Table of Contents
- -----------------
Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Report of Independent Public Accountants 29
Consolidated Balance Sheets 30
Statements of Consolidated Income (Loss) 31
Statements of Consolidated Cash Flows 32
Notes to Consolidated Financial Statements 33
Five-Year Financial Data 57
Quarterly Financial Data (Unaudited) 59
Corporate Information 60
19
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Kaiser Aluminum Corporation ("Kaiser" or the "Company"), through its
wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation
("KACC"), 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) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Shipments: (000 tons) (1)
Alumina 2,040.1 2,086.7 1,997.5
Aluminum products:
Primary aluminum 271.7 224.0 242.5
Fabricated aluminum products 368.2 399.0 373.2
-------- -------- --------
Total aluminum products 639.9 623.0 615.7
======== ======== ========
Average realized sales price:
Alumina (per ton) $ 208 $ 169 $ 169
Primary aluminum (per pound) .81 .59 .56
Net sales:
Bauxite and alumina:
Alumina $ 424.8 $ 352.8 $ 338.2
Other (2)(3) 89.4 79.7 85.2
-------- -------- --------
Total bauxite and alumina 514.2 432.5 423.4
-------- -------- --------
Aluminum processing:
Primary aluminum 488.0 292.0 301.7
Fabricated aluminum products 1,218.6 1,043.0 981.4
Other (3) 17.0 14.0 12.6
-------- -------- --------
Total aluminum processing 1,723.6 1,349.0 1,295.7
-------- -------- --------
Total net sales $2,237.8 $1,781.5 $1,719.1
======== ======== ========
Operating income (loss):
Bauxite and alumina $ 54.0 $ 19.8 $ (4.5)
Aluminum processing 238.9 (8.4) (46.3)
Corporate (82.3) (67.6) (72.6)
-------- -------- --------
Total operating income (loss) $ 210.6 $ (56.2) $ (123.4)
======== ======== ========
Income (loss) before extraordinary loss and cumulative effect of changes
in accounting principles $ 60.3 $ (101.4) $ (123.1)
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 (507.3)
-------- -------- --------
Net income (loss) $ 60.3 $ (106.8) $ (652.2)
======== ======= ========
Capital expenditures $ 79.4 $ 70.0 $ 67.7
======== ======== ========
(1) All references to tons refer to metric tons of 2,204.6 pounds.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority
interests in consolidated subsidiaries.
20
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Results of Operations
- ---------------------
The Company's operating results are sensitive to changes in prices of
alumina, primary aluminum, and fabricated aluminum products, and also
depend to a significant degree on the volume and mix of all products
sold and on KACC's hedging strategies. See Note 9 of the Notes to
Consolidated Financial Statements for an explanation of KACC's hedging
strategies. The previous table provides selected operational and
financial information on a consolidated basis with respect to the
Company for the years ended December 31, 1995, 1994, and 1993. 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 to third parties for the
bauxite and alumina segment was 19% higher in 1995 than in 1994 and 2%
higher in 1994 than in 1993. Revenue from alumina increased 20% in
1995 from 1994, due to higher average realized prices partially offset
by lower shipments. The remainder of the segment's sales revenues were
from sales of bauxite and the portion of sales of alumina attributable
to the minority interest in the Company's 65%-owned Alumina Partners
of Jamaica ("Alpart") alumina refinery in Jamaica.
Aluminum Processing - Revenue from net sales to third parties for the
aluminum processing segment was 28% higher in 1995 than in 1994 and 4%
higher in 1994 than in 1993. The bulk of the segment's sales
represents Kaiser's primary aluminum and fabricated aluminum products,
with the remainder representing the portion of sales of primary
aluminum attributable to the minority interest in the Company's 90%-
owned Volta Aluminium Company Limited ("Valco") aluminum smelter in
Ghana. Revenue from primary aluminum increased 67% in 1995 from 1994,
due primarily to higher average realized prices and higher shipments.
In 1995, the Company's average realized price from sales of primary
aluminum was approximately $.81 per pound, compared to the average
Midwest United States transaction price of approximately $.86 per
pound during the year. The higher shipments of primary aluminum were
due to increased production at the Company's smelters in the Pacific
Northwest and Valco, and reduced intracompany consumption of primary
metal at the Company's fabricated products units. The increase in
revenue for 1995 was partially offset by decreased shipments caused by
the strike by the United Steelworkers of America ("USWA") discussed
below. Revenue from primary aluminum decreased 3% in 1994 from 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 then-recent improvements in metal prices.
Shipments in 1994 reflected production curtailments at the Company's
smelters in the Pacific Northwest and Valco. Shipments of primary
aluminum to third parties were approximately 42% of total aluminum
products shipments in 1995, compared with approximately 36% in 1994
and 39% in 1993. Revenue from fabricated aluminum products increased
17% in 1995 from 1994, due to higher average realized prices partially
offset by lower shipments for most of these products. Revenue from
fabricated aluminum products increased 6% in 1994 from 1993,
principally due to increased shipments of most of these products.
Operating Income (Loss)
Improved operating results in 1995 were partially offset by expenses
related to the Company's smelting joint venture in China, accelerated
expenses on the Company's micromill technology, maintenance expenses
as a result of an electrical lightning strike at the Company's
Trentwood, Washington, facility, and a work slowdown at the Company's
49%-owned Kaiser Jamaica Bauxite Company prior to the signing of a new
labor contract. The combined impact of these expenditures on the
results for 1995 was approximately $6.0 million in the aggregate (on a
pre-tax basis). Operating results in 1995 were further impacted by (i)
an eight-day strike at five major domestic locations by the USWA, (ii)
a six-day strike by the National Workers Union at Alpart, and (iii) a
four-day disruption of alumina production at Alpart caused by a boiler
failure. The combined impact of these events on the results for 1995
was approximately $17.0
21
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
million in the aggregate (on a pre-tax basis) principally from lower
production volume and other related costs. In 1993, the Company recorded
a pre-tax charge of $35.8 million related to restructuring charges and
a pre-tax charge of $19.4 million 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 was $54.0
million in 1995, compared with $19.8 million in 1994 and a loss of
$4.5 million in 1993. The increase in operating income in 1995
compared with 1994 was principally due to higher revenue, partially
offset by the effect of the strike and boiler failure. In 1994,
compared with 1993, operating income was favorably affected by
increased shipments and lower manufacturing costs.
Aluminum Processing - This segment's operating income was $238.9
million in 1995, compared with losses of $8.4 million in 1994 and
$46.3 million in 1993. Improvement in operating results in 1995
compared with 1994 was principally due to higher revenue, partially
offset by the effect of the strike by the USWA. The decrease in
operating loss in 1994 compared with 1993 was caused principally by
the $35.8 million restructuring charges, increased shipments of
fabricated aluminum products, and higher average realized prices of
primary aluminum, partially offset by lower shipments of primary
aluminum.
Corporate - Corporate operating expenses of $82.3 million, $67.6
million, and $72.6 million in 1995, 1994, and 1993, respectively,
represented corporate general and administrative expenses that were
not allocated to segments.
Net Income (Loss)
The Company reported net income of $60.3 million or $.69 per common
and common equivalent share ($.72 on a fully diluted basis) in 1995,
compared with a net loss of $106.8 million or $2.18 per common and
common equivalent share in 1994 and a net loss of $652.2 million or
$11.47 per common and common equivalent share in 1993. The principal
reason for the improvement in 1995 compared to 1994 was the improvement
in operating results previously described, partially offset by other
charges, principally related to the establishment of additional
litigation reserves. The principal reasons for the 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 $507.3 million related to adoption of
Statement of Financial Accounting Standards No. 106, 109, and 112 as
of January 1, 1993. See Note 1 of the Notes to Consolidated Financial
Statements.
Liquidity and Capital Resources
- -------------------------------
Capital Structure
On February 17, 1994, the Company and KACC entered into a credit
agreement with BankAmerica Business Credit, Inc. and certain other
lenders (as amended, the "1994 Credit Agreement"). The 1994 Credit
Agreement consists of a $325.0 million five-year secured, revolving
line of credit, scheduled to mature in 1999. KACC 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. As of February 29, 1996,
$174.9 million (of which $72.4 million could have been used for
letters of credit) was available to KACC under the 1994 Credit
Agreement. The 1994 Credit Agreement is unconditionally guaranteed by
the Company and by certain significant subsidiaries of KACC. The 1994
Credit Agreement requires KACC to maintain certain financial covenants
and places restrictions on the Company's and KACC's ability to, among
other things, incur debt and liens, make investments, pay dividends,
undertake transactions with affiliates, make capital expenditures, and
enter into unrelated lines of business. The 1994 Credit Agreement is
secured by, among other things, (i) mortgages on KACC's major domestic
plants (excluding the Company's Gramercy alumina plant); (ii) subject
to certain exceptions, liens on the accounts receivable, inventory,
equipment, domestic patents and trademarks,
22
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
and substantially all other personal property of KACC and certain of
its subsidiaries; (iii) a pledge of all the stock of KACC owned by
Kaiser; and (iv) pledges of all of the stock of a number of KACC's
wholly owned domestic subsidiaries, pledges of a portion of the stock
of certain foreign subsidiaries, and pledges of a portion of the stock
of certain partially owned foreign affiliates. In 1993, Kaiser issued
19,382,950 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"). On September
19, 1995, the Company redeemed all 1,938,295 Series A Shares, which
resulted in the simultaneous redemption of all Depositary Shares, in
exchange for (i) 13,126,521 shares of the Company's common stock and
(ii) $2.8 million in cash comprised of (a) an amount equal to all
accrued and unpaid dividends up to and including the day immediately
prior to redemption date, and (b) cash in lieu of any fractional
shares of common stock that would have otherwise been issuable.
In the first quarter of 1994, the Company 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. On February 17,
1994, KACC issued $225.0 million of its 9-7/8% Senior Notes due 2002
(the "Senior Notes").
The obligations of KACC with respect to the Senior Notes and the
12-3/4% Notes (see Note 4 of the Notes to Consolidated Financial
Statements) are guaranteed, jointly and severally, by certain
subsidiaries of KACC. The indentures governing the Senior Notes and
the 12-3/4% Notes restrict, among other things, KACC's ability to incur
debt, undertake transactions with affiliates, and pay dividends.
Management believes that the Company's existing cash resources,
together with cash flows from operations and borrowings under the 1994
Credit Agreement, will be sufficient to satisfy its working capital
and capital expenditure requirements for the next year. With respect
to long-term liquidity, management believes that operating cash flows,
together with the ability to obtain both short and long-term
financing, should provide sufficient funds to meet the Company's
working capital and capital expenditure requirements.
On January 5, 1996, the Company announced that it filed a "shelf"
registration statement with the Securities and Exchange Commission
(the "SEC") covering up to 10 million shares of the Company's common
stock that are owned by MAXXAM Inc.
On February 5, 1996, the Company announced that it filed with the SEC
a preliminary proxy statement relating to a proposed recapitalization
and a special meeting of stockholders to consider and vote upon the
proposal. The proposed recapitalization would: (i) provide for two
classes of common stock: Class A Common Shares, $.01 par value, with
one vote per share and a new lesser-voting class designated as Common
Stock, $.01 par value, with 1/10 vote per share; (ii) redesignate as
Class A Common Shares the 100 million currently authorized shares of
existing common stock and authorize an additional 250 million shares to
be designated as Common Stock; and (iii) change each issued share of
the Company's existing common stock, par value $.01 per share, into
(a) .33 of a Class A Common Share and (b) .67 of a share of Common Stock.
The Company would pay cash in lieu of fractional shares. The Company
anticipates that both the Class A Common Shares and the Common Stock
will be approved for trading on the New York Stock Exchange. Upon the
effective date of the recapitalization, approximately 23.6 million
Class A Common Shares and 48.0 million shares of Common Stock would be
issued and outstanding. The proportionate voting power of the holders of
the PRIDES will increase immediately after the effectiveness of the
recapitalization until such shares are redeemed or converted, which will
occur on or before December 31, 1997. As of January 31, 1996, holders of the
existing common stock and the PRIDES had 91.2% and 8.8%, respectively,
of the total voting power of all
23
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
stockholders. Immediately after the recapitalization, the voting
power of such holders of the PRIDES will increase to 19.6% in the
aggregate, with a corresponding reduction in the voting power of such
holders of the existing common stock. At such time as the PRIDES are
redeemed or converted, the relative voting power of such holders of
the PRIDES will decrease and the relative voting power for both such
holders of the PRIDES and the existing common stock will be approximately
the same as it would have been had the recapitalization not occurred.
See Note 4 of the Notes to Consolidated Financial Statements.
Operating Activities
Cash provided by operations was $118.7 million in 1995, compared with
cash used for operations of $22.1 million in 1994 and cash provided by
operations of $36.9 million in 1993. The improvement in cash flows
from operations in 1995 compared with 1994 was primarily due to higher
earnings and a refund of margin deposits of $50.5 million under
certain hedging contracts.
At December 31, 1995, the Company had working capital of $331.7
million, compared with working capital of $259.7 million at December
31, 1994. The increase in working capital was due primarily to an
increase in Receivables and Inventories and a decrease in Other
accrued liabilities, partially offset by a decrease in Prepaid
expenses and other current assets (principally due to a refund of
margin deposits related to hedging activities) and an increase in
Accounts payable and Accrued salaries, wages, and related expense.
Postretirement benefits other than pensions are provided through
contracts with various insurance carriers. The Company has not funded
the liability for these benefits, which are expected to be paid out of
cash generated by operations.
Investing Activities
The Company's capital expenditures of $217.1 million (of which $25.2
million was funded by the Company's minority partners in certain
foreign joint ventures) during the three years ended December 31,
1995, were made primarily to improve production efficiency, reduce
operating costs, expand capacity at existing facilities, and construct
new facilities. Total consolidated capital expenditures were $79.4
million in 1995, compared with $70.0 million in 1994 and $67.7 million
in 1993 (of which $8.3, $7.5, and $9.4 million were funded by the
minority partners in certain foreign joint ventures in 1995, 1994, and
1993, respectively). Total consolidated capital expenditures (of which
approximately 10% is expected to be funded by the minority partners in
certain foreign joint ventures) are expected to be between $123.0 and
$143.0 million per year in the years 1996-1998, subject to necessary
approvals, if required, from the lenders under the 1994 Credit
Agreement.
The Company has developed a unique micromill for the production of can
sheet from molten metal based on a proprietary thin-strip, high-speed,
continuous-belt casting technique linked directly to hot rolling and
cold rolling mills. The first micromill will be constructed in Nevada
in 1996 as a demonstration production facility. KACC currently intends
to finance the cost of the construction of the Nevada micromill,
estimated to be $45.0 million, from general corporate funds, including
possible borrowings under the 1994 Credit Agreement, although KACC is
in discussions with third parties which might provide some or all of
such funding.
In 1995, Kaiser Yellow River Investment Limited ("KYRIL") was formed
to participate in the privatization, modernization, and operation of
aluminum smelting facilities in the People's Republic of China (the
"PRC"). KYRIL has entered into a Joint Venture Agreement and related
agreements with the Lanzhou Aluminum Smelters of the China National
Nonferrous Metals Industry Corporation relating to the formation and
operation of Yellow River Aluminum Industry Company Limited, a Sino-
foreign joint equity enterprise organized under the laws of the PRC
24
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(the "Joint Venture"). KYRIL contributed $9.0 million as a
contribution to the capital of the Joint Venture in July 1995. The
parties to the Joint Venture are currently engaged in discussion
concerning the amount, timing, and other conditions relating to
KYRIL's additional contributions to the Joint Venture. Governmental
approval in the PRC will be necessary in order to implement certain
arrangements agreed to by the parties, and there can be no assurance
such approvals will be obtained.
Financing Activities
The declaration and payment of dividends by the Company and KACC on
shares of their common stock are subject to certain covenants
contained in the 1994 Credit Agreement and, in the case of KACC, the
Senior Note Indenture and the 12-3/4% Note Indenture. The 1994 Credit
Agreement does not permit the Company or KACC to pay any dividends on
their common stock. The declaration and payment of dividends by the
Company on the PRIDES is expressly permitted by the terms of the 1994
Credit Agreement to the extent the Company receives payments on
certain intercompany notes or certain other permitted distributions
from KACC.
Environmental Contingencies
The Company and KACC are subject to a number of environmental laws, to
fines or penalties assessed for alleged breaches of the environmental
laws, and to claims and litigation based upon such laws. KACC
currently is subject to a number of 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. At December 31, 1995, the balance of such
accruals, which are primarily included in Long-term liabilities, was
$38.9 million. These environmental accruals represent the Company's
estimate of costs reasonably expected to be incurred based on
presently enacted laws and regulations, currently available facts,
existing technology, and the Company's assessment of the likely
remediation 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 $9.0 million for
the years 1996 through 2000 and an aggregate of approximately $10.0
million thereafter.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are
established or alternative technologies are developed, changes in
these and other factors may result in actual costs exceeding the
current environmental accruals. The Company believes that it is
reasonably possible that costs associated with these environmental
matters may exceed current accruals by amounts that could range, in
the aggregate, up to an estimated $23.0 million and that the factors
upon which a substantial portion of this estimate is based are
expected to be resolved over the next twelve months. While
uncertainties are inherent in the final outcome of these environmental
matters, and it is presently impossible to determine the actual costs
that ultimately may be incurred, management currently believes that
the resolution of such uncertainties should not have a material
adverse effect on the Company's consolidated financial position,
results of operations, or liquidity. See Note 8 of the Notes to
Consolidated Financial Statements for further description of these
contingencies.
Asbestos Contingencies
KACC is a defendant in a number of lawsuits, some of which involve
claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure
to asbestos during, and as a result of, their employment or
association with KACC or exposure to products containing asbestos
produced or sold by KACC.
25
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The lawsuits generally relate to products KACC has not manufactured
for at least 15 years. At December 31, 1995, the number of such claims
pending was approximately 59,700, as compared with 25,200 at December 31,
1994. In 1995, approximately 41,700 of such claims were received and
7,200 settled or dismissed. KACC has been advised by its regional
counsel that, although there can be no assurance, the recent increase
in pending claims may be attributable in part to tort reform legislation
in Texas which was passed by the legislature in March 1995 and which
became effective on September 1, 1995. The legislation, among other
things, is designed to restrict, beginning September 1, 1995, the
filing of cases in Texas that do not have a sufficient nexus to that
jurisdiction, and to impose, generally as of September 1, 1996,
limitations relating to joint and several liability in tort cases.
A substantial portion of the asbestos-related claims that were filed and
served on KACC between June 30, 1995, and November 30, 1995, were filed
in Texas prior to September 1, 1995.
Based on past experience and reasonably anticipated future activity,
the Company has established an accrual for estimated asbestos-related
costs for claims filed and estimated to be filed and settled through
2008. There are inherent uncertainties involved in estimating
asbestos-related costs, and the Company's actual costs could exceed
these estimates. The Company's accrual was calculated based on the
current and anticipated number of asbestos-related claims, the prior
timing and amounts of asbestos-related payments, and the advice of
Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to the
current state of the law related to asbestos claims. Accordingly, an
asbestos-related cost accrual of $160.1 million, before consideration
of insurance recoveries, is included primarily in Long-term
liabilities at December 31, 1995. The Company estimates that annual
future cash payments in connection with such litigation will be
approximately $13.0 to $20.0 million for each of the years 1996
through 2000, and an aggregate of approximately $78.0 million
thereafter through 2008. While the Company does not presently believe
there is a reasonable basis for estimating such costs beyond 2008 and,
accordingly, no accrual has been recorded for such costs which may be
incurred beyond 2008, there is a reasonable possibility that such
costs may continue beyond 2008, and such costs may be substantial.
The Company believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs. Claims
for recovery from some of KACC's insurance carriers are currently
subject to pending litigation and other carriers have raised certain
defenses, which have resulted in delays in recovering costs from the
insurance carriers. The timing and amount of ultimate recoveries from
these insurance carriers are dependent upon the resolution of these
disputes. The Company believes, based on prior insurance-related
recoveries in respect of asbestos-related claims, existing insurance
policies, and the advice of Thelen, Marrin, Johnson & Bridges with
respect to applicable insurance coverage law relating to the terms and
conditions of those policies, that substantial recoveries from the
insurance carriers are probable. Accordingly, an estimated aggregate
insurance recovery of $137.9 million, determined on the same basis as
the asbestos-related cost accrual, is recorded primarily in Other
assets at December 31, 1995.
While uncertainties are inherent in the final outcome of these
asbestos matters and it is presently impossible to determine the
actual costs that ultimately may be incurred and insurance recoveries
that will be received, management currently believes that, based on
the factors discussed in the preceding paragraphs, the resolution of
asbestos-related uncertainties and the incurrence of asbestos-related
costs net of related insurance recoveries should not have a material
adverse effect on the Company's consolidated financial position,
results of operations, or liquidity. See Note 8 of the Notes to
Consolidated Financial Statements for further description of this
contingency.
26
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Trends
- ------
Merger with Alumax
On February 22, 1996, the Company announced that it had proposed to
acquire all of the outstanding shares of Alumax Inc. and made public a
letter urging the Board of Directors of Alumax to seriously consider
the proposal. The Company's proposal to Alumax is for a combination of
cash and equity securities of the Company at a combined value of $40
to $45 per common share, of which $30 would be paid in cash and the
balance in Kaiser shares. The proposal was first made to Alumax on
February 8, 1996. Alumax subsequently rejected the proposal. On March
2, 1996, the Company announced that it decided to withdraw its
proposal.
Sensitivity to Prices and Hedging Programs
KACC enters into primary aluminum hedging transactions in the normal
course of business. The prices realized by KACC under certain sales
contracts for alumina, primary aluminum, and fabricated aluminum
products, as well as the costs incurred by KACC for certain items,
such as aluminum scrap, rolling ingot, power, and bauxite, fluctuate
with the market price of primary aluminum, together resulting in a
"net exposure" of earnings. The primary aluminum hedging transactions
are designed to mitigate the net exposure of earnings to declines in
the market price of primary aluminum, while retaining the ability to
participate in favorable pricing environments that may materialize.
KACC has employed strategies which include forward sales of primary
aluminum at fixed prices and the purchase or sale of options for
primary aluminum. In respect of its 1996 anticipated net exposure, at
December 31, 1995, KACC had purchased approximately 53,300 tons of
primary aluminum at fixed prices as a partial hedge against
approximately 161,100 tons of fabricated aluminum products sold to
customers at fixed or capped prices and had sold forward 15,750 tons
of primary aluminum at fixed prices.
In addition, as of December 31, 1995, KACC had sold approximately 75%
and 45% of the alumina available to it in excess of its projected
internal smelting requirements for 1996 and 1997, respectively.
Approximately 56% of such alumina sold for 1996 and all of such
alumina sold for 1997 has been sold at prices linked to the future
prices of primary aluminum as a percentage of the price of primary
aluminum ("Variable Price Contracts"), and approximately 44% of such
alumina sold for 1996 has been sold at fixed prices ("Fixed Price
Contracts"). The average realized prices of alumina sold under
Variable Price Contracts will depend on future prices of primary
aluminum, and the average realized prices of alumina sold under Fixed
Price Contracts will substantially exceed the Company's manufacturing
cost of alumina.
KACC also enters into hedging transactions in the normal course of
business that are designed to reduce its exposure to fluctuations in
foreign exchange rates. At December 31, 1995, KACC had net forward
foreign exchange contracts totaling approximately $102.8 million for
the purchase of 142.4 million Australian dollars through April 30,
1997.
KACC has established margin accounts with its counterparties related
to forward aluminum sales and option contracts. KACC 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,
1995, KACC had nil, compared with $50.5 million at December 31, 1994,
on deposit with counterparties in respect of such contracts. These
amounts are recorded in Prepaid expenses and other current assets.
Since December 31, 1995, KACC has entered into:
. Additional hedge positions in respect of its anticipated 1996,
1997, and 1998 production. As of February 29, 1996, KACC had
sold forward an additional 19,500 metric tons of primary
aluminum at fixed prices, had
27
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
purchased 20,150 metric tons of primary aluminum under
forward purchase contracts at fixed prices, and had purchased
put options to establish a minimum price for 45,000 metric
tons of primary aluminum.
. Additional forward foreign exchange contracts totaling
approximately $12.8 million for the purchase of 18.0 million
Australian dollars from March 1996 through December 1997 in
respect of its commitments for 1996 and 1997 expenditures
denominated in Australian dollars.
At February 29, 1996, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price
of $1,747 per metric ton ($.79 per pound) of primary aluminum, and
forward foreign exchange contracts was $13.3 million.
Income Tax Matters
- ------------------
The Company's net deferred income tax assets as of December 31, 1995,
were $291.8 million, net of valuation allowances of $128.5 million.
Approximately $97.7 million of these net deferred income tax assets
relate to the benefit of loss and credit carryforwards, net of
valuation allowances. 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 5 of the Notes to
Consolidated Financial Statements for a discussion of these and other
income tax matters.
Recent Accounting Pronouncements
- --------------------------------
In March 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"). SFAS 121 requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. The Company is required to
adopt SFAS 121 no later than January 1, 1996. The Company does not
expect that the adoption of SFAS 121 will have a material impact on
the Company's consolidated financial statements.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
SFAS 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans, and provides for alternative
methods for an employer to recognize stock-based compensation costs.
Under the first method, an employer may continue to account for
compensation costs for stock, stock options, and other equity
instruments issued to employees, as it has historically, using the
"intrinsic value based method" (as described in SFAS 123), and such
compensation costs would be the excess, if any, of the quoted market
price of the stock subject to an option at the grant date or other
measurement date over the amount an employee must pay to acquire the
stock. The intrinsic value based method generally would not result in
the recognition of compensation costs upon the grant of stock options.
Under the second method, an employer may adopt the "fair value based
method" (as described in SFAS 123). Under the fair value based method,
such compensation costs would be valued using an option-pricing model,
and such amount would be charged to expense over the option's vesting
period. Employers which elect to continue to account for stock-based
compensation under the intrinsic value based method will be required
by SFAS 123 to disclose in the notes to their financial statements the
amount of net income and the earnings per share which would have been
reported had the employer elected to use the fair value based method.
The Company has elected to continue to account for stock-based
compensation under the intrinsic value based method, and will comply
with the disclosure requirement of SFAS 123 as of January 1, 1996.
28
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Kaiser Aluminum
Corporation:
We have audited the accompanying consolidated balance sheets of Kaiser
Aluminum Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1995 and 1994, and the related statements of consolidated
income and cash flows for each of the three years in the period ended
December 31, 1995. 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 Corporation and subsidiaries as of December 31, 1995 and
1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Houston, Texas
February 16, 1996
29
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------
(In millions of dollars, except share amounts) 1995 1994
- --------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 21.9 $ 17.6
Receivables:
Trade, less allowance for doubtful receivables of $5.0 in 1995 and $4.2 in 1994 222.9 150.7
Other 85.7 48.5
Inventories 525.7 468.0
Prepaid expenses and other current assets 76.6 158.0
-------- --------
Total current assets 932.8 842.8
Investments in and advances to unconsolidated affiliates 178.2 169.7
Property, plant, and equipment - net 1,109.6 1,133.2
Deferred income taxes 269.1 271.2
Other assets 323.5 281.2
-------- --------
Total $2,813.2 $2,698.1
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 184.5 $ 152.1
Accrued interest 32.0 32.6
Accrued salaries, wages, and related expenses 105.3 77.7
Accrued postretirement medical benefit obligation - current portion 46.8 47.0
Other accrued liabilities 129.4 176.9
Payable to affiliates 94.2 85.3
Long-term debt - current portion 8.9 11.5
-------- --------
Total current liabilities 601.1 583.1
Long-term liabilities 548.5 495.5
Accrued postretirement medical benefit obligation 734.0 734.9
Long-term debt 749.2 751.1
Minority interests 122.7 116.2
Stockholders' equity:
Preferred stock, par value $.05, authorized 20,000,000 shares:
Series A Convertible, stated value $.10, issued and outstanding,
nil and 1,938,295 in 1995 and 1994 .2
PRIDES Convertible, par value $.05, issued and outstanding,
8,673,850 and 8,855,550 in 1995 and 1994 .4 .4
Common stock, par value $.01, authorized 100,000,000 shares; issued and
outstanding, 71,638,514 and 58,205,083 in 1995 and 1994 .7 .6
Additional capital 530.3 527.8
Accumulated deficit (459.9) (502.6)
Additional minimum pension liability (13.8) (9.1)
-------- --------
Total stockholders' equity 57.7 17.3
-------- --------
Total $2,813.2 $2,698.1
======== ========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
30
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
Year Ended December 31,
------------------------------
(In millions of dollars, except share amounts) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
Net sales $2,237.8 $1,781.5 $1,719.1
-------- -------- --------
Costs and expenses:
Cost of products sold 1,798.4 1,625.5 1,587.7
Depreciation 94.3 95.4 97.1
Selling, administrative, research and development, and general 134.5 116.8 121.9
Restructuring of operations 35.8
-------- -------- --------
Total costs and expenses
2,027.2 1,837.7 1,842.5
-------- -------- --------
Operating income (loss): 210.6 (56.2) (123.4)
Other expense:
Interest expense (93.9) (88.6) (84.2)
Other - net (14.1) (7.3) (.9)
-------- -------- --------
Income (loss) before income taxes, minority interests, extraordinary loss, and
cumulative effect of changes in accounting principles 102.6 (152.1) (208.5)
(Provision) credit for income taxes (37.2) 53.8 86.9
Minority interests (5.1) (3.1) (1.5)
-------- -------- --------
Income (loss) before extraordinary loss and cumulative effect of changes in
accounting principles 60.3 (101.4) (123.1)
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 (507.3)
-------- -------- --------
Net income (loss) 60.3 (106.8) (652.2)
Dividends on preferred stock (17.6) (20.1) (6.3)
-------- -------- --------
Net income (loss) available to common shareholders $ 42.7 $ (126.9) $ (658.5)
======== ======== ========
Earnings (loss) per common and common equivalent share:
Primary:
Income (loss) before extraordinary loss and cumulative effect of changes
in accounting principles $ .69 $ (2.09) $ (2.25)
Extraordinary loss (.09) (.38)
Cumulative effect of changes in accounting principles (8.84)
-------- -------- --------
Net income (loss) $ .69 $ (2.18) $ (11.47)
======== ======== ========
Fully diluted $ .72
========
Weighted average common and common equivalent shares outstanding (000):
Primary 62,264 58,139 57,423
======== ======== ========
Fully diluted 71,809
========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
31
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended December 31,
------------------------------
(In millions of dollars) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 60.3 $ (106.8) $ (652.2)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:
Depreciation 94.3 95.4 97.1
Amortization of excess investment over equity in unconsolidated affiliates 11.4 11.6 11.9
Amortization of deferred financing costs and discount on long-term debt 5.4 6.2 11.2
Equity in (income) losses of unconsolidated affiliates (19.2) 1.9 3.3
Restructuring of operations 35.8
Minority interests 5.1 3.1 1.5
Extraordinary loss on early extinguishment of debt - net 5.4 21.8
Cumulative effect of changes in accounting principles - net 507.3
(Increase) decrease in receivables (109.7) 36.4 (6.1)
(Increase) decrease in inventories (57.7) (41.1) 13.0
Decrease (increase) in prepaid expenses and other assets 82.9 (60.6) (5.2)
Increase (decrease) in accounts payable 32.4 25.8 (10.3)
(Decrease) increase in accrued interest (.6) 9.3 19.2
Increase in payable to affiliates and accrued liabilities 10.6 50.8 76.9
Decrease in accrued and deferred income taxes (7.4) (68.8) (96.4)
Other 10.9 9.3 8.1
-------- -------- --------
Net cash provided by (used for) operating activities 118.7 (22.1) 36.9
-------- -------- --------
Cash flows from investing activities:
Net proceeds from disposition of property and investments 8.6 4.1 13.1
Capital expenditures (79.4) (70.0) (67.7)
Investments in joint ventures (9.0)
-------- -------- --------
Net cash used for investing activities (79.8) (65.9) (54.6)
-------- -------- --------
Cash flows from financing activities:
Repayments of long-term debt, including revolving credit (537.7) (345.1) (1,134.5)
Borrowings of long-term debt, including revolving credit 532.3 378.9 1,068.1
Borrowings from MAXXAM Group Inc. (see supplemental disclosure below) 15.0
Tender premiums and other costs of early extinguishment of debt (27.1)
Net short-term debt repayments (.5) (4.3)
Incurrence of financing costs (.8) (19.2) (12.7)
Dividends paid (20.8) (14.8) (6.3)
Capital stock issued 1.2 100.1 119.3
Redemption of minority interests' preference stock (8.8) (8.5) (4.2)
-------- -------- --------
Net cash (used for) provided by financing activities (34.6) 90.9 13.3
-------- -------- --------
Net increase (decrease) in cash and cash equivalents during the year 4.3 2.9 (4.4)
Cash and cash equivalents at beginning of year 17.6 14.7 19.1
-------- -------- --------
Cash and cash equivalents at end of year $ 21.9 $ 17.6 $ 14.7
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 88.8 $ 73.1 $ 53.7
Income taxes paid 35.7 16.0 13.5
Tax allocation payments from MAXXAM Inc. (3.9)
Supplemental disclosure of non-cash financing activities:
Exchange of the borrowings from MAXXAM Group Inc. for capital stock $ 15.0
The accompanying notes to consolidated financial statements are
an integral part of these statements.
32
KAISER ALUMINUM 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 Corporation ("Kaiser" or the "Company") and its majority-
owned subsidiaries. The Company is a direct subsidiary of MAXXAM Inc.
("MAXXAM") and conducts its operations through its wholly owned
subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). KACC
operates in all principal aspects of the aluminum industry - the mining
of bauxite (the major aluminum-bearing ore), the refining of bauxite
into alumina (the intermediate material), the production of primary
aluminum, and the manufacture of fabricated and semi-fabricated
aluminum products. Kaiser's production levels of alumina and primary
aluminum exceed its internal processing needs, which allows it to be a
major seller of alumina and primary aluminum to domestic and
international third parties (see Note 10).
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities known to
exist as of the date the financial statements are published, and the
reported amount of revenues and expenses during the reporting period.
Uncertainties, with respect to such estimates and assumptions, are
inherent in the preparation of the Company's consolidated financial
statements; accordingly, it is possible that the actual results could
differ from these estimates and assumptions, which could have a
material effect on the reported amounts of the Company's consolidated
financial position and results of operation.
Investments in 50%-or-less-owned entities are accounted for primarily
by the equity method. Intercompany balances and transactions are
eliminated. Certain reclassifications of prior-year information were
made to conform to the current presentation.
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 changed 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". 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
33
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share amounts) (continued)
cumulative effect of the change in accounting principle reduced the
Company's results of operations by $2.3. 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 these 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. Inventories
consist of the following:
December 31,
---------------
1995 1994
- --------------------------------------------------------------------------
Finished fabricated products $ 91.5 $ 49.4
Primary aluminum and work in process 195.9 203.1
Bauxite and alumina 119.6 102.3
Operating supplies and repair and maintenance parts 118.7 113.2
------ ------
$525.7 $468.0
====== ======
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
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for a stock-based compensation plan. Accordingly, no
compensation cost has been recognized for this plan (see Note 6).
Other Expense
Other expense in 1995, 1994, and 1993 includes $17.8, $16.5, and $17.9
of pre-tax charges related principally to establishing additional:
(i) litigation reserves for asbestos claims and (ii) environmental reserves
for potential soil and groundwater remediation matters, each pertaining
to operations which were discontinued prior to the acquisition
of the Company by MAXXAM in 1988.
Deferred Financing Costs
Costs incurred to obtain debt financing are deferred and amortized
over the estimated term of the related borrowing. Amortization of
deferred financing costs of $5.3, $6.0, and $11.2 for the years ended
December 31, 1995, 1994, and 1993, respectively, are included in
interest expense.
34
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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, 1995, 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 9).
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.
December 31, 1995 December 31, 1994
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------
Debt $758.1 $806.3 $762.6 $747.6
Foreign currency contracts 1.9 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 4). 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 9).
Earnings (Loss) per Common and Common Equivalent Share
Primary earnings (loss) per common and common equivalent share are
computed by dividing net income (loss) available to common
shareholders by the weighted average number of common and common
equivalent shares outstanding during the period. Fully diluted
earnings per common and common equivalent share are computed as if the
Series A Shares and 181,700 shares of PRIDES (the "Converted PRIDES")
had been converted to common shares at the beginning of the period.
Accordingly, for purposes of the fully diluted calculations, the
dividends attributable to the Series A shares and the Converted PRIDES
($9.2 for the year ended December 31, 1995) have not been deducted
from net income, and the weighted average number of common and common
equivalent shares outstanding includes the shares issued upon
conversion of the Series A Shares and the Converted PRIDES as if they
had been outstanding for the entire period. As a result of the
redemption of the Series A Shares and conversion of the Converted
PRIDES during the 1995 period, fully diluted earnings per share are
presented for such period, even though the result is antidilutive. For
the years ended December 31, 1994 and 1993, common equivalent shares
attributable to the preferred stock and non-qualified stock options
were excluded from the calculation of weighted average shares because
they were antidilutive.
2. Investments In and Advances To Unconsolidated Affiliates
- ------------------------------------------------------------
Summary combined financial information is provided below for
unconsolidated aluminum investments, most of which supply and process
raw materials. The investees are Queensland Alumina Limited ("QAL")
(28.3% owned), Anglesey
35
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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, 1995 and 1994, KACC's net
receivables from these affiliates were not material.
Summary of Combined Financial Position
December 31,
---------------
1995 1994
- -----------------------------------------------------------------
Current assets $429.0 $342.3
Property, plant, and equipment - net 330.8 349.4
Other assets 39.3 42.4
------ ------
Total assets $799.1 $734.1
====== ======
Current liabilities $125.4 $122.4
Long-term debt 331.8 307.6
Other liabilities 35.6 31.0
Stockholders' equity 306.3 273.1
------ ------
Total liabilities and stockholders' equity $799.1 $734.1
====== ======
Summary of Combined Operations
Year Ended December 31,
---------------------------
1995 1994 1993
------- ------- -------
Net sales $ 685.9 $ 489.8 $ 510.3
Costs and expenses (618.7) (494.8) (527.2)
(Provision) credit for income taxes (18.7) (6.3) 1.9
------- ------- -------
Net income (loss) $ 48.5 $ (11.3) $ (15.0)
======= ======= =======
Company's equity in income (loss) $ 19.2 $ (1.9) $ (3.3)
======= ======= =======
The Company's equity in income (loss) differs from the summary net
income (loss) due to various percentage ownerships in the entities and
equity method accounting adjustments. At December 31, 1995, KACC's
investment in its unconsolidated affiliates exceeded its equity in their
net assets by approximately $54.9. The Company is amortizing this amount
over a 12-year period, which results in an annual amortization charge of
approximately $11.4.
The Company and its affiliates have interrelated operations. KACC
provides some of its affiliates with services such as financing,
management, and engineering. Significant activities with affiliates
include the acquisition and processing of bauxite, alumina, and primary
aluminum. Purchases from these affiliates were $284.4, $219.7, and $206.6
in the years ended December 31, 1995, 1994, and 1993, respectively.
Dividends of $8.1, nil, and nil were received from investees in the years
ended December 31, 1995, 1994, and 1993, respectively.
In 1995, a subsidiary of the Company invested $9.0 in a foreign joint venture.
This amount is included in Investments in and advances to unconsolidated
affiliates.
36
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
3. Property, Plant, and Equipment
- ----------------------------------
The major classes of property, plant, and equipment are as follows:
December 31,
-------------------
1995 1994
- ---------------------------------------------------------------------
Land and improvements $ 151.8 $ 153.5
Buildings 198.5 196.8
Machinery and equipment 1,337.6 1,285.0
Construction in progress 59.6 45.0
-------- --------
1,747.5 1,680.3
Accumulated depreciation 637.9 547.1
-------- --------
Property, plant, and equipment - net $1,109.6 $1,133.2
======== ========
4. Long-Term Debt
- ------------------
Long-term debt and its maturity schedule are as follows:
December 31,
2001 --------------
and 1995 1994
1996 1997 1998 1999 2000 After Total Total
- -----------------------------------------------------------------------------------------------------------
1994 Credit Agreement (9.00% at December 31,
1995 $ 13.1 $ 13.1 $ 6.7
9-7/8% Senior Notes, net $223.8 223.8 223.6
Pollution Control and Solid Waste Disposal
Facilities Obligations (6.00% - 7.75%) $ 1.2 $ 1.3 $ 1.4 .2 $ .2 32.6 36.9 38.1
Alpart CARIFA Loan (fixed and variable rates) 60.0 60.0 60.0
Alpart Term Loan (8.95%) 6.3 6.2 12.5 18.7
12-3/4% Senior Subordinated Notes 400.0 400.0 400.0
Other borrowings (fixed and variable rates) 1.4 1.4 7.7 .3 .2 .8 11.8 15.5
------ ------ ------ ------ ------ ------ ------ ------
Total $ 8.9 $ 8.9 $ 9.1 $ 13.6 $ .4 $717.2 758.1 762.6
====== ====== ====== ====== ====== ======
Less current portion 8.9 11.5
------ ------
Long-term debt $749.2 $751.1
====== ======
1994 Credit Agreement
On February 17, 1994, the Company and KACC entered into a credit
agreement with BankAmerica Business Credit, Inc. and certain other
lenders (as amended, the "1994 Credit Agreement"). The 1994 Credit
Agreement consists of a $325.0 five-year secured, revolving line of
credit, scheduled to mature in 1999. KACC is able to borrow under the
facility by means of revolving credit advances and letters of credit
(up to $125.0) in an aggregate amount equal to the lesser of $325.0 or
a borrowing base relating to eligible accounts receivable 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 previous credit agreement. As of December 31, 1995,
$259.3 (of which $72.4 could have been used for letters of credit) was
available to KACC under the 1994 Credit Agreement. The 1994 Credit
Agreement is unconditionally guaranteed by the Company and by certain
significant subsidiaries of KACC. Loans under the 1994 Credit
Agreement bear interest at a rate per annum, at KACC'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
37
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
test, determined quarterly. As of December 31, 1995, the financial
test permitted a reduction of 1-1/2% per annum in margins effective
January 1, 1996.
The 1994 Credit Agreement requires KACC to maintain certain financial
covenants and places restrictions on the Company's and KACC's ability
to, among other things, incur debt and liens, make investments, pay
dividends, undertake transactions with affiliates, make capital
expenditures, and enter into unrelated lines of business. Neither the
Company nor KACC currently is permitted to pay dividends on its common
stock. The 1994 Credit Agreement is secured by, among other things,
(i) mortgages on KACC'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 KACC and certain of its
subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser;
and (iv) pledges of all of the stock of a number of KACC's wholly
owned domestic subsidiaries, pledges of a portion of the stock of
certain foreign subsidiaries, and pledges of a portion of the stock of
certain partially owned foreign affiliates.
Senior Notes
Concurrent with the offering by the Company of its 8.255% PRIDES,
Convertible Preferred Stock (the "PRIDES") (see Note 7), KACC 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.
Gramercy Solid Waste Disposal Revenue Bonds
In December 1992, KACC 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 KACC'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, 1995, $3.8 remained
in the construction fund. The Sale Agreement requires KACC 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. Substantially all of the Series A bonds
bear interest at a floating rate of 87% of the applicable LIBID Rate
(LIBOR less 1/8 of 1%). 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 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).
38
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Senior Subordinated Notes
On February 1, 1993, KACC issued $400.0 of its 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.
The obligations of KACC with respect to the Senior Notes and the
12-3/4% Notes are guaranteed, jointly and severally, by certain
subsidiaries of KACC. The indentures governing the Senior Notes and
the 12-3/4% Notes (the "Indentures") restrict, among other things,
KACC's ability, and the 1994 Credit Agreement restricts, among other
things, Kaiser's and KACC's ability, to incur debt, undertake
transactions with affiliates, and pay dividends. Further, the
Indentures provide that KACC must offer to purchase the Senior Notes
and the 12-3/4% Notes, respectively, upon the occurrence of a Change
of Control (as defined therein), and the 1994 Credit Agreement
provides that the occurrence of a Change in Control (as defined
therein) shall constitute an Event of Default thereunder.
Capitalized Interest
Interest capitalized in 1995, 1994, and 1993 was $2.8, $2.7, and $3.4,
respectively.
Restricted Net Assets of Subsidiary
Certain debt instruments restrict the ability of KACC to transfer
assets, make loans and advances, and pay dividends to the Company. The
restricted net assets of KACC totaled $24.0 at December 31, 1995.
5. 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,
---------------------------
1995 1994 1993
- -------------------------------------------------------------------
Domestic $ (55.9) $(168.4) $(232.0)
Foreign 158.5 16.3 23.5
------- ------- -------
Total $ 102.6 $(152.1) $(208.5)
======= ======= =======
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.
39
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
The (provision) credit 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
- -------------------------------------------------------------------
1995 Current $ (4.3) $ (40.2) $ (.1) $ (44.6)
Deferred 15.2 (4.9) (2.9) 7.4
------- ------- ------- -------
Total $ 10.9 $ (45.1) $ (3.0) $ (37.2)
======= ======= ======= =======
1994 Current $ (18.0) $ (.1) $ (18.1)
Deferred $ 71.2 .6 .1 71.9
------- ------- ------- -------
Total $ 71.2 $ (17.4) $ 53.8
======= ======= ======= =======
1993 Current $ 12.6 $ (7.9) $ (.1) $ 4.6
Deferred 68.5 12.0 1.8 82.3
------- ------- ------- -------
Total $ 81.1 $ 4.1 $ 1.7 $ 86.9
======= ======= ======= =======
The 1994 federal deferred credit for income taxes of $71.2 includes
$29.3 for the benefit of operating loss carryforwards generated in
1994. The 1993 federal deferred credit for income taxes of $68.5
includes $29.2 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.
A reconciliation between the (provision) credit 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,
------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
Amount of federal income tax (provision) credit based on the statutory rate $(35.9) $ 53.2 $ 73.0
Percentage depletion 4.2 5.6 6.4
Revision of prior years' tax estimates and other changes in valuation allowances 1.5 .2 3.9
Foreign taxes, net of federal tax benefit (5.4) (5.3) (2.6)
Increase in net deferred income tax assets due to tax rate change 1.8 3.4
Other (1.6) (1.7) 2.8
------ ------ ------
(Provision) credit for income taxes $(37.2) $ 53.8 $ 86.9
====== ====== ======
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.
40
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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,
------------------
1995 1994
- ---------------------------------------------------------------------------------
Deferred income tax assets:
Postretirement benefits other than pensions $ 289.9 $ 293.7
Loss and credit carryforwards 156.1 187.6
Other liabilities 107.8 109.6
Pensions 56.0 51.0
Foreign and state deferred income tax liabilities 30.8 28.1
Property, plant, and equipment 22.9 23.1
Inventories 1.8
Other 10.7 3.5
Valuation allowances (128.5) (133.9)
------- -------
Total deferred income tax assets - net 547.5 562.7
------- -------
Deferred income tax liabilities:
Property, plant, and equipment (179.8) (203.2)
Investments in and advances to unconsolidated affiliates (66.4) (63.8)
Inventories (8.3)
Other (9.5) (6.4)
------- -------
Total deferred income tax liabilities (255.7) (281.7)
------- -------
Net deferred income tax assets $ 291.8 $ 281.0
======= =======
The valuation allowances listed above relate primarily to loss and
credit carryforwards and postretirement benefits other than pensions.
As of December 31, 1995, approximately $97.7 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, 1995, is approximately $194.1. 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.
As of December 31, 1995 and 1994, $53.5 and $37.9, respectively, of
the net deferred income tax assets listed above are included on the
Consolidated Balance Sheets in the caption entitled Prepaid expenses
and other current assets. Certain other portions of the deferred
income tax assets and liabilities listed above are included on the
Consolidated Balance Sheets in the captions entitled Other accrued
liabilities and Long-term liabilities.
41
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
The Company and its subsidiaries 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 7, the
Company and its subsidiaries are no longer included in the
consolidated federal income tax returns of MAXXAM. The Company and its
subsidiaries have become members of a new consolidated return group of
which the Company 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
"Company Tax Allocation Agreement") and the tax allocation agreement
between KACC and MAXXAM (the "KACC Tax Allocation Agreement")
(collectively, the "Tax Allocation Agreements"), terminated pursuant
to their terms, effective for taxable periods beginning after June 30,
1993. Any unused federal income tax attribute carryforwards under the
terms of the Tax Allocation Agreements 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 the New Kaiser Tax
Group, based on the provisions of the relevant consolidated return
regulations. The benefit of such tax attribute carryforwards
apportioned to the New Kaiser Tax Group approximated the benefit of
tax attribute carryforwards eliminated under the Tax Allocation
Agreements. To the extent the New Kaiser Tax Group 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 or KACC to MAXXAM for periods ending on or before
June 30, 1993, pursuant to the Tax Allocation Agreements.
KACC 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 KACC and its subsidiaries (collectively, the "Subgroup")
as if the Subgroup were a separate affiliated group of corporations
which was never connected with MAXXAM. During 1991, the Company and
MAXXAM entered into the Company Tax Allocation Agreement, which became
effective as of January 1, 1991. Under the terms of the Company Tax
Allocation Agreement, MAXXAM computed a tentative federal income tax
liability for the Company as if it and its subsidiaries, including
KACC and its subsidiaries, were a separate affiliated group of
corporations which was never connected with MAXXAM. The federal income
tax liability of the Company was the difference between the tentative
federal income tax liability and the liability computed under the KACC
Tax Allocation Agreement.
The provisions of the Tax Allocation Agreements 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 or KACC
under the terms of their respective tax allocation agreements for
these periods due to the final resolution of audits, amended returns,
and related matters. However, the 1994 Credit Agreement prohibits the
payment by KACC 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 KACC under the KACC Tax Allocation
Agreement.
42
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
The following table presents the Company's tax attributes for federal
income tax purposes as of December 31, 1995. The utilization of
certain of these tax attributes is subject to limitations:
Expiring
Through
- --------------------------------------------------------------------------
Regular tax attribute carryforwards:
Net operating losses $ 32.9 2007
General business tax credits 28.4 2008
Foreign tax credits 89.7 2000
Alternative minimum tax credits 19.4 Indefinite
Alternative minimum tax attribute carryforwards:
Net operating losses $ 17.1 2002
Foreign tax credits 83.5 2000
6. 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.
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 (1)
December 31,
-------------------------
1995 1994
- --------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation:
Vested employees $ 753.0 $ 663.9
Nonvested employees 28.7 41.1
------- -------
Accumulated benefit obligation 781.7 705.0
Additional amounts related to projected salary increases 34.2 30.0
------- -------
Projected benefit obligation 815.9 735.0
Plan assets (principally common stocks and fixed income obligations) at fair value (592.3) (524.6)
------- -------
Plan assets less than projected benefit obligation 223.6 210.4
Unrecognized net losses (54.7) (42.5)
Unrecognized net obligations (.5) (.8)
Unrecognized prior-service cost (28.2) (30.9)
Adjustment required to recognize minimum liability 49.8 42.9
------- -------
Accrued pension obligation included in the Consolidated Balance Sheets
(principally in Long-term liabilities) $ 190.0 $ 179.1
======= =======
(1) Includes plans with assets exceeding accumulated benefits by
approximately $.1 and $.3 in 1995 and 1994, respectively.
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 $(4.7) and $12.5 at December 31, 1995
and 1994, respectively, for the reduction (excess) of the minimum
liability over the unrecognized net obligation and prior-service cost.
These amounts
43
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
were recorded net of the related income tax (provision) credit of $2.8
and $(7.3) as of December 31, 1995 and 1994, respectively, which
approximated the federal and state statutory rates.
The components of net periodic pension cost are:
Year Ended December 31,
---------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------
Service cost - benefits earned during the period $ 10.0 $ 11.2 $ 10.8
Interest cost on projected benefit obligation 59.8 57.3 59.2
Return on assets:
Actual gain (112.2) (.8) (70.3)
Deferred gain (loss) 64.6 (53.0) 15.9
Net amortization and deferral 4.2 4.1 2.3
------- ------- -------
Net periodic pension cost $ 26.4 $ 18.8 $ 17.9
======= ======= =======
Assumptions used to value obligations at year-end, and to determine
the net periodic pension cost in the subsequent year are:
1995 1994 1993
- ------------------------------------------------------------------------
Discount rate 7.5% 8.5% 7.5%
Expected long-term rate of return on assets 9.5% 9.5% 10.0%
Rate of increase in compensation levels 5.0% 5.0% 5.0%
Postretirement Benefits Other Than Pensions
The Company and its subsidiaries provide postretirement health care
and life insurance benefits to eligible retired employees and their
dependents. Substantially all employees may become eligible for those
benefits if they reach retirement age while still working for the
Company or its subsidiaries. These benefits are provided through
contracts with various insurance carriers. The Company has not funded
the liability for these benefits, which are expected to be paid out of
cash generated by operations. The Company adopted SFAS 106 to account
for Postretirement benefits other than pensions as of January 1, 1993,
as discussed in Note 1.
In 1995, the Company adopted the Kaiser Aluminum Medicare Program
("KAMP"). KAMP is mandatory for all salaried retirees over 65 and for
USWA retirees who retire after December 31, 1995, when they become 65,
and voluntary for other hourly retirees of the Company's operations in
the states of California, Louisiana, and Washington. The USWA
contract, ratified on February 28, 1995, also contained changes to the
retiree health benefits. These changes included increased retirees'
copayments, deductibles, and coinsurance, and restricted Medicare Part
B premium reimbursement to the 1995 level for employees retiring after
November 1, 1994. These changes will lower the Company's expenses for
retiree medical care.
44
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
The Company's accrued postretirement benefit obligation is composed of
the following:
December 31,
----------------
1995 1994
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $557.6 $566.2
Active employees eligible for postretirement benefits 30.7 30.2
Active employees not eligible for postretirement benefits 61.1 98.7
------ ------
Accumulated postretirement benefit obligation 649.4 695.1
Unrecognized net gains 20.5 55.0
Unrecognized gains related to prior-service costs 110.9 31.8
------ ------
Accrued postretirement benefit obligation $780.8 $781.9
====== ======
The components of net periodic postretirement benefit cost are:
Year Ended December 31,
--------------------------
1995 1994 1993
- ----------------------------------------------------------------------------
Service cost $ 4.5 $ 8.2 $ 7.1
Interest cost 52.3 56.9 58.5
Amortization of prior service cost (8.9) (3.2)
------ ------ ------
Net periodic postretirement benefit cost $ 47.9 $ 61.9 $ 65.6
====== ====== ======
The 1996 annual assumed rates of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) are 8.0% and
7.5% for retirees under 65 and over 65, respectively, and are assumed
to decrease gradually to 5.0% 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, 1995, by
approximately $68.7 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1995 by
approximately $7.8. The weighted average discount rate used to
determine the accumulated postretirement benefit obligation at
December 31, 1995 and 1994, was 7.5% and 8.5%, respectively.
Postemployment Benefits
The Company provides certain benefits to former or inactive employees
after employment but before retirement. The Company adopted SFAS 112
to account for postemployment benefits as of January 1, 1993, as
discussed in Note 1.
Incentive Plans
Effective January 1, 1989, the Company and KACC adopted an unfunded
Long-Term Incentive Plan (the "LTIP") for certain key employees of the
Company, KACC, 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 544,839 shares were available
to be awarded at December 31, 1995. 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
45
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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
generally will vest at the rate of 20-25% per year. Information
relating to nonqualified stock options is shown below:
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,119,680 664,400
Granted 494,800 664,400
Exercised (at $7.25 and $9.75 per share) (155,500) (6,920)
Expired or forfeited (38,095) (32,600)
--------- --------- -------
Outstanding at end of year (prices ranging from $7.25 to $12.75 per share) 926,085 1,119,680 664,400
========= ========= =======
Exercisable at end of year 211,755 120,180
========= =========
In 1995, the Company adopted the Kaiser Aluminum Total Compensation
System, an unfunded incentive compensation program. The program
provides incentive pay based on performance against plan over a three-
year period. KACC 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 $11.9, $6.1, and $5.3
for the years ended December 31, 1995, 1994, and 1993, respectively.
46
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
7. Stockholders' Equity and Minority Interests
- -----------------------------------------------
Changes in stockholders' equity and minority interests were:
Minority Interests Stockholders' Equity
------------------- -----------------------------------------------
Retained
Earnings Additional
Redeemable (Accu- Minimum
Preference Preferred Common Additional mulated Pension
Stock Other Stock Stock Capital Deficit) Liability
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 $ 32.8 $ 72.1 $ .6 $288.5 $ 282.8 $ (6.7)
Net loss (652.2)
Redeemable preference stock:
Accretion 4.8
Stock redemption (4.0)
Conversions (1,967 preference shares into cash) (.2)
Common stock issued 3.3
Preferred stock issued $ .2 134.1
Dividends on preferred stock (6.3)
Minority interest in majority-owned subsidiaries (.5)
Additional minimum pension liability (14.9)
------ ------ ----- ----- ----- ------- ------
BALANCE, DECEMBER 31, 1993 33.6 71.4 .2 .6 425.9 (375.7) (21.6)
Net loss (106.8)
Redeemable preference stock:
Accretion 4.0
Stock redemption (8.5)
Common stock issued 2.2
Preferred stock issued .4 99.7
Dividends on preferred stock (20.1)
Minority interest in majority-owned subsidiaries 15.7
Reduction of minimum pension liability 12.5
------ ------ ----- ----- ----- ------- ------
BALANCE, DECEMBER 31, 1994 29.1 87.1 .6 .6 527.8 (502.6) (9.1)
Net income 60.3
Redeemable preference stock:
Accretion 3.9
Stock redemption (8.7)
Stock repurchase 5.4
Conversions (1,222 preference shares into cash) (.1)
Common stock issued upon redemption and
conversion of preferred stock (.2) .1 1.1
Dividends on preferred stock (17.6)
Minority interest in majority-owned subsidiaries 6.0
Incentive plans accretion 1.4
Additional minimum pension liability (4.7)
------ ------ ----- ----- ----- ------- ------
BALANCE, DECEMBER 31, 1995 $ 29.7 $ 93.0 $ .4 $ .7 $530.3 $(459.9) $(13.8)
====== ====== ===== ===== ====== ======= ======
47
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Redeemable Preference Stock
In March 1985, KACC entered into a three-year agreement with the 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." 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.
1995 1994 1993
- ------------------------------------------------------------------------
Shares:
Beginning of year 912,167 1,081,548 1,163,221
Redeemed (174,804) (169,381) (81,673)
-------- --------- ---------
End of year 737,363 912,167 1,081,548
======== ========= =========
No additional Series A or B Stock will be issued. 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 KACC on or after March 1, 1991, in
respect to years commencing January 1, 1990, based on a formula tied
to KACC's income before tax from aluminum operations. When distributed
to plan participants (generally upon separation from KACC), 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 KACC 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 1994 and 1995, KACC contributed $4.3 for
each of the years 1993 and 1994, and will contribute $4.3 in March
1996 for 1995.
Under the USWA labor contract effective November 1, 1994, KACC 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. KACC also agreed to offer to purchase up to an
additional 80 shares from each participant in 1998. In addition, a
profitability test was satisfied for 1995; therefore, KACC 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 1996. The employees could elect
to receive their shares, accept cash, or place the proceeds into
KACC's 401(k) savings plan. KACC will provide comparable purchases of
Series B Stock from active participants.
The Series A and B Stock is distributed in the event of death,
retirement, or in other specified circumstances. KACC 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, KACC 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 KACC to make such installment payments must be secured.
48
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
The Series A and B Stock is entitled to the same voting rights as KACC
common stock and to certain additional voting rights under certain
circumstances, including the right to elect, along with other KACC
preference stockholders, two directors whenever accrued dividends have
not been paid on two annual dividend payment dates or when accrued
dividends in an amount equivalent to six full quarterly dividends are in
arrears. The Series A and B Stock restricts the ability of KACC to
redeem or pay dividends on common stock if KACC is in default on any
dividends payable on the Series A and B Stock.
Preference Stock
KACC Cumulative Convertible Preference Stock, $100 par value ("$100
Preference Stock"), restricts acquisition of junior stock and payment
of dividends. At December 31, 1995, such provisions were less
restrictive as to the payment of cash dividends than the 1994 Credit
Agreement provisions. KACC has the option to redeem the $100
Preference Stocks at par value plus accrued dividends. KACC 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. KACC 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 KACC preference stock
were:
December 31,
---------------
1995 1994
- -----------------------------------------------------------------
4-1/8% 3,237 3,657
4-3/4% (1957 Series) 2,342 2,605
4-3/4% (1959 Series) 13,162 13,534
4-3/4% (1966 Series) 3,473 3,640
Preferred Stock
Series A Convertible - In 1993, Kaiser issued 19,382,950 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"). On September 19, 1995, the
Company redeemed all 1,938,295 Series A Shares, which resulted in the
simultaneous redemption of all Depositary Shares in exchange for (i)
13,126,521 shares of the Company's common stock and (ii) $2.8 in cash
comprised of (a) an amount equal to all accrued and unpaid dividends
up to and including the day immediately prior to redemption date and
(b) cash in lieu of any fractional shares of common stock that would
have otherwise been issuable.
PRIDES Convertible - In the first quarter of 1994, the Company
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. The Company used such net proceeds to make non-interest-
bearing loans to KACC 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 the
Company's common stock), evidenced by intercompany notes, and used the
balance of such net proceeds to make capital contributions to KACC in
the aggregate amount of $66.9.
Holders of shares of PRIDES are entitled to receive (when, as, and if
the Board of Directors declares dividends on the PRIDES) cumulative
preferential cash dividends at a rate per annum of 8.255% of the per
share offering price (equivalent to $.97 per annum for each share of
PRIDES), from the date of initial issuance, payable quarterly in
arrears on the last day of March, June, September, and December of
each year. Holders of shares of PRIDES have a 4/5 vote for each share
held of record and, except as required by law, are entitled to vote
together with the holders of common stock and together with
49
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
the holders of any other classes or series of stock who are entitled
to vote in such manner on all matters submitted to a vote of common
stockholders.
On December 31, 1997, unless either previously redeemed or converted
at the option of the holder, each of the outstanding shares of PRIDES
will mandatorily convert into one share of the Company's common stock,
subject to adjustment in certain events, and the right to receive an
amount in cash equal to all accrued and unpaid dividends thereon
(other than previously declared dividends payable to a holder of
record on a prior date).
Shares of PRIDES are not redeemable, at the election of the Company,
prior to December 31, 1996. At any time and from time to time on or
after December 31, 1996, the Company may redeem any or all of the
outstanding shares of PRIDES. Upon any such redemption, each holder
will receive, in exchange for each share of PRIDES, the number of
shares of common stock equal to (A) the sum of $11.9925, declining
after December 31, 1996, to $11.75 until December 31, 1997, plus, in
the event the Company does not elect to pay cash dividends to the
redemption date, all accrued and unpaid dividends thereon divided by
(B) the Current Market Price (as defined) on the applicable date of
determination, but in no event less than .8333 of a share of common
stock, subject to adjustment in certain events. At any time prior to
December 31, 1997, unless previously redeemed, each share of PRIDES is
convertible at the option of the holder thereof into .8333 of a share
of common stock (equivalent to a conversion price of $14.10 per share
of common stock), subject to adjustment in certain events. The number
of shares of common stock a holder will receive upon redemption, and
the value of the shares received upon conversion, will vary depending
on the market price of the common stock from time to time.
Dividends on Common Stock
The indentures governing the Senior Notes and the 12-3/4% Notes
restrict, among other things, KACC's ability, and the 1994 Credit
Agreement restricts, among other things, Kaiser's and KACC's ability,
to incur debt, undertake transactions with affiliates, and pay
dividends. Under the most restrictive of these covenants, neither the
Company nor KACC currently is permitted to pay dividends on its common
stock.
At December 31, 1995, 28,000,000 shares of the Company's common stock
owned by MAXXAM were pledged as security for debt of a wholly owned
subsidiary of MAXXAM, consisting of $100.0 aggregate principal amount of
11-1/4% Senior Secured Notes due 2003 and $125.7 aggregate principal
amount of 12-1/4% Senior Secured Discount Notes due 2003.
Proposed Recapitalization
On February 5, 1996, the Company announced that it filed with the SEC
a preliminary proxy statement relating to a proposed recapitalization
and a special meeting of stockholders to consider and vote upon the
proposal. The proposed recapitalization would: (i) provide for two
classes of common stock: Class A Common Shares, $.01 par value, with
one vote per share and a new lesser-voting class designated as Common
Stock, $.01 par value, with 1/10 vote per share; (ii) redesignate as
Class A Common Shares the 100 million currently authorized shares of
existing common stock and authorize an additional 250 million shares
to be designated as Common Stock; and (iii) change each issued share
of the Company's existing common stock, par value $.01 per share, into
(a) .33 of a Class A Common Share and (b) .67 of a share of Common Stock.
The Company would pay cash in lieu of fractional shares. The Company
anticipates that both the Class A Common Shares and the Common Stock will
be approved for trading on the New York Stock Exchange. Upon the effective
date of the recapitalization, approximately 23,640,000 Class A Common
Shares and 47,998,000 shares of Common Stock would be issued and
outstanding. The proportionate voting power of the holders of the PRIDES
will increase immediately after the effectiveness of the recapitalization
until such shares are redeemed or converted, which will occur on or before
December 31, 1997. As of January 31, 1996, holders of the existing
common stock and the PRIDES had 91.2% and 8.8%, respectively, of the
total voting power of all stockholders. Immediately after the
recapitalization, the
50
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
voting power of such holders of the PRIDES will increase to 19.6% in
the aggregate, with a corresponding reduction in the voting power of
such holders of the existing common stock. At such time as the PRIDES
are redeemed or converted, the relative voting power of such holders
of the PRIDES will decrease and the voting power for both such holders
of the PRIDES and the existing common stock will be approximately the
same as it would have been had the recapitalization not occurred.
8. Commitments and Contingencies
- ---------------------------------
Commitments
KACC has financial commitments, including purchase agreements, tolling
arrangements, forward foreign exchange and forward sales contracts
(see Note 9), 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, KACC 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, 1995, is
$88.9, of which $26.7 is due in 1997 and the rest is due in 2002. The
KACC share of payments, including operating costs and certain other
expenses under the agreement, was $77.5, $85.6, and $86.7 for the
years ended December 31, 1995, 1994, and 1993, respectively. KACC also
has agreements to supply alumina to and to purchase aluminum from
Anglesey.
Minimum rental commitments under operating leases at December 31,
1995, are as follows: years ending December 31, 1996 - $22.7; 1997 -
$21.6; 1998 - $24.6; 1999 - $29.7; 2000 - $27.3; thereafter - $187.0.
The future minimum rentals receivable under noncancelable subleases
was $67.0 at December 31, 1995.
Rental expenses were $29.0, $26.8, and $29.0 for the years ended
December 31, 1995, 1994, and 1993, respectively.
Environmental Contingencies
The Company and KACC are subject to a number of environmental laws, to
fines or penalties assessed for alleged breaches of the environmental
laws, and to claims and litigation based upon such laws. KACC
currently is subject to a number of lawsuits under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund Amendments Reauthorization Act of 1986
("CERCLA"), and, along with certain other entities, has been named as
a potentially responsible party for remedial costs at certain third-
party sites listed on the National Priorities List under CERCLA.
Based on the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals, primarily
related to potential solid waste disposal and soil and groundwater
remediation matters. The following table presents the changes in such
accruals, which are primarily included in Long-term liabilities, for
the years ended December 31, 1995, 1994, and 1993:
1995 1994 1993
- ------------------------------------------------------------------
Balance at beginning of period $ 40.1 $ 40.9 $ 46.4
Additional amounts 3.3 2.8 1.7
Less expenditures (4.5) (3.6) (7.2)
------ ------ ------
Balance at end of period $ 38.9 $ 40.1 $ 40.9
====== ====== ======
51
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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 $9.0 for the
years 1996 through 2000 and an aggregate of approximately $10.0
thereafter.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are
established or alternative technologies are developed, changes in
these and other factors may result in actual costs exceeding the
current environmental accruals. The Company believes that it is
reasonably possible that costs associated with these environmental
matters may exceed current accruals by amounts that could range, in
the aggregate, up to an estimated $23.0 and that the factors upon
which a substantial portion of this estimate is based are expected to
be resolved over the next twelve months. While uncertainties are
inherent in the final outcome of these environmental matters, and it
is presently impossible to determine the actual costs that ultimately
may be incurred, management currently believes that the resolution of
such uncertainties should not have a material adverse effect on the
Company's consolidated financial position, results of operations, or
liquidity.
Asbestos Contingencies
KACC is a defendant in a number of lawsuits, some of which involve
claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure
to asbestos during, and as a result of, their employment or
association with KACC or exposure to products containing asbestos
produced or sold by KACC. The lawsuits generally relate to products
KACC has not manufactured for at least 15 years.
The following table presents the changes in number of such claims
pending for the years ended December 31, 1995, 1994, and 1993.
1995 1994 1993
- --------------------------------------------------------------------------
Number of claims at beginning of period 25,200 23,400 13,500
Claims received 41,700 14,300 11,400
Claims settled or dismissed (7,200) (12,500) (1,500)
------ ------- ------
Number of claims at end of period 59,700 25,200 23,400
====== ======= ======
KACC has been advised by its regional counsel that, although there can
be no assurance, the recent increase in pending claims may be
attributable in part to tort reform legislation in Texas which was
passed by the legislature in March 1995 and which became effective on
September 1, 1995. The legislation, among other things, is designed to
restrict, beginning September 1, 1995, the filing of cases in Texas
that do not have a sufficient nexus to that jurisdiction, and to
impose, generally as of September 1, 1996, limitations relating to
joint and several liability in tort cases. A substantial portion of
the asbestos-related claims that were filed and served on KACC between
June 30, 1995, and November 30, 1995, were filed in Texas prior to
September 1, 1995.
Based on past experience and reasonably anticipated future activity,
the Company has established an accrual for estimated asbestos-related
costs for claims filed and estimated to be filed and settled through
2008. There are inherent uncertainties involved in estimating
asbestos-related costs, and the Company's actual costs could exceed
these estimates. The Company's accrual was calculated based on the
current and anticipated number of asbestos-related claims, the prior
timing and amounts of asbestos-related payments, and the advice of
Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to the
current state of the law related to asbestos claims. Accordingly, an
asbestos-related cost accrual of $160.1, before
52
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
consideration of insurance recoveries, is included primarily in Long-term
liabilities at December 31, 1995. The Company estimates that annual
future cash payments in connection with such litigation will be
approximately $13.0 to $20.0 for each of the years 1996 through 2000,
and an aggregate of approximately $78.0 thereafter through 2008. While
the Company does not presently believe there is a reasonable basis for
estimating such costs beyond 2008 and, accordingly, no accrual has been
recorded for such costs which may be incurred beyond 2008, there is a
reasonable possibility that such costs may continue beyond 2008, and
such costs may be substantial.
The Company believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs. Claims
for recovery from some of KACC's insurance carriers are currently
subject to pending litigation and other carriers have raised certain
defenses, which have resulted in delays in recovering costs from the
insurance carriers. The timing and amount of ultimate recoveries from
these insurance carriers are dependent upon the resolution of these
disputes. The Company believes, based on prior insurance-related
recoveries in respect of asbestos-related claims, existing insurance
policies, and the advice of Thelen, Marrin, Johnson & Bridges with
respect to applicable insurance coverage law relating to the terms and
conditions of those policies, that substantial recoveries from the
insurance carriers are probable. Accordingly, an estimated aggregate
insurance recovery of $137.9, determined on the same basis as the
asbestos-related cost accrual, is recorded primarily in Other assets
at December 31, 1995.
While uncertainties are inherent in the final outcome of these
asbestos matters and it is presently impossible to determine the
actual costs that ultimately may be incurred and insurance recoveries
that will be received, management currently believes that, based on
the factors discussed in the preceding paragraphs, the resolution of
asbestos-related uncertainties and the incurrence of asbestos-related
costs net of related insurance recoveries should not have a material
adverse effect on the Company's consolidated financial position,
results of operations, or liquidity.
Other Contingencies
The Company or KACC is involved in various other claims, lawsuits, and
other proceedings relating to a wide variety of matters. While
uncertainties are inherent in the final outcome of such matters, and
it is presently impossible to determine the actual costs that
ultimately may be incurred, management currently believes that the
resolution of such uncertainties and the incurrence of such costs
should not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.
9. Derivative Financial Instruments and Related Hedging Programs
- -----------------------------------------------------------------
KACC enters into a number of financial instruments 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.
KACC 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 KACC to
certain exchange rate risks. In order to mitigate its exposure, KACC
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, 1995, KACC had net forward foreign exchange
contracts totaling approximately $102.8 for the purchase of 142.4
Australian dollars through April 30, 1997.
53
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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, KACC 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 KACC's
price risk management strategy, which can be modified at any time,
(i) varying quantities of KACC's anticipated production are sold forward
at fixed prices; (ii) call options are purchased to allow KACC to
participate in certain higher market prices, should they materialize,
for a portion of KACC's primary aluminum and alumina sold forward;
(iii) option contracts are entered into to establish a price range
KACC will receive for a portion of its primary aluminum and alumina;
and (iv) put options are purchased to establish minimum prices KACC
will receive for a portion of its primary aluminum and alumina. In
this regard, in respect of its 1996 anticipated production, as of
December 31, 1995, KACC had sold forward 15,750 metric tons of primary
aluminum at fixed prices.
In addition, KACC 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, KACC may enter into forward and option
contracts. In this regard, at December 31, 1995 KACC had purchased
53,300 metric tons of primary aluminum under forward purchase
contracts at fixed prices that expire at various times through
December 1996.
At December 31, 1995, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average price
of $1,721 per metric ton ($.78 per pound) of aluminum, and forward
foreign exchange contracts was $4.1.
KACC is exposed to credit risk in the event of non-performance by
other parties to these currency and commodity contracts, but KACC does
not anticipate non-performance by any of these counterparties, given
their creditworthiness. When appropriate, KACC arranges master netting
agreements.
10. 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 $5.3, $.8, and $4.9 for the years ended December 31, 1995, 1994,
and 1993, respectively.
Sales of more than 10% of total revenue to a single customer were nil
in 1995 and were $58.2 and $40.7 of bauxite and alumina and $147.7 and
$145.7 of aluminum processing for the years ended December 31, 1994,
and 1993, respectively.
Export sales were less than 10% of total revenue during the years
ended December 31, 1995, 1994, and 1993, respectively.
54
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
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 1995 $1,589.5 $ 191.7 $ 239.4 $ 217.2 $2,237.8
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
Sales and transfers among 1995 $ 79.6 $ 191.5 $(271.1)
geographic areas 1994 98.7 139.4 (238.1)
1993 88.2 79.6 (167.8)
Equity in income (losses) of 1995 $ (.2) $ 19.4 $ 19.2
unconsolidated affiliates 1994 .2 (2.1) (1.9)
1993 (3.3) (3.3)
Operating income (loss) 1995 $ 32.0 $ 9.8 $ 83.5 $ 85.3 $ 210.6
1994 (128.8) 9.9 18.3 44.4 (56.2)
1993 (145.9) (11.8) 21.9 12.4 (123.4)
Investment in and advances to 1995 $ 1.2 $ 27.1 $ 149.9 $ 178.2
unconsolidated affiliates 1994 1.2 28.8 139.7 169.7
Identifiable assets 1995 $2,017.9 $ 381.9 $ 196.5 $ 216.9 $2,813.2
1994 1,933.8 364.8 200.0 199.5 2,698.1
55
KAISER ALUMINUM 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, 1995 and
1994, and for the years ended December 31, 1995, 1994, and 1993, is as follows:
Year Ended Bauxite & Aluminum
December 31, Alumina Processing Corporate Total
- ---------------------------------------------------------------------------------------------------
Net sales to unaffiliated customers 1995 $514.2 $1,723.6 $2,237.8
1994 432.5 1,349.0 1,781.5
1993 423.4 1,295.7 1,719.1
Intersegment sales 1995 $159.7 $ 159.7
1994 146.8 146.8
1993 129.4 129.4
Equity in income (losses) of 1995 $ 3.6 $ 15.8 $ (.2) $ 19.2
unconsolidated affiliates 1994 (4.7) 2.6 .2 (1.9)
1993 (2.5) (.8) (3.3)
Operating income (loss) 1995 $ 54.0 $ 238.9 $ (82.3) $ 210.6
1994 19.8 (8.4) (67.6) (56.2)
1993 (4.5) (46.3) (72.6) (123.4)
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 1995 $ 31.1 $ 60.4 $ 2.8 $ 94.3
1994 33.5 59.1 2.8 95.4
1993 35.3 59.9 1.9 97.1
Capital expenditures 1995 $ 27.3 $ 44.0 $ 8.1 $ 79.4
1994 28.9 39.9 1.2 70.0
1993 35.3 31.2 1.2 67.7
Investment in and advances to 1995 $129.9 $ 47.1 $ 1.2 $ 178.2
unconsolidated affiliates 1994 136.6 31.9 1.2 169.7
Identifiable assets 1995 $746.0 $1,341.2 $ 726.0 $2,813.2
1994 749.6 1,242.3 706.2 2,698.1
56
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
FIVE-YEAR FINANCIAL DATA
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------------------------------
(In millions of dollars) 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 21.9 $ 17.6 $ 14.7 $ 19.1 $ 15.8
Receivables 308.6 199.2 234.7 270.0 218.8
Inventories 525.7 468.0 426.9 439.9 498.6
Prepaid expenses and other current assets 76.6 158.0 60.7 37.0 84.0
-------- -------- -------- ------- --------
Total current assets 932.8 842.8 737.0 766.0 817.2
Investments in and advances to unconsolidated affiliates 178.2 169.7 183.2 150.1 161.9
Property, plant, and equipment - net 1,109.6 1,133.2 1,163.7 1,066.8 1,014.5
Deferred income taxes 269.1 271.2 210.8
Other assets 323.5 281.2 233.2 189.7 140.5
-------- -------- -------- -------- --------
Total $2,813.2 $2,698.1 $2,527.9 $2,172.6 $2,134.1
======== ======== ======== ======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accruals $ 451.2 $ 439.3 $ 339.7 $ 351.4 $ 461.6
Accrued postretirement medical benefit obligation -
current portion 46.8 47.0 47.6
Payable to affiliates 94.2 85.3 62.4 78.4 87.1
Long-term debt - current portion 8.9 11.5 8.7 25.9 26.3
-------- -------- -------- -------- --------
Total current liabilities 601.1 583.1 458.4 455.7 575.0
Long-term liabilities 548.5 495.5 501.8 281.7 212.9
Accrued postretirement medical benefit obligation 734.0 734.9 713.1
Long-term debt 749.2 751.1 720.2 765.1 681.5
Minority interests 122.7 116.2 105.0 104.9 108.9
Stockholders' equity:
Preferred stock .4 .6 .2
Common stock .7 .6 .6 .6 .6
Additional capital 530.3 527.8 425.9 288.5 287.9
Retained earnings (accumulated deficit) (459.9) (502.6) (375.7) 282.8 267.3
Additional minimum pension liability (13.8) (9.1) (21.6) (6.7)
-------- -------- -------- -------- --------
Total stockholders' equity 57.7 17.3 29.4 565.2 555.8
-------- -------- -------- -------- --------
Total $2,813.2 $2,698.1 $2,527.9 $2,172.6 $2,134.1
======== ======== ======== ======== ========
Debt-to-capital ratio(1) 78.1 82.4 81.3 54.1 51.5
(1) Total long-term debt - current portion and long-term debt
("debt") as a ratio of total debt, deferred income tax
liabilities, minority interests, and stockholders' equity.
57
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
FIVE-YEAR FINANCIAL DATA
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
Year Ended December 31,
------------------------------------------------------
(In millions of dollars, except share amounts) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
Net sales $2,237.8 $1,781.5 $1,719.1 $1,909.1 $2,000.8
-------- -------- -------- -------- --------
Costs and expenses:
Cost of products sold 1,798.4 1,625.5 1,587.7 1,619.3 1,594.2
Depreciation 94.3 95.4 97.1 80.3 73.2
Selling, administrative, research and development,
and general 134.5 116.8 121.9 119.6 117.4
Restructuring of operations 35.8
-------- -------- -------- -------- --------
Total costs and expenses 2,027.2 1,837.7 1,842.5 1,819.2 1,784.8
-------- -------- -------- -------- --------
Operating income (loss) 210.6 (56.2) (123.4) 89.9 216.0
Other income (expense):
Interest expense (93.9) (88.6) (84.2) (78.7) (93.9)
Other - net (14.1) (7.3) (.9) 20.9 20.3
-------- -------- -------- -------- --------
Income (loss) before income taxes, minority interests,
extraordinary loss, and cumulative effect of changes
in accounting principles 102.6 (152.1) (208.5) 32.1 142.4
(Provision) credit for income taxes (37.2) 53.8 86.9 (5.3) (32.4)
Minority interests (5.1) (3.1) (1.5) .1 (1.6)
-------- -------- -------- -------- --------
Income (loss) before extraordinary loss and cumulative
effect of changes in accounting principles 60.3 (101.4) (123.1) 26.9 108.4
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 (507.3)
-------- -------- -------- -------- --------
Net income (loss) $ 60.3 $ (106.8) $ (652.2) $ 26.9 $ 108.4
======== ======== ======== ======== ========
Per common and common equivalent share:
Net income (loss):
Primary $ .69 $ (2.18) $ (11.47) $ .47 $ 2.03
Fully diluted .72
Dividends declared .20 1.10
58
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended
-------------------------------------------------
(In millions of dollars, except share amounts) March 31 June 30 September 30 December 31,
- --------------------------------------------------------------------------------------------------------------
1995
Net sales $ 513.0 $ 583.4 $ 550.3 $ 591.1
Operating income 32.6 63.6 53.2 61.2
Net income 3.5 23.3 12.5 21.0
Earnings (loss) per common and common equivalent share:
Primary (.03)(1) .31 .13 .26
Fully diluted .14
Common stock market price:
High 11-7/8 14 21 15-3/4
Low 10-1/8 10-1/2 13-7/8 10-3/4
1994
Net sales $ 415.1 $ 459.5 $ 461.1 $ 445.8
Operating loss 25.6 14.2 6.9 9.5
Loss before extraordinary loss 29.3 23.6 20.8 27.7 (2)
Extraordinary loss - net 5.4
Net loss 34.7 23.6 20.8 27.7 (2)
Per common and common equivalent share:
Loss before extraordinary loss .58 .50 .45 .57
Extraordinary loss - net .09
Net loss .67 .50 .45 .57
Common stock market price:
High 12-1/2 10-1/2 11-5/8 12-3/8
Low 9 8-1/4 9-1/2 9-3/4
(1) After deduction of $5.3 dividends on preferred stock from net
income.
(2) Includes pre-tax charges of approximately $10.3, principally
related to establishing additional litigation and environmental
reserves in the fourth quarter of 1994.
59
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------------------------------------------
CORPORATE INFORMATION
KAISER ALUMINUM CORPORATION KAISER ALUMINUM & CHEMICAL CORPORATION
- --------------------------- --------------------------------------
Directors Directors
- --------- ---------
George T. Haymaker, Jr. George T. Haymaker, Jr.
Chairman and Chief Executive Officer Charles E. Hurwitz
Charles E. Hurwitz Robert J. Cruikshank
Chairman, President, and Chief Executive Officer, Ezra G. Levin
MAXXAM Inc., Robert Marcus
Chairman and Chief Executive Officer, Robert J. Petris
Federated Development Company
Robert J. Cruikshank Corporate Officers and Business Managers
Personal Investments ----------------------------------------
Ezra G. Levin George T. Haymaker, Jr.
Partner in the law firm of Kramer, Levin, Naftalis, Chairman and Chief Executive
Nessen, Kamin & Frankel Charles E. Hurwitz
Robert Marcus Vice Chairman
Former President and Chief Executive Officer, Joseph A. Bonn
Alumax Inc. Vice President, Planning and Administration
Robert J. Petris Robert E. Cole
Assistant to the International President of the Vice President, Government Affairs
United Steelworkers of America John E. Daniel
Vice President, and President of Kaiser Primary Aluminum
Products
Corporate Officers Arthur S. Donaldson
- ------------------ Controller
George T. Haymaker, Jr. Robert W. Irelan
Chairman and Chief Executive Officer Vice President, Public Relations
Joseph A. Bonn John T. La Duc
Vice President, Planning and Administration Vice President and Chief Financial Officer
Arthur S. Donaldson Alan G. Longmuir
Controller Vice President, Research & Development
John T. La Duc Raymond J. Milchovich
Vice President and Chief Financial Officer Vice President, and President of Kaiser Flat-Rolled
Anthony R. Pierno Products
Vice President and General Counsel James T. Owen
Karen A. Twitchell Vice President, and President of Kaiser Extruded Products
Treasurer Anthony R. Pierno
Byron L. Wade Vice President and General Counsel
Vice President, Secretary, and Deputy General Counsel Geoffrey W. Smith
Vice President, and President of Kaiser Alumina
Karen A. Twitchell
Treasurer
Kris S. Vasan
Vice President, Financial Risk Management
Byron L. Wade
Vice President, Secretary, and Deputy General Counsel
Lawrence L. Watts
Vice President, and President of Kaiser Aluminum
International
60
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
CORPORATE INFORMATION
- ----------------------------------------------------------------------
Kaiser Aluminum Corporation Auditors
- --------------------------- --------
5847 San Felipe, Suite 2600 (Zip 77057-3010) Arthur Andersen LLP
P.O. Box 572887 (Zip 77257-2887) 711 Louisiana, Suite 1300
Houston, TX Houston, TX 77002
713/267-3777
Internet at: http://www.kaiseral.com
Agents and Trustees
-------------------
Stockholder Matters The First National Bank of Boston
- ------------------- c/o Boston EquiServe
Kaiser Aluminum Corporation stock is traded on the P.O. Box 644, Mail Stop 45-02-09
New York Stock Exchange. Ticker symbols are KLU for Boston, MA 02102-0644
the Common Stock; and KLUPrD for the 8.255% 617-575-3400
PRIDES, Convertible Preferred Stock.
The Company's Annual Report on Form 10-K as filed Transfer Agent and Registrar for Kaiser
with the Securities and Exchange Commission is Aluminum Corporation Common Stock and
available, without charge, on written request. In 8.255% PRIDES, Convertible Preferred Stock
addition, a copy of the exhibits to the Form 10-K is
available upon payment of a specified fee, which fee
shall be limited to the Company's expenses in State Street Bank and Trust Company
furnishing such exhibit(s). All requests should be Corporate Trust Customer Srvice Dept.
directed to: P. O. Box 778
Boston, MA 02102
800-531-0368
Trustee for Kaiser Aluinum & Chemical Corporation
12-3/4% Senior Subordinated Notes due 2003
Kaiser Aluminum Corporation First Trust National Association
Shareholder Services 180 E. 5th Street
P.O. Box 572887 St. Paul, MN 55101
Houston, TX 77257-2887 612/244-0444
Trustee for Kaiser Aluminum & Chemical
Corporation 9-7/8% Senior Notes
This annual report is printed on recycled paper.
Additionally, the report uses vegetable-oil inks
that release fewer volatile gases into the
atmosphere than regular oil-based inks, that contain
no heavy metals, and that are not a health threat
during printing operations.
61