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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1995
Commission file number 1-3605
KAISER ALUMINUM & CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-0928288
(State of Incorporation) (I.R.S. Employer Identification No.)
6177 Sunol Boulevard, Pleasanton, California 94566-7769
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 462-1122
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Cumulative Convertible Preference Stock
(par value $100)
4 1/8% Series None
4 3/4% (1957 Series) None
4 3/4% (1959 Series) None
4 3/4% (1966 Series) None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Cumulative (1985 Series A) Preference Stock
Cumulative (1985 Series B) Preference Stock
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes X
-----
No -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
-----
As of March 15, 1996, there were 46,171,365 shares of the common stock
of the registrant outstanding, all of which were owned by Kaiser
Aluminum Corporation, the parent corporation of the registrant. As of
March 15, 1996, non-affiliates of the registrant held 599,845 shares
of Cumulative (1985 Series A) Preference Stock and 97,106 shares of
Cumulative (1985 Series B) Preference Stock of the registrant. The
aggregate value of such Cumulative (1985 Series A) Preference Stock and
the Cumulative (1985 Series B) Preference Stock, based upon the
redemption price for such stock, is $34.8 million.
Certain portions of the registrant's definitive proxy statement to be
filed not later than 120 days after the close of the registrant's
fiscal year are incorporated by reference into Part III of this Report
on Form 10-K.
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NOTE
Kaiser Aluminum & Chemical Corporation's Report on Form 10-K filed
with the Securities and Exchange Commission includes all exhibits
required to be filed with the Report. Copies of this Report on Form
10-K, including only Exhibit 21 of the exhibits listed on pages 59-62
of this Report, are available without charge upon written request.
The registrant will furnish copies of the other exhibits to this
Report on Form 10-K upon payment of a fee of 25 cents per page.
Please contact the office set forth below to request copies of this
Report on Form 10-K and for information as to the number of pages
contained in each of the other exhibits and to request copies of such
exhibits:
Corporate Secretary
Kaiser Aluminum & Chemical Corporation
6177 Sunol Boulevard
Pleasanton, California 94566-7769
(i)
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
TABLE OF CONTENTS
Page
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . 17
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . 17
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . 57
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . 57
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . 57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . . 57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . 57
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . 57
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
INDEX OF EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . 59
EXHIBIT 21 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . 63
(ii)
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
PART I
ITEM 1. BUSINESS
Industry Overview
- -----------------
Primary aluminum is produced by the refining of bauxite into alumina
and the reduction of alumina into primary aluminum. Approximately two
pounds of bauxite are required to produce one pound of alumina, and
approximately two pounds of alumina are required to produce one pound
of primary aluminum. Aluminum's valuable physical properties include
its light weight, corrosion resistance, thermal and electrical
conductivity, and high tensile strength.
Demand
The packaging, transportation and construction industries are the
principal consumers of aluminum in the United States, Japan, and
Western Europe. In the packaging industry, which accounted for
approximately 20% of aluminum consumption in 1994, aluminum's
recyclability and weight advantages have enabled it to gain market
share from steel and glass, primarily in the beverage container area.
Nearly all beer cans and soft drink cans manufactured for the United
States market are made of aluminum. Kaiser Aluminum & Chemical
Corporation ("KACC" or the "Company") believes that growth in the
packaging area is likely to continue through the 1990s due to general
population increase and to further penetration of the beverage
container market in Asia and Latin America, where aluminum cans are a
substantially lower percentage of the total beverage container market
than in the United States. The Company believes that growth in demand
for can sheet in the United States will follow the growth in
population, offset, in part, by the effects of the use of lighter
gauge aluminum for can sheet and of plastic container production from
newly installed capacity.
In the transportation industry, which accounted for approximately 28%
of aluminum consumption in the United States, Japan, and Western
Europe in 1994, automotive manufacturers use aluminum instead of
steel, ductile iron, or copper for an increasing number of components,
including radiators, wheels, suspension components, and engines, in
order to meet more stringent environmental, safety, and fuel
efficiency requirements. The Company believes that sales of aluminum
to the transportation industry have considerable growth potential due
to projected increases in the use of aluminum in automobiles. In
addition, the Company believes that consumption of aluminum in the
construction industry will follow the cyclical growth pattern of that
industry, and will benefit from higher growth in Asian and Latin American
economies.
Supply
As of year-end 1995, Western world aluminum capacity from 107 smelting
facilities was approximately 16.6 million tons* per year. Western
world production of primary aluminum for 1995 increased approximately
1.8% compared to 1994. Net exports of aluminum from the former Sino
Soviet bloc increased approximately 250% from 1990 levels during the
period from 1991 through 1994 to approximately 2.2 million tons per
year. These exports contributed to a significant increase in London
Metal Exchange ("LME") stocks of primary aluminum which peaked in June
1994 at 2.7 million tons. By the end of 1995, LME stocks of primary
aluminum had declined 2.1 million tons from this peak level and 1.1
million tons from the beginning of 1995. See "-Recent Industry
Trends."
Based upon information currently available, the Company believes that
moderate additions will be made during 1996-1998 to Western world
alumina and primary aluminum production capacity. The increases in
alumina capacity during 1996-1998 are expected to come from one new
refinery which began operations in 1995 and incremental expansions of
existing
- ----------
* All references to tons in this Report refer to metric tons of
2,204.6 pounds.
1
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
refineries. In addition, the Company believes that there is currently
approximately .9 million tons of curtailed smelting capacity that
could be restarted by aluminum producers. The increases in primary
aluminum capacity during 1996-1998 are expected to come from one new
smelter, which began operations in 1995 and is expected to reach its
rated capacity of approximately 466,000 tons per year in 1996, and the
remainder principally from incremental expansions of existing
smelters.
Recent Industry Trends
Market fundamentals for aluminum improved significantly in 1994 as
aluminum producers worldwide curtailed primary aluminum production,
Western world consumption of aluminum grew strongly, and customers
replenished inventories, particularly in the United States. In 1995,
production of primary aluminum increased and consumption of aluminum
continued to grow, but at a much lower rate than in 1994. In general,
the overall aluminum market was strongest in the first half of 1995.
By the second half of 1995, orders and shipments for certain products
had softened and the rate of decline in LME inventories had leveled
off. By the end of 1995, some small increases in LME inventories
occurred, and prices of aluminum weakened from first-half levels. The
Midwest U.S. transaction price for primary aluminum in 1995 averaged
approximately 86 cents per pound, compared to a 1994 annual average of
approximately 72 cents per pound. The Midwest U.S. transaction price
for primary aluminum averaged approximately 79 cents per pound in
December 1995.
Western world demand for alumina, and the price of alumina, declined
in 1994 in response to the curtailment of Western world smelter
production of primary aluminum, partially offset by increased usage of
Western world alumina by smelters in the Commonwealth of Independent
States (the "CIS") and in the People's Republic of China (the "PRC").
Increased Western world production of primary aluminum, as well as
continued imports of Western world alumina by the CIS and the PRC,
during 1995 resulted in higher demand for Western world alumina and
significantly stronger alumina pricing. United States shipments of
domestic fabricated aluminum products in 1995 were approximately at
1994 levels, although in 1995 demand for can sheet in the United
States softened relative to 1994. Overall, the Company believes that
the market fundamentals for aluminum will be good for the near future,
barring prolonged economic recession, and that demand is likely to
continue growing at levels sufficient to absorb the output from
restarts of industry smelter capacity and from the limited additions
of new supply under construction.
The Company
- -----------
General
The Company is a direct subsidiary of Kaiser Aluminum Corporation
("Kaiser") and is an indirect subsidiary of MAXXAM Inc. ("MAXXAM").
The Company operates in all principal aspects of the aluminum industry
- - the mining of bauxite, the refining of bauxite into alumina, the
production of primary aluminum from alumina, and the manufacture of
fabricated (including semi-fabricated) aluminum products. In addition
to the production utilized by the Company in its operations, the
Company sells significant amounts of alumina and primary aluminum in
domestic and international markets. In 1995, the Company produced
approximately 2,838,000 tons of alumina, of which approximately 72%
was sold to third parties, and produced 413,600 tons of primary
aluminum, of which approximately 66% was sold to third parties. The
Company is also a major domestic supplier of fabricated aluminum
products. In 1995, the Company shipped approximately 368,200 tons of
fabricated aluminum products to third parties, which accounted for
approximately 6% of the total tonnage of United States domestic
shipments. A majority of the Company's fabricated products are sold
to distributors or used by customers as components in the manufacture
and assembly of finished end-use products. Note 11 of the Notes to
Consolidated Financial Statements is incorporated herein by reference.
2
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
The following table sets forth total shipments and intracompany
transfers of the Company's alumina, primary aluminum, and fabricated
aluminum operations:
Year Ended December 31,
----------------------------
1995 1994 1993
------- ------- -------
(in thousands of tons)
ALUMINA:
Shipments to Third Parties 2,040.1 2,086.7 1,997.5
Intracompany Transfers 800.6 820.9 807.5
PRIMARY ALUMINUM:
Shipments to Third Parties 271.7 224.0 242.5
Intracompany Transfers 217.4 225.1 233.6
FABRICATED ALUMINUM PRODUCTS:
Shipments to Third Parties 368.2 399.0 373.2
Sensitivity to Prices and Hedging Programs
The Company's operating results are sensitive to changes in the prices
of alumina, primary aluminum, and fabricated aluminum products, and
also depend to a significant degree upon the volume and mix of all
products sold and on its hedging strategies. Fabricated aluminum
prices, which vary considerably among products, are influenced by
changes in the price of primary aluminum and generally lag behind
primary aluminum prices for periods of up to six months. Changes in
the market price of primary aluminum also affect the Company's
production costs of fabricated products because they influence the
price of aluminum scrap purchased by the Company and the Company's
labor costs, to the extent such costs are indexed to primary aluminum
prices. Through its variable cost structures, forward sales, and
hedging programs, the Company has attempted to mitigate its exposure
to possible declines in the market prices of alumina, primary
aluminum, and fabricated aluminum products while retaining the ability
to participate in favorable pricing environments that may materialize.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Trends - Sensitivity to Prices and Hedging
Programs" and Note 10 of the Notes to Consolidated Financial
Statements.
Production Operations
The Company's operations are conducted through decentralized business
units which compete throughout the aluminum industry.
. The alumina business unit, which mines bauxite and obtains
additional bauxite tonnage under long-term contracts, produced
approximately 8% of Western world alumina in 1995. During
1995, the Company's third party shipments of bauxite
represented approximately 21% of bauxite mined. In addition,
the Company's third party shipments of alumina represented
approximately 72% of alumina produced. The Company's share of
total Western world alumina capacity was approximately 7% in
1995.
. The primary aluminum products business unit operates two
domestic smelters wholly owned by the Company and two
foreign smelters in which the Company holds significant
ownership interests. During 1995, the Company's third
party shipments of primary aluminum represented approximately
66% of primary aluminum production. The Company's
share of total Western world primary aluminum capacity was
approximately 3% in 1995.
3
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
. Fabricated aluminum products are manufactured by three
business units - flat-rolled products, extruded products,
and engineered components. The products include body, lid,
and tab stock for beverage containers, sheet and
plate products, heat-treated products, screw machine stock,
redraw rod, forging stock, truck wheels and hubs,
air bag canisters, engine manifolds, and other castings,
forgings and extruded products, which are manufactured
at plants located in principal marketing areas of the United
States and Canada. The aluminum utilized in the
Company's fabricated products operations is comprised of
primary aluminum, obtained both internally and from
third parties, and scrap metal purchased from third parties.
Alumina
- -------
The following table lists the Company's bauxite mining and alumina
refining facilities as of December 31, 1995:
Annual
Production Total
Capacity Annual
Company Available to Production
Activity Facility Location Ownership the Company Capacity
- -------- -------- -------- --------- ------------ ----------
(tons) (tons)
Bauxite Mining KJBC(1) Jamaica 49% 4,500,000 4,500,000
Alpart(2) Jamaica 65% 2,275,000 3,500,000
--------- ---------
6,775,000 8,000,000
========= =========
Alumina Refining Gramercy Louisiana 100% 1,000,000 1,000,000
Alpart Jamaica 65% 943,000 1,450,000
QAL Australia 28.3% 934,000 3,300,000
--------- ---------
2,877,000 5,750,000
========= =========
- ----------
(1) Although the Company owns 49% of Kaiser Jamaica Bauxite Company
("KJBC"), it has the right to receive all of such entity's output.
(2) Alumina Partners of Jamaica ("Alpart") bauxite is refined into
alumina at the Alpart refinery.
Bauxite mined in Jamaica by KJBC is refined into alumina at the
Company's plant at Gramercy, Louisiana, or is sold to third parties.
In 1979, the Government of Jamaica granted the Company a mining lease
for the mining of bauxite sufficient to supply the Company's
then-existing Louisiana alumina refineries at their annual capacities
of 1,656,000 tons per year until January 31, 2020. Alumina from the
Gramercy plant is sold to third parties.
Alpart holds bauxite reserves and owns a 1,450,000 tons per year
alumina plant located in Jamaica. The Company owns a 65% interest in
Alpart, and Hydro Aluminium a.s ("Hydro") owns the remaining 35%
interest. The Company has management responsibility for the facility
on a fee basis. The Company and Hydro have agreed to be responsible
for their proportionate shares of Alpart's costs and expenses. The
Government of Jamaica has granted Alpart a mining lease and has
entered into other agreements with Alpart designed to assure that
sufficient reserves of bauxite will be available to Alpart to operate
its refinery as it may be expanded to a capacity of 2,000,000 tons per
year through the year 2024. Alpart has entered into an agreement for
the supply of substantially all of its fuel oil through 1996. The
balance of Alpart's fuel oil requirements through 1996 will be
purchased in the spot market.
4
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
The Company owns a 28.3% interest in Queensland Alumina Limited
("QAL"), which owns the largest and one of the most efficient alumina
refineries in the world, located in Queensland, Australia. QAL
refines bauxite into alumina, essentially on a cost basis, for the
account of its stockholders under long-term tolling contracts. The
stockholders, including the Company, purchase bauxite from another QAL
stockholder under long-term supply contracts. The Company has
contracted with QAL to take approximately 792,000 tons per year of
capacity or pay standby charges. The Company is unconditionally
obligated to pay amounts calculated to service its share ($88.9
million at December 31, 1995) of certain debt of QAL, as well as other
QAL costs and expenses, including bauxite shipping costs. QAL's
annual production capacity is approximately 3,300,000 tons, of which
approximately 934,000 tons are available to the Company.
The Company's principal customers for bauxite and alumina consist of
large and small domestic and international aluminum producers that
purchase bauxite and reduction-grade alumina for use in their internal
refining and smelting operations, trading intermediaries who resell
raw materials to end-users, and users of chemical-grade alumina. In
1995, the Company sold all of its bauxite to two customers, the
largest of which accounted for approximately 74% of such sales. The
Company also sold alumina to nine customers, the largest and top five
of which accounted for approximately 23% and 90% of such sales,
respectively. See "- Competition." The Company believes that among
alumina producers it is now the world's second largest seller of
alumina to third parties. The Company's strategy is to sell a
substantial portion of the bauxite and alumina available to it in
excess of its internal refining and smelting requirements under
multi-year sales contracts.
Primary Aluminum Products
- -------------------------
The following table lists the Company's primary aluminum smelting
facilities as of December 31, 1995:
Annual Rated Total 1995
Capacity Annual Average
Company Available to Rated Operating
Location Facility Ownership the Company Capacity Rate
- -------- -------- --------- ------------ -------- ---------
(tons) (tons)
Domestic
Washington Mead 100% 200,000 200,000 82%
Washington Tacoma 100% 73,000 73,000 82%
------- -------
Subtotal 273,000 273,000
------- -------
International
Ghana Valco 90% 180,000 200,000 68%
Wales, United Anglesey 49% 55,000 112,000 119%
------- -------
Subtotal 235,000 312,000
------- -------
Total 508,000 585,000
======= =======
The Company owns two smelters located at Mead and Tacoma, Washington,
where alumina is processed into primary aluminum. The Mead facility
uses pre-bake technology and produces primary aluminum. Approximately
71% of Mead's 1995 production was used at the Company's Trentwood
fabricating facility and the balance was sold to third parties. The
Tacoma plant uses Soderberg technology and produces primary aluminum
and high-grade, continuous-cast, redraw rod, which currently commands
a premium price in excess of the price of primary aluminum. Both
smelters have achieved significant production efficiencies in recent
years through retrofit technology, cost controls, and semi-variable
wage and
5
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
power contracts, leading to increases in production volume and
enhancing their ability to compete with newer smelters. At the Mead
plant, the Company has converted to welded anode assemblies to
increase energy efficiency, extended the anode life-cycle in the
smelting process, changed from pencil to liquid pitch to produce
carbon anodes which achieved environmental and operating savings, and
engaged in efforts to increase production through the use of improved,
higher-efficiency reduction cells.
Electric power represents an important production cost for the Company
at its aluminum smelters. In 1995 electric power purchase agreements
for the Company's facilities in the Pacific Northwest were
successfully restructured, which the Company anticipates will result
in significantly lower electric power costs in 1996 and beyond for the
Mead and Tacoma, Washington, smelters and the Trentwood, Washington,
rolling mill compared to 1995 electric power costs. From 1981 until 1995,
electric power for the Company's Mead and Tacoma smelters was purchased
exclusively from the Bonneville Power Administration (the "BPA") by the
Company under a contract which expires in 2001. In April 1995 the BPA
agreed to allow each of its direct service industrial customers (the "DSIs"),
which include the Company, to purchase a portion of its requirement for
electric power from sources other than the BPA beginning October 1, 1995.
In June 1995 the Company entered into an agreement with The Washington Water
Power Company (the "WWP") to purchase up to 50 megawatts of electric
power for its Northwest facilities for a five-year term beginning
October 1, 1995. The Company is receiving power under that contract,
which power displaces a portion of the Company's interruptible power
from the BPA. In addition, in 1995 the Company entered into a new
power purchase contract with the BPA, which amends the existing BPA
power contract and which contemplates reductions during 1996 in the
amount of power which the Company is obligated to purchase from the
BPA and which the BPA is obligated to sell to the Company, and the
replacement of such power with power to be purchased from other
suppliers. The Company is negotiating power purchase agreements for
such power with suppliers other than the BPA. Contracts for the
purchase of all power required by the Company's Mead and Tacoma
smelters and Trentwood rolling mill for 1996, and for approximately
one-half of such power for the period 1997-2000, have been finalized.
Two lawsuits were filed in December 1995 against the BPA by various
parties, one of which petitions for a review of the BPA's "Record of
Decision on Direct Service Industrial Customer Requirements Power
Sales Contract" issued on September 28, 1995, and one of which
petitions for review of, and to set aside, suspend, or modify, the
action of the BPA to decide to offer five-year "block" power sales to
the DSIs. The effect of such lawsuits, if any, on the Company's new
power purchase contract with the BPA is not known. Certain of the
DSIs, including the Company, have intervened in the two lawsuits.
In 1995 the Company also entered into agreements with the BPA and with
the WWP, with terms ending in 2001, under which the BPA and the WWP
would provide to the Company transmission services for power purchased
from sources other than the BPA. The term of the transmission
services agreement with the BPA was subsequently extended for an
additional fifteen years, which extension has been challenged. Four
lawsuits have been filed against the BPA by various parties, which
lawsuits either challenge the BPA's record of decision offering such
an extension agreement to the DSIs or challenge the BPA's Business
Plan Environmental Impact Statement record of decision in connection
therewith. Certain of the DSIs, including the Company, have
intervened in the four lawsuits.
The Company began operating its Mead and Tacoma smelters in Washington
at approximately 75% of their full capacity in January 1993, when
three reduction potlines were removed from production (two at Mead and
one at Tacoma) in response to a power reduction imposed by the BPA.
In March 1995, the BPA offered to its industrial customers, including
the Company, surplus firm power at a discounted rate for the period
April 1, 1995, through July 31, 1995, to enable such customers to
restart idle industrial loads. In April 1995, the Company and the BPA
entered into a contract for an amount of such power, and thereafter
the Company restarted one-half of an idle potline (approximately 9,000
tons of annual capacity) at its Tacoma, Washington, smelter. The
Tacoma smelter was returned to full production in October 1995. In
1995 the Company entered into a one-year power supply contract with
the BPA, for a term ending September 30, 1996,
6
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
in connection with the restart of idled capacity at its Mead smelter.
The Mead smelter returned to full production in December 1995.
The Company manages, and owns a 90% interest in, the Volta Aluminium
Company Limited ("Valco") aluminum smelter in Ghana. The Valco
smelter uses pre-bake technology and processes alumina supplied by the
Company and the other participant into primary aluminum under
long-term tolling contracts which provide for proportionate payments
by the participants in amounts intended to pay not less than all of
Valco's operating and financing costs. The Company's share of the
primary aluminum is sold to third parties. Power for the Valco
smelter is supplied under an agreement which expires in 2017. The
agreement indexes two-thirds of the price of the contract quantity of
power to the market price of primary aluminum. The agreement also
provides for a review and adjustment of the base power rate and the
price index every five years. The most recent review was completed in
April 1994 for the 1994-1998 period. Valco has entered into an
agreement with the government of Ghana under which Valco has been
assured (except in cases of force majeure) that it will receive
sufficient electric power to operate at its current level of three and
one-half potlines through December 31, 1996. The Company believes
that, assuming normal rainfall during 1996, Valco should have available
sufficient electric power to operate at its current level through
1996.
The Company owns a 49% interest in the Anglesey Aluminium Limited
("Anglesey") aluminum smelter and port facility at Holyhead, Wales.
The Anglesey smelter uses pre-bake technology. The Company supplies
49% of Anglesey's alumina requirements and purchases 49% of Anglesey's
aluminum output. The Company sells its share of Anglesey's output to
third parties. Power for the Anglesey aluminum smelter is supplied
under an agreement which expires in 2001.
The Company has developed and installed proprietary retrofit and
control technology in all of its smelters, as well as at third party
locations. This technology - which includes the redesign of the
cathodes and anodes that conduct electricity through reduction cells,
improved feed systems that add alumina to the cells, and a
computerized system that controls energy flow in the cells - enhances
the Company's ability to compete more effectively with the industry's
newer smelters. The Company is actively engaged in efforts to license
this technology and sell technical and managerial assistance to other
producers worldwide, and may participate in joint ventures or similar
business partnerships which employ the Company's technical and
managerial knowledge. See "-Research and Development."
The Company's principal primary aluminum customers consist of large
trading intermediaries and metal brokers, who resell primary aluminum
to fabricated product manufacturers, and large and small international
aluminum fabricators. In 1995, the Company sold its primary aluminum
production not utilized for internal purposes to approximately 35
customers, the largest and top five of which accounted for
approximately 25% and 62% of such sales, respectively. See "-
Competition." Marketing and sales efforts are conducted by a small
staff located at the business unit's headquarters in Pleasanton,
California, and by senior executives of the Company who participate in
the structuring of major sales transactions. A majority of the
business unit's sales are based upon long-term relationships with
metal merchants and end-users.
Fabricated Aluminum Products
- ----------------------------
The Company manufactures and markets fabricated aluminum products for
the packaging, transportation, construction, and consumer durables
markets in the United States and abroad. Sales in these markets are
made directly and through distributors to a large number of customers.
In 1995, four domestic beverage container manufacturers were among the
leading customers for the Company's fabricated products and accounted
for approximately 12% of the Company's sales revenue.
7
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
The Company's fabricated products compete with those of numerous
domestic and foreign producers and with products made of steel,
copper, glass, plastic, and other materials. Product quality, price,
and availability are the principal competitive factors in the market
for fabricated aluminum products. The Company has focused its
fabricated products operations on selected products in which the
Company has production expertise, high-quality capability, and
geographic and other competitive advantages.
Flat-Rolled Products - The flat-rolled products business unit, the
largest of the Company's fabricated products businesses, operates the
Trentwood sheet and plate mill at Spokane, Washington. The Trentwood
facility is the Company's largest fabricating plant and accounted for
approximately 64% of the Company's 1995 fabricated aluminum products
shipments. The business unit supplies the beverage container market
(producing body, lid, and tab stock), the aerospace market, and the
tooling plate, heat-treated alloy and common alloy coil markets, both
directly and through distributors. During 1995, the Company
successfully completed the two year restructuring of its flat-rolled
products operation at its Trentwood plant to reduce that facility's
annual operating costs by at least $50.0 million.
The Company's flat-rolled products are sold primarily to beverage
container manufacturers located in the western United States and in
the Asian Pacific Rim countries where the Trentwood plant's location
provides the Company with a transportation advantage. Quality of
products for the beverage container industry and timeliness of
delivery are the primary bases on which the Company competes. The
Company believes that capital improvements at Trentwood have enhanced
the quality of its products for the beverage container industry and
the capacity and efficiency of its manufacturing operations, and that
the Company is one of the highest quality producers of aluminum
beverage can stock in the world.
In 1995, the flat-rolled products business unit had 31 domestic and
foreign can stock customers, including the five major domestic
beverage can manufacturers. The largest and top five of such
customers accounted for approximately 14% and 41%, respectively, of
the business unit's revenue. See "- Competition." In 1995, the
business unit shipped products to approximately 150 customers in the
aerospace, transportation, and industrial ("ATI") markets, most of
which were distributors who sell to a variety of industrial end-users.
The top five customers in the ATI markets for flat-rolled products
accounted for approximately 13% of the business unit's revenue. The
marketing staff for the flat-rolled products business unit is located
at the Trentwood facility and in Pleasanton, California. Sales are
made directly to customers (including distributors) from eight sales
offices located throughout the United States. International customers
are served by sales offices in the Netherlands and Japan and by
independent sales agents in Asia and Latin America.
Extruded Products - The extruded products business unit is
headquartered in Dallas, Texas, and operates soft-alloy extrusion
facilities in Los Angeles, California; Santa Fe Springs, California;
Sherman, Texas; and London, Ontario, Canada; a cathodic protection
business located in Tulsa, Oklahoma, that also extrudes both aluminum
and magnesium; rod and bar facilities in Newark, Ohio, and Jackson,
Tennessee, which produce screw machine stock, redraw rod, forging
stock, and billet; and a facility in Richland, Washington, which
produces seamless tubing in both hard and soft alloys for the
automotive, other transportation, export, recreation, agriculture, and
other industrial markets. Each of the soft-alloy extrusion facilities
has fabricating capabilities and provides finishing services.
The extruded products business unit's major markets are in the
transportation industry, to which it provides extruded shapes for
automobiles, trucks, trailers, cabs, and shipping containers, and in
the distribution, durable goods, defense, building and construction,
ordnance and electrical markets. In 1995, the extruded products
business unit had approximately 825 customers for its products, the
largest and top five of which accounted for approximately 6% and 20%,
respectively, of its revenue. See "- Competition." Sales are made
directly from plants as well as marketing locations across the United
States.
8
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
Engineered Components - The engineered components business unit
operates forging facilities at Erie, Pennsylvania; Oxnard, California;
and Greenwood, South Carolina; a machine shop at Greenwood, South
Carolina; and a casting facility in Canton, Ohio. The engineered
components business unit is one of the largest producers of aluminum
forgings in the United States and is a major supplier of high-quality
forged parts to customers in the automotive, commercial vehicle and
ordnance markets. The high strength-to-weight properties of forged
and cast aluminum make it particularly well-suited for automotive
applications. The business unit's casting facility manufactures
aluminum engine manifolds for the automobile, truck and marine
markets.
In 1995, the engineered components business unit had approximately 250
customers, the largest and top five of which accounted for
approximately 34% and 77%, respectively, of the business unit's
revenue. See "- Competition." The engineered components business
unit's headquarters is located in Erie, Pennsylvania, and there is a
sales and engineering office located in Detroit, Michigan, which works
with car makers and other customers, the Center for Technology (see "-
Research and Development"), and plant personnel to create new automotive
component designs and improve existing products.
Competition
Aluminum competes in many markets with steel, copper, glass, plastic,
and numerous other materials. In recent years, plastic containers
have increased and glass containers have decreased their respective
shares of the soft drink sector of the beverage container market. In
the United States, beverage container materials, including aluminum,
face increased competition from plastics as increased polyethylene
("PET") container capacity is brought on line by plastics
manufacturers. Within the aluminum business, the Company competes
with both domestic and foreign producers of bauxite, alumina and
primary aluminum, and with domestic and foreign fabricators. Many of
the Company's competitors have greater financial resources than the
Company. The Company's principal competitors in the sale of alumina
include Alcoa Alumina and Chemicals LLC, Billiton Marketing and
Trading BV, and Alcan Aluminium Limited. The Company competes with
most aluminum producers in the sale of primary aluminum.
Primary aluminum and, to some degree, alumina are commodities with
generally standard qualities, and competition in the sale of these
commodities is based primarily upon price, quality and availability.
The Company also competes with a wide range of domestic and
international fabricators in the sale of fabricated aluminum products.
Competition in the sale of fabricated products is based upon quality,
availability, price and service, including delivery performance. The
Company concentrates its fabricating operations on selected products
in which it has production expertise, high-quality capability, and
geographic and other competitive advantages. The Company believes
that, assuming the current relationship between worldwide supply and
demand for alumina and primary aluminum does not change materially,
the loss of any one of its customers, including intermediaries, would
not have a material adverse effect on the Company's financial
condition or results of operations.
Research and Development
The Company conducts research and development activities principally
at three facilities - the Center for Technology ("CFT") in Pleasanton,
California; the Primary Aluminum Products Division Technology Center
("DTC") adjacent to the Mead smelter in Washington; and the Alumina
Development Laboratory ("ADL") at the Gramercy, Louisiana, refinery,
which supports Kaiser Alumina Technical Services ("KATS") and the
facilities of the alumina business unit. Net expenditures for
Company-sponsored research and development activities were $18.5
million in 1995, $16.7 million in 1994, and $18.5 million in 1993.
The Company's research staff totaled 157 at December 31, 1995. The
Company estimates that research and development net expenditures will
be approximately $22.5 million in 1996.
9
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
CFT performs research and development across a range of aluminum
process and product technologies to support the Company's business
units and new business opportunities. It also selectively offers
technical services to third parties. Significant efforts are directed
at product and process technology for the can stock, aircraft and
automotive markets, and aluminum reduction cell models which are
applied to improving cell designs and operating conditions. The
largest and most notable single project being developed at CFT is a
strip-casting micromill process for producing can sheet. The
conversion and capital costs of these micromills are expected to be
significantly lower than conventional rolling mills and to result in
improved economics compared with historical manufacturing and
transportation costs for can stock. A pilot facility has been
constructed and operated at CFT. The first micromill is being
constructed in Nevada as a demonstration production facility, and the
Company expects operational startup of the facility at the end of
1996. The Company currently intends to finance the cost of the
construction of the Nevada micromill, estimated to be approximately
$45.0 million, from general corporate funds, including possible borrowings
under the 1994 Credit Agreement (defined below), although the Company
is in discussions with third parties which might provide some or all of
such funding. DTC maintains specialized laboratories and a miniature
carbon plant where experiments with new anode and cathode technology
are performed. DTC supports the Company's primary aluminum smelters,
and concentrates on the development of cost-effective technical
innovations such as equipment and process improvements. KATS provides
improved alumina process technology to the Company's facilities and
technical support to new business ventures in cooperation with the Company's
international business development group.
The Company is actively engaged in efforts to license its technology
and sell technical and managerial assistance to other producers
worldwide. The Company's technology has been installed in alumina
refineries, aluminum smelters and rolling mills located in the United
States, Jamaica, Sweden, Germany, Russia, India, Australia, Korea, New
Zealand, Ghana, United Arab Emirates, and the United Kingdom. The
Company's revenue from technology sales and technical assistance to
third parties were $5.7 million in 1995, $10.0 million in 1994, and
$12.8 million in 1993.
The Company has entered into agreements with respect to the
Krasnoyarsk smelter in Russia under which the Company has licensed
certain of its technology for use in such facility and agreed to
provide purchasing services in obtaining Western-sourced technology
and equipment to be used in such facility. These agreements were
entered into in November 1990, and the services under them are
expected to be completed in 1996. In addition, in 1993 the Company
entered into agreements with respect to the Nadvoitsy smelter in
Russia and the Korba smelter of the Bharat Aluminum Co. Ltd., in
India, under which the Company has licensed certain of its technology
for use in such facilities. Services under the Nadvoitsy agreement
were completed in 1995, and the Company expects that services under
the Korba agreement will be completed in 1996.
Operations in China
In 1994, the Company commenced efforts to increase its activities in
certain countries that are expected to be important suppliers of
aluminum and large customers for aluminum and alumina. The Company
intends to use its technical skills, together with capital
investments, to form joint ventures or acquire equity in facilities in
such countries.
In 1995, Kaiser Yellow River Investment Limited ("KYRIL"), a subsidiary
of the Company, was formed to participate in the privatization,
modernization, expansion, and operation of aluminum smelting facilities
in the PRC. KYRIL has entered into a Joint Venture Agreement and related
agreements (the "Joint Venture Agreements") with the Lanzhou Aluminum
Smelters ("LAS") of the China National Nonferrous Metals Industry
Corporation relating to the formation and operation of Yellow River
Aluminum Industry Company Limited, a Sino-foreign joint equity enterprise
organized under PRC law (the "Joint Venture").
The Joint Venture Agreements include provisions for KYRIL to
contribute up to $59.7 million to the Joint Venture in exchange for up
to a 49% interest in the Joint Venture (the "Capital Contribution")
and contemplate that such capital may be used to expand the annual
production capacity of LAS from 85,000 to 115,000 tons, construct a
dry Soderberg paste plant, install and upgrade pollution control
equipment, and provide for general corporate purposes, including
working capital. KYRIL contributed $9.0 million as a contribution to
the capital of the Joint Venture in July 1995. The parties to
10
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
The Joint Venture constitutes the first large-scale privatization in
the Chinese aluminum smelting industry. The Joint Venture's assets
and operations are located primarily in the industrial city of
Lanzhou, the capital of Gansu Province in northwestern China, and in
nearby Lianhai, a special economic zone also in Gansu Province. The
smelter at Lanzhou is the fifth largest aluminum smelter in the PRC
and produces approximately 55,000 tons of primary aluminum per year.
The smelter at Lianhai produces approximately 30,000 tons of primary
aluminum per year. LAS's capital contribution to the Joint Venture
consisted primarily of the Lanzhou and Lianhai smelters.
The Joint Venture Agreements include provisions for KYRIL to contribute up
to $59.7 million to the Joint Venture in exchange for up to a 49% interest
in the Joint Venture (the "Capital Contribution") and contemplate that such
capital may be used to expand the annual production capacity of LAS from 85,000
to 115,000 tons, construct a dry Soderberg paste plant, install and upgrade
pollution control equipment, and provide for general corporate purposes,
including working capital. KYRIL contributed $9.0 million as a contribution
to the capital of the Joint Venture in July 1995. The parties to the Joint
Venture are currently engaged in discussions concerning the amount, timing and
other conditions relating to KYRIL's additional contributions to the
Joint Venture. Governmental approval in the PRC will be necessary in order
to implement any arrangements agreed to by the parties, and there can be no
assurance such approvals will be obtained.
The Company, through its extruded products business unit, has entered
into contracts to form two small joint venture companies in the PRC.
The Company will indirectly acquire equity interests of approximately
45% and 49%, respectively, in these two companies which will
manufacture aluminum extrusions, in exchange for the contribution to
those companies of certain used equipment, technology, services and
cash. The majority equity interests in the two companies will be
owned by affiliates of Guizhou Guang Da Construction Company.
Employees
During 1995, the Company employed an average of 9,546 persons,
compared with an average of 9,744 employees in 1994, and 10,220
employees in 1993. At December 31, 1995, the Company's work force was
9,624, including a domestic work force of 5,946, of whom 4,010 were
paid at an hourly rate. Most hourly paid domestic employees are
covered by collective bargaining agreements with various labor unions.
Approximately 74% of such employees are covered by a master agreement
(the "Labor Contract") with the United Steelworkers of America
("USWA") expiring September 30, 1998. The Labor Contract covers the
Company's plants in Spokane (Trentwood and Mead) and Tacoma,
Washington; Gramercy, Louisiana; and Newark, Ohio. The Labor Contract
replaced a contract that expired October 31, 1994, and was reached
after an eight-day work stoppage by the USWA at these plants in
February 1995.
The Labor Contract provides for base wages at all covered plants. In
addition, workers covered by the Labor Contract may receive quarterly
bonus payments based on various indices of profitability,
productivity, efficiency, and other aspects of specific plant
performance, as well as, in certain cases, the price of alumina or
primary aluminum. Pursuant to the Labor Contract, base wage rates
were raised effective January 2, 1995, were raised again effective
November 6, 1995, and will be raised an additional amount effective
November 3, 1997, and an amount in respect of the cost of living
adjustment under the previous master agreement will be phased into
base wages during the term of the Labor Contract. In the second
quarter of 1995, the Company acquired up to $2,000 of preference stock
held in a stock plan for the benefit of each of approximately 82% of
the employees covered by the Labor Contract and in the first half of
1998 will acquire up to an additional $4,000 of such preference stock
held in such plan for the benefit of substantially the same employees.
In addition, a profitability test was satisfied and, therefore, the
Company will acquire during 1996 up to an additional $1,000 of such
preference stock held in such plan for the benefit of substantially
the same employees. The Company made and will make comparable
acquisitions of preference stock held for the benefit of each of
certain salaried employees.
11
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 1. BUSINESS (continued)
In February 1995, Alpart's employees engaged in a six-day work
stoppage by its National Workers Union, which was settled by a new
contract.
Management considers the Company's employee relations to be
satisfactory.
Environmental Matters
The Company is subject to a wide variety of international, federal,
state and local environmental laws and regulations (the "Environmental
Laws"). From time to time the Environmental Laws are amended and new
ones are adopted. The Environmental Laws regulate, among other
things, air and water emissions and discharges; the generation,
storage, treatment, transportation, and disposal of solid and
hazardous waste; the release of hazardous or toxic substances,
pollutants and contaminants into the environment; and, in certain
instances, the environmental condition of industrial property prior to
transfer or sale. In addition, the Company is subject to various
federal, state, and local workplace health and safety laws and
regulations ("Health Laws").
From time to time, the Company is subject, with respect to its current
and former operations, to fines or penalties assessed for alleged
breaches of the Environmental and Health Laws and to claims and
litigation brought by federal, state or local agencies and by private
parties seeking remedial or other enforcement action under the
Environmental and Health Laws or damages related to alleged injuries
to health or to the environment, including claims with respect to
certain waste disposal sites and the remediation of sites presently or
formerly operated by the Company. See "Legal Proceedings." The
Company currently is subject to a number of lawsuits under the
Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended by the Superfund Amendments and Reauthorization
Act of 1986 ("CERCLA"). The Company, along with certain other
entities, has been named as a Potentially Responsible Party ("PRP")
for remedial costs at certain third-party sites listed on the National
Priorities List under CERCLA and, in certain instances, may be exposed
to joint and several liability for those costs or damages to natural
resources. The Company's Mead, Washington, facility has been listed
on the National Priorities List under CERCLA. In addition, in
connection with certain of its asset sales, the Company has agreed to
indemnify the purchasers with respect to certain liabilities (and
associated expenses) resulting from acts or omissions arising prior to
such dispositions, including environmental liabilities. While
uncertainties are inherent in the final outcome of these matters, and
it is presently impossible to determine the actual costs that
ultimately may be incurred, the Company believes that the resolution
of such uncertainties should not have a material adverse effect on its
consolidated financial position, results of operations, or liquidity.
Environmental capital spending was $9.2 million in 1995, $11.9 million
in 1994, and $12.6 million in 1993. Annual operating costs for
pollution control, not including corporate overhead or depreciation,
were approximately $26.0 million in 1995, $23.1 million in 1994, and
$22.4 million in 1993. Legislative, regulatory, and economic
uncertainties make it difficult to project future spending for these
purposes. However, the Company currently anticipates that in the
1996-1997 period, environmental capital spending will be within the
range of $27.0 - $33.0 million per year, and operating costs for
pollution control will be within the range of $28.0 - $29.0 million
per year. In addition, $4.5 million in cash expenditures in 1995,
$3.6 million in 1994, and $7.2 million in 1993 were charged to
previously established reserves relating to environmental costs.
Approximately $8.4 million is expected to be charged to such reserves
in 1996.
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources - Environmental Contingencies." The portion of Note 9 of
the Notes to Consolidated Financial Statements under the heading
"Environmental Contingencies" is incorporated herein by reference.
12
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 2. PROPERTIES
The locations and general character of the principal plants, mines,
and other materially important physical properties relating to the
Company's operations are described in "Business - The Company -
Production Operations" and those descriptions are incorporated herein
by reference. The Company owns in fee or leases all the real estate
and facilities used in connection with its business. Plants and
equipment and other facilities are generally in good condition and
suitable for their intended uses, subject to changing environmental
requirements. Although the Company's domestic aluminum smelters and
alumina facility were initially designed early in the Company's
history, they have been modified frequently over the years to
incorporate technological advances in order to improve efficiency,
increase capacity, and achieve energy savings. The Company believes
that its domestic plants are cost competitive on an international
basis. Due to the Company's variable cost structure, the plants'
operating costs are relatively lower in periods of low primary
aluminum prices and relatively higher in periods of high primary
aluminum prices.
The Company's obligations under the Credit Agreement entered into on
February 17, 1994, as amended (the "1994 Credit Agreement") are
secured by, among other things, mortgages on the Company's major
domestic plants (other than the Gramercy alumina plant). See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Capital
Structure."
ITEM 3. LEGAL PROCEEDINGS
Aberdeen Pesticide Dumps Site Matter
The Aberdeen Pesticide Dumps Site, listed on the Superfund National
Priorities List, is composed of five separate sites around the town of
Aberdeen, North Carolina (collectively, the "Sites"). The Sites are
of concern to the United States Environmental Protection Agency (the
"EPA") because of their past use as either pesticide formulation
facilities or pesticide disposal areas from approximately the
mid-1930's through the late-1980's. The United States filed a cost
recovery complaint (the "Complaint") in the United States District
Court for the Middle District of North Carolina, Rockingham Division,
No. C-89-231-R, which, as amended, includes the Company and a number
of other defendants. The Complaint, as amended, seeks reimbursement
for past and future response costs and a determination of liability of
the defendants under Section 107 of CERCLA. The EPA has performed a
Remedial Investigation/Feasibility Study and issued a Record of
Decision ("ROD") for the Sites in September 1991. The estimated cost
of the major soil remediation remedy selected for the Sites is
approximately $32 million. Other possible remedies described in the
ROD would have estimated costs of approximately $53 million and $222
million, respectively. The EPA has stated that it has incurred past
costs at the Sites in the range of $7.5-$8 million as of February 9,
1993, and alleges that response costs will continue to be incurred in
the future.
On May 20, 1993, the EPA issued three unilateral Administrative Orders
under Section 106(a) of CERCLA ordering the respondents, including the
Company, to perform the soil remedial design and remedial action
described in the ROD for three of the Sites. The estimated cost as
set forth in the ROD for the remedial action at the three Sites is
approximately $27 million. A number of other companies are also named
as respondents. The Company has entered into a PRP Participation
Agreement with certain of the respondents (the "Aberdeen Site PRP
Group" or the "Group") to participate jointly in responding to the
Administrative Orders dated May 20, 1993, regarding soil remediation,
to share costs incurred on an interim basis, and to seek to reach a
final allocation of costs through agreement or to allow such final
allocation and determination of liability to be made by the United
States District Court. By letter dated July 6, 1993, the Company has
notified the EPA of its ongoing participation with such group of
respondents which, as a group, are intending to comply with the
Administrative Orders to the extent consistent with applicable law.
By letters dated December 30, 1993, the EPA notified the Company of
its potential liability for, and requested that the Company, along
with a number of other companies, undertake or agree to finance,
groundwater remediation at certain of the Sites. The ROD-selected
remedy for the groundwater remediation selected by EPA includes a
variety of techniques. The EPA has estimated the total present worth
cost, including thirty years of operation and maintenance, at
approximately $11.8 million. On June 22, 1994,
13
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 3. LEGAL PROCEEDINGS (continued)
the EPA issued two unilateral Administrative Orders under Section 106(a)
of CERCLA ordering the respondents, including the Company, to undertake the
groundwater remediation at three of the Sites. A PRP Participation
Agreement with respect to groundwater remediation has been entered
into by certain of the respondents, including the Company.
By letter dated March 6, 1996, the Company gave notice of withdrawal
from the Aberdeen Site PRP Group pursuant to the provisions of the PRP
Participation Agreement. The Company advised the Group and the EPA
that even if it were liable for cleanup at the Sites, which it
expressly denies, it had already contributed far more than its
allocable potential share of response costs. The Company has advised
the Group and the EPA that it has fully complied with the Unilateral
Orders and that should additional evidence be presented which
demonstrates the Company's liability in excess of the amount
contributed to date, the Company would be willing to discuss the
matter further at that time.
United States of America v. Kaiser Aluminum & Chemical Corporation
In February 1989, a civil action was filed by the United States
Department of Justice (the "DOJ") at the request of the EPA against
the Company in the United States District Court for the Eastern
District of Washington, Case No. C-89-106-CLQ. The complaint alleged
that emissions from certain stacks at the Company's Trentwood facility
in Spokane, Washington intermittently violated the opacity standard
contained in the Washington State Implementation Plan ("SIP"),
approved by the EPA under the federal Clean Air Act. The complaint
sought injunctive relief, including an order that the Company take all
necessary action to achieve compliance with the SIP opacity limit and
the assessment of civil penalties of not more than $25,000 per day.
The Company and the EPA, without adjudication of any issue of fact or
law, and without any admission of the violations alleged in the
underlying complaint, have entered into a Consent Decree, which was
approved by a Consent Order entered by the United States District
Court for the Eastern District of Washington in January 1996. As
approved, the Consent Decree settles the underlying disputes and
requires the Company to (i) pay a $.5 million civil penalty (which
penalty has been paid), (ii) complete a program of plant improvements
and operational changes that began in 1990 at its Trentwood facility,
including the installation of an emission control system to capture
particulate emissions from certain furnaces, and (iii) achieve and
maintain furnace compliance with the opacity standard in the SIP by no
later than February 28, 1997. The Company anticipates that capital
expenditures for the environmental upgrade of the furnace operation at
its Trentwood facility, including the improvements and changes
required by the Consent Decree, will be approximately $20.0 million.
Catellus Development Corporation v. Kaiser Aluminum & Chemical
Corporation and James L. Ferry & Son Inc.
In January 1991, the City of Richmond, et al. (the "Plaintiffs") filed
a Second Amended Complaint for Damages and Declaratory Relief against
the United States, Catellus Development Corporation ("Catellus") and
other defendants (collectively, the "Defendants") alleging, among
other things, that the Defendants caused or allowed hazardous
substances, pollutants, contaminants, debris and other solid wastes to
be discharged, deposited, disposed of or released on certain property
located in Richmond, California (the "Property") formerly owned by
Catellus and leased to the Company for the purpose of shipbuilding
activities conducted by the Company on behalf of the United States
during World War II. The Plaintiffs sought recovery of response costs
and natural resource damages under CERCLA. Certain of the Plaintiffs
alleged they had incurred or expected to incur costs and damages of
approximately $49 million. Catellus subsequently filed a third party
complaint (the "Third Party Complaint") against the Company in the
United States District Court for the Northern District of California,
Case No. C-89-2935 DLJ. Thereafter, the Plaintiffs filed a separate
complaint against the Company, Case No. C-92-4176. The Plaintiffs
settled their CERCLA and tort claims against the United States for
$3.5 million plus thirty-five percent (35%) of future response costs.
14
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 3. LEGAL PROCEEDINGS (continued)
The trial involving this case commenced in March 1995. During the
trial, Plaintiffs settled their claims against Catellus in exchange
for payment of approximately $3.25 million. Subsequently, on June 2,
1995, the United States District Court for the Northern District of
California issued an order on the remaining claims in that action. On
December 7, 1995, the District Court issued the Final Judgment on
those claims concluding that the Company is liable for various costs
and interest, aggregating approximately $2.2 million, fifty percent
(50%) of future costs of cleaning up certain parts of the Property and
certain fees and costs associated specifically with the claim by
Catellus against the Company. In January 1996, Catellus filed a
notice of appeal with respect to its indemnity judgment against the
Company. The Company has since filed a notice of cross appeal as to
the Court's decision adjudicating that the Company is obligated to
indemnify Catellus. In February 1996, the Plaintiffs filed motions,
which the Company intends to contest, seeking reimbursement of fees
and costs from the Company in the aggregate amount of $2.76 million.
Based on the Company's estimate of future costs of cleanup, resolution
of the Catellus matter is not expected to have a material adverse
effect on the Company's consolidated financial condition, results of
operations, or liquidity.
Waste Inc. Superfund Site
On December 8, 1995, the EPA issued a unilateral Administrative Order
for Remedial Design and Remedial Action under CERCLA to the Company
and thirty-one other respondents for remedial design and action at the
Waste Inc. Superfund Site at Michigan City, Indiana. This site was
operated as a landfill from 1965 to 1982. The Company is alleged to
have arranged for the disposal of waste from its formerly-owned plant
at Wanatah, Indiana, during the period from 1964 to 1972. In its
Record of Decision, the EPA estimated the cost of the work to be
performed to have a present value of $15.7 million. The Company's
share of the total waste sent to the site is unknown. A consultant
retained by a group of PRPs estimated that the Company contributed
2.0% of the waste sent to the site by the forty-one largest
contributors. The Company's ultimate exposure will depend on the
number of PRPs that participate and the volume of waste properly
allocable to the Company. Based on the EPA's cost estimate, the
Company believes that its financial exposure for remedial design and
remedial action at this site is less than $500,000. A PRP
participation agreement is under negotiation.
Hammons v. Alcan Aluminum Corp. et al
On March 5, 1996, a class action complaint was filed in California
against Kaiser, Alcan Aluminum Corp., Aluminum Company of America,
Alumax, Inc, Reynolds Metal Company, the Aluminum Association and
others in the Superior Court of California for the County of Los
Angeles, Case No. BC145612. The complaint claims that the defendants
conspired, in violation of state antitrust laws, to raise, stabilize
and maintain the price of primary aluminum and aluminum products
through cuts in production allegedly in connection with the
ratification of a Memorandum of Understanding in 1994 by
representatives of the authorities of Australia, Canada, the European
Union, Norway, the Russian Federation and the United States. The
complaint seeks certification of a class consisting of persons who at
any time between January 1, 1994, and the date of the complaint
purchased aluminum or aluminum products manufactured by one or more of
the defendants and estimates damages sustained by the class to be $4.4
billion, before trebling.
Matheson et al v. Kaiser Aluminum Corporation et al
On September 11, 1995, Kaiser announced that it had appointed an
independent committee of its Board of Directors to consider a possible
recapitalization transaction. On February 5, 1996, Kaiser publicly
announced that it had filed a preliminary proxy statement with the
Securities and Exchange Commission relating to a proposed recapitalization.
A special shareholders' meeting to consider the recapitalization was
subsequently scheduled for April 10, 1996, and the definitive proxy
statement was mailed to shareholders commencing on March 20, 1996.
See Note 7 of the Notes to Consolidated Financial Statements of Kaiser,
under the heading Proposed Recapitalization, at pages 50-51 of Kaiser's
1995
15
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 3. LEGAL PROCEEDINGS (continued)
Annual Report to Shareholders, for a description of the proposed
recapitalization. On March 19, 1996, a lawsuit was filed against MAXXAM,
Kaiser and Kaiser's directors challenging and seeking to enjoin the
recapitalization and the April 10, 1996, special shareholders' meeting.
The suit, which is entitled Matheson et al v. Kaiser Aluminum Corporation
et al (No. 14900) and was filed in the Delaware Court of Chancery,
purports to be a class action by persons who as of March 18, 1996 (the
record date for the April 10, 1996, meeting) owned Kaiser's outstanding
common stock and 8.255% PRIDES, Convertible Preferred Stock ("PRIDES").
Plaintiffs allege, among other things, breaches of fiduciary duties by
certain defendants and that the proposed recapitalization violates Delaware
law and the certificate of designation for the PRIDES. Plaintiffs seek
injunctive relief, rescission, rescissory damages and other relief.
A hearing on the motion for injunctive relief is presently scheduled for
April 8, 1996.
Asbestos-related Litigation
The Company is a defendant in a number of lawsuits, some of which
involve claims of multiple persons, in which the plaintiffs allege
that certain of their injuries were caused by, among other things,
exposure to asbestos during, and as a result of, their employment or
association with the Company or exposure to products containing
asbestos produced or sold by the Company. The lawsuits generally
relate to products the Company has not manufactured for at least 15
years. At December 31, 1995, the number of such claims pending was
approximately 59,700, as compared with 25,200 at December 31, 1994.
In 1995, approximately 41,700 of such claims were received and
7,200 settled or dismissed. The Company has been advised by its
regional counsel that, although there can be no assurance, the recent
increase in pending claims may be attributable in part to tort reform
legislation in Texas which was passed by the legislature in March 1995
and which became effective on September 1, 1995. The legislation,
among other things, is designed to restrict, beginning September 1,
1995, the filing of cases in Texas that do not have a sufficient nexus
to that jurisdiction, and to impose, generally as of September 1,
1996, limitations relating to joint and several liability in tort
cases. A substantial portion of the asbestos-related claims that were
filed and served on the Company between June 30, 1995, and November
30, 1995, were filed in Texas prior to September 1, 1995. For
additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources - Asbestos Contingencies." The portion of Note 9 of the
Notes to Consolidated Financial Statements under the heading "Asbestos
Contingencies" is incorporated herein by reference.
Other Proceedings
On August 24, 1994, the DOJ issued Civil Investigative Demand No.
11356 ("CID No. 11356") requesting information from Kaiser regarding
(i) its production, capacity to produce, and sales of primary aluminum
from January 1, 1991, to the date of the response; (ii) any actual or
contemplated reduction in its production of primary aluminum during
that period; and (iii) any communications with others regarding any
actual, contemplated, possible or desired reductions in primary
aluminum production by Kaiser or any of its competitors during that
period. Management believes that Kaiser's actions have at all times
been appropriate, and Kaiser has submitted documents and interrogatory
answers to the DOJ responding to CID No. 11356.
On March 27, 1995, the DOJ issued Civil Investigative Demand No. 12503
("CID No. 12503"), as part of an industry-wide investigation,
requesting information from the Company regarding (i) any actual or
contemplated changes in its method of pricing can stock from January
1, 1994, through March 31, 1995, (ii) the percentage of aluminum scrap
and primary aluminum ingot used by the Company to produce can stock
and the manner in which the Company's cost of acquiring aluminum scrap
is factored into its can stock prices, and (iii) any communications
with others regarding any actual or contemplated changes in its method
of pricing can stock from January 1, 1994, through March 31, 1995.
The Company believes that its actions have at all times been
appropriate, and the Company has submitted documents and interrogatory
answers to the DOJ responding to CID No. 12503.
16
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
Various other lawsuits and claims are pending against the Company.
While uncertainties are inherent in the final outcome of such matters
and it is presently impossible to determine the actual costs that
ultimately may be incurred, management believes that the resolution of
such uncertainties and the incurrence of such costs should not have a
material adverse effect on the Company's consolidated financial
position, results of operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public trading market for the Company's common
stock, which is held solely by Kaiser. The information in Note 8 of the
Notes to Consolidated Financial Statements under the heading "Dividends on
Common Stock" at page 46 of this Report, are incorporated herein by
reference. The Company has not paid any dividends on its common stock
during the two most recent fiscal years.
The Indentures and the 1994 Credit Agreement (Exhibits 4.1 through
4.11 to this Report) contains restrictions on the ability of the
Company to pay dividends on or make distributions on account of the
Company's common stock and restrictions on the ability of the
Company's subsidiaries to transfer funds to the Company in the form of
cash dividends, loans or advances. Exhibits 4.1 through 4.11 to this
Report, Note 4 of the Notes to Consolidated Financial Statements at
pages 35-37 of this Report, and the information under the heading
"Liquidity and Capital Resources - Capital Structure" at pages 20-21
of this Report, are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company is incorporated herein by
reference to the table at page 3 of this Report, to the table at page
18 of this Report, to the discussion under the heading "Results of
Operations" at page 19 of this Report, to Note 1 of the Notes to
Consolidated Financial Statements at pages 31-33 of this Report, and
to pages 54-55 of this Report.
17
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company operates in two business segments: bauxite and alumina,
and aluminum processing. Intracompany shipments and sales are excluded
from the information set forth below. The following should be read in
conjunction with the Company's consolidated financial statements and
the notes thereto, contained elsewhere herein.
Year Ended December 31,
-----------------------------
(In millions of dollars, except shipments and prices) 1995 1994 1993
-------- -------- --------
Shipments: (000 tons)(1)
Alumina 2,040.1 2,086.7 1,997.5
Aluminum products:
Primary aluminum 271.7 224.0 242.5
Fabricated aluminum products 368.2 399.0 373.2
-------- -------- --------
Total aluminum products 639.9 623.0 615.7
======== ======== ========
Average realized sales price:
Alumina (per ton) $ 208 $ 169 $ 169
Primary aluminum (per pound) .81 .59 .56
Net sales:
Bauxite and alumina:
Alumina $ 424.8 $ 352.8 $ 338.2
Other(2)(3) 89.4 79.7 85.2
-------- -------- --------
Total bauxite and alumina 514.2 432.5 423.4
-------- -------- --------
Aluminum processing:
Primary aluminum 488.0 292.0 301.7
Fabricated aluminum products 1,218.6 1,043.0 981.4
Other(3) 17.0 14.0 12.6
-------- -------- --------
Total aluminum processing 1,723.6 1,349.0 1,295.7
-------- -------- --------
Total net sales $2,237.8 $1,781.5 $1,719.1
======== ======== ========
Operating income (loss):
Bauxite and alumina $ 54.0 $ 19.8 $ (4.5)
Aluminum processing 238.9 (8.4) (46.3)
Corporate (81.8) (67.3) (72.3)
-------- -------- --------
Total operating income (loss) $ 211.1 $ (55.9) $ (123.1)
======== ======== ========
Income (loss) before extraordinary loss and cumulative effect of changes
in accounting principles $ 65.3 $ (96.2) $ (117.6)
Extraordinary loss on early extinguishment of debt, net of tax benefit of $2.9 and
$11.2 for 1994 and 1993, respectively (5.4) (21.8)
Cumulative effect of changes in accounting principles, net of tax benefit of $237.7 (507.9)
-------- -------- --------
Net income (loss) $ 65.3 $ (101.6) $ (647.3)
======== ======== ========
Capital expenditures $ 79.4 $ 70.0 $ 67.7
======== ======== ========
(1) All references to tons refer to metric tons of 2,204.6 pounds.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority
interests in consolidated subsidiaries.
18
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Results of Operations
- ---------------------
The Company's operating results are sensitive to changes in prices of
alumina, primary aluminum, and fabricated aluminum products, and also
depend to a significant degree on the volume and mix of all products
sold and on its hedging strategies. See Note 10 of the Notes to
Consolidated Financial Statements for an explanation of the Company's
hedging strategies. The previous table provides selected operational
and financial information on a consolidated basis with respect to the
Company for the years ended December 31, 1995, 1994, and 1993. As an
integrated aluminum producer, the Company uses a portion of its
bauxite, alumina, and primary aluminum production for additional
processing at certain of its facilities.
Net Sales
Bauxite and Alumina - Revenue from net sales to third parties for the
bauxite and alumina segment was 19% higher in 1995 than in 1994 and 2%
higher in 1994 than in 1993. Revenue from alumina increased 20% in
1995 from 1994, due to higher average realized prices partially offset
by lower shipments. The remainder of the segment's sales revenues were
from sales of bauxite and the portion of sales of alumina attributable
to the minority interest in the Company's 65%-owned Alumina Partners
of Jamaica ("Alpart") alumina refinery in Jamaica.
Aluminum Processing - Revenue from net sales to third parties for the
aluminum processing segment was 28% higher in 1995 than in 1994 and 4%
higher in 1994 than in 1993. The bulk of the segment's sales
represents Kaiser's primary aluminum and fabricated aluminum products,
with the remainder representing the portion of sales of primary
aluminum attributable to the minority interest in the Company's 90%-
owned Volta Aluminium Company Limited ("Valco") aluminum smelter in
Ghana. Revenue from primary aluminum increased 67% in 1995 from 1994,
due primarily to higher average realized prices and higher shipments.
In 1995, the Company's average realized price from sales of primary
aluminum was approximately $.81 per pound, compared to the average
Midwest United States transaction price of approximately $.86 per
pound during the year. The higher shipments of primary aluminum were
due to increased production at the Company's smelters in the Pacific
Northwest and Valco, and reduced intracompany consumption of primary
metal at the Company's fabricated products units. The increase in
revenue for 1995 was partially offset by decreased shipments caused by
the strike by the United Steelworkers of America ("USWA") discussed
below. Revenue from primary aluminum decreased 3% in 1994 from 1993 as
higher average realized prices were more than offset by lower
shipments. Average realized prices in 1994 reflected the defensive
hedging of primary aluminum prices in respect of 1994 shipments, which
was initiated prior to then-recent improvements in metal prices.
Shipments in 1994 reflected production curtailments at the Company's
smelters in the Pacific Northwest and Valco. Shipments of primary
aluminum to third parties were approximately 42% of total aluminum
products shipments in 1995, compared with approximately 36% in 1994
and 39% in 1993. Revenue from fabricated aluminum products increased
17% in 1995 from 1994, due to higher average realized prices partially
offset by lower shipments for most of these products. Revenue from
fabricated aluminum products increased 6% in 1994 from 1993,
principally due to increased shipments of most of these products.
Operating Income (Loss)
Improved operating results in 1995 were partially offset by expenses
related to the Company's smelting joint venture in China, accelerated
expenses on the Company's micromill technology, maintenance expenses
as a result of an electrical lightning strike at the Company's
Trentwood, Washington, facility, and a work slowdown at the Company's
49%-owned Kaiser Jamaica Bauxite Company prior to the signing of a new
labor contract. The combined impact of these expenditures on the
results for 1995 was approximately $6.0 million in the aggregate (on a
pre-tax basis). Operating results in 1995 were further impacted by (i)
an eight-day strike at five major domestic locations by the USWA, (ii)
a six-day strike by the National Workers Union at Alpart, and (iii) a
four-day disruption of alumina production at Alpart
19
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
caused by a boiler failure. The combined impact of these events on the
results for 1995 was approximately $17.0 million in the aggregate (on
a pre-tax basis) principally from lower production volume and other
related costs. In 1993, the Company recorded a pre-tax charge of $35.8
million related to restructuring charges and a pre-tax charge of $19.4
million because of a reduction in the carrying value of its
inventories caused principally by prevailing lower prices for alumina,
primary aluminum, and fabricated aluminum products.
Bauxite and Alumina - This segment's operating income was $54.0
million in 1995, compared with $19.8 million in 1994 and a loss of
$4.5 million in 1993. The increase in operating income in 1995
compared with 1994 was principally due to higher revenue, partially
offset by the effect of the strike and boiler failure. In 1994,
compared with 1993, operating income was favorably affected by
increased shipments and lower manufacturing costs.
Aluminum Processing - This segment's operating income was $238.9
million in 1995, compared with losses of $8.4 million in 1994 and
$46.3 million in 1993. Improvement in operating results in 1995
compared with 1994 was principally due to higher revenue, partially
offset by the effect of the strike by the USWA. The decrease in
operating loss in 1994 compared with 1993 was caused principally by
the $35.8 million restructuring charges, increased shipments of
fabricated aluminum products, and higher average realized prices of
primary aluminum, partially offset by lower shipments of primary
aluminum.
Corporate - Corporate operating expenses of $81.8 million, $67.3
million, and $72.3 million in 1995, 1994, and 1993, respectively,
represented corporate general and administrative expenses that were
not allocated to segments.
Net Income (Loss)
The Company reported net income of $65.3 million in 1995, compared
with a net loss of $101.6 million in 1994 and a net loss of $647.3
million in 1993. The principal reason for the improvement in 1995
compared to 1994 was the improvement in operating results previously
described, partially offset by other charges, principally related to
the establishment of additional litigation reserves. The principal
reasons for the reduced net loss in 1994 compared with 1993 were the
reduction in the operating loss previously described and the
cumulative effect of changes in accounting principles of $507.9
million related to adoption of Statement of Financial Accounting
Standards No. 106, 109, and 112 as of January 1, 1993. See Note 1 of
the Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
- -------------------------------
Capital Structure
On February 17, 1994, the Company and Kaiser entered into a credit
agreement with BankAmerica Business Credit, Inc. and certain other
lenders (as amended, the "1994 Credit Agreement"). The 1994 Credit
Agreement consists of a $325.0 million five-year secured, revolving
line of credit, scheduled to mature in 1999. The Company is able to
borrow under the facility by means of revolving credit advances and
letters of credit (up to $125.0 million) in an aggregate amount equal
to the lesser of $325.0 million or a borrowing base relating to
eligible accounts receivable plus eligible inventory. As of February
29, 1996, $174.9 million (of which $72.4 million could have been used
for letters of credit) was available to the Company under the 1994
Credit Agreement. The 1994 Credit Agreement is unconditionally
guaranteed by Kaiser and by certain significant subsidiaries of the
Company. The 1994 Credit Agreement requires the Company to maintain
certain financial covenants and places restrictions on the Company's
and Kaiser's ability to, among other things, incur debt and liens,
make investments, pay dividends, undertake transactions with
affiliates, make capital expenditures, and enter into unrelated lines
of business. The 1994 Credit Agreement is secured by, among other
things, (i) mortgages on the Company's major domestic plants
(excluding the Company's Gramercy alumina plant); (ii) subject to
certain exceptions, liens on the accounts receivable, inventory,
equipment, domestic patents and
20
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
trademarks, and substantially all other personal property of the
Company and certain of its subsidiaries; (iii) a pledge of all the
stock of the Company owned by Kaiser; and (iv) pledges of all of the
stock of a number of the Company's wholly owned domestic subsidiaries,
pledges of a portion of the stock of certain foreign subsidiaries, and
pledges of a portion of the stock of certain partially owned foreign
affiliates.
In 1993, Kaiser issued 19,382,950 of its $.65 Depositary Shares (the
"Depositary Shares"), each representing one-tenth of a share of Series
A Mandatory Conversion Premium Dividend Preferred Stock (the "Series A
Shares"). On September 19, 1995, Kaiser redeemed all 1,938,295 Series
A Shares, which resulted in the simultaneous redemption of all
Depositary Shares, in exchange for (i) 13,126,521 shares of Kaiser's
common stock and (ii) $2.8 million in cash comprised of (a) an amount
equal to all accrued and unpaid dividends up to and including the day
immediately prior to redemption date, and (b) cash in lieu of any
fractional shares of common stock that would have otherwise been
issuable.
In the first quarter of 1994, Kaiser consummated the public offering
of 8,855,550 shares of its 8.255% PRIDES, Convertible Preferred Stock
(the "PRIDES"). The net proceeds from the sale of the shares of PRIDES
were approximately $100.1 million. On February 17, 1994, the Company
issued $225.0 million of its 9-7/8% Senior Notes due 2002 (the "Senior
Notes").
The obligations of the Company with respect to the Senior Notes and
the 12-3/4% Notes (see Note 4 of the Notes to Consolidated Financial
Statements) are guaranteed, jointly and severally, by certain
subsidiaries of the Company. The indentures governing the Senior Notes
and the 12-3/4% Notes restrict, among other things, the Company's
ability to incur debt, undertake transactions with affiliates, and pay
dividends.
Management believes that the Company's existing cash resources,
together with cash flows from operations and borrowings under the 1994
Credit Agreement, will be sufficient to satisfy its working capital
and capital expenditure requirements for the next year. With respect
to long-term liquidity, management believes that operating cash flows,
together with the ability to obtain both short and long-term
financing, should provide sufficient funds to meet the Company's
working capital and capital expenditure requirements.
See Note 4 of the Notes to Consolidated Financial Statements.
Operating Activities
Cash provided by operations was $119.5 million in 1995, compared with
cash used for operations of $21.3 million in 1994 and cash provided by
operations of $38.0 million in 1993. The improvement in cash flows
from operations in 1995 compared with 1994 was primarily due to higher
earnings and a refund of margin deposits of $50.5 million under
certain hedging contracts.
At December 31, 1995, the Company had working capital of $324.5
million, compared with working capital of $239.5 million at December
31, 1994. The increase in working capital was due primarily to an
increase in Receivables and Inventories and a decrease in Other
accrued liabilities, partially offset by a decrease in Prepaid
expenses and other current assets (principally due to a refund of
margin deposits related to hedging activities) and an increase in
Accounts payable and Accrued salaries, wages, and related expense.
Postretirement benefits other than pensions are provided through
contracts with various insurance carriers. The Company has not funded
the liability for these benefits, which are expected to be paid out of
cash generated by operations.
21
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Investing Activities
The Company's capital expenditures of $217.1 million (of which $25.2
million was funded by the Company's minority partners in certain
foreign joint ventures) during the three years ended December 31,
1995, were made primarily to improve production efficiency, reduce
operating costs, expand capacity at existing facilities, and construct
new facilities. Total consolidated capital expenditures were $79.4
million in 1995, compared with $70.0 million in 1994 and $67.7 million
in 1993 (of which $8.3, $7.5, and $9.4 million were funded by the
minority partners in certain foreign joint ventures in 1995, 1994, and
1993, respectively). Total consolidated capital expenditures (of which
approximately 10% is expected to be funded by the minority partners in
certain foreign joint ventures) are expected to be between $123.0 and
$143.0 million per year in the years 1996-1998, subject to necessary
approvals, if required, from the lenders under the 1994 Credit
Agreement.
The Company has developed a unique micromill for the production of can
sheet from molten metal based on a proprietary thin-strip, high-speed,
continuous-belt casting technique linked directly to hot rolling and
cold rolling mills. The first micromill will be constructed in Nevada
in 1996 as a demonstration production facility. The Company currently
intends to finance the cost of the construction of the Nevada
micromill, estimated to be $45.0 million, from general corporate
funds, including possible borrowings under the 1994 Credit Agreement,
although the Company is in discussions with third parties which might
provide some or all of such funding.
In 1995, Kaiser Yellow River Investment Limited ("KYRIL") was formed
to participate in the privatization, modernization, and operation of
aluminum smelting facilities in the People's Republic of China (the
"PRC"). KYRIL has entered into a Joint Venture Agreement and related
agreements with the Lanzhou Aluminum Smelters of the China National
Nonferrous Metals Industry Corporation relating to the formation and
operation of Yellow River Aluminum Industry Company Limited, a Sino-
foreign joint equity enterprise organized under the laws of the PRC
(the "Joint Venture"). KYRIL contributed $9.0 million as a
contribution to the capital of the Joint Venture in July 1995. The
parties to the Joint Venture are currently engaged in discussion
concerning the amount, timing, and other conditions relating to
KYRIL's additional contributions to the Joint Venture. Governmental
approval in the PRC will be necessary in order to implement certain
arrangements agreed to by the parties, and there can be no assurance
such approvals will be obtained.
Financing Activities
The declaration and payment of dividends by the Company and Kaiser on
shares of their common stock are subject to certain covenants
contained in the 1994 Credit Agreement and, in the case of the
Company, the Senior Note Indenture and the 12-3/4% Note Indenture. The
1994 Credit Agreement does not permit the Company or Kaiser to pay any
dividends on their common stock. The declaration and payment of
dividends by Kaiser on the PRIDES is expressly permitted by the terms
of the 1994 Credit Agreement to the extent Kaiser receives payments on
certain intercompany notes or certain other permitted distributions
from the Company.
Environmental Contingencies
The Company and Kaiser are subject to a number of environmental laws,
to fines or penalties assessed for alleged breaches of the
environmental laws, and to claims and litigation based upon such laws.
The Company currently is subject to a number of lawsuits under the
Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended by the Superfund Amendments Reauthorization Act of
1986 ("CERCLA"), and, along with certain other entities, has been
named as a potentially responsible party for remedial costs at certain
third-party sites listed on the National Priorities List under CERCLA.
22
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Based on the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals, primarily
related to potential solid waste disposal and soil and groundwater
remediation matters. At December 31, 1995, the balance of such
accruals, which are primarily included in Long-term liabilities, was
$38.9 million. These environmental accruals represent the Company's
estimate of costs reasonably expected to be incurred based on
presently enacted laws and regulations, currently available facts,
existing technology, and the Company's assessment of the likely
remediation action to be taken. The Company expects that these
remediation actions will be taken over the next several years and
estimates that annual expenditures to be charged to these
environmental accruals will be approximately $3.0 to $9.0 million for
the years 1996 through 2000 and an aggregate of approximately $10.0
million thereafter.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are
established or alternative technologies are developed, changes in
these and other factors may result in actual costs exceeding the
current environmental accruals. The Company believes that it is
reasonably possible that costs associated with these environmental
matters may exceed current accruals by amounts that could range, in
the aggregate, up to an estimated $23.0 million and that the factors
upon which a substantial portion of this estimate is based are
expected to be resolved over the next twelve months. While
uncertainties are inherent in the final outcome of these environmental
matters, and it is presently impossible to determine the actual costs
that ultimately may be incurred, management currently believes that
the resolution of such uncertainties should not have a material
adverse effect on the Company's consolidated financial position,
results of operations, or liquidity. See Note 9 of the Notes to
Consolidated Financial Statements for further description of these
contingencies.
Asbestos Contingencies
The Company is a defendant in a number of lawsuits, 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 manufactured for at least 15
years. At December 31, 1995, the number of such claims pending was
approximately 59,700, as compared with 25,200 at December 31, 1994. In
1995, approximately 41,700 of such claims were received and 7,200
settled or dismissed. The Company has been advised by its regional
counsel that, although there can be no assurance, the recent increase
in pending claims may be attributable in part to tort reform
legislation in Texas which was passed by the legislature in March 1995
and which became effective on September 1, 1995. The legislation,
among other things, is designed to restrict, beginning September 1,
1995, the filing of cases in Texas that do not have a sufficient nexus
to that jurisdiction, and to impose, generally as of September 1,
1996, limitations relating to joint and several liability in tort
cases. A substantial portion of the asbestos-related claims that were
filed and served on the Company between June 30, 1995, and November
30, 1995, were filed in Texas prior to September 1, 1995.
Based on past experience and reasonably anticipated future activity,
the Company has established an accrual for estimated asbestos-related
costs for claims filed and estimated to be filed and settled through
2008. There are inherent uncertainties involved in estimating
asbestos-related costs, and the Company's actual costs could exceed
these estimates. The Company's accrual was calculated based on the
current and anticipated number of asbestos-related claims, the prior
timing and amounts of asbestos-related payments, and the advice of
Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to the
current state of the law related to asbestos claims. Accordingly, an
asbestos-related cost accrual of $160.1 million, before consideration
of insurance recoveries, is included primarily in Long-term
liabilities at December 31, 1995. The Company estimates that annual
future cash payments in connection with such litigation will be
approximately $13.0 to $20.0 million for each of the years 1996
through 2000, and an aggregate of approximately $78.0 million
thereafter through 2008. While the Company does not presently believe
there is a reasonable basis for
23
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
estimating such costs beyond 2008 and, accordingly, no accrual has
been recorded for such costs which may be incurred beyond 2008, there
is a reasonable possibility that such costs may continue beyond 2008,
and such costs may be substantial.
The Company believes that it has insurance coverage available to
recover a substantial portion of its asbestos-related costs. Claims
for recovery from some of the Company's insurance carriers are
currently subject to pending litigation and other carriers have raised
certain defenses, which have resulted in delays in recovering costs
from the insurance carriers. The timing and amount of ultimate
recoveries from these insurance carriers are dependent upon the
resolution of these disputes. The Company believes, based on prior
insurance-related recoveries in respect of asbestos-related claims,
existing insurance policies, and the advice of Thelen, Marrin, Johnson
& Bridges with respect to applicable insurance coverage law relating
to the terms and conditions of those policies, that substantial
recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $137.9 million, determined
on the same basis as the asbestos-related cost accrual, is recorded
primarily in Other assets at December 31, 1995.
While uncertainties are inherent in the final outcome of these
asbestos matters and it is presently impossible to determine the
actual costs that ultimately may be incurred and insurance recoveries
that will be received, management currently believes that, based on
the factors discussed in the preceding paragraphs, the resolution of
asbestos-related uncertainties and the incurrence of asbestos-related
costs net of related insurance recoveries should not have a material
adverse effect on the Company's consolidated financial position,
results of operations, or liquidity. See Note 9 of the Notes to
Consolidated Financial Statements for further description of this
contingency.
Trends
- ------
Sensitivity to Prices and Hedging Programs
The Company enters into primary aluminum hedging transactions in the
normal course of business. The prices realized by the Company under
certain sales contracts for alumina, primary aluminum, and fabricated
aluminum products, as well as the costs incurred by the Company for
certain items, such as aluminum scrap, rolling ingot, power, and
bauxite, fluctuate with the market price of primary aluminum, together
resulting in a "net exposure" of earnings. The primary aluminum
hedging transactions are designed to mitigate the net exposure of
earnings to declines in the market price of primary aluminum, while
retaining the ability to participate in favorable pricing environments
that may materialize. The Company has employed strategies which
include forward sales of primary aluminum at fixed prices and the
purchase or sale of options for primary aluminum. In respect of its
1996 anticipated net exposure, at December 31, 1995, the Company had
purchased approximately 53,300 tons of primary aluminum at fixed
prices as a partial hedge against approximately 161,100 tons of
fabricated aluminum products sold to customers at fixed or capped
prices and had sold forward 15,750 tons of primary aluminum at fixed
prices.
In addition, as of December 31, 1995, the Company had sold
approximately 75% and 45% of the alumina available to it in excess of
its projected internal smelting requirements for 1996 and 1997,
respectively. Approximately 56% of such alumina sold for 1996 and all
of such alumina sold for 1997 has been sold at prices linked to the
future prices of primary aluminum as a percentage of the price of
primary aluminum ("Variable Price Contracts"), and approximately 44%
of such alumina sold for 1996 has been sold at fixed prices ("Fixed
Price Contracts"). The average realized prices of alumina sold under
Variable Price Contracts will depend on future prices of primary
aluminum, and the average realized prices of alumina sold under Fixed
Price Contracts will substantially exceed the Company's manufacturing
cost of alumina.
24
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The Company also enters into hedging transactions in the normal course
of business that are designed to reduce its exposure to fluctuations
in foreign exchange rates. At December 31, 1995, the Company had net
forward foreign exchange contracts totaling approximately $102.8
million for the purchase of 142.4 million Australian dollars through
April 30, 1997.
The Company has established margin accounts with its counterparties
related to forward aluminum sales and option contracts. The Company is
entitled to receive advances from counterparties related to unrealized
gains and, in turn, is required to make margin deposits with
counterparties to cover unrealized losses related to these contracts.
At December 31, 1995, the Company had nil, compared with $50.5 million
at December 31, 1994, on deposit with counterparties in respect of
such contracts. These amounts are recorded in Prepaid expenses and
other current assets.
Since December 31, 1995, the Company has entered into:
. Additional hedge positions in respect of its anticipated 1996,
1997, and 1998 production. As of February 29, 1996, the
Company had sold forward an additional 19,500 metric tons of
primary aluminum at fixed prices, had purchased 20,150 metric
tons of primary aluminum under forward purchase contracts at
fixed prices, and had purchased put options to establish a
minimum price for 45,000 metric tons of primary aluminum.
. Additional forward foreign exchange contracts totaling
approximately $12.8 million for the purchase of 18.0 million
Australian dollars from March 1996 through December 1997 in
respect of its commitments for 1996 and 1997 expenditures
denominated in Australian dollars.
At February 29, 1996, the net unrealized gain on the Company's
position in aluminum forward sales and option contracts, based on an
average price of $1,747 per metric ton ($.79 per pound) of primary
aluminum, and forward foreign exchange contracts was $13.3 million.
Income Tax Matters
- ------------------
The Company's net deferred income tax assets as of December 31, 1995,
were $291.5 million, net of valuation allowances of $128.5 million.
Approximately $97.4 million of these net deferred income tax assets
relate to the benefit of loss and credit carryforwards, net of
valuation allowances. The Company believes a long-term view of
profitability is appropriate and has concluded that this net deferred
income tax asset will more likely than not be realized despite the
operating losses incurred in recent years. See Note 5 of the Notes to
Consolidated Financial Statements for a discussion of these and other
income tax matters.
Recent Accounting Pronouncements
- --------------------------------
In March 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires that long-
lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. The Company is
required to adopt SFAS 121 no later than January 1, 1996. The Company
does not expect that the adoption of SFAS 121 will have a material
impact on the Company's consolidated financial statements.
25
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans, and provides
for alternative methods for an employer to recognize stock-based
compensation costs. Under the first method, an employer may continue
to account for compensation costs for stock, stock options, and other
equity instruments issued to employees, as it has historically, using
the "intrinsic value based method" (as described in SFAS 123), and
such compensation costs would be the excess, if any, of the quoted
market price of the stock subject to an option at the grant date or
other measurement date over the amount an employee must pay to acquire
the stock. The intrinsic value based method generally would not result
in the recognition of compensation costs upon the grant of stock
options. Under the second method, an employer may adopt the "fair
value based method" (as described in SFAS 123). Under the fair value
based method, such compensation costs would be valued using an option-
pricing model, and such amount would be charged to expense over the
option's vesting period. Employers which elect to continue to account
for stock-based compensation under the intrinsic value based method
will be required by SFAS 123 to disclose in the notes to their
financial statements the amount of net income and the earnings per
share which would have been reported had the employer elected to use
the