remedial costs at certain third-party sites listed on the National
Priorities List under CERCLA and, in certain instances, may be exposed
to joint and several liability for those costs or damages to natural
resources. The Company's Mead, Washington, facility has been listed
on the National Priorities List under CERCLA. In addition, in
connection with certain of its asset sales, the Company has
indemnified the purchasers of assets with respect to certain
liabilities (and associated expenses) resulting from acts or omissions
arising prior to such dispositions, including environmental
liabilities. 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, management currently believes
that the resolution of such uncertainties should not have a material
adverse effect on the Company's consolidated financial position or
results of operations.
Environmental capital spending was $11.9 million in 1994, $12.6
million in 1993, and $13.1 million in 1992. Annual operating costs
for pollution control, not including corporate overhead or
depreciation, were approximately $23.1 million in 1994, $22.4 million
in 1993, and $21.6 million in 1992. Legislative, regulatory, and
economic uncertainties make it difficult to project future spending
for these purposes. However, the Company currently anticipates that
in the 1995-1996 period, environmental capital spending will be within
the range of approximately $15.0 - $18.0 million per year, and
operating costs for pollution control will be within the range of
$25.0 - $27.0 million per year. In addition, $3.6 million in cash
expenditures in 1994, $7.2 million in 1993, and $9.6 million in 1992
were charged to previously established reserves relating to
environmental costs. Approximately $11.4 million is expected to be
charged to such reserves in 1995.
The portion of Note 10 of the Notes to Consolidated Financial
Statements under the heading "Environmental Contingencies" is
incorporated herein by reference.
10
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 2. PROPERTIES
The locations and general character of the principal plants, mines,
and other materially important physical properties relating to the
Company's operations are described in "ITEM 1. BUSINESS," and those
descriptions are incorporated herein by reference. The Company owns
in fee or leases all the real estate and facilities used in connection
with its business. Plants and equipment and other facilities are
generally in good condition and suitable for their intended uses,
subject to changing environmental requirements. Although the
Company's domestic aluminum smelters and alumina facility were
initially designed early in the Company's history, they have been
modified frequently over the years to incorporate technological
advances in order to improve efficiency, increase capacity, and
achieve energy savings. Management believes that the Company's
domestic plants are cost competitive on an international basis. Due
to the Company's variable cost structure, the plants' operating costs
are relatively lower in periods of low primary aluminum prices and
relatively higher in periods of high primary aluminum prices.
The Company's obligations under the Credit Agreement entered into on
February 17, 1994, as amended (the "1994 Credit Agreement"), are
secured by, among other things, mortgages on the Company's major
domestic plants (other than the Gramercy alumina plant). See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Financial Condition and Capital Spending."
ITEM 3. LEGAL PROCEEDINGS
Aberdeen Pesticide Dumps Site Matter
The Aberdeen Pesticide Dumps Site, listed on the Superfund National
Priorities List, is composed of five separate sites around the town of
Aberdeen, North Carolina. These sites (collectively, the "Sites")
include the Farm Chemicals Site, Twin Sites, Fairway Six Site, McIver
Dump Site and the Route 211 Site. The Sites are of concern to the
United States Environmental Protection Agency (the "EPA") because of
their past use as either pesticide formulation facilities or pesticide
disposal areas from approximately the mid-1930s through the late
1980s.
The United States originally filed a cost recovery complaint (as
amended, the "Complaint") in the United States District Court for the
Middle District of North Carolina, Rockingham Division, No. C-89-231-
R, against five defendants on March 31, 1989, and subsequently amended
its complaint to add another ten defendants on February 6, 1991, and
another four defendants on August 1, 1991. The Company was not a
named defendant in the Complaint. The Complaint seeks reimbursement
for past and future response costs and a determination of liability of
the defendants under Section 107 of CERCLA. On or about October 2,
1991, the Company, along with approximately 17 other parties, was
served with third party complaints from four of the defendants named
in the Complaint (the "Third Party Plaintiffs") alleging claims
arising under various theories of contribution and indemnity. On
October 22, 1992, the United States filed a motion for leave to file
an amended complaint naming the Company as a first party defendant in
its cost recovery action. On February 16, 1993, the court granted
that motion.
The EPA has performed a Remedial Investigation/Feasibility Study and
issued a Record of Decision ("ROD") dated September 30, 1991, for the
Sites. The major remedy selected for the Sites in the ROD consisted
of excavation of contaminated soil, treatment of the contaminated soil
at a single location utilizing thermal treatment, and placement of the
treated material back into the areas of excavation. The estimated
cost of such remedy for the Sites is approximately $32 million. Other
possible remedies described in the ROD included on-site incineration
and on-site ash disposal at an estimated cost of approximately $53
million, and off-site incineration and disposal at an estimated cost
of approximately $222 million. The EPA has stated that it has
incurred past costs at the Sites in the range of $7.5 - $8 million as
of February 9, 1993, and alleges that response costs will continue to
be incurred in the future.
11
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 3. LEGAL PROCEEDINGS (continued)
On May 20, 1993, the EPA issued three unilateral Administrative Orders
under Section 106(a) of CERCLA ordering the respondents, including the
Company, to perform the remedial design and remedial action described
in the ROD for the Farm Chemicals Site (EPA Docket No. 93-13-C), Twin
Sites (EPA Docket No. 93-14-C) and Fairway Six Site (EPA Docket No.
93-15-C). The estimated cost as set forth in the ROD for the remedial
action at the three Sites is approximately $27 million. In addition
to the Company, respondents named in the Administrative Orders for all
three Sites include J. M. Taylor, Grower Service Corporation, E. I.
DuPont de Nemours & Co., Olin Corporation, UCI Holdings, Inc., PPG
Industries, Inc., and Union Carbide Corporation. Ciba-Geigy
Corporation, Hercules, Inc., Mobil Oil Corporation, Shell Oil Company,
The Boots Company (USA), Inc., Nor-Am Chemical Co., George D.
Anderson, Farm Chemicals, Inc., Partners In The Pits, Ltd., Dan F.
Maples, Pits Management Corp., Maples Golf Construction, Inc., Yadco
of Pinehurst, Inc., and Robert Trent Jones are named as respondents
for one or two of the Sites.
The Company has entered into a PRP Participation Agreement with
certain of the respondents to participate jointly in responding to the
Administrative Orders dated May 20, 1993, regarding soil remediation,
to share costs incurred on an interim basis, and to seek to reach a
final allocation of costs through agreement or to allow such final
allocation and determination of liability to be made by the United
States District Court. By letter dated July 6, 1993, the Company has
notified the EPA of its ongoing participation with such group of
respondents which, as a group, are intending to comply with the
Administrative Orders to the extent consistent with applicable law.
By letters dated December 30, 1993, the EPA notified the Company of
its potential liability for, and requested that the Company, along
with certain other named companies, undertake or agree to finance,
groundwater remediation at certain of the Sites.
On June 22, 1994, the EPA issued two Unilateral Administrative Orders
under Section 106(a) of CERCLA under U.S. EPA Docket No. 94-28-C and
U.S. EPA Docket No. 94-27-C, respectively, ordering the named
respondents to design and implement the groundwater remediation remedy
for the Farm Chemicals and Twin Sites and for the Fairway Six Site.
In addition to the Company, the Unilateral Administrative Order for
the Farm Chemicals and Twin Site areas named as respondents J. M.
Taylor, Grower Service Corporation, Farm Chemicals, Inc., E. I. Dupont
de Nemours and Company, Olin Corporation, UCI Holdings, Inc., Union
Carbide Corporation, Miles, Inc., Mobil Oil Corporation, Shell Oil
Company, Hercules, Inc., The Boots Company (USA), Inc., Nor-Am
Chemical Company, and Ciba-Geigy Corporation. Named as respondents in
addition to the Company for the Fairway Six Site area were J. M.
Taylor, George Anderson, Grower Service Corporation, Partners in the Pits,
Dan Maples, Pits Management Corporation, Maples Golf Construction, Inc.,
Yadco of Pinehurst Inc., Robert Trent Jones, E. I. Dupont de Nemours
and Company, Olin Corporation, UCI Holdings, Inc., and Ciba-Geigy
Corporation. The ROD-selected remedy for the groundwater remediation
selected by the EPA includes extraction, on site treatment by
coagulation, flocculation, precipitation, air stripping, GAC
absorption, and discharge on site for the Farm Chemicals/Twin Sites
and extraction, on-site treatment by GAC absorption and discharge on-
site for the Fairway Six Site. The EPA has estimated the total
present worth cost, including 30 years of operation and maintenance,
at $11,849,757. A definitive PRP Participation Agreement with
respect to groundwater remediation is under negotiation among certain
of the respondents, including the Company, and these respondents are
proceeding with work required under the administrative orders.
Based upon the information presently available to it, the Company is
unable to determine whether the Company has any liability with respect
to any of the Sites or, if there is any liability, the amount thereof.
Two government witnesses have testified that the Company acquired
pesticide products from the operator of the formulation site over a
two to three year period. The Company has been unable to confirm the
accuracy of this testimony.
United States of America v. Kaiser Aluminum & Chemical Corporation
On February 8, 1989, a civil action was filed by the United States
Department of Justice at the request of the EPA against the Company in
the United States District Court for the Eastern District of
Washington, Case No. C-89-106-CLQ. The complaint alleged that
emissions from certain stacks at the Company's Trentwood facility in
Spokane, Washington, intermittently violated the opacity standard
contained in the Washington State Implementation Plan ("SIP"),
approved by
12
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 3. LEGAL PROCEEDINGS (continued)
the EPA under the federal Clean Air Act. The complaint sought
injunctive relief, including an order that the Company take all
necessary action to achieve compliance with the Washington SIP opacity
limit and the assessment of civil penalties of not more than $25,000
per day.
In the course of the litigation, questions arose as to whether the
observers who recorded the alleged exceedances were qualified under
the Washington SIP to read opacity. In July 1990, the Company and the
Department of Justice agreed to a voluntary dismissal of the action.
At that time, however, the EPA had arranged for increased surveillance
of the Trentwood facility by consultants and the EPA's personnel.
From May 1990 through May 1991, these observers recorded approximately
130 alleged exceedances of the SIP opacity rule. Justice Department
representatives have stated their intent to file a second lawsuit
against the Company based on the opacity observations recorded during
that period.
The second lawsuit has not yet been filed. Instead, the Company has
entered into negotiations with the EPA to resolve the claims against
the Company through a consent decree. The EPA and the Company have
made substantial progress in negotiating the terms of the consent
decree. The terms of the consent decree currently being negotiated
include, in principle, a commitment by the Company to improve emission
control equipment at the Trentwood facility and a civil penalty
assessment against the Company. The Company anticipates that
agreement upon the terms of a consent decree will be reached during
1995. In the event the terms of a consent decree are not agreed upon,
the matter would likely be resolved in federal court.
Catellus Development Corporation v. Kaiser Aluminum & Chemical
Corporation and James L. Ferry & Son, Inc.
On January 7, 1991, the City of Richmond, et al. (the "Plaintiffs")
filed a Second Amended Complaint for Damages and Declaratory Relief
against the United States of America, the United States Maritime
Administration and Santa Fe Land Corporation (now known as Catellus
Development Corporation ("Catellus")) (collectively, the "Defendants")
alleging, among other things, that the Defendants caused or allowed
hazardous substances, pollutants, contaminants, debris, and other
solid wastes to be discharged, deposited, disposed of or released on
certain property located in Richmond, California (the "Property")
formerly owned by Catellus and leased to (i) the Company for the
purpose of shipbuilding activities conducted by the Company on behalf
of the United States during World War II, and (ii) subsequent tenants
thereafter. Plaintiffs allege, among other things, that (i) the
Defendants are jointly and severally liable for response costs and
natural resources damages under CERCLA, (ii) Defendant United States
of America is liable on grounds of negligence for damages under the
Federal Tort Claims Act, and (iii) Defendant Catellus is strictly
liable on grounds of negligence for such discharge, deposit, disposal
or release. Certain of the Plaintiffs have alleged that they had
incurred or expect to incur costs and damages in the amount of
approximately $49 million, in the aggregate.
On or about September 23, 1992, the Plaintiffs filed a Third Amended
Complaint, alleging, among other things, that (i) the Defendants are
jointly and severally liable for response costs, declaratory relief,
and natural resources damages under CERCLA; (ii) Defendant United
States of America is liable on grounds of negligence, continuing
trespass and continuing nuisance for damages under the Federal Tort
Claims Act; (iii) Defendant Catellus is strictly liable on grounds of
continuing nuisance, continuing trespass, and negligence for such
discharge, deposit, disposal or release; (iv) Catellus is liable to
indemnify Plaintiffs; and (v) Catellus is liable for fraudulent
concealment of the alleged contamination.
On February 20, 1991, Catellus filed a third party complaint (the
"Third Party Complaint") against the Company and James L. Ferry & Son,
Inc. ("Ferry") in the United States District Court for the Northern
District of California, Case No. C-89-2935 DLJ. The Third Party
Complaint was served on the Company as of April 12, 1991. The Third
Party Complaint alleges that, if the allegations of the Plaintiffs are
true, then the Company and Ferry (which is alleged to have performed
certain excavation activities on the Property and, as a result
thereof, to have released contaminants on the Property and to have
arranged for the transportation, treatment, and disposal of such
contaminants) are liable for Catellus' response costs and damages
under CERCLA and damages under other theories of negligence and
nuisance and, in the case of the Company, waste. Catellus seeks (i)
contribution from the Company and Ferry, jointly and severally, for
its costs and damages pursuant
13
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 3. LEGAL PROCEEDINGS (continued)
to CERCLA; (ii) indemnity from the Company and Ferry for any liability
or judgment imposed upon it; (iii) indemnity from the Company and
Ferry for reasonable attorneys fees and costs incurred by it; (iv)
damages for the injury to its interest in the Property; and (v) treble
damages from the Company pursuant to California Code of Civil
Procedure Section 732. On June 4, 1991, Catellus served on the
Company a first amended third party complaint which alleges, in
addition to the allegations of the Third Party Complaint, that the
Company and/or a predecessor in interest to the Company is also liable
for Catellus' damages, if any, on the basis of alleged contractual
indemnities contained in certain former leases of the Property.
The Third Party Complaint was amended on or about October 26, 1992.
The amended Third Party Complaint alleges that, if the allegations of
the Plaintiffs are true, then the Company and Ferry are liable for (i)
Catellus' response costs and natural resources damage under CERCLA;
(ii) damages under theories of negligence, trespass and nuisance;
(iii) indemnity (equitable and contractual); and (iv) attorneys fees
under California Code of Civil Procedure Section 1021.6.
By letter dated October 26, 1992, counsel for certain underwriters at
Lloyd's London and certain London Market insurance companies ("London
Insurers") advised that the London Insurers agreed to reimburse the
Company for defense expenses in the third party action filed by
Catellus, subject to a full reservation of rights.
The Plaintiffs filed a motion for leave to file a Third Amended
Complaint which would have added the Company as a first party
defendant. This motion was denied. On October 26, 1992, the
Plaintiffs served a separate Complaint against the Company for damages
and declaratory relief. The claims asserted by the Plaintiffs are for
(i) recovery of costs, natural resources damages, and declaratory
relief under CERCLA; (ii) damages for injury to the Property arising
from negligence; (iii) damages under a theory of strict liability;
(iv) continuing nuisance and continuing trespass; (v) equitable
indemnity; (vi) response costs incurred by the Richmond Redevelopment
Agency under California Health & Safety Code Section 33459.4; and
(vii) declaratory relief on the state claims. This matter has been
tendered to the London Insurers.
On June 24, 1994, the District Court approved a Consent Decree
consummating the settlement of the Plaintiffs' CERCLA and tort claims
against the United States in exchange for payment of approximately
$3.5 million plus 35% of future response costs. Trial of this matter
commenced in March 1995.
Picketville Road Landfill Matter
On July 1, 1991, the EPA served on the Company and 13 other PRPs a
Unilateral Administrative Order For Remedial Design and Remedial
Action (the "Order") at the Picketville Road Landfill site in
Jacksonville, Florida. The EPA seeks remedial design and remedial
action pursuant to CERCLA from some, but apparently not all, PRPs
based upon a Record of Decision outlining remedial cleanup measures to
be undertaken at the site adopted by the EPA on September 28, 1990.
The site was operated as a municipal and industrial waste landfill
from 1968 to 1977 by the City of Jacksonville. The Company was first
notified by the EPA on January 17, 1991, that wastes from one of the
Company's plants may have been transported to and deposited in the
site. In its Record of Decision, the EPA estimated that the total
capital, operations, and maintenance costs of its elected remedy for
the site would be approximately $9.9 million. In addition, the EPA
has reserved the right to seek recovery of its costs incurred relating
to the Order, including, but not limited to, reimbursement of the
EPA's cost of response. The Company has reached an agreement with
certain PRPs who are conducting remedial design and remedial action at
the site, under which the Company will fund $146,700 of the cost of
the remedial design and remedial action (unless remedial costs exceed
$19 million in which event the settlement agreement will be re-
opened).
14
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 3. LEGAL PROCEEDINGS (continued)
Asbestos-related Litigation
The Company is a defendant in a number of lawsuits in which the
plaintiffs allege that certain of their injuries were caused by
exposure to asbestos during, and as a result of, their employment or
association with the Company or exposure to products containing
asbestos produced or sold by the Company. The lawsuits generally
relate to products the Company has not manufactured for at least 15
years. At December 31, 1994, the number of such lawsuits pending was
approximately 25,200. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Financial Condition
and Capital Spending - Asbestos Contingencies." The portion of Note
10 of the Notes to Consolidated Financial Statements under the heading
"Asbestos Contingencies" is incorporated herein by reference.
Other
On August 24, 1994, the United States Department of Justice (the
"DOJ") issued Civil Investigative Demand No. 11356 ("CID") requesting
information from Kaiser regarding (i) its production, capacity to
produce, and sales of primary aluminum from January 1, 1991, to the
date of the response; (ii) any actual or contemplated reductions in
its production of primary aluminum during that period; and (iii) any
communications with others regarding any actual, contemplated,
possible or desired reductions in primary aluminum production by
Kaiser or any of its competitors during that period. Kaiser has
submitted documents and interrogatory answers to the DOJ responding to
the CID.
Various other lawsuits and claims are pending against the Company.
Management believes that resolution of the lawsuits and claims made
against the Company, including matters discussed above, will not have
a material adverse effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of 1994.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public trading market for the Company's common
stock, which is held solely by Kaiser. The information in Note 9 of
the Notes to Consolidated Financial Statements under the heading
"Dividends on Common Stock" at page 46 of this Report, are
incorporated herein by reference. The Company has not paid any
dividends on its common stock during the two most recent fiscal years.
The Indentures and the 1994 Credit Agreement (Exhibits 4.1 through 4.6
to this Report) contain restrictions on the ability of the Company to
pay dividends on or make distributions on account of the Company's
common stock and restrictions on the ability of the Company's
subsidiaries to transfer funds to the Company in the form of cash
dividends, loans or advances. Exhibits 4.1 through 4.6 to this
Report; Note 5 of the Notes to Consolidated Financial Statements at
pages 33-35 of this Report; and the information under the heading
"Financial Condition and Capital Spending - Capital Structure" at
pages 18-19 of this Report, are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company is incorporated herein by
reference to the table at page 3 of this Report; to the table at page
16 of this Report; to the discussion under the heading "Results of
Operations" at page 17 of this Report; to Note 1 of the Notes to
Consolidated Financial Statements at pages 29-31 of this Report; and
to pages 54-55 of this Report.
15
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company operates in two business segments: bauxite and alumina,
and aluminum processing. Intracompany shipments and sales are
excluded from the information set forth below. The following should be
read in conjunction with the Company's consolidated financial
statements and the notes thereto, contained elsewhere herein.
Year Ended December 31,
----------------------------
(In millions of dollars, except shipments and prices) 1994 1993 1992
-----------------------------------------------------------------------------------------------------
Shipments: (000 tons) <F1>
Alumina 2,086.7 1,997.5 2,001.3
Aluminum processing:
Primary aluminum 224.0 242.5 355.4
Fabricated aluminum products 399.0 373.2 343.6
-------- -------- --------
Total aluminum products 623.0 615.7 699.0
======== ======== ========
Average realized sales price:
Alumina (per ton) $ 169 $ 169 $ 195
Primary aluminum (per pound) .59 .56 .66
Net sales:
Bauxite and alumina:
Alumina $ 352.8 $ 338.2 $ 390.8
Other <F2><F3> 79.7 85.2 75.7
-------- -------- --------
Total bauxite and alumina 432.5 423.4 466.5
-------- -------- --------
Aluminum processing:
Primary aluminum 292.0 301.7 515.0
Fabricated aluminum products 1,043.0 981.4 913.7
Other <F3> 14.0 12.6 13.9
-------- -------- --------
Total aluminum processing 1,349.0 1,295.7 1,442.6
-------- -------- --------
Total net sales $1,781.5 $1,719.1 $1,909.1
======== ======== ========
Operating income (loss):
Bauxite and alumina $ 19.8 $ (4.5) $ 62.6
Aluminum processing (8.4) (46.3) 104.9
Corporate (67.3) (72.3) (77.3)
-------- -------- --------
Total operating income (loss) $ (55.9) $ (123.1) $ 90.2
======== ======== ========
Income (loss) before extraordinary loss and cumulative effect of changes
in accounting principles $ (96.2) $ (117.6) $ 29.6
Extraordinary loss on early extinguishment of debt, net of tax benefit
of $2.9 and $11.2 for 1994 and 1993, respectively (5.4) (21.8)
Cumulative effect of changes in accounting principles, net of tax
benefit of $237.7 (507.9)
-------- -------- --------
Net income (loss) $ (101.6) $ (647.3) $ 29.6
======== ======== ========
Capital expenditures $ 70.0 $ 67.7 $ 114.4
======== ======== ========
<FN>
<F1>
All references to tons refer to metric tons of 2,204.6 pounds.
<F2>
Includes net sales of bauxite.
<F3>
Includes the portion of net sales attributable to minority interests
in consolidated subsidiaries.
</FN>
16
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Results of Operations
The previous table provides selected operational and financial
information on a consolidated basis with respect to the Company for
the years ended December 31, 1994, 1993, and 1992. As an integrated
aluminum producer, the Company uses a portion of its bauxite, alumina,
and primary aluminum production for additional processing at certain
of its facilities.
Net Sales
Bauxite and Alumina - Revenue from net sales of bauxite and alumina to
third parties was $432.5 million in 1994, compared with $423.4 million
in 1993 and $466.5 million in 1992. Revenue from alumina increased 4%
to $352.8 million in 1994 from $338.2 million in 1993 because of
increased shipments. Revenue from alumina decreased 13% to $338.2
million in 1993 from $390.8 million in 1992 because of lower average
realized prices. The remainder of the segment's sales revenues were
from sales of bauxite, which remained about the same throughout the
three years, and the portion of sales of alumina attributable to the
minority interest in Alpart.
Aluminum Processing - Revenue from net sales to third parties for the
aluminum processing segment was $1,349.0 million in 1994, compared
with $1,295.7 million in 1993 and $1,442.6 million in 1992. The bulk
of the segment's sales represents the Company's primary aluminum and
fabricated aluminum products, with the remainder attributable to the
portion of sales of primary aluminum related to the minority interest
in Valco.
Revenue from primary aluminum decreased 3% to $292.0 million in 1994
from $301.7 million in 1993 as higher average realized prices were
more than offset by lower shipments. Average realized prices in 1994
reflected the defensive hedging of primary aluminum prices in respect
of 1994 shipments, which was initiated prior to recent improvements in
metal prices. In 1994, the Company's average realized price from sales
of primary aluminum was approximately $.59 per pound, compared to the
average Midwest United States transaction price of approximately $.72
per pound during the year. Shipments in 1994 reflected production
curtailments at the Company's smelters in the Pacific Northwest and
Ghana. Revenue from primary aluminum decreased 41% to $301.7 million
in 1993 from $515.0 million in 1992 because of lower shipments and
lower average realized prices. Shipments of primary aluminum to third
parties were approximately 36% of total aluminum products shipments in
1994, compared with approximately 39% in 1993 and 51% in 1992.
Revenue from fabricated aluminum products increased 6% to $1,043.0
million in 1994 from $981.4 million in 1993, principally due to
increased shipments of most of these products. Revenue from fabricated
aluminum products increased 7% to $981.4 million in 1993 from $913.7
million in 1992, principally due to increased shipments of most
fabricated aluminum products, partially offset by a decrease in
average realized prices of most of these products.
Operating Income (Loss)
The Company had an operating loss of $55.9 million in 1994, compared
with a loss of $123.1 million in 1993 and income of $90.2 million in
1992. In 1993, the Company recorded a pre-tax charge of $35.8 million
related to restructuring charges (see Note 2 of the Notes to
Consolidated Financial Statements) and a pre-tax charge of $19.4
million ($29.0 million in 1992) because of a reduction in the carrying
value of its inventories caused principally by prevailing lower prices
for alumina, primary aluminum, and fabricated aluminum products.
Bauxite and Alumina - This segment's operating income in 1994 was
$19.8 million, compared with a loss of $4.5 million in 1993 and income
of $62.6 million in 1992. In 1994 compared with 1993, operating income
was favorably affected by increased shipments and lower manufacturing
costs. In 1993 compared with 1992, operating income was adversely
affected principally due to a decrease in average realized prices for
alumina, which more than offset above-market prices for virtually all
of the Company's excess alumina sold forward in prior periods under
long-term contracts.
17
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Aluminum Processing - This segment's operating loss was $8.4 million
in 1994, compared with $46.3 million in 1993 and income of $104.9
million in 1992. The decrease in operating loss in 1994 compared with
1993 was caused principally by the $35.8 million restructuring charges
previously described, increased shipments of fabricated aluminum
products and higher average realized prices of primary aluminum,
partially offset by lower shipments of primary aluminum.
The decrease in 1993 compared with 1992 was caused principally by
reduced shipments and lower average realized prices of primary
aluminum, which more than offset increased shipments of fabricated
aluminum products. In 1993, the Company implemented a restructuring
plan for its flat-rolled products operation at its Trentwood plant in
response to overcapacity in the aluminum rolling industry, flat demand
in U.S. can stock markets, and declining demand for aluminum products
sold to customers in the commercial aerospace industry, all of which
resulted in declining prices in Trentwood's key markets. Additionally,
the Company implemented a plan to streamline its casting operations,
which included the shutdown of two facilities located in Ohio. This
entire restructuring is expected to be completed by the end of 1995
and will affect approximately 620 employees. The pre-tax charge for
this restructuring of $35.8 million included $25.2 million for
pension, severance, and other termination benefits at Trentwood; $8.0
million related to casting facilities; and $2.6 million for various
other items. At December 31, 1994, Trentwood was ahead of its
restructuring plan, which is expected to result in annual cost savings
of at least $50.0 million after it has been fully implemented. Other
contributing factors were lower production at the Company's smelters
in the Pacific Northwest in 1993 as a result of the removal of three
reduction potlines from production in January 1993 in response to the
BPA's reduction during the first quarter of 1993 of the amount of
power it normally provides to the Company, and the increased cost of
substitute power in such quarter. In both 1993 and 1992, the Company
realized above-market prices for significant quantities of primary
aluminum sold forward in prior periods under long-term contracts.
Corporate - Corporate operating expenses of $67.3 million, $72.3
million, and $77.3 million in 1994, 1993, and 1992, respectively,
represented corporate general and administrative expenses that were
not allocated to segments.
Income (Loss) Before Extraordinary Loss and Cumulative
Effect of Changes in Accounting Principles
Loss before extraordinary loss and cumulative effect of changes in
accounting principles was $96.2 million in 1994, compared with $117.6
million in 1993, as a result of the reduction in operating loss
previously described, partially offset by a lower credit for income
taxes. Loss before extraordinary loss and cumulative effect of changes
in accounting principles was $117.6 million in 1993, compared with
income of $29.6 million in 1992. This decrease resulted from the lower
operating income previously described and $10.8 million of other pre-
tax charges in 1993, principally related to establishing additional
litigation and environmental reserves.
Net Income (Loss)
The Company reported a net loss of $101.6 million in 1994, compared
with $647.3 million in 1993 and net income of $29.6 million in 1992.
The principal reasons for reduced net loss in 1994 compared with 1993
were the reduction in the operating loss previously described and the
cumulative effect of changes in accounting principles of $507.9
million related to adoption of Statement of Financial Accounting
Standards No. 106, 109, and 112 (see Note 1 of the Notes to
Consolidated Financial Statements). The principal reasons for the
earnings decline in 1993 compared with 1992 were the cumulative effect
of changes in accounting principles of $507.9 million (see above), the
extraordinary loss on early extinguishment of debt of $21.8 million,
and the operating losses described above.
Financial Condition and Capital Spending
Capital Structure
On February 17, 1994, the Company and its parent, Kaiser, entered into
a credit agreement with BankAmerica Business Credit, Inc. (as agent
for itself and other lenders), Bank of America National Trust and
Savings Association, and certain other lenders (as amended, the "1994
Credit Agreement"). Prior to its amendment in March 1995, the 1994
18
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Credit Agreement consisted of a $275.0 million five-year secured,
revolving line of credit, scheduled to mature in 1999. The 1994 Credit
Agreement replaced the credit agreement entered into in December
1989 by the Company and Kaiser with a syndicate of commercial banks
and other financial institutions (as amended, the "1989 Credit
Agreement"). In March 1995, the 1994 Credit Agreement was amended
pursuant to which the line of credit was increased to $325.0 million.
The Company is able to borrow under the facility by means of revolving
credit advances and letters of credit (up to $125.0 million) in an
aggregate amount equal to the lesser of $325.0 million or a borrowing
base relating to eligible accounts receivable plus eligible inventory.
The Company recorded a pre-tax extraordinary loss of $8.3 million
($5.4 million after taxes) in the first quarter of 1994, consisting
primarily of the write-off of unamortized deferred financing costs
related to the 1989 Credit Agreement. As of March 15, 1995, $199.3
million (of which $59.3 million could have been used for letters of
credit) was available to the Company under the 1994 Credit Agreement.
The 1994 Credit Agreement is unconditionally guaranteed by Kaiser and
by certain significant subsidiaries of the Company. Loans under the
1994 Credit Agreement bear interest at a rate per annum, at the
Company's election, equal to a Reference Rate (as defined) plus 1-1/2%
or LIBO Rate (Reserve Adjusted) (as defined) plus 3-1/4%. After June
30, 1995, the interest rate margins applicable to borrowings under the
1994 Credit Agreement may be reduced by up to 1-1/2% (non-
cumulatively), based upon a financial test, determined quarterly.
The 1994 Credit Agreement requires the Company to maintain certain
financial covenants and places restrictions on Kaiser's and the
Company'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 1994 Credit Agreement is secured by, among other things, (i)
mortgages on the Company's major domestic plants (excluding the
Gramercy plant); (ii) subject to certain exceptions, liens on the
accounts receivable, inventory, equipment, domestic patents and
trademarks, and substantially all other personal property of the
Company and certain of its subsidiaries; (iii) a pledge of all the
stock of the Company owned by Kaiser; and (iv) pledges of all of the
stock of a number of the Company's wholly owned domestic subsidiaries,
pledges of a portion of the stock of certain foreign subsidiaries, and
pledges of a portion of the stock of certain partially owned foreign
affiliates.
In the first quarter of 1994, Kaiser consummated the public offering
of 8,855,550 shares of its 8.255% PRIDES, Convertible Preferred Stock
(the "PRIDES"). The net proceeds from the sale of the shares of PRIDES
were approximately $100.1 million. Kaiser used such net proceeds to
make non-interest-bearing loans to the Company in the aggregate
principal amount of $33.2 million (the aggregate dividends scheduled
to accrue on the shares of PRIDES from the issuance date until
December 31, 1997, the date on which the outstanding PRIDES will be
mandatorily converted into shares of Kaiser's common stock), evidenced
by intercompany notes, and used the balance of such net proceeds to
make capital contributions to the Company in the aggregate amount of
$66.9 million.
On February 17, 1994, the Company issued $225.0 million of its 9-7/8%
Senior Notes due 2002 (the "Senior Notes"). The net proceeds of the
offering of the Senior Notes were used to reduce outstanding
borrowings under the revolving credit facility of the 1989 Credit
Agreement immediately prior to the effectiveness of the 1994 Credit
Agreement and for working capital and general corporate purposes.
The offering of the PRIDES, the issuance of the Senior Notes, and the
replacement of the 1989 Credit Agreement were the final steps of a
comprehensive refinancing plan which the Company and Kaiser began in
January 1993 to extend the maturities of the Company's outstanding
indebtedness, enhance its liquidity, and raise new equity capital. At
December 31, 1994, the Company's total consolidated indebtedness,
including notes payable to parent, was $807.3 million, compared to
$760.9 million at December 31, 1993.
The obligations of the Company with respect to the Senior Notes and
the 12-3/4% Notes (see Note 5 of the Notes to Consolidated Financial
Statements) are guaranteed, jointly and severally, by certain
subsidiaries of the Company. The indentures governing the Senior Notes
and the 12-3/4% Notes restrict, among other things, the Company's
ability to incur debt, undertake transactions with affiliates, and pay
dividends.
19
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Cash from Operations
Cash used for operations was $40.5 million in 1994, compared with cash
provided by operations of $25.3 million in 1993 and $28.0 million in
1992. The decrease in cash provided in 1994 compared with 1993 was
primarily due to margin deposits of $50.5 million under certain
hedging contracts and an increase in inventories.
Capital Expenditures
The Company's capital expenditures of $252.1 million (of which $34.0
million was funded by the Company's minority partners in certain
foreign joint ventures) during the three years ended December 31,
1994, were made primarily to improve production efficiency, reduce
operating costs, expand capacity at existing facilities, and construct
new facilities. Total consolidated capital expenditures were $70.0
million in 1994, compared with $67.7 million in 1993 and $114.4
million in 1992 (of which $7.5, $9.4, and $17.1 million were funded by
the minority partners in certain foreign joint ventures in 1994, 1993,
and 1992, respectively). Total consolidated capital expenditures (of
which approximately 11% is expected to be funded by the minority
partners in certain foreign joint ventures) are expected to be between
$80.0 and $130.0 million per year in the years 1995-1997, subject to
necessary approvals, if required, from the lenders under the 1994
Credit Agreement.
Dividends and Distributions
The declaration and payment of dividends by the Company and Kaiser on
shares of their common stock is subject to certain covenants contained
in the 1994 Credit Agreement and, in the case of the Company, the
Senior Note Indenture and the 12-3/4% Note Indenture. The 1994 Credit
Agreement does not permit the Company or Kaiser to pay any dividends
on their common stock. The declaration and payment of dividends by
Kaiser on the shares of the Series A Mandatory Conversion Premium
Dividend Preferred Stock (the "Series A Shares") and the PRIDES is
expressly permitted by the terms of the 1994 Credit Agreement to the
extent Kaiser receives payments on the intercompany notes or certain
other permitted distributions from the Company.
Joint Venture Indebtedness
The Company historically has participated in various raw material
joint ventures outside the United States. At December 31, 1994, the
Company was unconditionally obligated for $78.7 million of
indebtedness of one such joint venture affiliate.
Environmental Contingencies
The Company and Kaiser are subject to a wide variety of environmental
laws and regulations and to fines or penalties assessed for alleged
breaches of the environmental laws and to claims and litigation based
upon such laws. The Company currently is subject to a number of
lawsuits under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended by the Superfund Amendments
Reauthorization Act of 1986 ("CERCLA"), and, along with certain other
entities, has been named as a potentially responsible party for
remedial costs at certain third-party sites listed on the National
Priorities List under CERCLA.
Based on the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals, primarily
related to potential solid waste disposal and soil and groundwater
remediation matters, totaling $40.1 million at December 31, 1994.
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. 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 approximately $20.0 million. While uncertainties
are inherent in the final outcome of these environmental matters, and
it is presently impossible to determine the actual costs that ultimately
may be incurred, management currently believes
20
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
that the resolution of such uncertainties should not have a material
adverse effect on the Company's consolidated financial position or
results of operations. See Note 10 of the Notes to Consolidated
Financial Statements for further description of these contingencies.
Asbestos Contingencies
The Company is a defendant in a number of lawsuits in which the
plaintiffs allege that certain of their injuries were caused by, among
other things, exposure to asbestos during, and as a result of, their
employment or association with the Company or exposure to products
containing asbestos produced or sold by the Company. The lawsuits
generally relate to products the Company has not manufactured for at
least 15 years. At December 31, 1994, the number of such lawsuits
pending was approximately 25,200 with approximately 14,300 received
and 12,500 settled or dismissed in 1994.
Based on past experience and reasonably anticipated future activity,
the Company has established an accrual of $102.0 million at December
31, 1994, for estimated asbestos-related costs for claims filed and
estimated to be filed and settled through 2007. The Company does not
presently believe there is a reasonable basis for estimating such
costs beyond 2007 and, accordingly, no accrual has been recorded for
such costs which may be incurred.
The Company believes that it has insurance coverage available to
recover a substantial portion of its asbestos-related costs. While
claims for recovery from some of the Company's insurance carriers are
currently subject to pending litigation and other carriers have raised
certain defenses, the Company believes, based on prior insurance-
related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of counsel, that substantial
recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $86.4 million, determined on
the same basis as the asbestos-related cost accrual, is recorded
primarily in Other assets at December 31, 1994.
While uncertainties are inherent in the final outcome of these
asbestos matters and it is presently impossible to determine the
actual costs that ultimately may be incurred and insurance recoveries
that will be received, management currently believes that, based on
the factors discussed in the preceding paragraphs, the resolution of
asbestos-related uncertainties and the incurrence of asbestos-related
costs net of related insurance recoveries should not have a material
adverse effect on the Company's consolidated financial position or
results of operations. See Note 10 of the Notes to Consolidated
Financial Statements for further description of this contingency.
Income Tax Matters
------------------
The Company's net deferred income tax assets as of December 31, 1994,
were $280.8 million, net of valuation allowances of $133.9 million.
Approximately $124.9 million of these net deferred income tax assets
relate to the benefit of loss and credit carryforwards, net of
valuation allowances. The Company evaluated all appropriate factors to
determine the proper valuation allowances for these carryforwards,
including any limitations concerning their use and the year the
carryforwards expire, as well as the levels of taxable income
necessary for utilization. The Company believes, based on the cyclical
nature of its business, its history of prior operating earnings, and
its expectations for future years, that it will more likely than not
generate sufficient taxable income to realize the benefit attributable
to the loss and credit carryforwards for which valuation allowances
were not provided. A principal component of the remaining amount of
the net deferred income tax assets is the tax benefit associated with
the accrual for postretirement benefits other than pensions. The
future tax deductions with respect to the turnaround of this accrual
will occur over a 30- to 40-year period. The Company believes a long-
term view of profitability is appropriate and has concluded that this
net deferred income tax asset will more likely than not be realized
despite the operating losses incurred in recent years. See Note 6 of
the Notes to Consolidated Financial Statements for a discussion of
these and other income tax matters.
21
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Trends
------
During 1994, the expansion of world economies increased the demand for
aluminum. This factor, together with primary aluminum smelter cutbacks
caused by previous excessive aluminum inventories and low prices,
resulted in lower London Metal Exchange inventories of primary
aluminum at year-end 1994 than at year-end 1993. Average Midwest U.S.
transaction prices for aluminum increased from a low of $.504 per
pound in November 1993 to $.915 per pound in December 1994. The
Company expects to be profitable in 1995, considering its hedging
program in place at December 31, 1994.
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 on the volume and mix of all
products sold and on its hedging strategies. Consequently, the Company
has developed strategies to mitigate its exposure to possible declines
in the market prices of alumina, primary aluminum, and fabricated
aluminum products while retaining the ability to participate in
favorable pricing environments that may materialize. The Company
enters into a number of financial instruments with off-balance-sheet
risk in the normal course of business that are designed to reduce its
exposure to fluctuations in foreign exchange rates, alumina, primary
aluminum, and fabricated aluminum products prices, and the cost of
purchased commodities.
The Company has significant expenditures which are denominated in
foreign currencies related to long-term purchase commitments with its
affiliates in Australia and the United Kingdom, which expose it to
certain exchange rate risks. In order to mitigate its exposure, the
Company periodically enters into forward foreign exchange and currency
option contracts in Australian dollars and Pounds Sterling to hedge
these commitments. The forward foreign currency exchange contracts are
agreements to purchase or sell a foreign currency, for a price
specified at the contract date, with delivery and settlement in the
future. At December 31, 1994, the Company had net forward foreign
exchange contracts totaling approximately $74.4 million for the
purchase of 102.0 million Australian dollars through December 31,
1996.
To mitigate its exposure to declines in the market prices of alumina,
primary aluminum, and fabricated aluminum products, while retaining
the ability to participate in favorable pricing environments that may
materialize, the Company has developed strategies which include
forward sales of primary aluminum at fixed prices and the purchase or
sale of options for primary aluminum. Under the principal components
of the Company's price risk management strategy, which can be modified
at any time, (i) varying quantities of the Company's anticipated
production are sold forward at fixed prices; (ii) call options are
purchased to allow the Company to participate in certain higher market
prices, should they materialize, for a portion of the Company's
primary aluminum and alumina sold forward; (iii) option contracts are
entered into to establish a price range the Company will receive for a
portion of its primary aluminum and alumina; and (iv) put options are
purchased to establish minimum prices the Company will receive for a
portion of its primary aluminum and alumina. In this regard, in
respect of its 1995 anticipated production, as of December 31, 1994,
the Company had sold forward 170,950 metric tons of primary aluminum
at fixed prices, purchased call options in respect of 69,000 metric
tons of primary aluminum, purchased put options to establish a minimum
price for 193,500 metric tons of primary aluminum, and entered into
option contracts that established a price range for 90,000 metric tons
of primary aluminum. The Company will not receive the benefit of
market price increases to the extent (i) the quantity of production
sold forward is greater than the tonnage covered by the purchased call
options; (ii) market prices exceed the prices at which primary
aluminum is sold forward, but are less than the strike price of the
purchased call options, on the tonnage covered by the options; or
(iii) market prices exceed the maximum of the price range on the
tonnage covered by the option contracts entered to establish a price
range.
In addition, the Company enters into forward fixed price arrangements
with certain customers which provide for the delivery of a specific
quantity of fabricated aluminum products over a specified future
period of time. In order to establish the cost of primary aluminum for
a portion of such sales, the Company may enter into forward and option
22
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
contracts. In this regard, at December 31, 1994, the Company had
purchased 4,500 metric tons of primary aluminum under forward purchase
contracts at fixed prices that expire at various times through June
1995.
The Company has also entered into a natural gas pricing contract to
fix future prices of a portion (20,000 million BTUs per day) of a
plant's natural gas supply through March 1995.
At December 31, 1994, the net unrealized gain on the Company's
position in forward foreign exchange was $3.5 million and the net
unrealized loss on aluminum forward sales and option contracts and the
natural gas pricing contract was $80.4 million, based on a price of
$1,955 per metric ton of aluminum and $1.59 per million BTUs of
natural gas. See Note 11 of the Notes to Consolidated Financial
Statements.
Since December 31, 1994, the Company has entered into:
O Additional forward foreign exchange contracts totaling
approximately $44.3 million for the purchase of 60.0 million
Australian dollars from July 1995 through December 1996 in
respect of its commitments for 1995 and 1996 expenditures
denominated in Australian dollars.
O Additional hedge positions in respect of its anticipated 1995
and 1996 production. As of the date of this report, the Company
had sold forward an additional 121,025 metric tons of primary
aluminum at fixed prices.
O A natural gas pricing contract to fix future prices of a portion
(20,000 million BTUs per day) of a plant's natural gas supply
through September 1995.
At February 28, 1995, the net unrealized loss on the Company's
position in forward foreign exchange was $.7 million, and the net
unrealized loss on aluminum forward sales and option contracts and
natural gas pricing contracts was $3.6 million, based on a price of
$1,808 per metric ton of aluminum and $1.42 per million BTUs of
natural gas.
Labor Matter
On February 17, 1995, the Company's approximately 3,000 hourly-paid
employees represented by the USWA failed to ratify a proposed master
labor agreement (47 months duration effective November 1, 1994 through
September 30, 1998) with the Company which had been recommended for
ratification by the USWA, and on February 20, 1995, a strike by such
employees began which affected five plants: aluminum smelters at
Tacoma and Mead (Spokane), Washington; a sheet and plate rolling mill
at Trentwood (Spokane), Washington; an alumina refinery at Gramercy,
Louisiana; and a rod and bar plant at Newark, Ohio. The strike
continued for eight days until the agreement (including two technical
modifications) was ratified by those employees on February 28, 1995.
During the strike, operations at all five plant locations continued at
various levels of production, and all five plants continued to ship
product to customers. Management believes that the temporary
disruptions to normal production and shipments resulting from the
strike should not have a material adverse effect on the financial
condition or results of operations of the Company for 1995 and that
the Company's employee relations will continue to be satisfactory.
23
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Report of Independent Public Accountants . . . . . . . . . . 25
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . 26
Statements of Consolidated Income (Loss) . . . . . . . . . . 27
Statements of Consolidated Cash Flows . . . . . . . . . . . 28
Notes to Consolidated Financial Statements. . . . . . . . . . 29
Five-year Financial Data. . . . . . . . . . . . . . . . . . . 54
Quarterly Financial Data. . . . . . . . . . . . . . . . . . . 56
Financial statement schedules are inapplicable or the required
information is included in the Consolidated Financial Statements or
the Notes thereto.
24
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Kaiser Aluminum &
Chemical Corporation:
We have audited the accompanying consolidated balance sheets of Kaiser
Aluminum & Chemical Corporation (a Delaware corporation) and
subsidiaries as of December 31, 1994 and 1993, and the related
statements of consolidated income and cash flows for each of the three
years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Kaiser
Aluminum & Chemical Corporation and subsidiaries as of December 31,
1994 and 1993, and the results of their operations and their cash
flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles.
As explained in Note 1 of the Notes to Consolidated Financial
Statements, effective January 1, 1993, the Company changed its methods
of accounting for postretirement benefits other than pensions,
postemployment benefits, and income taxes.
ARTHUR ANDERSEN LLP
San Francisco, California
February 17, 1995
25
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------
(In millions of dollars, except share amounts) 1994 1993
-------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 12.0 $ 14.2
Receivables:
Trade, less allowance for doubtful receivables of $4.2 in 1994 and $2.9 in 1993 150.7 156.1
Other 49.8 79.9
Inventories 468.0 426.9
Prepaid expenses and other current assets 158.0 60.7
-------- --------
Total current assets 838.5 737.8
Investments in and advances to unconsolidated affiliates 169.7 183.2
Property, plant, and equipment - net 1,133.2 1,163.7
Deferred income taxes 271.0 210.3
Other assets 281.2 233.2
-------- --------
Total $2,693.6 $2,528.2
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 152.1 $ 126.3
Accrued interest 32.6 23.6
Accrued salaries, wages, and related expenses 77.7 56.1
Accrued postretirement medical benefit obligation - current portion 47.0 47.6
Other accrued liabilities 171.7 133.1
Payable to affiliates 85.2 62.4
Short-term borrowings .5
Long-term debt - current portion 11.5 8.7
Notes payable to parent - current portion 21.2 12.6
-------- --------
Total current liabilities 599.0 470.9
Long-term liabilities 495.5 501.7
Accrued postretirement medical benefit obligation 734.9 713.1
Long-term debt 751.1 720.2
Notes payable to parent 23.5 18.9
Minority interests 85.4 69.7
Redeemable preference stock - aggregate liquidation value of $45.6 in 1994
and $54.1 in 1993 29.0 33.6
Stockholders' equity (deficit):
Preference stock - cumulative and convertible, par value $100, authorized
1,000,000 shares; issued and outstanding, 23,436 and 24,039 in 1994 and 1993 1.8 1.8
Common stock, par value 33-1/3 cents, authorized 100,000,000 shares;
issued and outstanding, 46,171,365 shares in 1994 and 1993 15.4 15.4
Additional capital 1,626.3 1,471.2
Accumulated deficit (271.5) (165.2)
Additional minimum pension liability (9.1) (21.6)
Less: Note receivable from parent (1,387.7) (1,301.5)
-------- --------
Total stockholders' equity (deficit) (24.8) .1
-------- --------
Total $2,693.6 $2,528.2
======== ========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
26
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
Year Ended December 31,
------------------------------
(In millions of dollars) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------
Net sales $1,781.5 $1,719.1 $1,909.1
-------- -------- --------
Costs and expenses:
Cost of products sold 1,625.5 1,587.7 1,619.3
Depreciation 95.4 97.1 80.3
Selling, administrative, research and development, and general 116.5 121.6 119.3
Restructuring of operations 35.8
-------- -------- --------
Total costs and expenses 1,837.4 1,842.2 1,818.9
-------- -------- --------
Operating income (loss) (55.9) (123.1) 90.2
Other income (expense):
Interest and other income - net (7.3) (1.5) 16.9
Interest expense (88.6) (84.2) (78.7)
-------- -------- --------
Income (loss) before income taxes, minority interests, extraordinary loss,
and cumulative effect of changes in accounting principles (151.8) (208.8) 28.4
Credit (provision) for income taxes 54.0 86.9 (5.3)
Minority interests 1.6 4.3 6.5
-------- -------- --------
Income (loss) before extraordinary loss and cumulative effect of changes
in accounting principles (96.2) (117.6) 29.6
Extraordinary loss on early extinguishment of debt, net of tax benefit
of $2.9 and $11.2 for 1994 and 1993, respectively (5.4) (21.8)
Cumulative effect of changes in accounting principles, net of tax benefit
of $237.7 (507.9)
-------- -------- --------
Net income (loss) $ (101.6) $ (647.3) $ 29.6
======== ======== ========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
27
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended December 31,
--------------------------
(In millions of dollars) 1994 1993 1992
----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $(101.6) $(647.3) $ 29.6
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities:
Depreciation 95.4 97.1 80.3
Amortization of deferred financing costs and discount on long-term debt 6.2 11.2 11.5
Non-cash postretirement medical benefit expenses 13.9 19.2
Restructuring of operations 35.8
Minority interests (1.6) (4.3) (6.5)
Extraordinary loss on early extinguishment of debt - net 5.4 21.8
Cumulative effect of changes in accounting principles - net 507.9
(Decrease) increase in accrued and deferred income taxes (69.2) (96.4) 3.5
Equity in losses of unconsolidated affiliates 1.9 3.3 1.9
Recognition of previously deferred income from a forward alumina sale (.6) (25.7)
Increase (decrease) in accrued interest 9.3 19.2 (.3)
Incurrence of financing costs (19.2) (12.7) (5.5)
Decrease (increase) in receivables 36.2 (6.2) (58.6)
(Increase) decrease in inventories (41.1) 13.0 58.7
(Increase) decrease in prepaid expenses and other current assets (49.7) 7.4 7.6
Increase (decrease) in accounts payable 25.8 (10.3) (5.2)
Increase (decrease) in payable to affiliates and accrued liabilities 37.7 57.2 (87.6)
Other 10.1 10.0 24.3
------- ------- -------
Net cash (used for) provided by operating activities (40.5) 25.3 28.0
------- ------- -------
Cash flows from investing activities:
Net proceeds from disposition of property and investments 4.1 13.1 26.1
Capital expenditures (70.0) (67.7) (114.4)
------- ------- -------
Net cash used for investing activities (65.9) (54.6) (88.3)
------- ------- -------
Cash flows from financing activities:
Repayments of long-term debt, including revolving credit (345.1) (1,134.) (221.4)
Borrowings of long-term debt, including revolving credit 378.9 1,068.1 303.8
Borrowings from MAXXAM Group Inc. (see supplemental disclosure below) 15.0 2.5
Tender premiums and other costs of early extinguishment of debt (27.1)
Net short-term debt repayments (.5) (4.3) (1.5)
Net borrowings from parent 13.2 31.5
Dividends paid (.7) (1.0) (12.8)
Redemption of preference stock (8.5) (4.2) (7.3)
Capital contribution 66.9 81.5
------- ------- -------
Net cash provided by financing activities 104.2 25.0 63.3
------- ------- -------
Net (decrease) increase in cash and cash equivalents during the year (2.2) (4.3) 3.0
Cash and cash equivalents at beginning of year 14.2 18.5 15.5
------- ------- -------
Cash and cash equivalents at end of year $ 12.0 $ 14.2 $ 18.5
======= ======= =======
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 73.1 $ 53.7 $ 68.1
Income taxes paid 16.0 13.5 1.8
Tax allocation payments to (from) MAXXAM Inc. (3.8) 28.1
Supplemental disclosure of non-cash financing activities:
Contribution to capital of the borrowings from MAXXAM Group Inc. $ 15.0
The accompanying notes to consolidated financial statements are
an integral part of these statements.
28
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
1. Summary of Significant Accounting Policies
---------------------------------------------
Principles of Consolidation
The consolidated financial statements include the statements of Kaiser
Aluminum & Chemical Corporation (the "Company" or "KACC") and its
majority-owned subsidiaries. Investments in 50%-or-less-owned entities
are accounted for primarily by the equity method. Intercompany
balances and transactions are eliminated. The Company is a wholly
owned subsidiary of Kaiser Aluminum Corporation ("Kaiser") which is a
subsidiary of MAXXAM Inc. ("MAXXAM"). Certain reclassifications of
prior-year information were made to conform to the current
presentation.
Changes in Accounting Principles
The Company adopted Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("SFAS 106"), and Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits"
("SFAS 112"), as of January 1, 1993. The costs of postretirement
benefits other than pensions and postemployment benefits are now
accrued over the period employees provide services to the date of
their full eligibility for such benefits. Previously, such costs were
expensed as actual claims were incurred. The cumulative effect of the
changes in accounting principles for the adoption of SFAS 106 and SFAS
112 were recorded as charges to results of operations of $497.7 and
$7.3, net of related income taxes of $234.2 and $3.5, respectively.
These deferred income tax benefits were recorded at the federal
statutory rate in effect on the date the accounting standards were
adopted, before giving effect to certain valuation allowances. The new
accounting standards had no effect on the Company's cash outlays for
postretirement or postemployment benefits, nor did these one-time
charges affect the Company's compliance with its existing debt
covenants. The Company reserves the right, subject to applicable
collective bargaining agreements and applicable legal requirements, to
amend or terminate these benefits.
The Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), as of January 1,
1993. The adoption of SFAS 109 changes the Company's method of
accounting for income taxes to an asset and liability approach from
the deferral method prescribed by Accounting Principles Board Opinion
No. 11, "Accounting for Income Taxes" ("APB 11"). The asset and
liability approach requires the recognition of deferred income tax
assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's financial statements
or tax returns. Under this method, deferred income tax assets and
liabilities are determined based on the temporary differences between
the financial statement and tax bases of assets and liabilities using
enacted tax rates. The cumulative effect of the change in accounting
principle reduced the Company's results of operations by $2.9. The
adoption of SFAS 109 required the Company to restate certain assets
and liabilities to their pre-tax amounts from their net-of-tax amounts
originally recorded in connection with the acquisition by MAXXAM in
October 1988. As a result of restating the assets and liabilities, the
loss before income taxes, minority interests, extraordinary loss, and
cumulative effect of changes in accounting principles for the year
ended December 31, 1993, was increased by $9.3.
Cash and Cash Equivalents
The Company considers only those short-term, highly liquid investments
with original maturities of 90 days or less to be cash equivalents.
Inventories
Substantially all product inventories are stated at last-in, first-out
("LIFO") cost, not in excess of market value. Replacement cost is not
in excess of LIFO cost. Other inventories, principally operating
supplies and repair and maintenance parts, are stated at the lower of
average cost or market. Inventory costs consist of material, labor,
and manufacturing overhead, including depreciation.
29
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
Inventories consist of the following:
December 31,
--------------
1994 1993
--------------------------------------------------------------------------
Finished fabricated products $ 49.4 $ 83.7
Primary aluminum and work in process 203.1 141.4
Bauxite and alumina 102.3 94.0
Operating supplies and repair and maintenance parts 113.2 107.8
------ ------
$468.0 $426.9
====== ======
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 by class of assets are:
------------------------------------------------------------------
Land improvements 8 to 25 years
Buildings 15 to 45 years
Machinery and equipment 10 to 22 years
Other Income
Other income in 1994 and 1993 includes $10.3 and $10.8 of pre-tax
charges related principally to establishing additional litigation and
environmental reserves in the fourth quarters, respectively. Other
income in 1992 includes $14.0 of pre-tax income for non-recurring
adjustments to previously recorded liabilities and reserves in the
fourth quarter.
Deferred Financing Costs
Costs incurred to obtain debt financing are deferred and amortized
over the estimated term of the related borrowing. Amortization of
deferred financing costs of $6.0, $11.2, and $10.9 for the years ended
December 31, 1994, 1993, and 1992, respectively, are included in
interest expense.
Foreign Currency
The Company uses the United States dollar as the functional currency
for its foreign operations.
Derivative Financial Instruments
Gains and losses arising from the use of derivative financial
instruments are reflected in the Company's operating results
concurrently with the consummation of the underlying hedged
transactions. Deferred gains or losses as of December 31, 1994, are
included in Prepaid expenses and other current assets and Other
accrued liabilities. The Company does not hold or issue derivative
financial instruments for trading purposes (see Note 10).
Fair Value of Financial Instruments
The following table presents the estimated fair value of the Company's
financial instruments, together with the carrying amounts of the
related assets or liabilities. Unless otherwise noted, the carrying
amount of all financial instruments is a reasonable estimate of fair
value.
30
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
December 31, 1994 December 31, 1993
-------------------- -------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------------------------------------------------------------
Debt $762.6 $747.6 $728.9 $734.1
Foreign currency contracts 3.5
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Debt - The quoted market prices were used for the Senior Notes and
12-3/4% Notes (see Note 5). The fair value of all other debt is based
on discounting the future cash flows using the current rate for debt of
similar maturities and terms.
Foreign Currency Contracts - The fair value generally reflects the
estimated amounts that the Company would receive to enter into
similar contracts at the reporting date, thereby taking into account
unrealized gains or losses on open contracts (see Note 10).
2. Restructuring of Operations
--------------------------------
In 1993, the Company implemented a restructuring plan primarily for
its flat-rolled products operation at its Trentwood plant in response
to overcapacity in the aluminum rolling industry, flat demand in the
U.S. can stock markets, and declining demand for aluminum products
sold to customers in the commercial aerospace industry, all of which
had resulted in declining prices in Trentwood's key markets. As of
December 31, 1994, the costs related to the 1993 pre-tax charge for
this restructuring of $35.8 have been substantially incurred.
3. Investments In and Advances To Unconsolidated Affiliates
-------------------------------------------------------------
Summary combined financial information is provided below for
unconsolidated aluminum investments, most of which supply and process
raw materials. The investees are Queensland Alumina Limited ("QAL")
(28.3% owned), Anglesey Aluminium Limited ("Anglesey") (49.0% owned),
and Kaiser Jamaica Bauxite Company (49.0% owned). The equity in
earnings (losses) before income taxes of such operations is treated as
a reduction (increase) in cost of products sold. At December 31, 1994
and 1993, the Company's net receivables from these affiliates were not
material.
Summary of Combined Operations
Year Ended December 31,
-----------------------
1994 1993 1992
-------------------------------------------------------------------
Net sales $ 489.8 $510.3 $586.6
Costs and expenses (494.8) (527.2) (586.7)
Provision (credit) for income taxes (6.3) 1.9 6.9
------- ----- ------
Net income (loss) $ (11.3) $(15.0) $ 6.8
======= ====== ======
Company's equity in losses $ (1.9) $ (3.3) $ (1.9)
======= ====== ======
31
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
Summary of Combined Financial Position
December 31,
--------------
1994 1993
--------------------------------------------------------------------
Current assets $342.3 $312.3
Property, plant, and equipment - net 349.4 371.1
Other assets 42.4 46.3
------ ------
Total assets $734.1 $729.7
====== ======
Current liabilities $122.4 $130.4
Long-term debt 307.6 290.0
Other liabilities 31.0 17.8
Stockholders' equity 273.1 291.5
------ ------
Total liabilities and stockholders' equity $734.1 $729.7
====== ======
The Company's equity in losses differs from the summary net income
(loss) due to various percentage ownerships in the entities and equity
method accounting adjustments.
At December 31, 1994, the Company's investment in its unconsolidated
affiliates exceeded its equity in their net assets by approximately
$67.9. The Company is amortizing this amount over a 12-year period,
which results in an annual amortization charge of approximately $11.6.
The Company and its affiliates have interrelated operations. The
Company provides some of its affiliates with services such as
financing, management, and engineering. Significant activities with
affiliates include the acquisition and processing of bauxite, alumina,
and primary aluminum. Purchases from these affiliates were $219.7,
$206.6, and $219.4 in the years ended December 31, 1994, 1993, and
1992, respectively. No dividends were received from investees in the
three years ended December 31, 1994.
4. Property, Plant, and Equipment
----------------------------------
The major classes of property, plant, and equipment are as follows:
December 31,
-------------------
1994 1993
----------------------------------------------------------------------------
Land and improvements $ 153.5 $ 135.1
Buildings 196.8 194.8
Machinery and equipment 1,285.0 1,223.0
Construction in progress 45.0 64.9
-------- --------
1,680.3 1,617.8
Accumulated depreciation 547.1 454.1
-------- --------
Property, plant, and equipment - net $1,133.2 $1,163.7
======== ========
32
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
5. Long-Term Debt
------------------
Long-term debt and its maturity schedule are as follows:
2000 December 31,
---------------
and 1994 1993
1995 1996 1997 1998 1999 After Total Total
---------------------------------------------------------------------------------------------------------
1994 Credit Agreement (10% at December 31, 1994) $6.7 $ 6.7
1989 Credit Agreement (6.59% at December 31, 1993) $188.0
9-7/8% Senior Notes, net $223.6 223.6
Pollution Control and Solid Waste Disposal
Facilities Obligations (6.00%-7.75%) $ 1.2 $1.2 $1.3 $1.4 .2 32.8 38.1 39.2
Alpart CARIFA Loan (fixed and variable rates) 60.0 60.0 60.0
Alpart Term Loan (8.95%) 6.2 6.3 6.2 18.7 25.0
12-3/4% Senior Subordinated Notes 400.0 400.0 400.0
Other borrowings (fixed and variable rates) 4.1 1.5 1.7 7.4 .4 .4 15.5 16.7
----- ---- ---- ---- ---- ------ ---- -----
Total $11.5 $9.0 $9.2 $8.8 $7.3 $716.8 762.6 728.9
===== ==== ==== ==== ==== ======
Less current portion 11.5 8.7
------ ------
Long-term debt $751.1 $720.2
====== ======
1994 Credit Agreement
On February 17, 1994, the Company and Kaiser entered into a credit
agreement with BankAmerica Business Credit, Inc. (as agent for itself
and other lenders), Bank of America National Trust and Savings
Association, and certain other lenders (as amended, the "1994 Credit
Agreement"). The 1994 Credit Agreement consists of a $275.0 five-year
secured, revolving line of credit, scheduled to mature in 1999, and
replaced the credit agreement entered into in December 1989 by the
Company and Kaiser with a syndicate of commercial banks and other
financial institutions (as amended, the "1989 Credit Agreement"). The
Company is able to borrow under the facility by means of revolving
credit advances and letters of credit (up to $125.0) in an aggregate
amount equal to the lesser of $275.0 or a borrowing base relating to
eligible accounts receivable plus eligible inventory. The Company
recorded a pre-tax extraordinary loss of $8.3 ($5.4 after taxes) in
the first quarter of 1994, consisting primarily of the write-off of
unamortized deferred financing costs related to the 1989 Credit
Agreement. As of December 31, 1994, $202.5 (of which $59.3 could have
been used for letters of credit) was available to the Company under
the 1994 Credit Agreement. The 1994 Credit Agreement is
unconditionally guaranteed by Kaiser and by certain significant
subsidiaries of the Company. Loans under the 1994 Credit Agreement
bear interest at a rate per annum, at the Company's election, equal to
a Reference Rate (as defined) plus 1-1/2% or LIBO Rate (Reserve
Adjusted) (as defined) plus 3-1/4%. After June 30, 1995, the interest
rate margins applicable to borrowings under the 1994 Credit Agreement
may be reduced by up to 1-1/2% (non-cumulatively), based on a
financial test, determined quarterly.
The 1994 Credit Agreement requires the Company to maintain certain
financial covenants and places restrictions on the Company's and
Kaiser's ability to, among other things, incur debt and liens, make
investments, pay dividends, undertake transactions with affiliates,
make capital expenditures, and enter into unrelated lines of business.
Neither the Company nor Kaiser currently is permitted to pay dividends
on its common stock. The 1994 Credit Agreement is secured by, among
other things, (i) mortgages on the Company's major domestic plants
(excluding the Gramercy plant); (ii) subject to certain exceptions,
liens on the accounts receivable, inventory, equipment, domestic
patents and trademarks, and substantially all other personal property
of the Company and certain of its subsidiaries; (iii) a pledge of all
the stock of the Company owned by Kaiser; and (iv) pledges of all of
the stock of a number of the Company's wholly
33
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
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.
Senior Notes
Concurrent with the offering by Kaiser of its 8.255% PRIDES,
Convertible Preferred Stock (the "PRIDES") (see Note 9), the Company
issued $225.0 of its 9-7/8% Senior Notes due 2002 (the "Senior
Notes"). The net proceeds of the offering of the Senior Notes were
used to reduce outstanding borrowings under the revolving credit
facility of the 1989 Credit Agreement immediately prior to the
effectiveness of the 1994 Credit Agreement and for working capital and
general corporate purposes.
Senior Subordinated Notes
On February 1, 1993, the Company issued $400.0 of 12-3/4% Senior
Subordinated Notes due 2003 (the "12-3/4% Notes"). The net proceeds
from the sale of the 12-3/4% Notes were used to retire the 14-1/4%
Senior Subordinated Notes due 1995 (the "14-1/4% Notes"), to prepay
$18.0 of the term loan, and to reduce outstanding borrowings under the
revolving credit facility of the 1989 Credit Agreement. These
transactions resulted in a pre-tax extraordinary loss of $33.0 in the
first quarter of 1993, consisting primarily of the write-off of
unamortized discount and deferred financing costs related to the 14-
1/4% Notes and the payment of premiums on the 14-1/4% Notes.
The obligations of the Company with respect to the Senior Notes and
the 12-3/4% Notes are guaranteed, jointly and severally, by certain
subsidiaries of the Company. The indentures governing the Senior Notes
and the 12-3/4% Notes restrict, among other things, the Company's
ability to incur debt, undertake transactions with affiliates, and pay
dividends.
Gramercy Revenue Bonds
In December 1992, the Company entered into an installment sale
agreement (the "Sale Agreement") with the Parish of St. James,
Louisiana (the "Louisiana Parish"), pursuant to which the Louisiana
Parish issued $20.0 aggregate principal amount of its 7-3/4% Bonds due
August 1, 2022 (the "Bonds") to finance the construction of certain
solid waste disposal facilities at the Company's Gramercy plant. The
proceeds from the sale of the Bonds were deposited into a construction
fund and may be withdrawn, from time to time, pursuant to the terms of
the Sale Agreement and the Bond indenture. At December 31, 1994, $6.4
remained in the construction fund. The Sale Agreement requires the
Company to make payments to the Louisiana Parish in installments due
on the dates and in the amounts required to permit the Louisiana
Parish to satisfy all of its payment obligations under the Bonds.
Alpart CARIFA Loan
In December 1991, Alpart entered into a loan agreement with the
Caribbean Basin Projects Financing Authority ("CARIFA") under which
CARIFA loaned Alpart the proceeds from the issuance of CARIFA's
industrial revenue bonds. The terms of the loan parallel the bonds'
repayment terms. The $38.0 aggregate principal amount of Series A
bonds matures on June 1, 2008. The Series A bonds bear interest at a
floating rate of 87% of the applicable LIBID Rate (LIBOR less 1/8 of
1%) on $37.5 of the principal amount (5.2% at December 31, 1994) with
the remaining $.5 bearing interest at a fixed rate of 6.35%. The $22.0
aggregate principal amount of Series B bonds matures on June 1, 2007,
and bears interest at a fixed rate of 8.25%.
Proceeds from the sale of the bonds were used by Alpart to refinance
interim loans from the partners in Alpart, to pay eligible project
costs for the expansion and modernization of its alumina refinery and
related port and bauxite mining facilities, and to pay certain costs
of issuance. Under the terms of the loan agreement, Alpart must remain
a qualified recipient for Caribbean Basin Initiative funds as defined
in applicable laws. Alpart has agreed to indemnify bondholders
34
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
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. Alpart's obligations under the loan agreement are
secured by a $64.2 letter of credit guaranteed by the partners in
Alpart (of which $22.5 is guaranteed by the Company's minority partner
in Alpart).
Capitalized Interest
Interest capitalized in 1994, 1993, and 1992 was $2.7, $3.4, and $4.4,
respectively.
6. Income Taxes
----------------
Income (loss) before income taxes, minority interests, extraordinary
loss, and cumulative effect of changes in accounting principles by
geographic area is as follows:
Year Ended December 31,
---------------------------
1994 1993 1992
-------------------------------------------------------------------
Domestic $(168.1) $(232.3) $ (81.3)
Foreign 16.3 23.5 109.7
------- ------- -------
Total $(151.8) $(208.8) $ 28.4
======= ======= =======
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 credit (provision) for income taxes on income (loss) before income
taxes, minority interests, extraordinary loss, and cumulative effect
of changes in accounting principles consists of:
Federal Foreign State Total
-----------------------------------------------------------------------
1994 Current $(18.0) $ (.1) $(18.1)
Deferred $ 71.4 .6 .1 72.1
------ ------ ------ ------
Total $ 71.4 $(17.4) $ 54.0
====== ====== ====== ======
1993 Current $ 12.5 $ (7.9) $ (.1) $ 4.5
Deferred 68.6 12.0 1.8 82.4
------ ------ ------ ------
Total $ 81.1 $ 4.1 $ 1.7 $ 86.9
====== ====== ====== ======
1992 Current $ (9.7) $(11.4) $ (.1) $(21.2)
Deferred 13.1 3.3 (.5) 15.9
------ ------ ------ ------
Total $ 3.4 $ (8.1) $ (.6) $ (5.3)
====== ====== ====== ======
The 1994 federal deferred credit for income taxes of $71.4 includes
$29.2 for the benefit of operating loss carryforwards generated in
1994. The 1993 federal deferred credit for income taxes of $68.6
includes $29.1 for the benefit of operating loss carryforwards
generated in 1993 and a $3.4 benefit for increasing net deferred
income tax assets (liabilities) as of the date of enactment (August
10, 1993) of the Omnibus Budget Reconciliation Act of 1993, which
retroactively increased the federal statutory income tax rate from 34%
to 35% for periods beginning on or after January 1, 1993.
35
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
A reconciliation between the credit (provision) for income taxes and
the amount computed by applying the federal statutory income tax rate
to income (loss) before income taxes, minority interests,
extraordinary loss, and cumulative effect of changes in accounting
principles is as follows:
Year Ended December 31,
-----------------------
1994 1993 1992
----------------------------------------------------------------------------------------------------------
S>
Amount of federal income tax based on the statutory rate $53.1 $73.1 $(9.7)
Percentage depletion 5.6 6.4 6.3
Increase in net deferred income tax assets due to tax rate change 1.8 3.4
Revision of prior years' tax estimates and other changes in valuation allowances .5 3.9 2.9
Foreign taxes, net of federal tax benefit (5.3) (2.6) (.4)
Financial reporting/tax basis differences (4.2)
Other (1.7) 2.7 (.2)
----- ----- -----
Credit (provision) for income taxes $54.0 $86.9 $(5.3)
===== ===== =====
As shown in the Statements of Consolidated Income (Loss) for the years
ended December 31, 1994 and 1993, the Company reported extraordinary
losses related to the early extinguishment of debt. The Company
reported the 1994 extraordinary loss net of related deferred federal
income taxes of $2.9 and reported the 1993 extraordinary loss net of
related current federal income taxes of $11.2, which approximated the
federal statutory rate in effect on the dates the transactions
occurred.
The Company adopted SFAS 109 as of January 1, 1993, as discussed in
Note 1. The components of the Company's net deferred income tax assets
are as follows:
December 31, December 31,
1994 1993
----------------------------------------------------------------------------------------------
Deferred income tax assets:
Postretirement benefits other than pensions $ 293.7 $ 285.4
Loss and credit carryforwards 187.4 142.5
Other liabilities 109.6 104.8
Pensions 51.0 60.6
Foreign and state deferred income tax liabilities 28.1 33.0
Property, plant, and equipment 23.1 23.1
Other 3.5 10.5
Valuation allowances (133.9) (133.5)
------- -------
Total deferred income tax assets - net 562.5 526.4
------- -------
Deferred income tax liabilities:
Property, plant, and equipment (203.2) (224.4)
Investments in and advances to unconsolidated affiliates (63.8) (60.6)
Inventories (8.3) (14.8)
Other (6.4) (20.3)
------- -------
Total deferred income tax liabilities
(281.7) (320.1)
------- -------
Net deferred income tax assets $ 280.8 $ 206.3
======= =======
36
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In milliona of dollars, except share amounts)
--------------------------------------------------------------------
The valuation allowances listed above relate primarily to loss and
credit carryforwards and postretirement benefits other than pensions.
As of December 31, 1994, approximately $124.9 of the net deferred
income tax assets listed above relate to the benefit of loss and
credit carryforwards, net of valuation allowances. The Company
evaluated all appropriate factors to determine the proper valuation
allowances for these carryforwards, including any limitations
concerning their use and the year the carryforwards expire, as well as
the levels of taxable income necessary for utilization. For example,
full valuation allowances were provided for certain credit
carryforwards that expire in the near term. With regard to future
levels of income, the Company believes, based on the cyclical nature
of its business, its history of prior operating earnings, and its
expectations for future years, that it will more likely than not
generate sufficient taxable income to realize the benefit attributable
to the loss and credit carryforwards for which valuation allowances
were not provided. The remaining portion of the Company's net deferred
income tax assets at December 31, 1994, is approximately $155.9. A
principal component of this amount is the tax benefit associated with
the accrual for postretirement benefits other than pensions. The
future tax deductions with respect to the turnaround of this accrual
will occur over a 30- to 40-year period. If such deductions create or
increase a net operating loss in any one year, the Company has the
ability to carry forward such loss for 15 taxable years. For these
reasons, the Company believes a long-term view of profitability is
appropriate and has concluded that this net deferred income tax asset
will more likely than not be realized despite the operating losses
incurred in recent years.
Certain of the deferred income tax assets and liabilities listed above
are included on the Consolidated Balance Sheet in the captions
entitled Receivables, Prepaid expenses and other current assets, Other
accrued liabilities, and Long-term liabilities.
The Company and its subsidiaries (collectively, the "KACC Subgroup")
were included in the consolidated federal income tax returns of MAXXAM
for the period from October 28, 1988, through June 30, 1993. As a
consequence of the issuance of the Depositary Shares on June 30, 1993,
as discussed in Note 9, the KACC Subgroup is no longer included in the
consolidated federal income tax returns of MAXXAM. The KACC Subgroup
has become a member of a new consolidated return group of which Kaiser
is the common parent corporation (the "New Kaiser Tax Group"). The New
Kaiser Tax Group files consolidated federal income tax returns for
taxable periods beginning on or after July 1, 1993.
The tax allocation agreement between the Company and MAXXAM (the "KACC
Tax Allocation Agreement") terminated pursuant to its terms, effective
for taxable periods beginning after June 30, 1993. Any unused federal
income tax attribute carryforwards under the terms of the KACC Tax
Allocation Agreement were eliminated and are not available to offset
federal income tax liabilities for taxable periods beginning on or
after July 1, 1993. Upon the filing of MAXXAM's 1993 consolidated
federal income tax return, the tax attribute carryforwards of the
MAXXAM consolidated return group as of December 31, 1993, were
apportioned in part to Kaiser and the KACC Subgroup, based on the
provisions of the relevant consolidated return regulations. The
benefit of such tax attribute carryforwards apportioned to the KACC
Subgroup approximated the benefit of tax attribute carryforwards
eliminated under the KACC Tax Allocation Agreement. To the extent the
KACC Subgroup generates unused tax losses or tax credits for periods
beginning on or after July 1, 1993, such amounts will not be available
to obtain refunds of amounts paid by the Company to MAXXAM for periods
ending on or before June 30, 1993, pursuant to the KACC Tax Allocation
Agreement.
The Company and MAXXAM entered into the KACC Tax Allocation
Agreement, which became effective as of October 28, 1988. Under the
terms of the KACC Tax Allocation Agreement, MAXXAM computed the
federal income tax liability for the KACC Subgroup as if the KACC
Subgroup were a separate affiliated group of corporations which was
37
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
never connected with MAXXAM. The provisions of the KACC Tax Allocation
Agreement will continue to govern for periods ended prior to July 1,
1993. Therefore, payments or refunds may still be required by or
payable to the Company under the terms of the KACC Tax Allocation
Agreement for these periods due to the final resolution of audits,
amended returns, and related matters. However, the 1994 Credit
Agreement prohibits the payment by the Company to MAXXAM of any
amounts due under the KACC Tax Allocation Agreement, except for
certain payments that are required as a result of audits and only to
the extent of any amounts paid after February 17, 1994, by MAXXAM to
the Company under the KACC Tax Allocation Agreement.
On June 30, 1993, the Company and Kaiser entered into a tax allocation
agreement (the "New KACC Tax Allocation Agreement"), effective for
taxable periods beginning on or after July 1, 1993. The terms of the
New KACC Tax Allocation Agreement are similar, in all material
respects, to those of the KACC Tax Allocation Agreement except that
the Company is liable to Kaiser.
The following table presents the Company's tax attributes for federal
income tax purposes as of December 31, 1994 under the terms of the New
KACC Tax Allocation Agreement. The utilization of certain of these tax
attributes is subject to limitations:
Expiring
Through
-----------------------------------------------------------------------------
Regular tax attribute carryforwards:
Current year net operating loss $ 83.5 2009
Prior year net operating losses 135.1 2008
General business tax credits 37.4 2006
Foreign tax credits 42.2 1999
Alternative minimum tax credits 15.3 Indefinite
Alternative minimum tax attribute carryforwards:
Current year net operating loss $ 64.1 2009
Prior year net operating losses 84.1 2008
Foreign tax credits 33.8 1999
7.Employee Benefit and Incentive Plans
---------------------------------------
Retirement Plans
Retirement plans are non-contributory for salaried and hourly
employees and generally provide for benefits based on a formula which
considers length of service and earnings during years of service. The
Company's funding policies meet or exceed all regulatory requirements.
38
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
The funded status of the employee pension benefit plans and the
corresponding amounts that are included in the Company's Consolidated
Balance Sheets are as follows:
Plans with Accumulated
Benefits Exceeding Assets<F1>
December 31,
-----------------------------
1994 1993
-----------------------------------------------------------------------------------------------------
Accumulated benefit obligation:
Vested employees $(663.9) $(705.0)
Nonvested employees (41.1) (40.1)
------- -------
Accumulated benefit obligation (705.0) (745.1)
Additional amounts related to projected salary increases (30.0) (45.5)
------- -------
Projected benefit obligation (735.0) (790.6)
Plan assets (principally common stocks and fixed income
obligations) at fair value 524.6 569.8
------- -------
Plan assets less than projected benefit obligation (210.4) (220.8)
Unrecognized net losses 42.5 75.7
Unrecognized net obligations .8 1.6
Unrecognized prior-service cost 30.9 16.9
Adjustment required to recognize minimum liability (42.9) (47.7)
------- -------
Accrued pension obligation included in the
Consolidated Balance Sheets (principally in long-term liabilities) $(179.1) $(174.3)
======= =======
<FN>
<F1>
Includes plans with assets exceeding accumulated benefits by
approximately $.3 and $.1 in 1994 and 1993, respectively.
</FN>
As required by Statement of Financial Accounting Standards No. 87,
Employers' Accounting for Pensions, the Company recorded an after-tax
credit (charge) to equity of $12.5 and $(14.9) at December 31, 1994
and 1993, respectively, for the reduction (excess) of the minimum
liability over the unrecognized net obligation and prior-service cost.
These amounts were recorded net of the related income tax (provision)
credit of $(7.3) and $8.7 as of December 31, 1994 and 1993,
respectively, which approximated the federal and state statutory
rates.
The components of net periodic pension cost are:
Year Ended December 31,
-------------------------
1994 1993 1992
-------------------------------------------------------------------------------
Service cost - benefits earned during the period $ 11.2 $ 10.8 $ 11.0
Interest cost on projected benefit obligation 57.3 59.2 58.8
Return on assets:
Actual gain (.8) (70.3) (26.3)
Deferred gain (loss) (53.0) 15.9 (31.2)
Net amortization and deferral 4.1 2.3 2.1
------ ------ ------
Net periodic pension cost $ 18.8 $ 17.9 $ 14.4
====== ====== ======
39
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
Assumptions used to value obligations at year-end, and to determine
the net periodic pension cost in the subsequent year are:
1994 1993 1992
--------------------------------------------------------------------------
Discount rate 8.50% 7.50% 8.25%
Expected long-term rate of return on assets 9.50% 10.00% 10.00%
Rate of increase in compensation levels 5.00% 5.00% 5.00%
Postretirement Benefits Other Than Pensions
The Company adopted SFAS 106 to account for postretirement benefits
other than pensions effective January 1, 1993 (see Note 1). 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. These benefits are provided through
contracts with various insurance carriers. The Company has not funded
the liability for these benefits.
The Company's accrued postretirement benefit obligation is composed of
the following:
December 31,
------------------
1994 1993
--------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $(566.2) $(629.3)
Active employees eligible for postretirement benefits (30.2) (35.1)
Active employees not eligible for postretirement (98.7) (128.3)
------- -------
Accumulated postretirement benefit obligation (695.1) (792.7)
Unrecognized net (gains) losses (55.0) 67.0
Unrecognized prior-service costs (31.8) (35.0)
------- -------
Accrued postretirement benefit obligation $(781.9) $(760.7)
======= =======
The components of net periodic postretirement benefit cost are:
Year Ended
December 31,
-------------
1994 1993
----------------------------------------------------------------
Service cost $ 8.2 $ 7.1
Interest cost 56.9 58.5
Amortization of prior service cost (3.2)
----- -----
Net periodic postretirement benefit cost $61.9 $65.6
===== =====
The 1995 annual assumed rates of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) are 9.5% and
8.0% for retirees under 65 and over 65, respectively, and are assumed
to decrease gradually to 5.5% in 2007 and remain at that level
thereafter. The health care cost trend rate has a significant effect
on the amounts reported. A one percentage point increase in the
assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation as of December 31, 1994, by
approximately $79.8 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1994 by
approximately $9.5. The weighted average discount rate used to
determine the accumulated postretirement benefit obligation at
December 31, 1994 and 1993, was 8.5% and 7.5%, respectively.
40
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
Postemployment Benefits
The Company adopted the new accounting standard on postemployment
benefits effective January 1, 1993 (see Note 1). The Company provides
certain benefits to former or inactive employees after employment but
before retirement.
Incentive Plans
Effective January 1, 1989, the Company and Kaiser adopted an unfunded
Long-Term Incentive Plan (the "LTIP") for certain key employees of the
Company, Kaiser, and their consolidated subsidiaries. All compensation
vested as of December 31, 1992, under the LTIP, as amended in 1991 and
1992, has been paid to the participants in cash or common stock of the
Company as of December 31, 1993. Under the LTIP, as amended, 764,092
restricted shares were distributed to six Company executives during
1993 for benefits generally earned but not vested as of December 31,
1992. These shares generally will vest at the rate of 25% per year.
The Company will record the related expense of $6.5 over the four-year
period ending December 31, 1996. In 1993, the Company adopted the
Kaiser 1993 Omnibus Stock Incentive Plan. A total of 2,500,000 shares
of Kaiser common stock were reserved for awards or for payment of
rights granted under the Plan, of which 504,044 shares were available
to be awarded at December 31, 1994. Under the Kaiser 1993 Omnibus
Stock Incentive Plan, 102,564 restricted shares were distributed to
two Company executives during 1994, which will vest at the rate of 25%
per year. The Company will record the related expense of $1.0 over the
four-year period ending December 31, 1998.
In 1993 and 1994, the Compensation Committee of the Board of Directors
approved the award of "nonqualified stock options" to members of
management other than those participating in the LTIP. These options
to acquire Kaiser's common stock generally will vest at the rate of
20-25% per year. Information relating to nonqualified stock options is
shown below:
1994 1993
---------------------------------------------------------------------------------------------------
Outstanding at beginning of year 664,400
Granted 494,800 664,400
Exercised (at $7.25 per share) (6,920)
Expired or forfeited (29,900)
--------- -------
Outstanding at end of year (prices ranging from $7.25 to $12.75 per share) 1,122,380 664,400
========= =======
Exercisable at end of year 119,980
=========
Effective January 1, 1990, the Company adopted an unfunded Middle
Management Long-Term Incentive Plan. The Company also has a
supplemental savings and retirement plan for salaried employees, under
which the participants contribute a percentage of their base salaries.
The Company's expense for the above plans was $6.1, $5.3, and $6.6 for
the years ended December 31, 1994, 1993, and 1992, respectively.
8. Redeemable Preference Stock
-------------------------------
In March 1985, the Company entered into a three-year agreement with
the United Steelworkers of America (USWA) whereby shares of a new
series of "Cumulative (1985 Series A) Preference Stock" would be
issued to an employee stock ownership plan in exchange for certain
elements of wages and benefits. Concurrently, a similar plan was
established for certain nonbargaining employees which provided for the
issuance of "Cumulative (1985 Series B) Preference Stock."
41
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
Series A Stock and Series B Stock ("Series A and B Stock") each have a
par value of $1 per share and a liquidation and redemption value of
$50 per share plus accrued dividends, if any.
For financial reporting purposes, Series A and B Stock were recorded
at fair market value when issued, based on independent appraisals,
with a corresponding charge to compensation cost. Carrying values have
been increased each year to recognize accretion of redemption values
and, in certain years, there have been other increases for reasons
described below. Changes in Series A and B Stock are shown below.
1994 1993 1992
------------------------------------------------------------
Shares:
Beginning of year 1,081,548 1,163,221 1,305,550
Redeemed (169,381) (81,673) (142,329)
--------- --------- ---------
End of year 912,167 1,081,548 1,163,221
========= ========= =========
No additional Series A or B Stock will be issued based on compensation
earned in 1992 or subsequent years. While held by the plan trustee,
Series B Stock is entitled to cumulative annual dividends, when and as
declared by the Board of Directors, payable in stock or in cash at the
option of the Company on or after March 1, 1991, in respect to years
commencing January 1, 1990, based on a formula tied to the Company's
income before tax from aluminum operations. When distributed to plan
participants (generally upon separation from the Company), the Series
A and B Stocks are entitled to an annual cash dividend of $5 per
share, payable quarterly, when and as declared by the Board of
Directors.
Redemption fund agreements require the Company to make annual payments
by March 31 each year based on a formula tied to consolidated net
income until the redemption funds are sufficient to redeem all Series
A and B Stock. On an annual basis, the minimum payment is $4.3 and the
maximum payment is $7.3. In March 1993 and 1994, the Company
contributed $4.3 for each of the years 1992 and 1993, and will
contribute $4.3 in March 1995 for 1994.
Under the USWA labor contract effective November 1, 1990, the Company
was obligated to offer to purchase up to 80 shares of Series A Stock
from each active participant in 1991 at a price equal to its
redemption value of $50 per share. The Company also agreed to offer to
purchase up to an additional 40 shares from each participant in 1994.
The employees could elect to receive their shares, accept cash, or
place the proceeds into the Company's 401(k) savings plan. Under
separate action, the Company also offered to purchase 80 shares of
Series B Stock from active participants in 1991 and 40 shares in 1994.
Under the provisions of these contracts, in February 1994, the Company
purchased $4.6 and $.8 of the Series A and B Stock, respectively.
Under the USWA labor contract effective November 1, 1994, the Company
is obligated to offer to purchase up to 40 shares of Series A Stock
from each active participant in 1995 at a price equal to its
redemption value of $50 per share. The Company also agreed to offer to
purchase up to an additional 80 shares from each participant in 1998.
In addition, if a profitability test is satisfied for either 1995 or
1996, the Company will offer to purchase from each active participant
an additional 20 shares of such preference stock held in the stock
ownership plan for the benefit of substantially the same employees in
either 1996 or 1997. The employees could elect to receive their
shares, accept cash, or place the proceeds into the Company's 401(k)
savings plan. the Company will provide comparable purchases of Series
B Stock from active participants.
42
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
The Series A and B Stock is distributed in the event of death,
retirement, or in other specified circumstances. The Company also may
redeem such stock at $50 per share plus accrued dividends, if any. At
the option of the plan participant, the trustee shall redeem stock
distributed from the plans at redemption value to the extent funds are
available in the redemption fund. Under the Tax Reform Act of 1986, at
the option of the plan participant, the Company must purchase
distributed shares earned after December 31, 1985, at redemption value
on a five-year installment basis, with interest at market rates. The
obligation of the Company to make such installment payments must be
secured.
The Series A and B Stock is entitled to the same voting rights as the
Company common stock and to certain additional voting rights under
certain circumstances, including the right to elect, along with other
The Company preference stockholders, two directors whenever accrued
dividends have not been paid on two annual dividend payment dates or
when accrued dividends in an amount equivalent to six full quarterly
dividends are in arrears. The Series A and B Stock restricts the
ability of the Company to redeem or pay dividends on common stock if
the Company is in default on any dividends payable on the Series A and
B Stock.
43
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
9. Stockholders' Equity
------------------------
Changes in stockholders' equity were:
Retained Additional Note
Earnings Minimum Receivable
Preference Common Additional (Accumulated Pension From
Stock Stock Capital Deficit) Liability Parent
-----------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1992 $2.2 $15.4 $1,118.4 $ 476.2 $(1,049.3)
Net income 29.6
Interest on note receivable from parent 136.5 (136.5)
Contribution for LTIP shares .7
Conversions (2,405 preference shares into cash) (.2)
Dividends:
Preference stock (1.4)
Common stock (11.4)
Redeemable preference stock accretion (5.1)
Additional minimum pension liability $ (6.7)
---- ----- -------- ------- ----- --------
BALANCE, DECEMBER 31, 1992 2.0 15.4 1,255.6 487.9 (6.7) (1,185.8)
Net loss (647.3)
Interest on note receivable from parent 115.7 (115.7)
Contribution for LTIP shares 3.4
Conversions (1,967 preference shares into cash) (.2)
Capital contribution 96.5
Preference stock dividends (1.0)
Redeemable preference stock accretion (4.8)
Additional minimum pension liability (14.9)
1.8 15.4 1,471.2 (165.2) (21.6) (1,301.5)
BALANCE, DECEMBER 31, 1993 ---- ----- -------- ------- ----- --------
Net loss (101.6)
Interest on note receivable from parent 86.2 (86.2)
Contribution for LTIP shares 2.0
Capital contribution 66.9
Preference stock dividends (.7)
Redeemable preference stock accretion (4.0)
Reduction of minimum pension liability 12.5
---- ----- -------- ------- ----- --------
BALANCE, DECEMBER 31, 1994 $1.8 $15.4 $1,626.3 $(271.5) $ (9.1) $(1,387.7)
==== ===== ======== ======= ====== =========
Preference Stock
The Company's Cumulative Convertible Preference Stock, $100 par value
("$100 Preference Stock"), restricts acquisition of junior stock and
payment of dividends. At December 31, 1994, such provisions were less
restrictive as to the payment of cash dividends than the 1994 Credit
Agreement provisions. The Company has the option to redeem the $100
Preference
44
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
Stocks at par value plus accrued dividends. The Company does not
intend to issue any additional shares of the $100 Preference Stocks.
The 4-1/8% and 4-3/4% (1957 Series, 1959 Series, and 1966 Series) $100
Preference Stock can be exchanged for per share cash amounts of
$69.30, $77.84, $78.38, and $76.46, respectively. The Company records
the $100 Preference Stock at their exchange amounts for financial
statement presentation and the Company includes such amounts in
minority interests. The outstanding shares of preference stock were:
December 31,
---------------
1994 1993
-----------------------------------------------------------------
4-1/8% 3,657 3,921
4-3/4% (1957 Series) 2,605 2,623
4-3/4% (1959 Series) 13,534 13,605
4-3/4% (1966 Series) 3,640 3,890
Additional Capital
Series A Convertible - On June 30, 1993, Kaiser issued 17,250,000 of
its $.65 Depositary Shares (the "Depositary Shares"), each
representing one-tenth of a share of Series A Mandatory Conversion
Premium Dividend Preferred Stock (the "Series A Shares"). In
connection with the issuance of the Depositary Shares, MAXXAM Group
Inc. ("MGI"), a wholly owned subsidiary of MAXXAM, exchanged a $15.0
promissory note of the Company (the "MAXXAM Note") for an additional
2,132,950 Depositary Shares. On August 4, 1993, MGI transferred the
2,132,950 Depositary Shares to MAXXAM in exchange for satisfaction of
a $15.0 promissory note evidencing a cash loan made to MGI by MAXXAM
in January 1993. MAXXAM sold 1,239,400 of the Depositary Shares
during 1994.
The net cash proceeds from the sale of Depositary Shares were
approximately $119.3. Kaiser used $37.8 of such net proceeds to make a
non-interest-bearing loan to the Company evidenced by an intercompany
note, which matures on June 29, 1996, and is payable in quarterly
installments. The intercompany note is designed to provide sufficient
funds to Kaiser to enable it to make dividend payments on the Series A
Shares until June 30, 1996, the date on which the outstanding Series A
Shares are mandatorily converted into shares of Kaiser's common stock.
Kaiser used $81.5 of such net proceeds and the MAXXAM Note to make a
capital contribution to the Company. The Company used $13.7 of the
funds it received from Kaiser to prepay the remaining balance of the
term loan under the 1989 Credit Agreement and $105.6 of such funds to
reduce outstanding borrowings under the revolving credit facility of
the 1989 Credit Agreement.
PRIDES Convertible - In the first quarter of 1994, Kaiser consummated
the public offering of 8,855,550 shares of the PRIDES. The net
proceeds from the sale of the shares of PRIDES were approximately
$100.1. Kaiser used such net proceeds to make non-interest-bearing
loans to the Company in the aggregate principal amount of $33.2 (the
aggregate dividends scheduled to accrue on the shares of PRIDES from
the issuance date until December 31, 1997, the date on which the
outstanding PRIDES will be mandatorily converted into shares of
Kaiser's common stock), evidenced by intercompany notes, and used the
balance of such net proceeds to make capital contributions to the
Company in the aggregate amount of $66.9.
45
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
Note Receivable from Parent
The Note Receivable from Parent bears interest at a fixed rate of
6-5/8% per annum. No interest or principal payments are due until
December 21, 2000, after which interest and principal will be payable
over a 15-year term pursuant to a predetermined schedule. Accrued
interest is accounted for as additional contributed capital.
Dividends on Common Stock
The Company paid cash dividends on common stock of $2.9 in each
quarter of 1992. As required under the 1989 Credit Agreement, on
December 15, 1992, the Company issued a Pay-in-Kind Note (the "PIK
Note") to a subsidiar of MAXXAM in the principal amount of $2.5,
representing the entire amount of the dividend received by such subsidiary
in respect of the shares of Kaiser's common stock which it owned.
The PIK Note bears interest, compounded semiannually, at a rate
equal to 12% per annum, and is due and payable, together with accrued
interest thereon, on June 30, 1995.
The indentures governing the Senior Notes, the 12-3/4% Notes, and the
1994 Credit Agreement restrict, among other things, the Company's
ability to incur debt, undertake transactions with affiliates, and pay
dividends. Under the most restrictive of these covenants, the Company
is not currently permitted to pay dividends on its common stock.
10. Commitments and Contingencies
----------------------------------
Commitments
The Company has financial commitments, including purchase agreements,
tolling arrangements, forward foreign exchange and forward sales
contracts (see Note 11), letters of credit, and guarantees. Such
purchase agreements and tolling arrangements include long-term
agreements for the purchase and tolling of bauxite into alumina in
Australia by QAL. These obligations expire in 2008. Under the
agreements, the Company is unconditionally obligated to pay its
proportional share of debt, operating costs, and certain other costs
of QAL. The aggregate minimum amount of required future principal
payments at December 31, 1994, is $78.7, due in 1997. The Company's
share of payments, including operating costs and certain other
expenses under the agreement, was $85.6, $86.7, and $99.2 for the
years ended December 31, 1994, 1993, and 1992, respectively. The
Company also has agreements to supply alumina to and to purchase
aluminum from Anglesey.
Minimum rental commitments under operating leases at December 31,
1994, are as follows: years ending December 31, 1995 - $22.1; 1996 -
$21.5; 1997 - $21.0; 1998 - $24.1; 1999 - $30.4; thereafter - $213.9.
The future minimum rentals receivable under noncancelable subleases
was $73.2 at December 31, 1994.
Rental expenses were $26.8, $29.0, and $26.2 for the years ended
December 31, 1994, 1993, and 1992, respectively.
Environmental Contingencies
The Company is subject to a wide variety of environmental laws and
regulations and to fines or penalties assessed for alleged breaches of
the environmental laws and to claims and litigation based upon such
laws. The Company currently is subject to a number of lawsuits under
the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended by the Superfund Amendments Reauthorization
Act of 1986 ("CERCLA"), and, along with certain other entities, has
been named as a potentially responsible party for remedial costs at
certain third-party sites listed on the National Priorities List under
CERCLA.
46
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
Based on the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals primarily
related to potential solid waste disposal and soil and groundwater
remediation matters. The following table presents the changes in such
accruals, which are primarily included in Long-term liabilities, for
the years ended December 31, 1994, 1993, and 1992:
1994 1993 1992
------------------------------------------------------------------
Balance at beginning of period $40.9 $46.4 $51.5
Additional amounts 2.8 1.7 4.5
Less expenditures (3.6) (7.2) (9.6)
----- ----- -----
Balance at end of period $40.1 $40.9 $46.4
===== ===== =====
These environmental accruals represent the Company's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and the
Company's assessment of the likely remediation action to be taken. The
Company expects that these remediation actions will be taken over the
next several years and estimates that annual expenditures to be
charged to these environmental accruals will be approximately $3.0 to
$11.0 for the years 1995 through 1999 and an aggregate of
approximately $11.0 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 approximately $20.0. 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 or results of operations.
Asbestos Contingencies
The Company is a defendant in a number of lawsuits in which the
plaintiffs allege that certain of their injuries were caused by, among
other things, exposure to asbestos during, and as a result of, their
employment or association with the Company or exposure to products
containing asbestos produced or sold by the Company. The lawsuits
generally relate to products the Company has not manufactured for at
least 15 years. At December 31, 1994, the number of such lawsuits
pending was approximately 25,200 with approximately 14,300 received
and 12,500 settled or dismissed in 1994.
Based on prior experience, the Company estimates that annual future
cash payments in connection with such litigation will be approximately
$11.0 to $14.0 for the years 1995 through 1999, and an aggregate of
approximately $95.0 thereafter through 2007. 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 2007. The Company
does not presently believe there is a reasonable basis for estimating
such costs beyond 2007 and, accordingly, no accrual has been recorded
for such costs which may be incurred. This accrual was calculated
based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, the
current state of case law related to asbestos claims, the advice of
counsel, and the anticipated effects of inflation and discounting at
an estimated risk-free rate (8% at December 31, 1994). Accordingly, an
asbestos-related cost accrual of
47
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
$102.0 is included primarily in Long-term liabilities at December 31,
1994. The aggregate amount of the undiscounted liability at December
31, 1994 is $158.1, before considerations for insurance recoveries.
The Company believes that it has insurance coverage available to
recover a substantial portion of its asbestos-related costs. While
claims for recovery from some of the Company's insurance carriers are
currently subject to pending litigation and other carriers have raised
certain defenses, the Company believes, based on prior insurance-
related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of counsel, that substantial
recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $86.4, determined on the
same basis as the asbestos-related cost accrual, is recorded primarily
in Other assets at December 31, 1994.
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 the 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 or results of operations.
Other Contingencies
The Company is involved in various other claims, lawsuits, and other
proceedings relating to a wide variety of matters. While uncertainties
are inherent in the final outcome of such matters, and it is presently
impossible to determine the actual costs that ultimately may be
incurred, management currently believes that the resolution of such
uncertainties and the incurrence of such costs should not have a
material adverse effect on the Company's consolidated financial
position or results of operations.
11. Derivative Financial Instruments and Related Hedging Programs
------------------------------------------------------------------
The Company enters into a number of financial instruments with
off-balance-sheet risk in the normal course of business that are
designed to reduce its exposure to fluctuations in foreign exchange
rates, alumina, primary aluminum, and fabricated aluminum products
prices, and the cost of purchased commodities.
The Company has significant expenditures which are denominated in
foreign currencies related to long-term purchase commitments with its
affiliates in Australia and the United Kingdom, which expose it to
certain exchange rate risks. In order to mitigate its exposure, the
Company periodically enters into forward foreign exchange and currency
option contracts in Australian dollars and Pounds Sterling to hedge
these commitments. The forward foreign currency exchange contracts are
agreements to purchase or sell a foreign currency, for a price
specified at the contract date, with delivery and settlement in the
future. At December 31, 1994, the Company had net forward foreign
exchange contracts totaling approximately $74.4 for the purchase of
102.0 Australian dollars through December 31, 1996.
To mitigate its exposure to declines in the market prices of alumina,
primary aluminum, and fabricated aluminum products, while retaining
the ability to participate in favorable pricing environments that may
materialize, the Company has developed strategies which include
forward sales of primary aluminum at fixed prices and the purchase or
48
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
sale of options for primary aluminum. Under the principal components
of the Company's price risk management strategy, which can be modified
at any time, (i) varying quantities of the Company's anticipated
production are sold forward at fixed prices; (ii) call options are
purchased to allow the Company to participate in certain higher market
prices, should they materialize, for a portion of the Company's
primary aluminum and alumina sold forward; (iii) option contracts are
entered into to establish a price range the Company will receive for a
portion of its primary aluminum and alumina; and (iv) put options are
purchased to establish minimum prices the Company will receive for a
portion of its primary aluminum and alumina. In this regard, in
respect of its 1995 anticipated production, as of December 31, 1994,
the Company had sold forward 170,950 metric tons of primary aluminum
at fixed prices, purchased call options in respect of 69,000 metric
tons of primary aluminum, purchased put options to establish a minimum
price for 193,500 metric tons of primary aluminum, and entered into
option contracts that established a price range for 90,000 metric tons
of primary aluminum. The Company will not receive the benefit of
market price increases to the extent (i) the quantity of production
sold forward is greater than the tonnage covered by the purchased call
options; (ii) market prices exceed the prices at which primary
aluminum is sold forward, but are less than the strike price of the
purchased call options, on the tonnage covered by the options; or
(iii) market prices exceed the maximum of the price range on the
tonnage covered by the option contracts entered to establish a price
range.
In addition, the Company enters into forward fixed price arrangements
with certain customers which provide for the delivery of a specific
quantity of fabricated aluminum products over a specified future
period of time. In order to establish the cost of primary aluminum for
a portion of such sales, the Company may enter into forward and option
contracts. In this regard, at December 31, 1994, the Company had
purchased 4,500 metric tons of primary aluminum under forward purchase
contracts at fixed prices that expire at various times through June
1995.
The Company has also entered into a natural gas pricing contract to
fix future prices of a portion (20,000 million BTUs per day) of a
plant's natural gas supply through March 1995.
At December 31, 1994, the net unrealized gain on the Company's
position in forward foreign exchange was $3.5 and the net unrealized
loss on aluminum forward sales and option contracts and the natural
gas pricing contract was $80.4, based on a price of $1,955 per metric
ton of aluminum and $1.59 per million BTUs of natural gas.
The Company has established margin accounts with its counterparties
related to aluminum forward sales and option contracts. The Company is
entitled to receive advances from counterparties related to unrealized
gains and, in turn, is required to make margin deposits with
counterparties to cover unrealized losses related to these contracts.
At December 31, 1994, the Company had $50.5 on deposit with various
counterparties in respect of such unrealized losses. This amount is
recorded in Prepaid expenses and other current assets.
The Company is exposed to credit risk in the event of non-performance
by other parties to these currency and commodity contracts, but the
Company does not anticipate non-performance by any of these
counterparties, given their credit worthiness. When appropriate, the
Company arranges master netting agreements.
49
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
12. Segment and Geographical Area Information
----------------------------------------------
Sales and transfers among geographic areas are made on a basis
intended to reflect the market value of products.
The aggregate foreign currency gain included in determining net income
was $.8, $4.9, and $12.0 for the years ended December 31, 1994, 1993,
and 1992, respectively.
Sales of more than 10% of total revenue to a single customer were
$58.2, $40.7, and $135.3 of bauxite and alumina and $147.7, $145.7,
and $144.9 of aluminum processing for the years ended December 31,
1994, 1993, and 1992.
Export sales were less than 10% of total revenue during the years
ended December 31, 1994, 1993, and 1992, respectively.
Geographical area information relative to operations is summarized as
follows:
Year Ended Other
December 31, Domestic Caribbean Africa Foreign Eliminations Total
-----------------------------------------------------------------------------------------------------------------------
Net sales to unaffiliated customers 1994 $1,263.2 $169.9 $180.0 $168.4 $1,781.5
1993 1,177.8 155.4 207.5 178.4 1,719.1
1992 1,285.0 170.1 263.5 190.5 1,909.1
Sales and transfers among 1994 $ 98.7 $139.4 $(238.1)
geographic areas 1993 88.2 79.6 (167.8)
1992 90.1 86.5 (176.6)
Equity in income (losses) of 1994 $ .2 $ (2.1) $ (1.9)
unconsolidated affiliates 1993 (3.3) (3.3)
1992 (1.9) (1.9)
Operating income (loss) 1994 $ (128.5) $ 9.9 $ 18.3 $ 44.4 $ (55.9)
1993 (145.6) (11.8) 21.9 12.4 (123.1)
1992 (36.6) 26.5 65.4 34.9 90.2
Investment in and advances to 1994 $ 1.2 $ 28.8 $139.7 $ 169.7
unconsolidated affiliates 1993 1.0 30.5 151.7 183.2
Identifiable assets 1994 $1,929.3 $364.8 $200.0 $199.5 $2,693.6
1993 1,758.3 360.4 223.0 186.5 2,528.2
50
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
Financial information by industry segment at December 31, 1994 and
1993, and for the years ended December 31, 1994, 1993, and 1992, is as
follows:
Year Ended Bauxite & Aluminum
December 31, Alumina Processing Corporate Total
----------------------------------------------------------------------------------------------
Net sales to unaffiliated customers 1994 $432.5 $1,349.0 $1,781.5
1993 423.4 1,295.7 1,719.1
1992 466.5 1,442.6 1,909.1
Intersegment sales 1994 $146.8 $ 146.8
1993 129.4 129.4
1992 179.9 179.9
Equity in earnings (losses) of 1994 $ (4.7) $ 2.6 $ .2 $ (1.9)
unconsolidated affiliates 1993 (2.5) (.8) (3.3)
1992 1.8 (3.7) (1.9)
Operating income (loss) 1994 $ 19.8 $ (8.4) $(67.3) $ (55.9)
1993 (4.5) (46.3) (72.3) (123.1)
1992 62.6 104.9 (77.3) 90.2
Effect of changes in accounting
principles on operating income (loss)
SFAS 106 1993 $ (2.0) $ (16.1) $ (1.1) $ (19.2)
SFAS 109 1993 (7.7) (7.8) .3 (15.2)
Depreciation 1994 $ 33.5 $ 59.1 $ 2.8 $ 95.4
1993 35.3 59.9 1.9 97.1
1992 29.8 49.0 1.5 80.3
Capital expenditures 1994 $ 28.9 $ 39.9 $ 1.2 $ 70.0
1993 35.3 31.2 1.2 67.7
1992 50.8 39.4 24.2 114.4
Investment in and advances to 1994 $136.6 $ 31.9 $ 1.2 $ 169.7
unconsolidated affiliates 1993 151.5 30.7 1.0 183.2
Identifiable assets 1994 $749.6 $1,242.3 $701.7 $2,693.6
1993 734.0 1,214.9 579.3 2,528.2
13. Subsidiary Guarantors
---------------------------
Kaiser Alumina Australia Corporation ("KAAC"), Kaiser Finance
Corporation ("KFC"), Kaiser Jamaica Corporation ("KJC"), and Alpart
Jamaica Inc. ("AJI") (collectively referred to as the "Subsidiary
Guarantors") are domestic wholly owned (directly or indirectly)
subsidiaries of the Company that have provided subordinated guarantees
of the Senior Notes and the 12-3/4% Notes (see Note 5).
51
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
KAAC, KJC, and AJI are wholly owned subsidiaries, which serve as
holding companies for the Company's investments in QAL and Alpart. KFC
is a wholly owned subsidiary of KAAC, whose principal business is
making loans to the Company and its subsidiaries. Summary of combined
financial information for the Subsidiary Guarantors as of December 31,
1994 and 1993, is as follows:
Summary of Combined Financial Position
December 31,
--------------------
1994 1993
-----------------------------------------------------------------------------------
Assets
Current assets $ 84.2 $ 73.8
Due from the Company 683.4 665.1
Investments in and advances to unconsolidated affiliates 107.8 121.0
Property, plant, and equipment - net 258.0 256.5
Other assets 28.0 27.4
-------- --------
Total $1,161.4 $1,143.8
======== ========
Liabilities and Stockholders' Equity
Current liabilities $ 163.2 $ 141.7
Due to the Company 281.8 267.2
Other long-term liabilities 49.6 54.2
Long-term debt - net of current maturity 72.5 82.7
Minority interest 70.1 56.6
Stockholders' equity 524.2 541.4
-------- --------
Total $1,161.4 $1,143.8
======== ========
Summary of Combined Operations
Year Ended December 31,
------------------------
1994 1993 1992
---------------------------------------------------------------------------------------
Net sales $354.7 $326.3 $316.0
Costs and expenses 321.4 348.0 303.0
------ ------ ------
Operating income (loss) 33.3 (21.7) 13.0
Other income (expense):
Interest and other income (expense) (28.0) 26.0 24.5
Interest expense (22.3) (20.4) (24.1)
------ ------ ------
Income (loss) before income taxes, minority interests, and
cumulative effect of change in accounting principle (17.0) (16.1) 13.4
Credit (provision) for income taxes (6.9) 3.8 (2.3)
Minority interest 6.7 7.6 6.7
------ ------ ------
Income (loss) before cumulative effect of change in
accounting principle (17.2) (4.7) 17.8
Cumulative effect of change in accounting principle (11.3)
------ ------ ------
Net income (loss) $(17.2) $(16.0) $ 17.8
====== ====== ======
52
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
Notes to Summary of Combined Financial Information for the Subsidiary
Guarantors
Income Taxes - The Subsidiary Guarantors were included in the
consolidated federal income tax returns of MAXXAM through June 30,
1993. Effective July 1, 1993, the Subsidiary Guarantors became members
of the consolidated federal income tax return group of which Kaiser is
the common parent corporation. The taxable income (loss) of the
Subsidiary Guarantors for periods beginning on or after July 1, 1993,
is included in the consolidated federal income tax returns of Kaiser.
The credit (provision) for income taxes is computed as if each
Subsidiary Guarantor filed returns on a separate company basis.
Effective January 1, 1993, the Subsidiary Guarantors adopted SFAS 109,
which required the restatement of certain assets and liabilities to
their pre-tax amounts from their net-of-tax amounts originally
recorded in connection with the acquisition by MAXXAM in October 1988.
The cumulative effect of the change in accounting principle, as of
January 1, 1993, reduced the Subsidiary Guarantors' results of
operations by $11.3. Included in Other assets and Other long-term
liabilities at December 31, 1994, are $25.0 and $49.6 of deferred
income tax assets and liabilities, respectively.
Receivables and Payables - At December 31, 1994, receivables from and
payables to the Company include $663.8 and $272.9 of interest bearing
loans, respectively. The similar amounts at December 31, 1993 were
$635.8 and $237.3.
Inventory Valuation - Inventories are stated at first-in, first-out
(FIFO) cost, not in excess of market.
Investments - At December 31, 1993, KAAC held a 28.3% interest in QAL.
This investment is accounted for by the equity method. The equity in
QAL's loss before income taxes of $4.7 and $2.5 in 1994 and 1993,
respectively, is included in the Company's cost of products sold.
Capital Contribution - In 1993, the Company converted $200.0 and $25.0
of its receivables from KJC and AJI, respectively, into capital
contributions to these companies. These amounts are included in
Stockholders' equity as of December 31, 1993.
Foreign Currency - The functional currency of the Subsidiary
Guarantors is the United States dollar, and accordingly, translation
gains (losses) included in net income (loss) were $(42.4), $5.6, and
$27.3 for the years ended December 31, 1994, 1993, and 1992,
respectively.
53
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
FIVE-YEAR FINANCIAL DATA
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------------------
(In millions of dollars) 1994 1993 1992 1991 1990
----------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 12.0 $ 14.2 $ 18.5 $ 15.5 $ 23.8
Receivables 200.5 236.0 271.1 219.0 227.5
Inventories 468.0 426.9 439.9 498.6 523.9
Prepaid expenses and other current assets 158.0 60.7 37.0 84.0 48.7
-------- -------- -------- -------- --------
Total current assets 838.5 737.8 766.5 817.1 823.9
Investments in and advances to unconsolidated affiliates 169.7 183.2 150.1 161.9 184.5
Property, plant, and equipment - net 1,133.2 1,163.7 1,066.8 1,014.5 970.3
Deferred income taxes 271.0 210.3
Other assets 281.2 233.2 190.4 145.2 148.3
-------- -------- -------- -------- --------
Total $2,693.6 $2,528.2 $2,173.8 $2,138.7 $2,127.0
======== ======== ======== ======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accruals $ 434.1 $ 339.6 $ 351.3 $ 461.3 $ 428.3
Accrued postretirement benefit obligation - current portion 47.0 47.6
Payable to affiliates 85.2 62.4 78.5 87.1 82.2
Long-term debt - current portion 11.5 8.7 25.9 26.3 32.5
Notes payable to parent - current portion 21.2 12.6
-------- -------- -------- -------- --------
Total current liabilities 599.0 470.9 455.7 574.7 543.0
Long-term liabilities 495.5 501.7 281.7 212.9 314.6
Accrued postretirement benefit obligation 734.9 713.1
Long-term debt 751.1 720.2 765.1 681.5 631.5
Notes payable to parent 23.5 18.9
Minority interests 85.4 69.7 70.1 71.9 73.0
Redeemable preferred stock 29.0 33.6 32.8 34.8 47.8
Stockholders' equity (deficit):
Preference stock 1.8 1.8 2.0 2.2 2.4
Common stock 15.4 15.4 15.4 15.4 15.0
Additional capital 1,626.3 1,471.2 1,255.6 1,118.4 975.2
Retained earnings (accumulated deficit) (271.5) (165.2) 487.9 476.2 453.5
Additional minimum pension liability (9.1) (21.6) (6.7)
Less: Note receivable from parent (1,387.7) (1,301.5) (1,185.8) (1,049.3) (929.0)
-------- -------- -------- -------- --------
Total stockholders' equity (deficit) (24.8) .1 568.4 562.9 517.1
-------- -------- -------- -------- --------
Total $2,693.6 $2,528.2 $2,173.8 $2,138.7 $2,127.0
======== ======== ======== ======== ========
54
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
FIVE-YEAR FINANCIAL DATA
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
Year Ended December 31,
------------------------------------------------
(In millions of dollars) 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------------------------------
Net sales $1,781.5 $1,719.1 $1,909.1 $2,000.8 $2,095.0
-------- -------- -------- -------- --------
Costs and expenses:
Cost of products sold 1,625.5 1,587.7 1,619.3 1,594.2 1,525.2
Depreciation 95.4 97.1 80.3 73.2 70.5
Selling, administrative, research and development,
and general 116.5 121.6 119.3 117.6 122.9
Restructuring of operations 35.8
-------- -------- -------- -------- --------
Total costs and expenses 1,837.4 1,842.2 1,818.9 1,785.0 1,718.6
-------- -------- -------- -------- --------
Operating income (loss) (55.9) (123.1) 90.2 215.8 376.4
Other income (expense):
Interest and other income - net (7.3) (1.5) 16.9 16.4 11.0
Interest expense (88.6) (84.2) (78.7) (82.7) (96.6)
-------- -------- -------- -------- --------
Income (loss) before income taxes, minority interests,
extraordinary loss, and cumulative effect of changes in
accounting principles (151.8) (208.8) 28.4 149.5 290.8
Credit (provision) for income taxes 54.0 86.9 (5.3) (32.4) (75.6)
Minority interests 1.6 4.3 6.5 7.6 5.5
-------- -------- -------- -------- --------
Income (loss) before extraordinary loss and cumulative
effect of changes in accounting principles (96.2) (117.6) 29.6 124.7 220.7
Extraordinary loss on early extinguishment of debt, net of
tax benefit of $2.9 and $11.2 for 1994 and 1993, respectively (5.4) (21.8)
Cumulative effect of changes in accounting principles,
net of tax benefit of $237.7 (507.9)
-------- -------- -------- -------- --------
Net income (loss) $ (101.6) $ (647.3) $ 29.6 $ 124.7 $220.7
======== ======== ======== ======== ========
55
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended
------------------------------------------------
(In millions of dollars) March 31 June 30 September 30 December 31
--------------------------------------------------------------------------------------
1994
Net sales $415.1 $459.5 $461.1 $445.8
Operating loss 25.6 14.1 6.8 9.4
Net loss 33.5 22.1 19.5 26.5<F1>
1993
Net sales $442.6 $432.2 $428.4 $415.9
Operating loss 9.6 14.1 17.5 81.9<F2>
Net loss 545.3 18.0 19.5 64.5<F1>
<FN>
<F1>
Includes a pre-tax charge of approximately $10.3 and $10.8 principally
related to establishing additional litigation and environmental
reserves in the fourth quarter of 1994 and 1993, respectively.
<F2>
Includes pre-tax charges of approximately $35.8 related to the
restructuring of operations and $19.4 because of a reduction in the
carrying value of inventories.
</FN>
56
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
--------
Information required under PART III (Items 10, 11, 12, and 13) has
been omitted from this Report since the Company intends to file with
the Securities and Exchange Commission, not later than 120 days after
the close of its fiscal year, a definitive proxy statement pursuant to
Regulation 14A which involves the election of directors.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) Index to Financial Statements and Schedules
1. Financial Statements Page
-------------------- ----
Report of Independent Public Accountants . . . . . 25
Consolidated Balance Sheets. . . . . . . . . . . . 26
Statements of Consolidated Income. . . . . . . . . 27
Statements of Consolidated Cash Flows . . . . . . . 28
Notes to Consolidated Financial Statements. . . . . 29
Five-Year Financial Data. . . . . . . . . . . . . . 54
Quarterly Financial Data. . . . . . . . . . . . . . 56
2. Financial Statement Schedules
-----------------------------
Financial statement schedules are inapplicable or the
required information is included in the Consolidated
Financial Statements or the Notes thereto.
3. Exhibits
Reference is made to the Index of Exhibits immediately
preceding the exhibits hereto (beginning on page 59),
which index is incorporated herein by reference.
(b) Reports on Form 8-K
No Report on Form 8-K was filed by the Company during the
last quarter of the period covered by this Report.
(c) Exhibits
--------
Reference is made to the Index of Exhibits immediately
preceding the exhibits hereto (beginning on page 59), which
index is incorporated herein by reference.
57
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
KAISER ALUMINUM & CHEMICAL CORPORATION
Date: March 24, 1995 By George T. Haymaker, Jr.
--------------------------------------
George T. Haymaker, Jr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Date: March 24, 1995 George T. Haymaker, Jr.
--------------------------------------
George T. Haymaker, Jr.
Chairman of The Board and
Chief Executive Officer
(Principal Executive Officer)
Date: March 24, 1995 John T. La Duc
--------------------------------------
John T. La Duc
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: March 24, 1995 Charlie Alongi
--------------------------------------
Charlie Alongi
Controller
(Principal Accounting Officer)
Date: March 24, 1995 Robert J. Cruikshank
--------------------------------------
Robert J. Cruikshank
Director
Date: March 24, 1995 Charles E. Hurwitz
--------------------------------------
Charles E. Hurwitz
Director
Date: March 24, 1995 Ezra G. Levin
--------------------------------------
Ezra G. Levin
Director
Date: March 24, 1995 Robert Marcus
--------------------------------------
Robert Marcus
Director
Date: March 24, 1995 Paul D. Rusen
--------------------------------------
Paul D. Rusen
Director
58
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
INDEX OF EXHIBITS
Exhibit
Number Description
------- -----------
3.1 Restated Certificate of Incorporation of Kaiser Aluminum &
Chemical Corporation ("KACC"), dated July 25, 1989
(incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1, dated August 25, 1989, filed by KACC,
Registration No. 33-30645).
3.2 Certificate of Retirement of KACC, dated February 7, 1990
(incorporated by reference to Exhibit 3.2 to Form 10-K for the
period ended December 31, 1989, filed by KACC, File No.
1-3605).
*3.3 By-laws of KACC, amended and restated as of December 15, 1994.
4.1 Indenture, dated as of February 1, 1993, among KACC, as
Issuer, Kaiser Alumina Australia Corporation, Alpart Jamaica
Inc., and Kaiser Jamaica Corporation, as Subsidiary
Guarantors, and The First National Bank of Boston, as Trustee,
regarding KACC's 12-3/4%% Senior Subordinated Notes Due 2003
(incorporated by reference to Exhibit 4.1 to Form 10-K for the
period ended December 31, 1992, filed by KACC, File No. 1-
3605).
4.2 First Supplemental Indenture, dated as of May 1, 1993
(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 Indenture, dated as of February 17, 1994, among KACC, as
Issuer, Kaiser Alumina Australia Corporation, Alpart Jamaica
Inc., Kaiser Jamaica Corporation, and Kaiser Finance
Corporation, as Subsidiary Guarantors, and First Trust
National Association as Trustee, regarding KACC's 9-7/8%
Senior Notes Due 2002 (incorporated by reference to Exhibit
4.3 to the Report on Form 10-K for the period ended December
31, 1993, filed by KAC, File No. 1-9447).
4.4 Credit Agreement, dated as of February 17, 1994, among KACC,
Kaiser Aluminum Corporation ("KAC"), the financial
institutions a party thereto, BankAmerica Business Credit,
Inc., as Agent (incorporated by reference to Exhibit 4.4 to
Form 10-K for the period ended December 31, 1993, filed by
KAC, File No. 1-9447).
4.5 First Amendment to Credit Agreement, dated as of July 21,
1994, amending the Credit Agreement, dated as of February 17,
1994, among KACC, KAC, the financial institutions party
thereto, and BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.1 to the Report on
Form 10-Q for the quarterly period ended June 30, 1994, filed
by KAC, File No. 1-9447).
*4.6 Second Amendment to Credit Agreement, dated as of March 10,
1995, amending the Credit Agreement, dated as of February
17,] 1994, among KACC, KAC, the financial institutions party
thereto, and BankAmerica Business Credit, Inc., as Agent.
4.7 Certificate of Designations of Series A Mandatory Conversion
Premium Dividend Preferred Stock of KAC, dated June 28, 1993
(incorporated by reference to Exhibit 4.3 to the Report on
Form 10-Q for the quarterly period ended June 30, 1993, filed
by KAC, File No. 1-9447).
4.8 Deposit Agreement between KAC and The First National Bank of
Boston, dated as of June 30, 1993 (incorporated by reference
to Exhibit 4.4 to the Report on Form 10-Q for the quarterly
period ended June 30, 1993, filed by KAC, File No. 1-9447).
59
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
Exhibit
Number Description
------- -----------
4.9 Intercompany Note between KAC and KACC (incorporated by
reference to Exhibit 4.2 to Amendment No. 5 to the
Registration Statement on Form S-1, dated December 13, 1989,
filed by KACC, Registration No. 33-30645).
*4.10 Pay-in-kind Note between KACC and MAXXAM Group Inc., dated
December 15, 1992.
4.11 Certificate of Designations of 8.255% PRIDES, Convertible
Preferred Stock of KAC dated February 17, 1994 (incorporated
by reference to Exhibit 4.21 to the Report on Form 10-K for
the period ended December 31, 1993, filed by KAC, File No.
1-9447).
4.12 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).
4.13 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).
4.14 Senior Subordinated Intercompany Note between KAC and KACC
dated June 30, 1993 (incorporated by reference to Exhibit
4.24 to the Report on Form 10-K for the period ended
December 31, 1993, filed by KAC, File No. 1-9447).
KACC has not filed certain long-term debt instruments not
being registered with the Securities and Exchange Commission
where the total amount of indebtedness authorized under any
such instrument does not exceed 10% of the total assets of
KACC and its subsidiaries on a consolidated basis. KACC
agrees and undertakes to furnish a copy of any such instrument
to the Securities and Exchange Commission upon its request.
10.1 Form of indemnification agreement with officers and
directors (incorporated by reference to Exhibit (10)(b) to the
Registration Statement of KAC on Form S-4, File No. 33-12836).
10.2 Tax Allocation Agreement 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 between KAC and MAXXAM (incorporated
by reference to Exhibit 10.23 to Amendment No. 2 to the
Registration Statement on Form S-1, dated June 11, 1991, filed
by KAC, Registration No. 33-37895).
10.4 Tax Allocation Agreement, dated as of June 30, 1993, between
KACC and KAC (incorporated by reference to Exhibit 10.3 to
the Report on Form 10-Q for the quarterly period ended June
30, 1993, filed by KACC, File No. 1-3605).
10.5 Assumption Agreement, dated as of October 28, 1988
(incorporated by reference to Exhibit HHH to the Final
Amendment to the Schedule 13D of MAXXAM Group Inc. and others
in respect of the Common Stock of KAC, par value $.33-1/3 per
share).
60
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
Exhibit
Number Description
------- -----------
10.6 Agreement, dated as of June 30, 1993, between KAC and MAXXAM
(incorporated by reference to Exhibit 10.2 to the Report on
Form 10-Q for the quarterly period ended June 30, 1993, filed
by KACC, File No. 1-3605).
Executive Compensation Plans and Arrangements
---------------------------------------------
10.7 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).
10.8 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).
10.9 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).
10.10 Promissory Note, dated October 4, 1990, by Robert W. Irelan
and Barbara M. Irelan to KACC (incorporated by reference to
Exhibit 10.54 to Form 10-K for the period ended December 31,
1990, filed by MAXXAM, File No. 1-3924).
10.11 Promissory Note, dated February 1, 1989, by Anthony R. Pierno
and Beverly J. Pierno to MAXXAM (incorporated by reference to
Exhibit 10.30 to Form 10-K for the period ended December 31,
1988, filed by MAXXAM, File No. 1-3924).
10.12 Promissory Note, dated July 19, 1990, by Anthony R. Pierno to
MAXXAM (incorporated by reference to Exhibit 10.31 to Form
10-K for the period ended December 31, 1990, filed by MAXXAM,
File No. 1-3924).
10.13 Promissory Note, dated July 20, 1993, between MAXXAM and Byron
L. Wade (incorporated by reference to Exhibit 10.59 to Form
10-K for the period ended December 31, 1993, filed by MAXXAM,
File No. 1-3924).
10.14 Employment Agreement, dated August 20, 1993, between KACC and
Robert E. Cole (incorporated by reference to Exhibit 10.63 to
Form 10-K for the period ended December 31, 1993, filed by
MAXXAM, File No. 1-3924).
10.15 Compensation Agreement, dated July 18, 1994, between KACC and
Larry L. Watts (incorporated by reference to Exhibit 10.1 to
the Report on Form 10-Q for the quarterly period ended June
30, 1994, filed by KAC, File No. 1-9447).
10.16 Compensation Agreement, dated July 18, 1994, between KACC and
Geoff S. Smith (incorporated by reference to Exhibit 10.2 to
the Report on Form 10-Q for the quarterly period ended June
30, 1994, filed by KAC, File No. 1-9447).
*10.17 Letter Agreement, dated January 1995, between KAC and Charles
E. Hurwitz, granting Mr. Hurwitz stock options under the
Kaiser 1993 Omnibus Stock Incentive Plan.
61
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
Exhibit
Number Description
------- -----------
*10.18 Form of letter agreement with persons granted stock options
under the Kaiser 1993 Omnibus Stock Incentive Plan to acquire
shares of KAC common stock.
*21 Significant Subsidiaries of KAC.
*27 Financial Data Schedule.
__________
* Filed herewith
62
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
Exhibit 21
SUBSIDIARIES
Listed below are the principal subsidiaries of Kaiser Aluminum &
Chemical Corporation, the jurisdiction of their incorporation or
organization and the names under which such subsidiaries do business.
Certain subsidiaries are omitted which, considered in the aggregate as
a single subsidiary, would not constitute a significant subsidiary.
Place of
Incorporation
Name or Organization
-------------------- ---------------
Alpart Jamaica Inc. . . . . . . . . . . . . . . Delaware
Alumina Partners of Jamaica (partnership) . . . Delaware
Anglesey Aluminium Limited. . . . . . . . . . . United Kingdom
Kaiser Alumina Australia Corporation. . . . . . Delaware
Kaiser Aluminium International, Inc. . . . . . Delaware
Kaiser Aluminum & Chemical of Canada Limited. . Ontario
Kaiser Bauxite Company. . . . . . . . . . . . . Nevada
Kaiser Finance Corporation. . . . . . . . . . . Delaware
Kaiser Jamaica Bauxite Company (partnership). . Jamaica
Kaiser Jamaica Corporation. . . . . . . . . . . Delaware
Queensland Alumina Limited. . . . . . . . . . . Queensland
Volta Aluminium Company Limited . . . . . . . . Ghana
63
Domestic California Pennsylvania
Operations Los Angeles (City of Commerce) Erie
(Partial List) Extruded Products Forgings Plant and Offices
Los Angeles (Santa Fe Springs) South Carolina
Extruded Products Fabricating Greenwood
Oxnard Forgings
Forgings Greenwood
Pleasanton Machine Shop
R&D at the Center for Technology Tennessee
Administrative Offices Jackson
Florida Extruded Products
Mulberry Texas
Sodium Silicofluoride, Dallas
Potassium Silicofluoride Extruded products Offices
Louisiana Houston
Baton Rouge Kaiser Aluminum Corporation Headquarters
Alumina, Kaiser Alumina Technical Services, Sherman
International Business Development, and Extruded Products
Environmental Offices Washington
Gramercy Mead
Alumina Primary Aluminum
Michigan Division Technology Center
Detroit (Southfield Richland
Automotive Product Development and Sales Extruded Products
Ohio Tacoma
Canton Primary Aluminium
Castings Trentwood
Newark Flat-Rolled Products Plant and Offices
Extruded Products
Oklahoma
Tulsa
Aluminum and Magnesium Extruded
Products, anodes
------------------------------------------------------------------------------------------------------------------
Worldwide Australia Japan
Operations Queensland Alumina Limited (28.3% owned) Furukawa Kaiser Forged products Company
(Partial List) Alumina (47.5%)
Canada Sales Office
Kaiser Aluminum & Chemical of Canada Limited The Netherlands
(100%) Kaiser Aluminum Mill Products Inc. (100%)
Extruded products Sales Office
Ghana Russia
Volta Aluminium Company Limited (90%) Kaiser Aluminium Russia, Inc. (100%)
Jamaica International Business Development
Alumina Partners of Jamaica (65%) Wales, United Kingdom
Bauxite, Alumina Anglesey Aluminium Limited (49%)
Kaiser Jamaica Bauxite Company (49%) Primary Aluminum
Bauxite
64
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
----------------------------------------------------------------
Directors Executive Offices
--------- -----------------
Charles E. Hurwitz 6177 Sunol Boulevard
George T. Haymaker, Jr. Pleasanton, CA 94566-7769
Robert J. Cruikshank 510/462-1122
Ezra G. Levin
Robert Marcus
Paul D. Rusen Auditors
--------
Corporate officers and Business Arthur Andersen LLP
------------------------------- Spear Street Tower
Unit Managers One Market Plaza
-------------- San Francisco, CA 94015-1019
George T. Haymaker, Jr.
Chairman of the Board and
Chief Executive Officer
Charles E. Hurwitz
Vice Chairman
Charlie Alongi
Controller
Joseph A. Bonn
Vice President, Planning and Administration
Robert E. Cole
Vice President, Government Affairs
John E. Daniel
Vice President, Primary Aluminum
Richard B. Evans
Vice President, Flat-Rolled Products
Robert W. Irelan
Vice President, Public Relations
John T. La Duc
Vice President and Chief Financial Officer
Alan G. Longmuir
Vice President, Research & Development
Raymond J. Milchovich
Vice President, Flat-Rolled Products
James T. Owen
Vice President, Extruded Products
Joseph Peganoff
Vice President, Forgings
Anthony R. Pierno
Vice President and General Counsel
Geoffrey W. Smith
Vice President, Alumina
Kris S. Vasan
Treasurer
Byron L. Wade
Vice President, Secretary, and Deputy
General Counsel
Lawrence L. Watts
Vice President, International Business Development
65