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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
Commission file number 1-3605
KAISER ALUMINUM & CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State of incorporation
94-0928288
(I.R.S. Employer Identification No.)
5847 SAN FELIPE, SUITE 2500, HOUSTON, TEXAS 77057-3268
(Address of principal executive offices) (Zip Code)
(713) 267-3777
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes / / No /X/
At April 30, 2002, the registrant had 46,171,365 shares of Common Stock
outstanding.
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
March 31, December 31,
2003 2002
-------------- ---------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 89.7 $ 78.7
Receivables:
Trade, less allowance for doubtful receivables of $11.0 122.2 103.1
Other 45.5 51.4
Inventories 247.5 254.9
Prepaid expenses and other current assets 33.4 33.5
-------------- ---------------
Total current assets 538.3 521.6
Investments in and advances to unconsolidated affiliates 73.4 69.7
Property, plant, and equipment - net 990.8 1,009.9
Other assets 547.5 629.2
-------------- ---------------
Total $ 2,150.0 $ 2,230.4
============== ===============
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities not subject to compromise -
Current liabilities:
Accounts payable $ 138.5 $ 129.0
Accrued interest 3.5 2.9
Accrued salaries, wages, and related expenses 43.9 46.7
Accrued postretirement medical benefit obligation - current portion 60.2 60.2
Other accrued liabilities 49.7 64.3
Payable to affiliates 31.1 28.0
Long-term debt - current portion 1.0 .9
-------------- ---------------
Total current liabilities 327.9 332.0
Long-term liabilities 83.3 86.9
Long-term debt 42.6 42.7
-------------- ---------------
453.8 461.6
Liabilities subject to compromise 2,719.8 2,726.0
Minority interests 121.5 121.1
Commitments and contingencies
Stockholders' equity (deficit):
Preference stock .7 .7
Common stock 15.4 15.4
Additional capital 2,454.4 2,454.8
Accumulated deficit (1,178.7) (1,113.6)
Accumulated other comprehensive income (loss) (245.2) (243.9)
Less: Note receivable from parent (2,191.7) (2,191.7)
-------------- ---------------
Total stockholders' equity (deficit) (1,145.1) (1,078.3)
-------------- ---------------
Total $ 2,150.0 $ 2,230.4
============== ===============
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited)
(In millions of dollars)
Quarter Ended
March 31,
--------------------------------
2003 2002
-------------- ---------------
Net sales $ 339.4 $ 370.6
-------------- ---------------
Costs and expenses:
Cost of products sold 353.3 340.2
Depreciation and amortization 19.3 22.5
Selling, administrative, research and development, and general 24.6 41.2
Non-recurring operating charges 1.3 1.6
-------------- ---------------
Total costs and expenses 398.5 405.5
-------------- ---------------
Operating loss (59.1) (34.9)
Other income (expense):
Interest expense (excluding unrecorded contractual interest expense of
$23.7 and $12.8, respectively) (2.6) (13.5)
Reorganization items (7.4) (9.6)
Other - net (1.3) 2.1
-------------- ---------------
Loss from continuing operations before income taxes, minority interests and
discontinued operations (70.4) (55.9)
Provision for income taxes (4.7) (8.0)
Minority interests 1.9 1.5
-------------- ---------------
Loss from continuing operations (73.2) (62.4)
-------------- ---------------
Discontinued operations:
Loss from operations of curtailed Tacoma facility (1.4) (1.7)
Gain from sale of Tacoma facility 9.5 -
-------------- ---------------
Income (loss) from discontinued operations 8.1 (1.7)
-------------- ---------------
Net loss $ (65.1) $ (64.1)
============== ===============
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In millions of dollars)
For the Quarter Ended March 31, 2003
Accumulated Note
Accu- Other Receivable
Preference Common Additional mulated Comprehensive From
Stock Stock Capital Deficit Income (Loss) Parent Total
- ------------------------------- ---------- --------- ---------- ---------- -------------- ----------- -----------
BALANCE, December 31, 2002 $ .7 $ 15.4 $ 2,454.8 $(1,113.6) $ (243.9) $ (2,191.7) $ (1,078.3)
Net loss - - (65.1) - - (65.1)
Unrealized net decrease in
value of derivative
instruments arising during
the period - - - (1.0) - (1.0)
Reclassification adjustment
for net realized gains on
derivative instruments
included in net loss - - - (.3) - (.3)
-----------
Comprehensive income (loss) - - - - (66.4)
Restricted stock cancellations (.6) - - - (.6)
Restricted stock accretion - .2 - - - .2
---------- --------- ---------- ---------- -------------- ----------- -----------
BALANCE, March 31, 2003 $ .7 $ 15.4 $ 2,454.4 $(1,178.7) $ (245.2) $ (2,191.7) $ (1,145.1)
========== ========= ========== ========== ============== =========== ===========
For the Quarter Ended March 31, 2002
Accumulated Note
Accu- Other Receivable
Preference Common Additional mulated Comprehensive From
Stock Stock Capital Deficit Income (Loss) Parent Total
- ------------------------------- ---------- --------- ---------- ---------- -------------- ----------- -----------
BALANCE, December 31, 2001 $ .7 $ 15.4 $ 2,437.6 $ (645.2) $ (67.3) $ (2,175.2) $ (434.0)
Net loss - - - (64.1) - - (64.1)
Unrealized net decrease in
value of derivative
instruments during the
period prior to settlement - - - - (12.1) - (12.1)
Reclassification adjustment
for net realized gains on
derivative instruments
included in net loss - - - - (8.4) - (8.4)
-----------
Comprehensive income (loss) - - - - (84.6)
Interest on note receivable
from parent - - 16.5 - - (16.5) -
Contributions for LTIP shares
and restricted stock
accretion - - .3 - - - .3
---------- --------- ---------- ---------- -------------- ----------- -----------
BALANCE, March 31, 2002 $ .7 $ 15.4 $ 2,454.4 $ (709.3) $ (87.8) $ (2,191.7) $ (518.3)
========== ========= ========== ========== ============== =========== ===========
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In millions of dollars)
Quarter Ended
March 31,
-----------------------
2003 2002
----------- ----------
Cash flows from operating activities:
Net loss $ (65.1) $ (64.1)
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
Depreciation and amortization (including deferred financing costs of $1.2 and $.7,
respectively) 20.5 23.2
Non-cash charges for restructuring charges in 2003 and reorganization items in 2002 .8 5.5
Gain on sale of Tacoma facility in 2003 and real estate in 2002 (9.5) (4.0)
Equity in (earnings) loss of unconsolidated affiliates, net of distributions (4.1) (1.5)
Minority interests (1.9) (1.5)
(Increase) decrease in trade and other receivables (13.3) 5.0
Decrease in inventories 7.3 13.5
(Increase) decrease in prepaid expenses and other current assets (1.2) 51.1
Increase in accounts payable and accrued interest 12.6 41.6
Increase (decrease) in payable to affiliates and other accrued liabilities 8.5 (35.9)
Decrease in accrued and deferred income taxes (24.0) (1.5)
Net cash impact of changes in long-term assets and liabilities 12.0 (22.4)
Other 3.2 (1.3)
----------- ----------
Net cash (used) provided by operating activities (54.2) 7.7
----------- ----------
Cash flows from investing activities:
Capital expenditures (9.0) (9.5)
Net proceeds from dispositions: primarily Tacoma facility and interests in office
building complex in 2003; miscellaneous real estate in 2002 74.4 4.7
----------- ----------
Net cash provided (used) by investing activities 65.4 (4.8)
----------- ----------
Cash flows from financing activities:
Incurrence of financing costs (.2) (7.3)
----------- ----------
Net cash used by financing activities (.2) (7.3)
----------- ----------
Net increase (decrease) in cash and cash equivalents during the period 11.0 (4.4)
Cash and cash equivalents at beginning of period 78.7 153.3
----------- ----------
Cash and cash equivalents at end of period $ 89.7 $ 148.9
=========== ==========
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest of $.4 and $.3, respectively $ .7 $ 1.9
Income taxes paid 28.6 9.1
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS (In millions of dollars, except prices and
per share amounts)
1. REORGANIZATION PROCEEDINGS
Kaiser Aluminum & Chemical Corporation (the "Company"), its parent company,
Kaiser Aluminum Corporation ("Kaiser"), and 24 of the Company's subsidiaries
have filed separate voluntary petitions in the United States Bankruptcy Court
for the District of Delaware (the "Court") for reorganization under Chapter 11
of the United States Bankruptcy Code (the "Code"); the Company, Kaiser and 15 of
the Company's subsidiaries (the "Original Debtors") filed in the first quarter
of 2002 and nine additional Company subsidiaries (the "Additional Debtors")
filed in the first quarter of 2003. The Original Debtors and Additional Debtors
are collectively referred to herein as the "Debtors" and the Chapter 11
proceedings of these entities are collectively referred to herein as the
"Cases." For purposes of this Report, the term "Filing Date" shall mean, with
respect to any particular Debtor, the date on which such Debtor filed its Case.
None of the Company's non-U.S. joint ventures are included in the Cases. The
Cases are being jointly administered. The Debtors are managing their businesses
in the ordinary course as debtors-in-possession subject to the control and
administration of the Court.
Original Debtors. During the first quarter of 2002, the Original Debtors filed
separate voluntary petitions for reorganization. The wholly owned subsidiaries
of the Company included in such filings were: Kaiser Bellwood Corporation,
Kaiser Aluminium International, Inc., Kaiser Aluminum Technical Services, Inc.,
Kaiser Alumina Australia Corporation (and its wholly owned subsidiary, Kaiser
Finance Corporation) and ten other entities with limited balances or activities.
The necessity for filing the Cases by the Original Debtors was attributable to
the liquidity and cash flow problems of the Company and its subsidiaries arising
in late 2001 and early 2002. The Company was facing significant near-term debt
maturities at a time of unusually weak aluminum industry business conditions,
depressed aluminum prices and a broad economic slowdown that was further
exacerbated by the events of September 11, 2001. In addition, the Company had
become increasingly burdened by asbestos litigation (see Note 7) and growing
legacy obligations for retiree medical and pension costs. The confluence of
these factors created the prospect of continuing operating losses and negative
cash flow, resulting in lower credit ratings and an inability to access the
capital markets.
The outstanding principal of, and accrued interest on, all debt of the Original
Debtors became immediately due and payable upon commencement of the Cases.
However, the vast majority of the claims in existence at the Filing Date
(including claims for principal and accrued interest and substantially all legal
proceedings) are stayed (deferred) during the pendency of the Cases. In
connection with the filing of the Original Debtors' Cases, the Court, upon
motion by the Original Debtors, authorized the Original Debtors to pay or
otherwise honor certain unsecured pre-Filing Date claims, including employee
wages and benefits and customer claims in the ordinary course of business,
subject to certain limitations. In July 2002, the Court also issued a final
order authorizing the Company to fund the cash requirements of its foreign joint
ventures in the ordinary course of business and to continue using the Company's
existing cash management systems. The Original Debtors also have the right to
assume or reject executory contracts existing prior to the Filing Date, subject
to Court approval and certain other limitations. In this context, "assumption"
means that the Original Debtors agree to perform their obligations and cure
certain existing defaults under an executory contract and "rejection" means that
the Original Debtors are relieved from their obligations to perform further
under an executory contract and are subject only to a claim for damages for the
breach thereof. Any claim for damages resulting from the rejection of an
executory contract is treated as a general unsecured claim in the Cases.
Generally, pre-Filing Date claims, including certain contingent or unliquidated
claims, against the Original Debtors will fall into two categories: secured and
unsecured. Under the Code, a creditor's claim is treated as secured only to the
extent of the value of the collateral securing such claim, with the balance of
such claim being treated as unsecured. Unsecured and partially secured claims do
not accrue interest after the Filing Date. A fully secured claim, however, does
accrue interest after the Filing Date until the amount due and owing to the
secured creditor, including interest accrued after the Filing Date, is equal to
the value of the collateral securing such claim. The amount and validity of
pre-Filing Date contingent or unliquidated claims, although presently unknown,
ultimately may be established by the Court or by agreement of the parties. As a
result of the Cases, additional pre-Filing Date claims and liabilities may be
asserted, some of which may be significant.
In October 2002, the Court set January 31, 2003 as the last date by which
holders of pre-Filing Date claims against the Original Debtors (other than
asbestos-related personal injury claims and certain hearing loss claims) could
file their claims. Any holder of a claim that was required to file a claim by
such date and did not do so may be barred from asserting such claim against any
of the Original Debtors and, accordingly, may not be able to participate in any
distribution in any of the Cases on account of such claim. Because the Company
has not had sufficient time to analyze the proofs of claim to determine their
validity, no provision has been included in the accompanying financial
statements for claims that have been filed. The January 31, 2003 bar date does
not apply to asbestos-related personal injury claims, for which the Original
Debtors reserve the right to establish a separate bar date at a later time. A
separate bar date of June 30, 2003 has been set for certain hearing loss claims.
Additional Debtors. On January 14, 2003, the Additional Debtors filed separate
voluntary petitions for reorganization. The wholly owned subsidiaries included
in such filings were: Kaiser Bauxite Company, Kaiser Jamaica Corporation, Alpart
Jamaica Inc., Kaiser Aluminum & Chemical of Canada Limited and five other
entities with limited balances or activities.
The Cases filed by the Additional Debtors were commenced, among other reasons,
to protect the assets held by these Debtors against possible statutory liens
that may arise and be enforced by the Pension Benefit Guaranty Corporation
("PBGC") primarily as a result of the Company's failure to meet a $17.0
accelerated funding requirement to its salaried employee retirement plan in
January 2003 (see Note 10 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2002 for additional
information regarding the accelerated funding requirement). From an operating
perspective, the filing of the Cases by the additional Debtors had no impact on
the Company's day-to-day operations.
In connection with the Additional Debtors' filings, the Court authorized the
Additional Debtors to continue to make payments in the normal course of business
(including payments of pre-Filing Date amounts), including payments of wages and
benefits, payments for items such as materials, supplies and freight and
payments of taxes. The Court also approved the continuation of the Company's
existing cash management systems and routine intercompany transactions
involving, among other transactions, the transfer of materials and supplies
among affiliates.
In March 2003, the Court set May 15, 2003, as the last date by which holders of
pre-Filing Date claims against the Additional Debtors (other than
asbestos-related personal injury claims and certain hearing loss claims) must
file their claims.
All Debtors. The Debtors' objective is to achieve the highest possible
recoveries for all creditors and stockholders, consistent with the Debtors'
abilities to pay, and to continue the operations of their businesses. However,
there can be no assurance that the Debtors will be able to attain these
objectives or achieve a successful reorganization. While valuation of the
Debtors' assets and pre-Filing Date claims at this stage of the Cases is subject
to inherent uncertainties, the Debtors currently believe that it is likely that
their liabilities will be found in the Cases to exceed the fair value of their
assets. Therefore, the Debtors currently believe that it is likely that
pre-Filing Date claims will be paid at less than 100% of their face value and
the equity of the Company's stockholders will be diluted or cancelled.
Under the Code, the rights of and ultimate payments to pre-Filing Date creditors
and stockholders may be substantially altered. At this time, it is not possible
to predict the outcome of the Cases, in general, or the effect of the Cases on
the businesses of the Debtors.
Two creditors' committees, one representing the unsecured creditors and the
other representing the asbestos claimants, have been appointed as official
committees in the Cases and, in accordance with the provisions of the Code, will
have the right to be heard on all matters that come before the Court. The
Debtors expect that the appointed committees, together with the legal
representative for potential future asbestos claimants that has been appointed
in the Cases, will play important roles in the Cases and the negotiation of the
terms of any plan or plans of reorganization. The Debtors are required to bear
certain costs and expenses for the committees and the legal representative for
potential future asbestos claimants, including those of their counsel and other
advisors.
The Debtors anticipate that substantially all liabilities of the Debtors as of
the date of the Filing will be resolved under one or more plans of
reorganization to be proposed and voted on in the Cases in accordance with the
provisions of the Code. Although the Debtors intend to file and seek
confirmation of such a plan or plans, there can be no assurance as to when the
Debtors will file such a plan or plans, or that such plan or plans will be
confirmed by the Court and consummated.
As provided by the Code, the Original Debtors had the exclusive right to propose
a plan of reorganization for 120 days following the initial Filing Date. The
Court has subsequently approved several extensions of the exclusivity period for
all Debtors, the most recent of which was set to expire April 30, 2003. A motion
to extend the exclusivity period through July 31, 2003, was filed by the Debtors
in late April 2003. By filing the motion to extend the exclusivity period, the
period is automatically extended until the June 17, 2003 Court hearing date.
As the Debtors' motion to extend the exclusivity period through July 31, 2003
was agreed with by the two creditors' committees in advance of the filing,
the Debtors expect the motion to be approved by the Court. Additional extensions
are likely to be sought. However, no assurance can be given that such future
extension requests will be granted by the Court. If the Debtors fail to file a
plan of reorganization during the exclusivity period, or if such plan is not
accepted by the requisite numbers of creditors and equity holders entitled to
vote on the plan, other parties in interest in the Cases may be permitted to
propose their own plan(s) of reorganization for the Debtors.
The Company expects that, when the Debtors ultimately file a plan of
reorganization, it will reflect the Company's strategic vision for emergence
from Chapter 11: (a) a standalone going concern with manageable leverage,
improved cost structure and competitive strength; (b) a company positioned to
execute its long-standing vision of market leadership and growth in fabricated
products specifically with a financial structure that provides financial
flexibility, including access to capital markets, for accretive acquisitions;
(c) a company that delivers a broad product offering and leadership in service
and quality for its customers and distributors; and (d) a company with continued
presence in those commodities markets that have the potential to generate
significant cash at steady-state metal prices. The Company's advisors have
developed a preliminary timeline that, assuming the current pace of the Cases
continues, could allow the Company to emerge from Chapter 11 in 2004. While no
assurances can be given in this regard, the Company's management continues to
push for an aggressive pace in advancing the Cases. Continued sales of non-core
assets and facilities that are ultimately determined not to be an important part
of the reorganized entity are likely. In light of the Company's stated strategy
of market leadership and growth in fabricated products and to further the
Company's ultimate planned emergence from Chapter 11, the Company has determined
that it is appropriate to explore the possible disposition of one or more of its
commodities assets. Any sale of assets would be subject to various prior
approvals including, but not limited to, approvals by the Company's Board of
Directors, the Court and the DIP Facility lenders and no assurances can be given
that acceptable offers will be received for any assets or that any assets will
ultimately be sold. The Company's strategic vision is subject to continuing
review in consultation with the Company's stakeholders and may also be modified
from time to time as the Cases proceed due to changes in such items as changes
in the global markets, changes in the economics of the Company's facilities or
changing financial circumstances.
Financial Statement Presentation. The accompanying consolidated financial
statements have been prepared in accordance with AICPA Statement of Position
90-7 ("SOP 90-7"), Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code, and on a going concern basis, which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business. However, as a result of the Cases, such realization of assets and
liquidation of liabilities are subject to a significant number of uncertainties.
Financial Information. Condensed consolidating financial statements of the
Debtors and non-Debtors are set forth below:
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2003
Consolidation/
Original Additional Elimination
Debtors Debtors Non-Debtors Entries Consolidated
------------- ------------- -------------- ---------------- --------------
Current assets $ 378.6 $ 39.2 $ 120.5 $ - $ 538.3
Investments in subsidiaries and 1,428.0 202.9 .1 (1,557.6) 73.4
affiliates
Intercompany receivables (payables) (976.8) 887.4 89.4 - -
Property and equipment, net 592.6 18.5 379.7 - 990.8
Deferred income taxes (81.9) 81.9 - - -
Other assets 538.6 .5 8.4 - 547.5
------------- ------------- -------------- ---------------- --------------
$ 1,879.1 $ 1,230.4 $ 598.1 $ (1,557.6) $ 2,150.0
============= ============= ============== ================ ==============
Liabilities not subject to compromise -
Current liabilities $ 230.4 $ 24.2 $ 86.8 $ (13.5) $ 327.9
Long-term liabilities 74.0 16.4 35.5 - 125.9
Liabilities subject to compromise 2,719.8 - - - 2,719.8
Minority interests - - 103.1 18.4 121.5
Stockholders' equity (deficit) (1,145.1) 1,189.8 372.7 (1,562.5) (1,145.1)
------------- ------------- -------------- ---------------- --------------
$ 1,879.1 $ 1,230.4 $ 598.1 $ (1,557.6) $ 2,150.0
============= ============= ============== ================ ==============
For condensed consolidating balance sheets of the Debtors and non-Debtors as of
December 31, 2002, see Note 1 of Notes to Consolidated Financial Statements in
the Company's Form 10-K for the year ended December 31, 2002.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2003
Consolidation/
Original Additional Elimination
Debtors Debtors Non-Debtors Entries Consolidated
------------- ------------- -------------- ---------------- --------------
Net sales $ 302.9 $ 12.4 $ 33.7 $ (9.6) $ 339.4
------------- ------------- -------------- ---------------- --------------
Costs and expenses -
Operating costs and expenses 354.4 7.4 45.0 (9.6) 397.2
Non-recurring operating charges 1.3 - - - 1.3
------------- ------------- -------------- ---------------- --------------
355.7 7.4 45.0 (9.6) 398.5
------------- ------------- -------------- ---------------- --------------
Operating income (loss) (52.8) 5.0 (11.3) - (59.1)
Interest expense (2.3) - (.3) - (2.6)
All other income (expense), net (11.0) (.8) .4 2.7 (8.7)
Provision for income tax and minority
interests (1.8) (5.2) 4.2 - (2.8)
Equity in income of subsidiaries (5.3) - - 5.3 -
------------- ------------- -------------- ---------------- --------------
Income (loss) from continuing operations (73.2) (1.0) (7.0) 8.0 (73.2)
Discontinued operations 8.1 - - - 8.1
------------- ------------- -------------- ---------------- --------------
Net income (loss) $ (65.1) $ (1.0) $ (7.0) $ 8.0 $ (65.1)
============= ============= ============== ================ ==============
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2002
Consolidation/
Original Additional Elimination
Debtors Debtors Non-Debtors Entries Consolidated
------------- ------------- -------------- ---------------- --------------
Net sales $ 335.8 $ 11.9 $ 54.3 $ (31.4) $ 370.6
------------- ------------- -------------- ---------------- --------------
Costs and expenses -
Operating costs and expenses 375.2 (.2) 60.3 (31.4) 403.9
Non-recurring operating charges 1.6 - - - 1.6
------------- ------------- -------------- ---------------- --------------
376.8 (.2) 60.3 (31.4) 405.5
------------- ------------- -------------- ---------------- --------------
Operating income (loss) (41.0) 12.1 (6.0) - (34.9)
Interest expense (13.1) - (.4) - (13.5)
All other income (expense), net (7.4) (2.8) .1 2.6 (7.5)
Provision for income tax and minority
interests (2.8) (5.9) 2.2 - (6.5)
Equity in income of subsidiaries 1.9 - - (1.9) -
------------- ------------- -------------- ---------------- --------------
Income (loss) from continuing operations (62.4) 3.4 (4.1) .7 (62.4)
Discontinued operations (1.7) - - - (1.7)
------------- ------------- -------------- ---------------- --------------
Net income (loss) $ (64.1) $ 3.4 $ (4.1) $ .7 $ (64.1)
============= ============= ============== ================ ==============
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2003
Consolidation/
Original Additional Elimination
Debtors Debtors Non-Debtors Entries Consolidated
------------- ------------- -------------- ---------------- --------------
Net cash provided (used) by:
Operating activities $ (61.3) $ - $ 7.1 $ - $ (54.2)
Investing activities 72.1 - (6.7) - 65.4
Financing activities (.2) - - - (.2)
------------- ------------- -------------- ---------------- --------------
Net (decrease) increase in cash and cash
equivalents 10.6 - .4 - 11.0
Cash and cash equivalents at beginning
of period 75.5 2.1 1.1 - 78.7
------------- ------------- -------------- ---------------- --------------
Cash and cash equivalents at end of
period $ 86.1 $ 2.1 $ 1.5 $ - $ 89.7
============= ============= ============== ================ ==============
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2002
Consolidation/
Original Additional Elimination
Debtors Debtors Non-Debtors Entries Consolidated
------------- ------------- -------------- ---------------- --------------
Net cash provided (used) by:
Operating activities $ (1.8) $ 2.0 $ 7.5 $ - $ 7.7
Investing activities 2.2 (.1) (6.9) - (4.8)
Financing activities (7.3) - - - (7.3)
------------- ------------- -------------- ---------------- --------------
Net (decrease) increase in cash and cash
equivalents (6.9) 1.9 .6 - (4.4)
Cash and cash equivalents at beginning
of period 151.6 1.4 .3 - 153.3
------------- ------------- -------------- ---------------- --------------
Cash and cash equivalents at end of
period $ 144.7 $ 3.3 $ .9 $ - $ 148.9
============= ============= ============== ================ ==============
Classification of Liabilities as "Liabilities Not Subject to Compromise" Versus
"Liabilities Subject to Compromise." Liabilities not subject to compromise
include: (1) liabilities incurred after the Filing Date of the Cases; (2)
pre-Filing Date liabilities that the Debtors expect to pay in full, including
priority tax and employee claims and certain environmental liabilities, even
though certain of these amounts may not be paid until a plan of reorganization
is approved; and (3) pre-Filing Date liabilities that have been approved for
payment by the Court and that the Debtors expect to pay (in advance of a plan of
reorganization) over the next twelve-month period in the ordinary course of
business, including certain employee related items (salaries, vacation and
medical benefits), claims subject to a currently existing collective bargaining
agreement, and postretirement medical and other costs associated with retirees.
Liabilities subject to compromise refer to all other pre-Filing Date liabilities
of the Debtors. The amounts of the various categories of liabilities that are
subject to compromise are set forth below. These amounts represent the Company's
estimates of known or probable pre-Filing Date claims that are likely to be
resolved in connection with the Cases. Such claims remain subject to future
adjustments. There can be no assurance that the liabilities of the Debtors will
not be found in the Cases to exceed the fair value of their assets. This could
result in claims being paid at less than 100% of their face value and the equity
of the Company's stockholders being diluted or cancelled.
The amounts subject to compromise at March 31, 2003 and December 31, 2002
consisted of the following items:
March 31, December 31,
2003 2002
--------------- ----------------
Items, absent the Cases, that would have been considered current:
Accounts payable $ 49.3 $ 47.6
Accrued interest 44.0 44.0
Accrued salaries, wages and related expenses(1) 159.0 59.0
Other accrued liabilities (including asbestos liability of $130.0 - Note 7) 149.5 150.6
Items, absent the Cases, that would have been considered long-term:
Accrued pension benefits 275.2 362.7
Accrued postretirement medical obligation 668.7 672.4
Long-term liabilities(2) 543.9 559.5
Debt (Note 5) 830.2 830.2
--------------- ----------------
$ 2,719.8 $ 2,726.0
=============== ================
(1) Accrued salaries, wages and related expenses represent estimated minimum
pension contributions that, absent the Cases, would have otherwise been
payable. Amounts for the period ended March 31, 2003 include
approximately $100.0 associated with special liquidity payment
requirements for January 2003 and April 2003 that were not made. As
previously disclosed, the Company does not currently expect to make any
pension contributions in respect of its domestic pension plans. See Note
10 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2002 for additional information
about non-payment of pension contributions.
(2) Long-term liabilities include environmental liabilities of $22.7 at
March 31, 2003 and $21.7 at December 31, 2002 (Note 7) and asbestos
liabilities of $480.1 at March 31, 2003 and December 31, 2002 (Note 7).
The classification of liabilities "not subject to compromise" versus liabilities
"subject to compromise" is based on currently available information and
analysis. As the Cases proceed and additional information and analysis is
completed or, as the Court rules on relevant matters, the classification of
amounts between these two categories may change. The amount of any such changes
could be significant. Additionally, as the Company evaluates the proofs of claim
filed in the Cases, adjustments will be made for those claims that the Company
believes will probably be allowed by the Court. The amount of such claims could
be significant.
Reorganization Items. Reorganization items under the Cases are expense or income
items that are incurred or realized by the Company because it is in
reorganization. These items include, but are not limited to, professional fees
and similar types of expenses incurred directly related to the Cases, loss
accruals or gains or losses resulting from activities of the reorganization
process, and interest earned on cash accumulated by the Debtors because they are
not paying their pre-Filing Date liabilities. For the quarters ended March 31,
2003 and 2002, reorganization items were as follows:
2003 2002
-------------- -----------------
Professional fees $ 7.6 $ 3.7
Accelerated amortization of certain deferred financing costs - 4.5
Interest income (.2) (.4)
Other - 1.8
-------------- -----------------
$ 7.4 $ 9.6
============== =================
As required by SOP 90-7, in the first quarter of 2002, the Company recorded the
Debtors' pre-Filing Date debt that is subject to compromise at the allowed
amount. Accordingly, the Company accelerated the amortization of debt-related
premium, discount and costs attributable to this debt and recorded a net expense
of approximately $4.5 in Reorganization items during the first quarter of 2002.
Trust Fund. During the first quarter of 2002, the Company paid $5.8 into a trust
fund in respect of potential liability obligations of directors and officers.
2. GENERAL
This Quarterly Report on Form 10-Q should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
Going Concern. The interim consolidated financial statements of the Company have
been prepared on a "going concern" basis which contemplates the realization of
assets and the liquidation of liabilities in the ordinary course of business;
however, as a result of the commencement of the Cases, such realization of
assets and liquidation of liabilities are subject to a significant number of
uncertainties. Specifically, the interim consolidated financial statements do
not present: (a) the realizable value of assets on a liquidation basis or the
availability of such assets to satisfy liabilities, (b) the amount which will
ultimately be paid to settle liabilities and contingencies which may be allowed
in the Cases, or (c) the effect of any changes which may occur in connection
with the Debtors' capitalizations or operations of the Debtors as a result of a
plan of reorganization. Because of the ongoing nature of the Cases, the
discussions and consolidated financial statements contained herein are subject
to material uncertainties.
Principles of Consolidation. The Company is the principal operating subsidiary
of Kaiser. Kaiser is a subsidiary of MAXXAM Inc. ("MAXXAM"). MAXXAM and one of
its wholly owned subsidiaries together own approximately 62% of the Company's
Common Stock, with the remaining approximately 38% publicly held.
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and the rules and regulations of the
Securities and Exchange Commission. Accordingly, these financial statements do
not include all of the disclosures required by GAAP for complete financial
statements. In the opinion of management, the unaudited interim consolidated
financial statements furnished herein include all adjustments, all of which are
of a normal recurring nature unless otherwise noted, necessary for a fair
statement of the results for the interim periods presented.
The preparation of financial statements in accordance with GAAP requires the use
of estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities known to exist as
of the date the financial statements are published, and the reported amounts of
revenues and expenses during the reporting period. Uncertainties with respect to
such estimates and assumptions are inherent in the preparation of the Company's
consolidated financial statements; accordingly, it is possible that the actual
results could differ from these estimates and assumptions, which could have a
material effect on the reported amounts of the Company's consolidated financial
position and results of operations.
Operating results for the quarter ended March 31, 2003, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003.
Derivative Financial Instruments. Hedging transactions using derivative
financial instruments are primarily designed to mitigate the Company's exposure
to changes in prices for certain of the products which the Company sells and
consumes and, to a lesser extent, to mitigate the Company' exposure to change in
foreign currency exchange rates. The Company does not utilize derivative
financial instruments for trading or other speculative purposes. The Company's
derivative activities are initiated within guidelines established by management
and approved by the Company's board of directors. Hedging transactions are
executed centrally on behalf of all of the Company's business segments to
minimize transaction costs, monitor consolidated net exposure and allow for
increased responsiveness to changes in market factors.
See Note 2 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2002 and Note 8 for additional information
regarding derivative financial instruments.
3. INVENTORIES
The classification of inventories is as follows:
March 31, December 31,
2003 2002
--------------- ----------------
Finished fabricated aluminum products $ 25.2 $ 28.1
Primary aluminum and work in process 77.6 71.2
Bauxite and alumina 62.6 72.9
Operating supplies and repair and maintenance parts 82.1 82.7
--------------- ----------------
Total $ 247.5 $ 254.9
=============== ================
Substantially all product inventories are stated at last-in, first-out (LIFO)
cost, not in excess of market. Replacement cost is not in excess of LIFO cost.
4. PACIFIC NORTHWEST SMELTER CURTAILMENTS AND RELATED POWER MATTERS
Future Power Supply and its Impact on Future Operating Rate. During October
2000, the Company signed a new power contract with the Bonneville Power
Administration ("BPA") under which the BPA, starting October 1, 2001, was to
provide the Company's operations in the State of Washington with approximately
290 megawatts of power through September 2006. The contract provided the Company
with sufficient power to fully operate the Company's Trentwood facility (which
requires up to an approximate 40 megawatts), as well as approximately 40% of the
combined capacity of the Company's Mead and Tacoma aluminum smelting operations
which have been curtailed since the last half of 2000.
As a part of the reorganization process, the Company concluded that it was in
its best interest to reject the BPA contract as permitted by the Code. As such,
with the authorization of the Court, the Company rejected the BPA contract on
September 30, 2002. The contract rejection gives rise to a pre-petition claim
(see Note 1). The BPA has filed a proof of claim for approximately $75.0 in
connection with the Cases in respect of the contract rejection. The claim is
expected to be settled in the overall context of the Debtors' plan of
reorganization. Accordingly, any payments that may be required as a result of
the rejection of the BPA contract are expected to only be made pursuant to a
plan of reorganization and upon the Company's emergence from the Cases. The
amount of the BPA claim will be determined either through a negotiated
settlement, litigation or a computation of prevailing power prices over the
contract period. As the amount of the BPA's claim in respect of the contract
rejection has not been determined, no provision has been made for the claim in
the accompanying financial statements. The Company has entered into a rolling
short-term contract with an alternate supplier to provide the power necessary to
operate its Trentwood facility.
In January 2003, the Company announced the indefinite curtailment of the Mead
facility. The curtailment of the Mead facility was due to the continuing
unfavorable market dynamics, specifically unattractive long-term power prices
and weak primary aluminum prices - both of which are significant impediments for
an older smelter with higher-than-average operating costs. The Mead facility is
expected to remain completely curtailed unless and until an appropriate
combination of reduced power prices, higher primary aluminum prices and other
factors occurs. The restart of a portion of the Company's Mead facility would
require the purchase of additional power from available sources. For the Company
to make such a decision, it would have to be able to purchase such power at a
reasonable price in relation to current and expected market conditions for a
sufficient term to justify its restart costs, which could be significant
depending on the number of lines restarted and the length of time between the
shutdown and restart. Given recent primary aluminum prices and the forward price
of power in the Northwest, it is unlikely that the Company will operate the Mead
facility in the near future. If the Company were to restart all or a portion of
its Mead facility, it would take between three to six months to reach the full
operating rate for such operations, depending upon the number of lines
restarted. Even after achieving the full operating rate, operating only a
portion of the Mead facility would result in production/cost inefficiencies such
that operating results would, at best, be breakeven to modestly negative at
long-term primary aluminum prices. See Note 5 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2002, for
a discussion of the Northwest smelters 2002 impairment charge.
In January 2003, the Court approved the sale of the Tacoma facility to the Port
of Tacoma. The sale closed in February 2003. See Note 9 for additional
discussion on the sale of the Tacoma facility.
5. LONG-TERM DEBT
Debt consists of the following:
March 31, December 31,
2003 2002
- ---------------------------------------------------------------------- --------------- --------------
Secured:
Post-Petition Credit Agreement $ - $ -
8 1/4% Alpart CARIFA Loans due 2007 22.0 22.0
7.6% Solid Waste Disposal Revenue Bonds due 2027 19.0 19.0
Other borrowings (fixed rate) 2.6 2.6
Unsecured (reflected as Liabilities Subject to Compromise):
9 7/8% Senior Notes due 2002, net 172.8 172.8
10 7/8% Senior Notes due 2006, net 225.0 225.0
12 3/4% Senior Subordinated Notes due 2003 400.0 400.0
Other borrowings (fixed and variable rates) 32.4 32.4
--------------- --------------
Total 873.8 873.8
Less - Current portion 1.0 .9
Pre-Filing Date claims included in liabilities
subject to compromise (Note 1) 830.2 830.2
--------------- --------------
Long-term debt $ 42.6 $ 42.7
=============== ==============
DIP Facility. On February 12, 2002, the Company and Kaiser entered into a
post-petition credit agreement with a group of lenders for debtor-in-possession
financing (the "DIP Facility"). The Court signed a final order approving the DIP
Facility in March 2002. In March 2003, certain of the Additional Debtors were
added as co-guarantors and the DIP Facility lenders received super-priority
status with respect to certain of the Additional Debtors' assets. The DIP
Facility provides for a secured, revolving line of credit through the earlier of
February 12, 2004, the effective date of a plan of reorganization or voluntary
termination by the Company. Under the DIP Facility, the Company is able to
borrow amounts by means of revolving credit advances and to have issued for its
benefit letters of credit (up to $125.0) in an aggregate amount equal to the
lesser of $300.0 or a borrowing base relating to eligible accounts receivable,
eligible inventory and eligible fixed assets reduced by certain reserves, as
defined in the DIP Facility agreement. The DIP Facility is guaranteed by the
Company and certain significant subsidiaries of the Company. Interest on any
outstanding borrowings will bear a spread over either a base rate or LIBOR, at
the Company's option. The DIP Facility requires the Company to comply with
certain financial covenants and places restrictions on the Company's ability to,
among other things, incur debt and liens, make investments, pay dividends,
undertake transactions with affiliates, make capital expenditures, and enter
into unrelated lines of business. As of March 31, 2003, $116.0 was available to
the Company under the DIP Facility (of which $73.6 could be used for additional
letters of credit) and no borrowings were outstanding under the revolving credit
facility. During March 2003, the Company obtained a waiver from the lenders in
respect of its compliance with a financial covenant covering the four-quarter
period ending March 31, 2003. The waiver was of limited duration and would have
lapsed on June 29, 2003. In May 2003, the Company obtained an extension and
modification of the March 2003 limited waiver for the financial covenant for the
four-quarter period ending June 30, 2003. The May 2003 waiver will lapse on
September 30, 2003. The Company is working with the lenders to complete an
amendment that would incorporate the May 2003 limited waiver and also modify the
financial covenant for periods subsequent to June 30, 2003. As part of this
amendment, the Company also plans to request that, among other things, the
lenders extend the DIP Facility past its current February 2004 expiration and
increase the amount of credit available under the DIP Facility. The Company
believes that such an amendment will be agreed with the DIP Facility lenders not
later than June 2003. While absolute assurances cannot be given in respect of
the Company's ability to successfully obtain the necessary covenant
modification, based on discussions with the DIP Facility lenders and the fact
that there are currently no outstanding borrowings and only a limited amount of
letters of credit outstanding under the DIP facility, the Company believes that
acceptable modifications are likely to be obtained.
6. INCOME TAXES
The income tax provisions of $4.7 and $8.0 for the quarters ended March 31, 2003
and 2002, respectively, relate primarily to foreign income taxes. For the
quarters ended March 31, 2003 and 2002, as a result of the Cases, the Company
did not recognize any U.S. income tax benefit for the losses incurred from its
domestic operations (including temporary differences) or any U.S. income tax
benefit for foreign income taxes. Instead, the increases in federal and state
deferred tax assets as a result of additional net operating losses and foreign
tax credits generated in 2003 and 2002 were fully offset by increases in
valuation allowances. See Note 9 of Notes to Consolidated Financial Statements
in the Company's Form 10-K for the year ended December 31, 2002 for additional
information regarding the Deferred Tax Assets and Valuation Allowances.
In March 2003, the Company paid approximately $22.0 in settlement of certain
foreign tax matters in respect of a number of prior periods.
7. COMMITMENTS AND CONTINGENCIES
Impact of Reorganization Proceedings. During the pendency of the Cases,
substantially all pending litigation, except certain environmental claims and
litigation, against the Debtors is stayed. Generally, claims against a Debtor
arising from actions or omissions prior to its Filing Date will be settled in
connection with the plan of reorganization.
Commitments. The Company has a variety of financial commitments, including
purchase agreements, tolling arrangements, forward foreign exchange and forward
sales contracts (see Note 8), 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 Queensland Alumina
Limited ("QAL"). These obligations are scheduled to expire in 2008. Under the
agreements, the Company is unconditionally obligated to pay its proportional
share of debt, operating costs, and certain other costs of QAL. The Company's
share of the aggregate minimum amount of required future principal payments at
December 31, 2002, was $49.0 which matures as follows: $32.0 in July 2003 and
$17.0 in 2006. During July 2002, the Company made payments of approximately
$29.5 to QAL to fund the Company's share of QAL's scheduled debt maturities. The
Company's share of payments, including operating costs and certain other
expenses under the agreements, has ranged between $95.0 - $103.0 per year over
the past three years. The Company also has agreements to supply alumina to and
to purchase aluminum from Anglesey Aluminium Limited.
Minimum rental commitments under operating leases at December 31, 2002, are as
follows: years ending December 31, 2003 - $15.2; 2004 - $6.2; 2005 - $5.4; 2006
- - $3.1; 2007 - $2.4; thereafter - $3.7. Pursuant to the Code, the Debtors may
elect to reject or assume unexpired pre-petition leases. At this time, no
decisions have been made as to which significant leases will be accepted or
rejected (see Note 1).
Rental expenses were $38.3, $41.0 and $42.5 for the years ended December 31,
2002, 2001 and 2000, respectively.
The Company had a long-term liability, net of estimated subleases income, on the
Kaiser Center office complex in Oakland, California, in which the Company had
not maintained offices for a number of years, but for which it was responsible
for lease payments as master tenant through 2008 under a sale-and-leaseback
agreement. The Company also held an investment in certain notes issued by the
owners of the building (which were included in Other Assets). In October 2002,
the Company entered into a contract to sell its interests in the office complex.
As the contract amount was less than the asset's net carrying value, the Company
recorded a non-cash impairment charge in 2002 of approximately $20.0. The sale
was approved by the Court in February 2003 and closed in March 2003. Net cash
proceeds were approximately $61.1.
Environmental Contingencies. The Company is 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. The Company currently
is subject to a number of claims under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendments
Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities,
has been named as a potentially responsible party for remedial costs at certain
third-party sites listed on the National Priorities List under CERCLA.
Based on the Company's evaluation of these and other environmental matters, the
Company has established environmental accruals, primarily related to potential
solid waste disposal and soil and groundwater remediation matters. At March 31,
2003, the balance of such accruals was $59.7 (of which $22.7 was included in
Liabilities subject to compromise - see Note 1). These environmental accruals
represent the Company's estimate of costs reasonably expected to be incurred
based on presently enacted laws and regulations, currently available facts,
existing technology, and the Company's assessment of the likely remediation
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 $.6 to $12.3 for
the years 2003 through 2007 and an aggregate of approximately $33.3 thereafter.
As additional facts are developed and definitive remediation plans and necessary
regulatory approvals for implementation of remediation are established or
alternative technologies are developed, changes in these and other factors may
result in actual costs exceeding the current environmental accruals. The Company
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $27.0. As the resolution of these matters
is subject to further regulatory review and approval, no specific assurance can
be given as to when the factors upon which a substantial portion of this
estimate is based can be expected to be resolved. However, the Company is
currently working to resolve certain of these matters.
The Company believes that it has insurance coverage available to recover certain
incurred and future environmental costs and is pursuing claims in this regard.
However, no amounts have been accrued in the financial statements with respect
to such potential recoveries.
While uncertainties are inherent in the final outcome of these environmental
matters, and it is presently impossible to determine the actual costs that
ultimately may be incurred, management currently believes that the resolution of
such uncertainties should not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.
Asbestos Contingencies. The Company has been one of many defendants in a number
of lawsuits, some of which involve claims of multiple persons, in which the
plaintiffs allege that certain of their injuries were caused by, among other
things, exposure to asbestos during, and as a result of, their employment or
association with the Company or exposure to products containing asbestos
produced or sold by the Company. The lawsuits generally relate to products the
Company has not sold for more than 20 years. As of the initial Filing Date,
approximately 112,000 claims were pending. The lawsuits are currently stayed by
the Cases.
Due to the Cases, holders of asbestos claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against the
Debtors. However, during the pendency of the Cases, the Company expects
additional asbestos claims will be filed as part of the claims process. A
separate creditors' committee representing the interests of the asbestos
claimants has been appointed. The Debtors' obligations with respect to present
and future asbestos claims will be resolved pursuant to a plan of
reorganization.
The Company has accrued a liability for estimated asbestos-related costs for
claims filed to date and an estimate of claims to be filed through 2011. At
March 31, 2003, the balance of such accrual was $610.1, all of which was
included in Liabilities subject to compromise (see Note 1). The Company's
estimate is based on the Company's view, at March 31, 2003, of the current and
anticipated number of asbestos-related claims, the timing and amounts of
asbestos-related payments, the status of ongoing litigation and settlement
initiatives, and the advice of Wharton Levin Ehrmantraut & Klein, P.A., with
respect to the current state of the law related to asbestos claims. However,
there are inherent uncertainties involved in estimating asbestos-related costs
and the Company's actual costs could exceed the Company's estimates due to
changes in facts and circumstances after the date of each estimate. Further,
while the Company does not presently believe there is a reasonable basis for
estimating asbestos-related costs beyond 2011 and, accordingly, no accrual has
been recorded for any costs which may be incurred beyond 2011, the Company
expects that the plan of reorganization process may require an estimation of the
Company's entire asbestos-related liability, which may go beyond 2011, and that
such costs could be substantial.
The Company believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Although the Company has
settled asbestos-related coverage matters with certain of its insurance
carriers, other carriers have not yet agreed to settlements and disputes with
carriers exist. The timing and amount of future recoveries from these insurance
carriers will depend on the pendency of the Cases and on the resolution of any
disputes regarding coverage under the applicable insurance policies. The Company
believes that substantial recoveries from the insurance carriers are probable
and additional amounts may be recoverable in the future if additional claims are
added. The Company reached this conclusion after considering its prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of Heller Ehrman White & McAuliffe LLP
with respect to applicable insurance coverage law relating to the terms and
conditions of those policies. During 2000, the Company filed suit in San
Francisco Superior Court against a group of its insurers, which suit was
thereafter split into two related actions. Additional insurers were added to the
litigation in 2000 and 2002. During October 2001, the court ruled favorably on a
number of policy interpretation issues, one of which was affirmed in February
2002 by an intermediate appellate court in response to a petition from the
insurers. The rulings did not result in any changes to the Company's estimates
of its current or future asbestos-related insurance recoveries. The trial court
held a trial on certain policy interpretation issues during March 2003 but has
not yet issued its rulings. The trial court may hear additional issues from time
to time. Given the expected significance of probable future asbestos-related
payments, the receipt of timely and appropriate payments from its insurers is
critical to a successful plan of reorganization and the Company's long-term
liquidity.
The following tables present historical information regarding the Company's
asbestos-related balances and cash flows:
March 31, December 31,
2003 2002
- ---------------------------------------------------------- ----------------- ------------------
Liability $ 610.1 $ 610.1
Receivable (included in Other assets)(1) 476.9 484.0
----------------- ------------------
$ 133.2 $ 126.1
================= ==================
(1) The asbestos-related receivable was determined on the same basis as the
asbestos-related cost accrual. However, no assurances can be given that
the Company will be able to project similar recovery percentages for
future asbestos-related claims or that the amounts related to future
asbestos-related claims will not exceed the Company's aggregate insurance
coverage. As of March 31, 2003 and December 31, 2002, $17.6 and $24.7,
respectively, of the receivable amounts relate to costs paid. The
remaining receivable amounts relate to costs that are expected to be paid
by the Company in the future.
Quarter
Ended Inception
March 31, 2003 To Date
- ----------------------------------------------------------- ----------------- ------------------
Payments made, including related legal costs $ - $ 355.7
Insurance recoveries 7.1 252.2
----------------- ------------------
$ (7.1) $ 103.5
================= ==================
During the pendency of the Cases, all asbestos litigation is stayed. As a
result, the Company does not expect to make any asbestos payments in the near
term. Despite the Cases, the Company continues to pursue insurance collections
in respect of asbestos-related amounts paid prior to its Filing Date.
Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative developments, and costs incurred
in order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from the
Company's underlying assumptions. Additional asbestos-related claims are likely
to be asserted as a part of the Chapter 11 process. Management cannot reasonably
predict the ultimate number of such claims or the amount of the associated
liability. However, it is likely that such amounts could exceed, perhaps
significantly, the liability amounts reflected in the Company's consolidated
financial statements, which (as previously stated) is only reflective of an
estimate of claims through 2011. The Company's obligations in respect of the
currently pending and future asbestos-related claims will ultimately be
determined (and resolved) as a part of the overall Chapter 11 proceedings. It is
anticipated that resolution of these matters will be a lengthy process.
Management will continue to periodically reassess its asbestos-related
liabilities and estimated insurance recoveries as the Cases proceed. However,
absent unanticipated developments such as asbestos-related legislation, material
developments in other asbestos-related proceedings or in the Company's Chapter
11 proceedings, it is not anticipated that the Company will have sufficient
information to reevaluate its asbestos-related obligations and estimated
insurance recoveries until much later in the Cases. Any adjustments ultimately
deemed to be required as a result of the reevaluation of the Company's
asbestos-related liabilities or estimated insurance recoveries could have a
material impact on the Company's future financial statements.
Labor Matters. In connection with the United Steelworkers of America ("USWA")
strike and subsequent lock-out by the Company, which was settled in September
2000, certain allegations of unfair labor practices ("ULPs") were filed with the
National Labor Relations Board ("NLRB") by the USWA. As previously disclosed,
the Company has responded to all such allegations and believes that they were
without merit. Twenty-two of twenty-four allegations of ULPs previously brought
against the Company by the USWA have been dismissed. A trial before an
administrative law judge for the two remaining allegations concluded in
September 2001. In May 2002, the administrative law judge ruled against the
Company in respect of the two remaining ULP allegations and recommended that the
NLRB award back wages, plus interest, less any earnings of the workers during
the period of the lockout. The administrative law judge's ruling did not contain
any specific amount of proposed award and is not self-executing. The USWA has
filed a proof of claim for $240.0 in the Cases in respect of this matter. The
NLRB also filed a proof of claim in respect of this matter. The NLRB claim was
for $117.0, including interest of approximately $18.0. Depending on the ultimate
amount of any interest due and amount of offsetting employee earnings and other
factors, if the USWA ultimately were to prevail it is possible that the amount
of the award could exceed $100.0. It is also possible that the Company may
ultimately prevail on appeal and that no loss will occur.
The Company continues to believe that the allegations are without merit and will
vigorously defend its position. The Company has appealed the ruling of the
administrative law judge to the full NLRB. The general counsel of the NLRB and
the USWA have cross-appealed. Any outcome from the NLRB appeal would be subject
to additional appeals in a United States Circuit Court of Appeals by the general
counsel of the NLRB, the USWA or the Company. This process could take several
years. Because the Company believes that it may prevail in the appeals process,
the Company has not recognized a charge in response to the adverse ruling.
However, it is possible that, if the Company's appeal(s) are not ultimately
successful, a charge in respect of this matter may be required in one or more
future periods and the amount of such charge(s) could be significant.
This matter is not currently stayed by the Cases. However, as previously stated,
seeing this matter to its ultimate outcome could take several years. Further,
any amounts ultimately determined by a court to be payable in this matter will
be dealt with in the overall context of the Debtors' plan of reorganization and
will be subject to compromise. Accordingly, any payments that may ultimately be
required in respect of this matter would only be paid upon or after the
Company's emergence from the Cases.
Other Contingencies. The Company is involved in various other claims, lawsuits,
and other proceedings relating to a wide variety of matters related to past or
present operations. While uncertainties are inherent in the final outcome of
such matters, and it is presently impossible to determine the actual costs that
ultimately may be incurred, management currently believes that the resolution of
such uncertainties and the incurrence of such costs should not have a material
adverse effect on the Company's consolidated financial position, results of
operations, or liquidity.
8. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
In conducting its business, the Company uses various instruments, including
forward contracts and options, to manage the risks arising from fluctuations in
aluminum prices, energy prices and exchange rates. The Company enters into
hedging transactions from time to time to limit its exposure resulting from (1)
its anticipated sales of alumina, primary aluminum, and fabricated aluminum
products, net of expected purchase costs for items that fluctuate with aluminum
prices, (2) the energy price risk from fluctuating prices for natural gas, fuel
oil and diesel oil used in its production process, and (3) foreign currency
requirements with respect to its cash commitments with foreign subsidiaries and
affiliates. As the Company's hedging activities are generally designed to
lock-in a specified price or range of prices, gains or losses on the derivative
contracts utilized in the hedging activities (except the impact of those
contracts discussed below which have been marked to market) generally offset at
least a portion of any losses or gains, respectively, on the transactions being
hedged.
2003. The Company has entered into hedging transactions with respect to a
portion of its 2003 fuel oil and natural gas requirements. As of March 31, 2003,
the Company held option contracts which cap the price that the Company would
have to pay for substantially all of the Company's exposure to fuel oil
requirements for the second through fourth quarter of 2003 (2.0 million
barrels). In addition, as of March 31, 2003, the Company held option contracts
for substantially all of its natural gas requirements for May 2003 and June
2003. The carrying/market value as of March 31, 2003 of the fuel oil option
contracts was $.8 and natural gas option contracts was $.3 (included in Prepaid
expenses and other current assets).
The Company anticipates that, subject to prevailing economic conditions, it may
enter into additional hedging transactions with respect to primary aluminum
prices, natural gas and fuel oil prices and foreign currency values to protect
the interests of its constituents. However, no assurance can be given as to when
or if the Company will enter into such additional hedging activities.
As of March 31, 2003, the Company had sold forward substantially all for 2003
and a vast majority for 2004 of the alumina available to it in excess of its
projected internal smelting requirements at prices indexed to future prices of
primary aluminum.
2002. Because the agreements underlying the Company's hedging positions provided
that the counterparties to the hedging contracts could liquidate the Company's
hedging positions if the Company filed for reorganization, the Company chose to
liquidate these positions in advance of the Filing Date. Proceeds from the
liquidation totaled approximately $42.2. A net gain of $23.3 associated with
these liquidated positions was deferred and is being recognized over the period
during which the underlying transactions to which the hedges related are
expected to occur. The net gain upon liquidation consisted of: gains of $30.2
for aluminum contracts and losses of $5.0 for Australian dollars and $1.9 for
energy contracts. As of March 31, 2003, the remaining unamortized amount was
approximately a net loss of $1.6.
9. DISCONTINUED OPERATIONS
The Company has previously disclosed that, in connection with the development of
a plan of reorganization, it conducted a study of the long-term competitive
position of the Mead and Tacoma facilities and potential options for these
facilities. When the Company received the preliminary results of the study, it
analyzed the findings and met with the USWA and other parties prior to making
its determination as to the appropriate action(s). The outcome of the study and
the Company's ongoing work on developing a plan of reorganization led the
Company to conclude that the Tacoma facility, whose aluminum smelting operations
had been curtailed since the last half of 2000, could not compete with the much
larger, newer and more efficient smelters, generally located outside the United
States. As a result, the Company entered into an agreement, which was approved
by the Court in January 2003, to sell the Tacoma facility to the Port of Tacoma
(the "Port"). Gross proceeds from the sale, before considering approximately
$4.0 of proceeds being held in escrow pending the resolution of certain
environmental and other issues, were approximately $12.1. The Port also agreed
to assume the on-site environmental remediation obligations. The sale closed in
February 2003. The sale resulted in a pre-tax gain of approximately $9.5. In
accordance with Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), the
operating results of the Tacoma facility for the quarters ended March 31, 2003
and 2002 and the gain from the sale of the Tacoma facility have been reported as
discontinued operations in the accompanying Statements of Consolidated Income
(Loss). The balances and operating results associated with the Tacoma facility
were previously included in the Primary Aluminum business segment.
10. OTHER INCOME (EXPENSE) AND NON-RECURRING ITEMS
Non-Recurring Operating Charges. The income (loss) impact associated with
non-recurring operating charges for the quarters ended March 31, 2003 and 2002,
were related to restructuring activities.
Restructuring charges of $1.3 in 2003 consist of employee benefit costs
associated with 17 salaried job eliminations during the first quarter of 2003
resulting from the Mead facility's indefinite curtailment (see Note 4 - Primary
Aluminum business unit). The 2002 restructuring charges of $1.6 consisted
primarily of third-party costs associated with cost reduction initiatives at the
Bauxite and alumina business unit.
Other Income (Expense). Other income (expense), other than interest expense, for
the quarter ended March 31, 2003 included approximately $1.7 of adverse foreign
currency exchange impacts associated with a foreign tax settlement. Other income
(expense), other than interest expense, for the quarter ended March 31, 2002
included a gain of $4.0 from the sale, in the ordinary course of business, of
certain non-operating property. Proceeds from the sale totaled $4.5.
11. VALCO RELATED MATTERS
The amount of power made available to the Company's 90%-owned Volta Aluminium
Company ("Valco") by the Volta River Authority ("VRA") depends in large part on
the level of the lake that is the primary source for generating the
hydroelectric power used to supply the smelter. The level of the lake is
primarily a function of the level of annual rainfall and the alternative
(non-Valco) uses of the power generated, as directed by the VRA. The Company has
previously disclosed that Valco's power allocation was reduced in January 2003
resulting in the curtailment of two of its three operating potlines. In
connection with such curtailments, $6.9 million of employee end-of-service
benefits were paid resulting in $4.3 million of charges (included in Cost of
products sold) in the first quarter of 2003.
As previously disclosed, the lake level has been at or near a record low level.
Based on the level of the lake and the rate at which it had been declining, the
Company believed that curtailment of Valco's last remaining operating potline
was inevitable. Accordingly, on May 5, 2003, the Company voluntarily curtailed
the last operating potline. Voluntary curtailment of the last operating potline:
(1) is expected to provide Valco with an opportunity to run a greater number of
potlines later in 2003 once the annual rainy season has replenished the lake
level and Valco's 2004 power allocation is known (although no assurances can be
provided in this regard) and (2) offers the VRA and the Government of Ghana
("GoG") a contribution toward conservation of the water supply to improve their
ability to meet Valco's power needs later in the year as well as meet the
near-term needs of the rest of Ghana.
The Company is still evaluating the financial impacts of the curtailment,
including potential charges and cash requirements for affected Valco employees.
The net cash impact of such curtailment is expected to be offset, in part, by a
reduction in working capital. Excluding special items, the impact of the
additional curtailment on ongoing operating income is expected to be modest.
Valco has met with the GoG and the VRA and anticipates such discussions will
continue in respect of the current and future power situations. Valco has
objected to the power curtailments and expects to seek appropriate compensation
from the GoG. In addition, Valco and the Company have filed for arbitration with
the International Chamber of Commerce in Paris against both the GoG and the VRA.
However, no assurances can be given as to the ultimate success of any such
actions. Valco and the Company do not expect the voluntary curtailment of the
last operating potline to have any adverse impact on the pending arbitrations or
negotiations with the VRA and GoG.
12. INTERIM OPERATING SEGMENT INFORMATION
The Company uses a portion of its bauxite, alumina and primary aluminum
production for additional processing at its downstream facilities. Transfers
between business units are made at estimated market prices. The accounting
policies of the segments are the same as those described in Note 2 of Notes to
Consolidated Financial Statements in the Company's Form 10-K for the year ended
December 31, 2002. Business unit results are evaluated internally by management
before any allocation of corporate overhead and without any charge for income
taxes or interest expense. See Note 18 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2002.
Financial information by operating segment for the quarters ended March 31, 2003
and 2002 is as follows:
2003 2002
-------------- ----------------
Net Sales:
Bauxite and Alumina:
Net sales to unaffiliated customers $ 135.6 $ 113.6
Intersegment sales 10.3 23.2
-------------- ----------------
145.9 136.8
-------------- ----------------
Primary Aluminum:
Net sales to unaffiliated customers 30.8 71.0
Intersegment sales - 1.7
-------------- ----------------
30.8 72.7
-------------- ----------------
Flat-Rolled Products 44.1 48.3
Engineered Products 102.9 103.8
Commodities Marketing (Note 8) 2.0 11.0
Minority Interests 24.0 22.9
Eliminations (10.3) (24.9)
-------------- ----------------
$ 339.4 $ 370.6
============== ================
Operating income (loss):
Bauxite and Alumina $ (24.2) $ (3.2)
Primary Aluminum (Note 9) (13.6) (1.4)
Flat-Rolled Products (4.5) (9.9)
Engineered Products (.6) 3.3
Commodities Marketing (Note 8) 1.2 10.7
Eliminations 2.5 .5
Corporate and Other (18.6) (33.3)
Non-Recurring Operating Charges (Note 10) (1.3) (1.6)
-------------- ----------------
$ (59.1) $ (34.9)
============== ================
Depreciation and amortization:
Bauxite and Alumina $ 9.9 $ 9.8
Primary Aluminum 2.2 5.3
Flat-Rolled Products 2.9 3.9
Engineered Products 3.1 3.2
Corporate and Other 1.2 .3
-------------- ----------------
$ 19.3 $ 22.5
============== ================
13. SUPPLEMENTAL GUARANTOR INFORMATION
Certain domestic, wholly-owned (direct or indirect) subsidiaries of the Company
(hereinafter collectively referred to as the Subsidiary Guarantors) have
provided, joint and several, guarantees of the 9 7/8% Senior Notes, the 10 7/8%
Senior Notes, due 2006 and the 12 3/4% Senior Subordinated Notes (the "Notes").
Such guarantees are full and unconditional. See Note 19 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December 31,
2002 for a more complete discussion regarding the Subsidiary Guarantors and
their operations.
The accompanying financial information presents consolidating balance sheets,
statements of income (loss) and statements of cash flows showing separately the
Company, Subsidiary Guarantors, other subsidiaries and eliminating entries.
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2003
SUBSIDIARY OTHER ELIMINATING
COMPANY GUARANTORS SUBSIDIARIES ENTRIES CONSOLIDATED
---------------- --------------- --------------- -------------- --------------
ASSETS
Current assets $ 295.3 $ 76.8 $ 166.2 $ - $ 538.3
Investments in subsidiaries 2,674.7 169.6 - (2,844.3) -
Intercompany advances receivable
(payable) (2,223.9) 553.7 1,670.2 - -
Investments in and advances to
unconsolidated affiliates 16.2 33.2 24.0 - 73.4
Property and equipment, net 568.4 22.9 399.5 - 990.8
Deferred income taxes (54.9) 16.7 38.2 - -
Other assets 537.5 .4 9.6 - 547.5
---------------- --------------- --------------- -------------- --------------
$ 1,813.3 $ 873.3 $ 2,307.7 $ (2,844.3) $ 2,150.0
================ =============== =============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities $ 189.1 $ 28.2 $ 110.6 $ - $ 327.9
Other long-term liabilities 56.9 12.2 14.2 - 83.3
Long-term debt 20.6 - 22.0 - 42.6
Liabilities subject to compromise 2,691.8 14.7 13.3 - 2,719.8
Minority interests - - 18.4 103.1 121.5
Stockholders' equity (deficit) (1,145.1) 818.2 2,129.2 (2,947.4) (1,145.1)
---------------- --------------- --------------- -------------- --------------
$ 1,813.3 $ 873.3 $ 2,307.7 $ (2,844.3) $ 2,150.0
================ =============== =============== ============== ==============
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2002
SUBSIDIARY OTHER ELIMINATING
COMPANY GUARANTORS SUBSIDIARIES ENTRIES CONSOLIDATED
---------------- --------------- --------------- -------------- --------------
ASSETS
Current assets $ 284.1 $ 82.1 $ 155.4 $ - $ 521.6
Investments in subsidiaries 2,707.5 167.9 - (2,875.4) -
Intercompany advances receivable
(payable) (2,267.9) 588.0 1,679.9 - -
Investments in and advances to
unconsolidated affiliates 15.3 30.4 24.0 - 69.7
Property and equipment, net 578.6 23.2 408.1 - 1,009.9
Deferred income taxes (54.9) 16.7 38.2 - -
Other assets 610.4 .2 18.6 - 629.2
---------------- --------------- --------------- -------------- --------------
$ 1,873.1 $ 908.5 $ 2,324.2 $ (2,875.4) $ 2,230.4
================ =============== =============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities $ 171.7 $ 45.8 $ 114.5 $ - $ 332.0
Other long-term liabilities 56.8 12.1 18.0 - 86.9
Long-term debt 20.7 - 22.0 - 42.7
Liabilities subject to compromise 2,702.2 13.6 10.2 - 2,726.0
Minority interests - - 18.8 102.3 121.1
Stockholders' equity (deficit) (1,078.3) 837.0 2,140.7 (2,977.7) (1,078.3)
---------------- --------------- --------------- -------------- --------------
$ 1,873.1 $ 908.5 $ 2,324.2 $ (2,875.4) $ 2,230.4
================ =============== =============== ============== ==============
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2003
SUBSIDIARY OTHER ELIMINATING
COMPANY GUARANTORS SUBSIDIARIES ENTRIES CONSOLIDATED
---------------- --------------- --------------- -------------- --------------
Net sales $ 232.4 $ 118.4 $ 175.6 $ (187.0) $ 339.4
Costs and expenses:
Operating costs and expenses 288.0 124.2 172.0 (187.0) 397.2
Non-recurring operating items 1.3 - - - 1.3
---------------- --------------- --------------- -------------- --------------
Operating income (loss) (56.9) (5.8) 3.6 - (59.1)
Interest expense (2.4) - (.2) - (2.6)
Reorganization items (7.4) - - - (7.4)
Other income (expense), net 26.9 (16.5) (11.7) - (1.3)
Provision for income taxes (.4) (1.4) (2.9) - (4.7)
Minority interests - 1.5 .4 - 1.9
Equity in loss of subsidiaries (33.0) - - 33.0 -
---------------- --------------- --------------- -------------- --------------
Income (loss) from continuing operations (73.2) (22.2) (10.8) 33.0 (73.2)
Discontinued operations 8.1 - - - 8.1
---------------- --------------- --------------- -------------- --------------
Net income (loss) $ (65.1) $ (22.2) $ (10.8) $ 33.0 $ (65.1)
================ =============== =============== ============== ==============
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2002
SUBSIDIARY OTHER ELIMINATING
COMPANY GUARANTORS SUBSIDIARIES ENTRIES CONSOLIDATED
---------------- --------------- --------------- -------------- --------------
Net sales $ 290.3 $ 104.5 $ 242.9 $ (267.1) $ 370.6
Costs and expenses:
Operating costs and expenses 333.9 106.9 230.2 (267.1) 403.9
Non-recurring operating items 1.6 - - - 1.6
---------------- --------------- --------------- -------------- --------------
Operating income (loss) (45.2) (2.4) 12.7 - (34.9)
Interest expense (13.3) - (.2) - (13.5)
Other income (expense), net (5.8) 7.0 .9 - 2.1
Reorganization items (9.6) - - - (9.6)
Benefit (provision) for income taxes .8 (3.6) (5.2) - (8.0)
Minority interests - 1.4 .1 - 1.5
Equity in loss of subsidiaries 10.7 - - (10.7) -
---------------- --------------- --------------- -------------- --------------
Income (loss) from continuing operations (62.4) 2.4 8.3 (10.7) (62.4)
Discontinued operations (1.7) - - - (1.7)
---------------- --------------- --------------- -------------- --------------
Net income (loss) $ (64.1) $ 2.4 $ 8.3 $ (10.7) $ (64.1)
================ =============== =============== ============== ==============
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2003
SUBSIDIARY OTHER ELIMINATING
COMPANY GUARANTORS SUBSIDIARIES ENTRIES CONSOLIDATED
---------------- --------------- --------------- -------------- --------------
Net cash provided (used) by:
Operating activities $ (58.0) $ 9.8 $ (6.0) $ - $ (54.2)
Investing activities 68.4 (1.0) (2.0) - 65.4
Financing activities (.2) - - - (.2)
Intercompany activity 2.8 (8.4) 5.6 - -
---------------- --------------- --------------- -------------- --------------
Net increase in cash and cash equivalents
during the period 13.0 .4 (2.4) - 11.0
Cash and cash equivalents at
beginning of period 72.8 .5 5.4 - 78.7
---------------- --------------- --------------- -------------- --------------
Cash and cash equivalents at
end of period $ 85.8 $ .9 $ 3.0 $ - $ 89.7
================ =============== =============== ============== ==============
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2002
SUBSIDIARY OTHER ELIMINATING
COMPANY GUARANTORS SUBSIDIARIES ENTRIES CONSOLIDATED
---------------- --------------- --------------- -------------- --------------
Net cash provided (used) by:
Operating activities $ (4.9) $ 8.0 $ 4.6 $ - $ 7.7
Investing activities 2.2 - (7.0) - (4.8)
Financing activities (7.3) - - - (7.3)
Intercompany activity 2.3 (7.2) 4.9 - -
---------------- --------------- --------------- -------------- --------------
Net (decrease) increase in cash and cash
equivalents during the period (7.7) .8 2.5 - (4.4)
Cash and cash equivalents at
beginning of period 151.5 - 1.8 - 153.3
---------------- --------------- --------------- -------------- --------------
Cash and cash equivalents at
end of period $ 143.8 $ .8 $ 4.3 $ - $ 148.9
================ =============== =============== ============== ==============
Notes to Condensed Consolidating Financial Information
Income Taxes - The income tax provisions for the quarters ended March 31, 2003
and 2002, relate primarily to foreign income taxes. As a result of the Cases,
the Company did not recognize any income tax benefit for the losses incurred
from domestic operations (including temporary differences) or any U.S. income
tax benefit for foreign income taxes. Instead, the increases in federal and
state deferred tax assets as a result of additional net operating losses and
foreign tax credits generated were offset by equal increases in valuation
allowances.
Foreign Currency - The functional currency of the Company and its subsidiaries
is the United States Dollar, and accordingly, pre-tax translation gains (losses)
are included in the Company's and Subsidiary Guarantors' operating income (loss)
and other income (expense), net balances. Such amounts for the Company totaled
$14.2 and $3.9 for the quarters ended March 31, 2003 and 2002, respectively.
Such amounts for the Subsidiary Guarantors totaled $(14.3) and $(4.1) for the
quarters ended March 31, 2003 and 2002, respectively.
Debt Covenants and Restrictions - The Indentures contain restrictions on the
ability of the Company's subsidiaries to transfer funds to the Company in the
form of dividends, loans or advances.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section should be read in conjunction with the response to Part I, Item 1,
of this Report.
This section contains statements which constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear in a number of places in this section (see, for example,
"Recent Events and Developments," "Results of Operations," and "Liquidity and
Capital Resources"). Such statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "estimates,"
"will," "should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy.
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in the
forward-looking statements as a result of various factors. These factors include
the effectiveness of management's strategies and decisions, general economic and
business conditions, developments in technology, new or modified statutory or
regulatory requirements, and changing prices and market conditions. This section
and Part I, Item 1. "Business - Factors Affecting Future Performance" in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002, each
identify other factors that could cause actual results to vary. No assurance can
be given that these are all of the factors that could cause actual results to
vary materially from the forward-looking statements.
REORGANIZATION PROCEEDINGS
The Company, its parent company, Kaiser Aluminum Corporation ("Kaiser"), and 24
of the Company's subsidiaries have filed separate voluntary petitions in the
United States Bankruptcy Court for the District of Delaware (the "Court") for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Code"); the Company, Kaiser and 15 of the Company's subsidiaries (the "Original
Debtors") filed in the first quarter of 2002 and nine additional Company
subsidiaries (the "Additional Debtors") filed in the first quarter of 2003. The
Original Debtors and Additional Debtors are collectively referred to herein as
the "Debtors" and the Chapter 11 proceedings of these entities are collectively
referred to herein as the "Cases." For purposes of this Report, the term "Filing
Date" shall mean, with respect to any particular Debtor, the date on which such
Debtor filed its Case. None of the Company's non-U.S. joint ventures are
included in the Cases. The Cases are being jointly administered. The Debtors are
managing their businesses in the ordinary course as debtors-in-possession
subject to the control and administration of the Court.
Original Debtors. The necessity for filing the Cases by the Original Debtors was
attributable to the liquidity and cash flow problems of the Company and its
subsidiaries arising in late 2001 and early 2002. The Company was facing
significant near-term debt maturities at a time of unusually weak aluminum
industry business conditions, depressed aluminum prices and a broad economic
slowdown that was further exacerbated by the events of September 11, 2001. In
addition, the Company had become increasingly burdened by asbestos litigation
and growing legacy obligations for retiree medical and pension costs. The
confluence of these factors created the prospect of continuing operating losses
and negative cash flow, resulting in lower credit ratings and an inability to
access the capital markets. In connection with the filing of the Original
Debtors' Cases, the Original Debtors are prohibited from paying pre-Filing Date
obligations other than those related to certain joint ventures and in certain
other limited circumstances approved by the Court.
In October 2002, the Court set January 31, 2003 as the last date by which
holders of pre-Filing Date claims against the Original Debtors (other than
asbestos-related personal injury claims and certain hearing loss claims) could
file their claims. Any holder of a claim that was required to file a claim by
such date and did not do so may be barred from asserting such claim against any
of the Original Debtors and, accordingly, may not be able to participate in any
distribution in any of the Cases on account of such claim. Because the Company
has not had sufficient time to analyze the proofs of claim to determine their
validity, no provision has been included in the accompanying financial
statements for claims that have been filed. The bar date does not apply to
asbestos-related claims, for which the Original Debtors reserve the right to
establish a separate bar date at a later date. A separate bar date of June 30,
2003 has been set for certain hearing loss claims.
Additional Debtors. The Cases filed by the Additional Debtors were commenced,
among other reasons, to protect the assets held by these Debtors against
possible statutory liens that might arise and be enforced by the Pension Benefit
Guaranty Corporation ("PBGC") primarily as a result of the Company's failure to
meet a $17.0 million accelerated funding requirement to its salaried employee
retirement plan in January 2003. From an operating perspective, the filing of
the Cases by the Additional Debtors had no impact on the Company's day-to-day
operations. In contrast to the circumstances of the Original Debtors, the Court
authorized the Additional Debtors to continue to make all payments in the normal
course of business (including payments of pre-Filing Date amounts) to creditors.
In March 2003, the Court set May 15, 2003 as the last date by which holders of
pre-Filing Date claims against the Additional Debtors (other than
asbestos-related personal injury claims and certain hearing loss claims) must
file their claims.
All Debtors. The Debtors' objective in the Cases is to achieve the highest
possible recoveries for all creditors and stockholders and to continue the
operation of their businesses. However, there can be no assurance that the
Debtors will be able to attain these objectives or to achieve a successful
reorganization. While valuation of the Debtors' assets and pre-Filing Date
claims at this stage of the Cases is subject to inherent uncertainties, the
Debtors currently believe that it is likely that their liabilities will be found
in the Cases to exceed the fair value of their assets. Therefore, the Debtors
currently believe that it is likely that pre-Filing Date claims will be paid at
less than 100% of their face value and the equity of the Company's stockholders
will be diluted or cancelled.
As provided by the Code, the Original Debtors had the exclusive right to propose
a plan of reorganization for 120 days following the initial Filing Date. The
Court has subsequently approved several extensions of the exclusivity period for
all Debtors, the most recent of which was set to expire April 30, 2003. A motion
to extend the exclusivity period through July 31, 2003, was filed by the Debtors
in late April 2003. By filing the motion to extend the exclusivity period, the
period is automatically extended until the June 17, 2003 Court hearing date.
As the Debtors' motion to extend the exclusivity period through July 31, 2003
was agreed with by the two creditors' committees in advance of the filing,
the Debtors expect the motion to be approved by the Court. Additional extensions
are likely to be sought. Extensions of this nature are believed to be routine in
complex cases such as the Debtors' Cases. However, no assurance can be given