EXHIBIT 13 TO KAISER ALUMINUM 1993 10-K
Published on
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Kaiser Aluminum Corporation ("Kaiser" or the "Company"), through its
wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation
("KACC"), operates in two business segments: bauxite and alumina, and
aluminum processing. Intracompany shipments and sales are excluded
from the information set forth below.
(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.
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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 upon the volume and mix of all products
sold. The previous table provides selected operational and financial
information on a consolidated basis with respect to the Company for
the years ended December 31, 1993, 1992, and 1991. As an integrated
aluminum producer, the Company uses a portion of its bauxite, alumina,
and primary aluminum production for additional processing at certain
of its other facilities.
Net Sales
Bauxite and Alumina -- Revenue from net sales of bauxite and alumina
to third parties was $423.4 million in 1993, compared with $466.5
million in 1992 and $550.8 million in 1991. Revenue from alumina
decreased 13% to $338.2 million in 1993 from $390.8 million in 1992
because of lower average realized prices. Revenue from alumina
decreased 16% to $390.8 million in 1992 from $466.5 million in 1991 as
significantly lower average realized prices more than offset a 3%
increase in alumina shipments, which was principally attributable to
increased production at all three of Kaiser's refineries. The
remainder of the segment's sales revenues were from sales of bauxite,
which remained about the same throughout the three years, and the
portion of sales of alumina attributable to the minority interest in
Alumina Partners of Jamaica ("Alpart").
Aluminum Processing -- Revenue from net sales to third parties for
the aluminum processing segment was $1,295.7 million in 1993, compared
with $1,442.6 million in 1992 and $1,450.0 million in 1991. The bulk
of the segment's sales represents Kaiser's primary aluminum and
fabricated aluminum products, with the remainder attributable to the
portion of sales of primary aluminum related to the minority interest
in Volta Aluminium Company Limited.
Revenue from primary aluminum decreased 41% to $301.7 million in 1993
from $515.0 million in 1992 because of lower shipments and lower
average realized prices. Shipments of primary aluminum to third
parties were approximately 39% of total aluminum products shipments in
1993, compared with approximately 51% in 1992. Revenue from primary
aluminum decreased 4% to $515.0 million in 1992 from $538.5 million in
1991, as an 8% decrease in average realized prices more than offset a
4% increase in primary aluminum shipments. Shipments of primary
aluminum to third parties were approximately 51% of total aluminum
products shipments in 1992, compared with approximately 52% in 1991.
Revenue from fabricated aluminum products increased 7% to $981.4
million in 1993 from $913.7 million in 1992, principally due to
increased shipments of most fabricated aluminum products, partially
offset, to a lesser extent, by a decrease in average realized prices
of most of these products. Revenue from fabricated aluminum products
increased 2% to $913.7 million in 1992 from $898.9 million in 1991,
primarily because lower average realized prices were more than offset
by a 9% increase in shipments of fabricated aluminum products.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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Operating Income (Loss)
The Company had an operating loss of $123.4 million in 1993, compared
with income of $89.9 million in 1992 and $216.0 million in 1991. In
the fourth quarter of 1993, the Company recorded a pre-tax charge of
approximately $35.8 million related to the restructuring charges (see
Note 3 of the Notes to Consolidated Financial Statements) and a pre-
tax charge of $19.4 million ($29.0 million in the fourth quarter of
1992) because of a reduction in the carrying value of its inventories
caused principally by prevailing lower prices for alumina, primary
aluminum, and fabricated products.
Bauxite and Alumina -- This segment's operating loss in 1993 was $4.5
million, compared with income of $62.6 million in 1992 and $150.0
million in 1991. In 1993 compared with 1992, operating income was
adversely affected principally due to a decrease in average realized
prices for alumina, which more than offset above-market prices for
virtually all of its excess alumina sold forward in prior periods
under long-term contracts. In 1992 compared to 1991, operating income
was adversely affected by a decrease in average realized prices for
alumina, which more than offset higher alumina shipments and above-
market prices for significant quantities of alumina sold forward in
prior periods under long-term contracts.
Aluminum Processing -- This segment's operating loss was $46.3 million
in 1993, compared with income of $104.9 million in 1992. This
decrease was caused principally by reduced shipments and lower average
realized prices of primary aluminum products which more than offset
increased shipments of fabricated products. In 1993, KACC implemented
a restructuring plan for its flat-rolled products operation at its
Trentwood plant in response to overcapacity in the aluminum rolling
industry, flat demand in the U.S. can stock markets, and declining
demand for aluminum products sold to customers in the commercial
aerospace industry, all of which have resulted in declining prices in
Trentwood's key markets. Additionally, KACC implemented a plan to
discontinue its casting operations, which include three facilities
located in Ohio. This entire restructuring is expected to be
completed by the end of 1995 and will affect approximately 670
employees. The pre-tax charge for this restructuring of $35.8 million
includes $25.2 million for pension, severance, and other termination
benefits; $4.7 million for a writedown of the casting facilities to
net realizable value; $3.3 million for estimated 1994 casting
operating losses until the date of closure or sale; and $2.6 million
for various other items. The Trentwood restructuring is expected to
result in annual cost savings of at least $50.0 million after it has
been fully implemented. Other contributing factors were lower
production at the Company's smelters in the Pacific Northwest in 1993
as a result of the removal of three reduction potlines from production
at those smelters in January 1993 in response to the Bonneville Power
Administration's (the "BPA") reduction during the first quarter of
1993 of the amount of power it normally provides to the Company, and
the increased cost of substitute power in such quarter. In 1993, the
Company's average realized price from sales of primary aluminum was
approximately $.56 per pound, compared to the average Midwest United
States transaction price of approximately $.54 per pound during such
period. In both 1993 and 1992, the Company realized above-market
prices for significant quantities of primary aluminum sold forward in
prior periods under long-term contracts. Operating income for the
aluminum processing segment was $104.9 million in 1992, a decrease of
30% from $150.2 million in 1991. Operating income in 1992 was
adversely affected by a decrease in average realized prices for
primary aluminum and most fabricated aluminum products, partially
offset by increased shipments. In both 1992 and 1991, the Company
realized above-market prices for significant quantities of primary
aluminum sold forward in prior periods under long-term contracts.
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Corporate -- Corporate operating expenses of $72.6 million, $77.6
million, and $84.2 million in 1993, 1992, and 1991, respectively,
represented corporate general and administrative expenses which were
not allocated to segments.
Income (Loss) Before Extraordinary Loss and Cumulative Effect of
Changes in Accounting Principles
Loss before extraordinary loss and cumulative effect of changes in
accounting principles in 1993 was $123.1 million, compared with income
of $26.9 million in 1992. This decrease resulted from the lower
operating income previously described and approximately $10.8 million
of other pre-tax charges, principally related to establishing
additional litigation and environmental reserves. Other income
remained about the same in 1992 and 1991, as approximately $14.0
million of income for non-recurring adjustments to previously recorded
liabilities and reserves in the fourth quarter of 1992 approximately
equaled the receipt of a $12.0 million fee in the first quarter of
1991 from the Company's minority partner in Alpart in consideration
for the execution of an expansion agreement for the Alpart alumina
refinery.
Income before extraordinary loss and cumulative effect of changes in
accounting principles in 1992 was $26.9 million, a decrease of 75%
from $108.4 million in 1991. This decrease resulted from the lower
operating income previously described, partially offset by an increase
in other income principally due to approximately $14.0 million of
income for non-recurring adjustments to previously recorded
liabilities and reserves in the fourth quarter of 1992.
Net Income (Loss)
The Company reported a net loss of $652.2 million or $11.47 per common
share in 1993, compared with net income of $26.9 million or $.47 per
common share in 1992 and $108.4 million or $2.03 per common share in
1991. The principal reasons for the earnings decline in 1993 compared
with 1992 were the cumulative effect of changes in accounting
principles of $507.3 million related to the adoption of Statements of
Financial Accounting Standards No. 106, 112, and 109 (see Note 1 of
the Notes to Consolidated Financial Statements), the extraordinary
loss on early extinguishment of debt of $21.8 million, and the
operating losses described above.
The principal reason for the earnings decline in 1992 compared with
1991 was the decrease in average realized prices for alumina, primary
aluminum, and most fabricated products, partially offset by an
increase in shipments of such products.
Financial Condition and Capital Spending
Capital Structure
On February 17, 1994, the Company and KACC entered into a credit
agreement with BankAmerica Business Credit, Inc. (as agent for itself
and other lenders), the Bank of America National Trust and Savings
Association, and certain other lenders (the "1994 Credit Agreement").
The 1994 Credit Agreement replaced the credit agreement entered into
in December 1989 by the Company and KACC with a syndicate of
commercial banks and other financial institutions (as amended, the
"1989 Credit Agreement") and consists of a $250.0 million five-year
secured, revolving line of credit, scheduled to mature in 1999. KACC
is able to borrow under the facility by means of revolving credit
advances and letters of credit (up to $125.0 million) in an aggregate
amount equal to the lesser of $250.0 million or a borrowing base
relating to eligible accounts receivable plus eligible inventory. The
Company
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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will record a pre-tax extraordinary loss of approximately $8.3 million
in the first quarter of 1994, consisting primarily of the write-off of
unamortized deferred financing costs related to the 1989 Credit
Agreement. As of February 24, 1994, the amount outstanding under the
1994 Credit Agreement was $67.4 million of letters of credit. The
1994 Credit Agreement is unconditionally guaranteed by the Company and
by all significant subsidiaries of KACC which were guarantors of
KACC's obligations under the 1989 Credit Agreement. Loans under the
1994 Credit Agreement bear interest at a rate per annum, at KACC's
election, equal to (i) a Reference Rate (as defined) plus 1-1/2% or
(ii) LIBO Rate (Reserve Adjusted) plus 3-1/4%. After June 30, 1995,
the interest rate margins applicable to borrowings under the 1994
Credit Agreement may be reduced by up to 1-1/2% (non-cumulatively),
based upon a financial test, determined quarterly.
The 1994 Credit Agreement requires KACC to maintain certain financial
covenants and places restrictions on the Company's and KACC's ability
to, among other things, incur debt and liens, make investments, pay
common stock dividends, undertake transactions with affiliates, make
capital expenditures, and enter into unrelated lines of business. The
1994 Credit Agreement is secured by, among other things, (i) mortgages
on KACC's major domestic plants (excluding the Gramercy plant); (ii)
subject to certain exceptions, liens on the accounts receivable,
inventory, equipment, domestic patents and trademarks, and
substantially all other personal property of KACC and certain of its
subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser;
and (iv) pledges of all of the stock of a number of KACC's wholly
owned domestic subsidiaries, pledges of a portion of the stock of
certain foreign subsidiaries, and pledges of a portion of the stock of
certain partially owned foreign affiliates.
On February 17, 1994, the Company consummated the public offering of
8,000,000 shares of its 8.255% PRIDES, Convertible Preferred Stock
(the "PRIDES"). The net proceeds from the sale of the shares of
PRIDES were approximately $90.6 million. The Company used such net
proceeds to make a non-interest bearing loan to KACC in a principal
amount equal to $30.0 million (the aggregate dividends scheduled to
accrue on the shares of PRIDES from the issuance date until December
31, 1997, the date on which the outstanding PRIDES will be mandatorily
converted into shares of the Company's common stock), evidenced by an
intercompany note, and used the balance of such net proceeds to make a
capital contribution to KACC in the amount of approximately $60.6
million. In connection with the PRIDES offering, the Company granted
the underwriters an over allotment option for up to 1,200,000 of such
shares.
Concurrent with the offering of the PRIDES, on February 17, 1994, KACC
issued $225.0 million of its 9-7/8% Senior Notes due 2002 (the "Senior
Notes"). The net proceeds of the offering of the Senior Notes were
used to reduce outstanding borrowings under the Revolving Credit
Facility of the 1989 Credit Agreement immediately prior to the
effectiveness of the 1994 Credit Agreement and for working capital and
general corporate purposes.
The offering of the PRIDES, the concurrent issuance of the Senior
Notes, and the replacement of the 1989 Credit Agreement are the final
steps of a comprehensive refinancing plan which the Company and KACC
began in January 1993 which extended the maturities of the Company's
outstanding indebtedness, enhanced its liquidity, and raised new
equity capital.
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At December 31, 1993, the Company's total consolidated indebtedness
was $729.4 million, compared to $795.8 million at December 31, 1992.
As of December 31, 1992, the Company's long-term indebtedness
consisted principally of $321.7 million aggregate amount of the 14-
1/4% Senior Subordinated Notes due 1995 (the "14-1/4% Notes") and the
1989 Credit Agreement. KACC refinanced the 14-1/4% Notes through the
issuance in February 1993 of $400.0 million aggregate principal amount
of the 12-3/4% Senior Subordinated Notes due 2003 (the "12-3/4%
Notes"). The net proceeds from the sale of the 12-3/4% Notes were
used to retire $321.7 million aggregate principal amount of, and pay
premiums on, the 14-1/4% Notes, to prepay $18.0 million of the term
loan under the 1989 Credit Agreement, and to reduce outstanding
borrowings under the Revolving Credit Facility of the 1989 Credit
Agreement. These transactions resulted in a pre-tax extraordinary
loss of approximately $33.0 million in the first quarter of 1993
($21.8 million after taxes), consisting primarily of the write-off of
unamortized discount and deferred financing costs related to the 14-
1/4% Notes and the payment of premiums on the 14-1/4% Notes.
The obligations of KACC with respect to the Senior Notes and the 12-
3/4% Notes are guaranteed, jointly and severally, by certain
subsidiaries of KACC. The indentures governing the Senior Notes and
the 12-3/4% Notes restrict, among other things, KACC's ability, and
the 1994 Credit Agreement restricts, among other things, Kaiser's and
KACC's ability, to incur debt, undertake transactions with affiliates,
and pay dividends.
To increase its equity capital, the Company consummated a public
offering of its $.65 Depositary Shares in June 1993, each representing
one-tenth of a share of Series A Mandatory Conversion Premium Dividend
Preferred Stock (the "Series A Shares") pursuant to which it realized
net cash proceeds of approximately $119.3 million. In connection with
the offering of the $.65 Depositary Shares, the Company made a non-
interest bearing loan to KACC in the principal amount of $37.8 million
(the aggregate dividends scheduled to accrue on the Series A Shares
from the issuance date until the date on which the outstanding Series
A Shares mandatorily convert into shares of the Company's common
stock). The loan is evidenced by an intercompany note which matures
on June 29, 1996, and is payable in quarterly installments. As of
December 31, 1993, the aggregate principal amount of such intercompany
note was $31.5 million.
Cash from Operations
Cash provided by operations was $24.2 million in 1993, compared with
$26.3 million in 1992 and $135.0 million in 1991. The decrease in
1992 compared with 1991 was primarily because of the decline in net
income and a $66.3 million decrease in previously withdrawn equity
resulting from the excess of current market value over the premiums
paid in certain option contracts.
Capital Expenditures
The Company's capital expenditures of approximately $300.2 million (of
which $42.6 million was funded by the Company's minority partners in
certain foreign joint ventures) during the three years ended December
31, 1993, were made primarily to improve production efficiency, reduce
operating costs, expand capacity at existing facilities, and construct
new facilities. Total consolidated capital expenditures were $67.7
million in 1993, compared with $114.4 million in 1992 and $118.1
million in 1991 (of which $9.4, $17.1, and $16.1 million were funded
by the minority partners in certain foreign joint ventures in 1993,
1992, and 1991, respectively). Total consolidated capital
expenditures (of which approximately 5% is expected to be funded by
the minority partners in certain foreign joint ventures) are expected
to be in the range of $50.0 to $75.0 million per year in the years
1994-1996.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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Debt Service and Capital Expenditure Requirements
The Company expects that it will be able to satisfy its debt service
and capital expenditure requirements through at least December 31,
1995, from cash flows generated by operations and, to the extent
necessary, from borrowings under the 1994 Credit Agreement.
Dividends and Distributions
The declaration and payment of dividends by the Company and KACC on
their shares of common stock is subject to certain covenants contained
in the 1994 Credit Agreement and, in the case of KACC, the Senior Note
Indenture and the 12-3/4% Note Indenture. The 1994 Credit Agreement
does not permit the Company or KACC to pay any dividends on their
common stock. The declaration and payment of dividends by the Company
on the shares of the Series A Shares and the PRIDES is expressly
permitted by the terms of the 1994 Credit Agreement to the extent the
Company receives payments on the intercompany notes or certain other
permitted distributions from KACC.
Other Obligations
In December 1992, KACC entered into an installment sale agreement (the
"Sale Agreement") with the Parish of St. James, Louisiana (the
"Louisiana Parish"), pursuant to which the Louisiana Parish issued
$20.0 million aggregate principal amount of its 7-3/4% Bonds due
August 1, 2022 (the "Bonds"), to finance the construction of certain
solid waste disposal facilities at KACC's Gramercy plant. The
proceeds from the sale of the Bonds were deposited into a construction
fund and may be withdrawn, from time to time, pursuant to the terms of
the Sale Agreement and the Bond indenture. At December 31, 1993,
$10.8 million remained in the construction fund. The Sale Agreement
requires KACC to make payments to the Louisiana Parish in installments
due on the dates and in the amounts required to permit the Louisiana
Parish to satisfy all of its payment obligations under the Bonds.
The Company has historically participated in various raw material
joint ventures outside the United States. At December 31, 1993, the
Company was unconditionally obligated for $73.6 million of
indebtedness of one such joint venture affiliate.
Environmental Contingencies
The Company and KACC are subject to a wide variety of environmental
laws and regulations and to fines or penalties assessed for alleged
breaches of the environmental laws and to claims and litigation based
upon such laws. KACC is currently subject to a number of lawsuits
under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments
Reauthorization Act of 1986 ("CERCLA"), and, along with certain other
entities, has been named as a potentially responsible party for
remedial costs at certain third-party sites listed on the National
Priorities List under CERCLA.
Based upon KACC's evaluation of these and other environmental matters,
KACC has established environmental accruals primarily related to
potential solid waste disposal and soil and groundwater remediation
matters. The following table presents the changes in such accruals,
which are primarily included in Long-term liabilities, for the years
ended December 31, 1993, 1992, and 1991:
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These environmental accruals represent KACC's estimate of costs
reasonably expected to be incurred based upon presently enacted laws
and regulations, currently available facts, existing technology, and
KACC's assessment of the likely remediation action to be taken. KACC
expects that these remediation actions will be taken over the next
several years and estimates that expenditures to be charged to the
environmental accrual will be approximately $4.0 to $8.0 million for
the years 1994 through 1998 and an aggregate of approximately $12.8
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 by amounts which cannot presently be
estimated. While uncertainties are inherent in the ultimate outcome
of these matters and it is impossible to presently determine the
actual costs that ultimately may be incurred, management believes that
the resolution of such uncertainties should not have a material
adverse effect upon the Company's consolidated financial position or
results of operations.
Asbestos Contingencies
KACC is a defendant in a number of lawsuits in which the plaintiffs
allege that certain of their injuries were caused by exposure to
asbestos during, and as a result of, their employment with KACC or to
products containing asbestos produced or sold by KACC. The lawsuits
generally relate to products KACC has not manufactured for at least 15
years.
At year-end 1993, the number of such lawsuits pending was
approximately 23,400 (approximately 11,400 of which were received in
1993). The number of such lawsuits instituted against KACC increased
substantially in 1993, and management believes the number of such
lawsuits will continue at approximately the same rate for the next few
years.
In connection with such litigation, during 1993, 1992, and 1991, KACC
made cash payments for settlement and other related costs of $7.0,
$7.1, and $6.1 million, respectively. Based upon prior experience,
KACC estimates annual future cash payments in connection with such
litigation of approximately $8.0 to $13.0 million for the years 1994
through 1998, and an aggregate of approximately $88.4 million
thereafter through 2006. Based upon past experience and reasonably
anticipated future activity, KACC has established an accrual for
estimated asbestos-related costs for claims filed and estimated to be
filed and settled through 2006. The Company does not presently
believe there is a reasonable basis for estimating such costs beyond
2006 and, accordingly, no accrual has been recorded for such costs
which may be incurred. This accrual was calculated based upon the
current and anticipated number of asbestos-related claims, the prior
timing and amounts of asbestos-related payments, the current state of
case law related to asbestos claims, the advice of counsel, and the
anticipated effects of inflation and discounting at an estimated risk-
free rate (5.25% at December 31, 1993). Accordingly, an accrual of
$102.8 million for asbestos-related expenditures is included primarily
in Long-term liabilities at December 31, 1993. The aggregate amount
of the undiscounted liability at December 31, 1993, of $141.5 million,
before considerations for insurance recoveries, reflects an increase
of $56.6 million from the prior year, resulting primarily from an
increase in claims filed during 1993 and the Company's belief that the
number of such lawsuits will continue at approximately the same rate
for the next few years.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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The Company believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs. While
claims for recovery from one of KACC's insurance carriers are
currently subject to pending litigation and other carriers have raised
certain defenses, the Company believes, based upon prior insurance-
related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of counsel, that substantial
recoveries from the insurance carriers are probable. Accordingly,
estimated insurance recoveries of $94.0 million determined on the same
basis as the asbestos-related cost accrual are recorded primarily in
Other assets as of December 31, 1993.
Based upon the factors discussed in the two preceding paragraphs,
management currently believes that there is no more than a remote
possibility (under generally accepted accounting principles) that the
Company's asbestos-related costs net of related insurance recoveries
exceed those accrued as of December 31, 1993, and, accordingly, that
the resolution of such uncertainties and the incurrence of such net
costs should not have a material adverse effect upon the Company's
consolidated financial position or results of operations.
Income Tax Matters
Tax Attribute Carryforwards
At December 31, 1993, Kaiser had certain tax attribute carryforwards
which may be utilized, subject to certain limitations, to reduce
future income tax liabilities. See Note 7 of the Notes to
Consolidated Financial Statements for a discussion of the effects upon
the Company's tax attribute carryforwards and carrybacks resulting
from the offering of the Company's $.65 Depositary Shares in June
1993.
Deferred Income Tax Assets
As discussed in Note 7 of the Notes to Consolidated Financial
Statements, the Company's net deferred income tax assets as of
December 31, 1993, were $206.8 million. Approximately $82.4 million
of these net deferred income tax assets relate to the benefit of loss
and credit carryforwards, net of valuation allowances. The Company
evaluated all appropriate factors to determine the proper valuation
allowances for these carryforwards, including any limitations
concerning their use and the year the carryforwards expire, as well as
the levels of taxable income necessary for utilization. For example,
full valuation allowances were provided for certain credit
carryforwards that expire in the near term. With regard to future
levels of income, the Company believes, based on the cyclical nature
of its business, its history of prior operating earnings, and its
expectations for future years, that it will more likely than not
generate sufficient taxable income to realize the benefit attributable
to the loss and credit carryforwards for which valuation allowances
were not provided. The remaining portion of the Company's net
deferred income tax assets at December 31, 1993, is approximately
$124.4 million. A principal component of this amount is the tax
benefit associated with the accrual for postretirement benefits other
than pensions. The future tax deductions with respect to the
turnaround of this accrual will occur over a 30- to 40-year period.
If such deductions create or increase a net operating loss in any one
year, the Company has the ability to carry forward such loss for 15
taxable years. For these reasons, the Company believes a long-term
view of profitability is appropriate and has concluded that this net
deferred income tax asset will more likely than not be realized
despite the recent decline in profitability.
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Trends
Exports from the Commonwealth of Independent States ("C.I.S."),
additions to smelter capacities during the past several years,
continued high operating rates, and other factors have contributed to
a significant increase in primary aluminum inventories in the Western
world. If Western world production and exports from the C.I.S.
continue at current levels, primary aluminum inventory levels will
increase further in 1994. The foregoing factors, among others, have
contributed to a significant reduction in the market price of primary
aluminum, and may continue to adversely affect the market price of
primary aluminum in the future.
Government officials from the European Union, the United States of
America, Canada, Norway, Australia, and the Russian Federation met in
a multilateral conference in January 1994 to discuss the current
excess global supply of primary aluminum. All six participating
governments have ratified as a trade agreement the resulting
Memorandum which provides, in part, for (i) a reduction in Russian
Federation primary aluminum production by 300,000 tons per year within
three months of ratification of the Memorandum and an additional
200,000 tons within the following three months, (ii) improved
availability of comprehensive data on Russian aluminum production, and
(iii) certain assistance to the Russian aluminum industry. A Russian
Federation Trade Ministry official has publicly stated that the output
reduction would remain in effect for 18 months to two years, provided
that other worldwide production cutbacks occur, existing trade
restrictions on aluminum are eliminated, and no new trade restrictions
on aluminum are imposed. The Memorandum does not require specific
levels of production cutbacks by other producing nations. There can
be no assurance that the implementation of the Memorandum will
adequately address the current oversupply of primary aluminum.
If the Company's average realized sales prices in 1994 for substantial
quantities of its primary aluminum and alumina were based on the
current market price of primary aluminum, the Company would continue
to sustain net losses in 1994, which would be expected to approximate
the loss in 1993 ($81.5 million) before extraordinary loss and
cumulative effect of changes in accounting principles, restructuring
charges, reduction in the carrying value of inventories, and additions
to litigation and environmental reserves as described in Notes 1 and 3
of the Notes to Consolidated Financial Statements.
Effective October 1, 1993, an increase in the base rate the BPA
charges to its direct service industry customers for electricity was
adopted, which will increase the Company's production costs at the
Mead and Tacoma smelters by approximately $15.0 million per year
(approximately $11.3 million per year, based on the current operating
rate of approximately 75% of full capacity). The rate increase is
generally expected to remain in effect for two years.
Sensitivity to Prices and Hedging Programs
The Company's earnings are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also
depend to a significant degree upon the volume and mix of all products
sold. Consequently, the Company has developed strategies to mitigate
its exposure to possible further declines in the market prices of
alumina and primary aluminum while retaining the ability to
participate in favorable pricing environments that may materialize.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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Alumina -- The Company has sold forward substantially all of the
alumina available to it in excess of its projected internal smelting
requirements for 1994, and a substantial portion of such excess
alumina for 1995. Approximately 95% of 1994 sales and virtually all
of 1995 sales were made at prices indexed to future prices of primary
aluminum. Approximately 75% of 1994 sales were made at prices indexed
to future prices of primary aluminum, but with minimum prices that
exceed the Company's estimated cash production costs. The remainder
of 1994 sales were made either at fixed prices that exceed the
Company's estimated cash production costs, or are subject to prices
indexed to future prices of primary aluminum but without minimum
prices. Approximately 85% of 1995 sales were made at prices indexed
to future prices of primary aluminum, but with minimum prices that
exceed the Company's estimated cash production costs.
Aluminum Processing -- As of the date of this report, the Company has
sold forward at fixed prices approximately 75% of its primary aluminum
in excess of its projected internal fabrication requirements in 1994
and approximately 55% of such surplus in 1995 at fixed prices that
exceed the current market price of primary aluminum. Hedging programs
already in place would allow the Company to participate in higher
market prices, should they materialize, for approximately 40% of the
Company's excess primary aluminum sold forward in 1994, and 100% of
the Company's excess primary aluminum sold forward in 1995.
In response to the low price of primary aluminum caused by the current
surplus, a number of companies have closed smelting facilities. In
addition, in response to certain power reductions undertaken by the
BPA in the Pacific Northwest, a number of companies (including the
Company) have curtailed or shut down production capacities at their
smelter facilities in the Pacific Northwest. Furthermore, after
continued assessment of its production levels in light of market
prices, industry inventory levels, production costs, and user demand,
on February 25, 1994, the Company announced that in April 1994 it will
curtail approximately 9.3% of its primary aluminum current annual
production capacity.
Fabricated aluminum prices, which vary considerably among products,
are heavily influenced by changes in the price of primary aluminum and
generally lag behind primary aluminum prices for periods of up to six
months. A significant portion of the Company's fabricated product
shipments consist of body, lid, and tab stock for the beverage
container market. The Company may not be able to receive increases in
primary aluminum prices from its can stock customers as promptly as in
the recent past because of competition from other aluminum producers
and because of excess supply in the industry. The Company also ships
fabricated products to customers in the aerospace market. Aluminum
demand in the aerospace market is decreasing as a result of the
structural contraction of the defense industry caused by the end of
the Cold War. In addition, the commercial aerospace market is
experiencing a cyclical downturn in business due to the recent
economic recessions in the United States, Canada, Australia, and the
United Kingdom, and slow economic growth in other countries.
- 30 -
To the Stockholders and the Board of Directors of
Kaiser Aluminum Corporation:
We have audited the accompanying consolidated balance sheets of
Kaiser Aluminum Corporation (a Delaware corporation) and
subsidiaries as of December 31, 1993 and 1992, and the related
statements of consolidated income and cash flows for each of the
three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Kaiser
Aluminum Corporation and subsidiaries as of December 31, 1993 and
1992, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles.
As explained in Note 1 of the Notes to Consolidated Financial
Statements, effective January 1, 1993, the Company changed its
methods of accounting for postretirement benefits other than
pensions, postemployment benefits, and income taxes.
ARTHUR ANDERSEN & CO.
Houston, Texas
February 24, 1994
- 31 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an
integral part of these statements.
- 32 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
----------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an
integral part of these statements.
- 33 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
-----------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an
integral part of these statements.
- 34 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the statements of Kaiser
Aluminum Corporation ("Kaiser" or the "Company") and its majority
owned subsidiaries. Investments in 50%-or-less-owned entities are
accounted for primarily by the equity method. Intercompany balances
and transactions are eliminated. The Company is a subsidiary of
MAXXAM Inc. ("MAXXAM"), and conducts its operations through its wholly
owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC").
Certain reclassifications of prior-year information were made to
conform to the current presentation.
Changes in Accounting Principles
The Company adopted Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("SFAS 106"), and Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits"
("SFAS 112"), as of January 1, 1993. The costs of postretirement
benefits other than pensions and postemployment benefits are now
accrued over the period employees provide services to the date of
their full eligibility for such benefits. Previously, such costs were
expensed as actual claims were incurred. The cumulative effect of the
changes in accounting principles for the adoption of SFAS 106 and SFAS
112 were recorded as charges to results of operations of $497.7 and
$7.3, net of related income taxes of $234.2 and $3.5, respectively.
The new accounting standards had no effect on the Company's cash
outlays for postretirement or postemployment benefits, nor did these
one-time charges affect the Company's compliance with its existing
debt covenants. The Company reserves the right, subject to applicable
collective bargaining agreements and applicable legal requirements, to
amend or terminate these benefits.
The Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), as of January 1,
1993. The adoption of SFAS 109 changes the Company's method of
accounting for income taxes to an asset and liability approach from
the deferral method prescribed by Accounting Principles Board Opinion
No. 11, "Accounting for Income Taxes" ("APB 11"). The asset and
liability approach requires the recognition of deferred income tax
assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's financial statements
or tax returns. Under this method, deferred income tax assets and
liabilities are determined based on the temporary differences between
the financial statement and tax bases of assets and liabilities using
enacted tax rates. The cumulative effect of the change in accounting
principle reduced the Company's results of operations by $2.3.
Cash and Cash Equivalents
The Company considers only those short-term, highly liquid investments
with original maturities of 90 days or less to be cash equivalents.
Inventories
Substantially all product inventories are stated at last-in, first-out
("LIFO") cost, not in excess of market. Replacement cost is not in
excess of LIFO cost. Other inventories, principally operating
supplies and repair and maintenance parts, are stated at the lower of
average cost or market. Inventory costs consist of material, labor,
and manufacturing overhead, including depreciation. Inventories
consist of the following:
- 35 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------------
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
The Company recorded pre-tax charges of approximately $19.4 in 1993
and $29.0 in 1992 because of a reduction in the carrying values of its
inventories caused principally by prevailing lower prices for alumina,
primary aluminum, and fabricated products. The 1992 amount includes a
LIFO inventory liquidation of $10.2.
Depreciation
Depreciation is computed principally by the straight-line method at
rates based upon the estimated useful lives of the various classes of
assets. The principal estimated useful lives by class of assets are:
-----------------------------------------------------------------------
Land improvements 8 to 25 years
Buildings 15 to 45 years
Machinery and equipment 10 to 22 years
Other Income
Other income in 1993 includes approximately $10.8 of pre-tax charges
related principally to establishing additional litigation and
environmental reserves in the fourth quarter. Other income in 1992
includes approximately $14.0 of pre-tax income for non-recurring
adjustments to previously recorded liabilities and reserves in the
fourth quarter. Included in interest and other income in 1991 is the
receipt of a $12.0 fee in the first quarter from the Company s
minority partner in consideration for the execution of an expansion
agreement for the Alumina Partners of Jamaica ("Alpart") alumina
refinery. The agreement provides for a program of expansion and
modernization of Alpart at the existing ownership interest of 65% for
KACC and 35% for KACC's minority partner. The prior expansion
agreement provided for expansion rights of 75% for KACC and 25% for
KACC's minority partner.
Futures Contracts and Options
The Company periodically enters into forward foreign exchange,
commodity futures, and commodity and currency option contracts, which
are primarily accounted for as hedges of its revenues and costs. The
gains and losses on these contracts are reflected in earnings
concurrently with the hedged revenues or costs. The cash flows from
these contracts are classified in a manner consistent with the
underlying nature of the transactions. At December 31, 1993, the net
fair market value of the Company's position in these contracts was not
material.
Deferred Financing Costs
Costs incurred to obtain debt financing are deferred and amortized
over the estimated term of the related borrowing.
Foreign Currency
The Company uses the United States dollar as the functional currency
for its foreign operations.
(In millions of dollars, except share amounts)
-----------------------------------------------------------------------
Fair Value of Financial Instruments
Unless otherwise disclosed, the carrying amount of all financial
instruments is a reasonable estimate of fair value.
Net Income per Common and Common Equivalent Share
Net income per common and common equivalent share is computed based on
the weighted average number of common and common equivalent shares
outstanding during each period. For the year ended December 31, 1993,
common stock equivalents of 19,382,950 attributable to the Series A
Convertible Preferred Stock and 584,300 attributable to nonqualified
stock options (see Note 9) were excluded from the calculation of
weighted average shares because they were antidilutive. Dividends on
the Series A Convertible Preferred Stock ($6.3 for the year ended
December 31, 1993) are deducted from net income (added to net loss)
for the purpose of calculating net income (loss) per common and common
equivalent share.
2. Pro Forma Financial Information
On February 17, 1994, the Company completed an equity offering of
preferred stock (see Note 9), and KACC completed a refinancing which
included the issuance of $225.0 of Senior Notes and the signing of the
1994 Credit Agreement (see Note 6). The following unaudited pro forma
information reflects the effects of these transactions as if they had
occurred on December 31, 1993.
-----------------------------------------------------------------------
Current assets $ 843.6
Non-current assets 1,800.1
Current liabilities 454.2
Long-term debt 755.7
Stockholders' equity 113.8
3. Restructuring of Operations
In 1993, KACC implemented a restructuring plan for its flat-rolled
products operation at its Trentwood plant in response to overcapacity
in the aluminum rolling industry, flat demand in the U.S. can stock
markets, and declining demand for aluminum products sold to customers
in the commercial aerospace industry, all of which have resulted in
declining prices in Trentwood's key markets. Additionally, KACC
implemented a plan to discontinue its casting operations, which
include three facilities located in Ohio. This entire restructuring
is expected to be completed by the end of 1995 and will affect
approximately 670 employees. The pre-tax charge for this
restructuring of $35.8 includes $25.2 for pension, severance, and
other termination benefits; $4.7 for a writedown of the casting
facilities to net realizable value; $3.3 for estimated 1994 casting
operating losses until the date of closure or sale; and $2.6 for
various other items.
4. Investments In and Advances To Unconsolidated Affiliates
Summary combined financial information is provided below for
unconsolidated aluminum investments, most of which supply and process
raw materials. The investees are Queensland Alumina Limited ("QAL")
(28.3% owned), Anglesey Aluminium Limited ("Anglesey") (49.0% owned),
and Kaiser Jamaica Bauxite Company (49.0% owned). The equity in
earnings (losses) before income taxes of such operations are treated
as a reduction (increase) in cost of products sold. At December 31,
1993 and 1992, KACC's net receivables from these affiliates were not
material.
- 37 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------------------------
(In millions of dollars, except share amounts)
------------------------------------------------------------------------
Summary of Combined Operations
The Company's equity in losses differs from the summary net income
(loss) due to various percentage ownerships in the entities and equity
method accounting adjustments.
At December 31, 1993, KACC's investment in its unconsolidated
affiliates exceeded its equity in their net assets by approximately
$80.7. The Company is amortizing this amount over a 12-year period,
which results in an annual amortization charge of approximately $11.9.
The Company and its affiliates have interrelated operations. KACC
provides some of its affiliates with services such as financing,
management, and engineering. Significant activities with affiliates
include the acquisition and processing of bauxite, alumina, and
primary aluminum. Purchases from these affiliates were $206.6,
$219.4 and $238.7 in the years ended December 31, 1993, 1992, and
1991, respectively. No dividends were received from investees in the
three years ended December 31, 1993. See Note 7 for the impact of the
adoption of SFAS 109 in 1993.
- 38 -
(In millions of dollars, except share amounts)
------------------------------------------------------------------------
5. Property, Plant, and Equipment
The major classes of property, plant, and equipment are as follows:
See Note 7 for the impact of the adoption of SFAS 109 in 1993.
6. Long-Term Debt
Long-term debt and its maturity schedule are as follows:
1994 Credit Agreement
On February 17, 1994, the Company and KACC entered into a credit
agreement with BankAmerica Business Credit, Inc. (as agent for itself
and other lenders), Bank of America National Trust and Savings
Association, and certain other lenders (the "1994 Credit Agreement").
The 1994 Credit Agreement replaced the 1989 Credit Agreement (as
defined below) and consists of a $250.0 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) in an aggregate amount equal to the
lesser of $250.0 or a borrowing base relating to eligible accounts
- 39 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------------
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
receivable plus eligible inventory. The Company will record a
pre-tax extraordinary loss of approximately $8.3 in the first quarter
of 1994, consisting primarily of the write-off of unamortized deferred
financing costs related to the 1989 Credit Agreement. As of February
24, 1994, the amount outstanding under the 1994 Credit Agreement was
$67.4 of letters of credit. The 1994 Credit Agreement is
unconditionally guaranteed by the Company and by all significant
subsidiaries of KACC which were guarantors of KACC's obligations under
the 1989 Credit Agreement. Loans under the 1994 Credit Agreement bear
interest at a rate per annum, at KACC's election, equal to (i) a
Reference Rate (as defined) plus 1-1/2% or (ii) LIBO Rate (Reserve
Adjusted) plus 3-1/4%. After June 30, 1995, the interest rate margins
applicable to borrowings under the 1994 Credit Agreement may be
reduced by up to 1-1/2% (non-cumulatively), based upon a financial
test, determined quarterly.
The 1994 Credit Agreement requires KACC to maintain certain financial
covenants and places restrictions on the Company's and KACC's ability
to, among other things, incur debt and liens, make investments, pay
common stock dividends, undertake transactions with affiliates, make
capital expenditures, and enter into unrelated lines of business. The
1994 Credit Agreement is secured by, among other things, (i) mortgages
on KACC's major domestic plants (excluding the Gramercy plant); (ii)
subject to certain exceptions, liens on the accounts receivable,
inventory, equipment, domestic patents and trademarks, and
substantially all other personal property of KACC and certain of its
subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser;
and (iv) pledges of all of the stock of a number of KACC's wholly
owned domestic subsidiaries, pledges of a portion of the stock of
certain foreign subsidiaries, and pledges of a portion of the stock of
certain partially owned foreign affiliates.
The 1989 Credit Agreement
The Company and KACC entered into a credit agreement with a syndicate
of commercial banks and other financial institutions. This agreement
was composed of a Revolving Credit Facility, a five-year Term Loan,
and certain other agreements (as amended, the "1989 Credit
Agreement"). The obligations of KACC in respect of the credit
facilities were guaranteed by Kaiser, and by a number of wholly owned
subsidiaries of KACC.
The Revolving Credit Facility under the 1989 Credit Agreement provided
for loans not to exceed the lesser of $350.0 or a borrowing base
relating to the amount of eligible accounts receivable and eligible
inventory of KACC and certain of its subsidiaries. Up to $50.0 of
availability under the Revolving Credit Facility could have been used
for letters of credit. As of December 31, 1993, $113.6 of borrowing
capacity was unused under the Revolving Credit Facility of the 1989
Credit Agreement (of which $12.8 could also have been used for letters
of credit). The five-year Term Loan component of the 1989 Credit
Agreement, which was originally to be repaid in ten equal semi-annual
installments commencing May 31, 1990, was prepaid in June 1993.
Senior Notes
Concurrent with the offering by the Company of its 8.255% PRIDES,
Convertible Preferred Stock (the "PRIDES") on February 17, 1994 (see
Note 9), KACC issued $225.0 of its 9-7/8% Senior Notes due 2002 (the
"Senior Notes"). The net proceeds of the offering of the Senior Notes
were used to reduce outstanding borrowings under the Revolving Credit
Facility of the 1989 Credit Agreement immediately prior to the
effectiveness of the 1994 Credit Agreement and for working capital and
general corporate purposes.
Senior Subordinated Notes
On February 1, 1993, KACC issued $400.0 of 12-3/4% Senior Subordinated
Notes due 2003 (the "12-3/4% Notes"). The net proceeds from the sale
of the 12-3/4% Notes were used to retire the 14-1/4% Senior
Subordinated Notes due 1995 (the "14-1/4% Notes"), to prepay $18.0 of
the Term Loan, and to reduce outstanding borrowings under the
Revolving Credit
- 40 -
(In millions of dollars, except share amounts)
-----------------------------------------------------------------
Facility. These transactions resulted in a pre-tax extraordinary loss
of approximately $33.0 in the first quarter of 1993, consisting
primarily of the write-off of unamortized discount and deferred
financing costs related to the 14-1/4% Notes and the payment of premiums
on the 14-1/4% Notes.
The obligations of KACC with respect to the Senior Notes and the 12-3/4%
Notes are guaranteed, jointly and severally, by certain subsidiaries
of KACC. The indentures governing the Senior Notes and the 12-3/4% Notes
restrict, among other things, KACC's ability, and the 1994 Credit
Agreement restricts, among other things, Kaiser's and KACC's ability,
to incur debt, undertake transactions with affiliates, and pay
dividends.
Gramercy Revenue Bonds
In December 1992, KACC entered into an installment sale agreement (the
"Sale Agreement") with the Parish of St. James, Louisiana (the
"Louisiana Parish"), pursuant to which the Louisiana Parish issued
$20.0 aggregate principal amount of its 7-3/4% Bonds due August 1,
2022 (the "Bonds") to finance the construction of certain solid waste
disposal facilities at KACC's Gramercy plant. The proceeds from the
sale of the Bonds were deposited into a construction fund and may be
withdrawn, from time to time, pursuant to the terms of the Sale
Agreement and the Bond indenture. At December 31, 1993, $10.8
remained in the construction fund. The Sale Agreement requires KACC
to make payments to the Louisiana Parish in installments due on the
dates and in the amounts required to permit the Louisiana Parish to
satisfy all of its payment obligations under the Bonds.
Alpart CARIFA Loan
In December 1991, Alpart entered into a loan agreement with the
Caribbean Basin Projects Financing Authority ("CARIFA") under which
CARIFA loaned Alpart the proceeds from the issuance of CARIFA's
industrial revenue bonds. The terms of the loan parallel the bonds'
repayment terms. The $38.0 aggregate principal amount of Series A
bonds matures on June 1, 2008. The Series A bonds bear interest at a
floating rate of 87% of the applicable LIBID Rate (LIBOR less 1/8 of
1%) on $37.5 of the principal amount (2.9% at December 31, 1993) with
the remaining $.5 bearing interest at a fixed rate of 6.35%. The
$22.0 aggregate principal amount of Series B bonds matures on June 1,
2007, and bears interest at a fixed rate of 8.25%.
Proceeds from the sale of the bonds were used by Alpart to refinance
interim loans from the partners in Alpart, to pay eligible project
costs for the expansion and modernization of its alumina refinery and
related port and bauxite mining facilities, and to pay certain costs
of issuance. Under the terms of the loan agreement, Alpart must
remain a qualified recipient for Caribbean Basin Initiative funds as
defined in applicable laws. Alpart has agreed to indemnify
bondholders of CARIFA for certain tax payments that could result from
events, as defined, that adversely affect the tax treatment of the
interest income on the bonds. Alpart's obligations under the loan
agreement are secured by a $64.2 letter of credit guaranteed by the
partners in Alpart (of which $22.5 is guaranteed by the Company s
minority partner in Alpart).
Capitalized Interest
Interest capitalized in 1993, 1992, and 1991 was $3.4, $4.4, and $4.2,
respectively.
Restricted Net Assets of Subsidiary
Certain debt instruments restrict the ability of KACC to transfer
assets, make loans and advances, and pay dividends to the Company.
The assets of KACC, which are substantially all of the Company's
assets, are restricted.
- 41 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------------
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
Fair Value Disclosure
The fair value of the Company's long-term debt was approximately
$734.1 and $806.8 at December 31, 1993 and 1992, respectively. For
1993, the fair value of the 12-3/4% Notes was estimated using the market
value of such notes, or $401.0. For 1992, the estimated fair value of
the 14-1/4% Notes was the amount used to retire the 14-1/4% Notes in
February 1993, or $347.8. The fair value of all other long-term debt
is based upon discounting the future cash flows using the current rate
for debt of similar maturities and terms.
7. Income Taxes
The adoption of SFAS 109 as of January 1, 1993, as discussed in Note
1, required the Company to restate certain assets and liabilities to
their pre-tax amounts from their net-of-tax amounts originally
recorded in connection with the acquisition by MAXXAM in October 1988.
The restatement of the assigned values with respect to certain assets
and liabilities recorded as a result of the acquisition and the
recomputation of deferred income tax liabilities under SFAS 109
resulted in: (i) an increase of $144.6 in the net carrying value of
property, plant, and equipment; (ii) an increase of $47.8 in
investments in and advances to unconsolidated affiliates; (iii) an
increase of $126.1 in deferred income tax liabilities (a substantial
portion of which has been netted against deferred income tax assets on
the Consolidated Balance Sheet); (iv) a decrease of $2.5 in other
assets; (v) an increase of $56.0 in long-term liabilities; and (vi) an
increase of $10.1 in other liabilities. As a result of restating the
assets and liabilities, as described above, the loss before income
taxes, minority interests, extraordinary loss, and cumulative effect
of changes in accounting principles for the year ended December 31,
1993, was increased by $9.3.
Concurrent with the adoption of SFAS 109, the Company implemented
changes in its accounting method for postretirement benefits and
postemployment benefits pursuant to SFAS 106 and SFAS 112 (see Notes 1
and 8). The pre-tax cumulative effect of changes in accounting
principles relating to SFAS 106 and SFAS 112 was a charge of $742.7.
These accounting principles changes resulted in the recognition of
deferred income tax assets of $237.7, net of valuation allowances.
Income (loss) before income taxes, minority interests, extraordinary
loss, and cumulative effect of changes in accounting principles by
geographic area is as follows:
- 42 -
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
The credit (provision) for income taxes on income (loss) before income
taxes, minority interests, extraordinary loss, and cumulative effect
of changes in accounting principles consists of:
The Omnibus Budget Reconciliation Act of 1993 (the "Act"), enacted on
August 10, 1993, retroactively increased the maximum federal statutory
income tax rate from 34% to 35% for periods beginning on or after
January 1, 1993. The 1993 federal deferred credit for income taxes of
$68.5 includes $29.2 for the benefit of operating loss carryforwards
generated in 1993 and includes a $3.4 benefit for increasing net
deferred income tax assets (liabilities) as of the date of enactment
of the Act due to the increase in the federal statutory income tax
rate.
The deferred credit for income taxes for the years ended December 31,
1992 and 1991, as computed under APB 11, results from the following
timing differences:
A reconciliation between the credit (provision) for income taxes and
the amount computed by applying the federal statutory income tax rate
to income (loss) before income taxes, minority interests,
extraordinary loss, and cumulative effect of changes in accounting
principles is as follows:
- 43 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
----------------------------------------------------------------------
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
As shown in the Statement of Consolidated Income (Loss) for the year
ended December 31, 1993, the Company reported an extraordinary loss
related to the early extinguishment of debt. The Company reported the
loss, net of related current federal income taxes, of $11.2, which
approximated the federal statutory rate in effect on the date the
transaction occurred. The related deferred income tax benefits
recorded by the Company in respect of SFAS 106 and SFAS 112 were
recorded at the federal statutory rate in effect on the date the
accounting standards were adopted before giving effect to certain
valuation allowances. At December 31, 1993 and 1992, the Company
recorded charges to equity for additional minimum pension liabilities
pursuant to Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions" ("SFAS 87"). The Company
recorded the charges net of related deferred federal and state income
taxes of $8.7 at December 31, 1993, and $3.6 at December 31, 1992,
which approximated the federal and state statutory rates.
After giving effect to the adoption of SFAS 106, SFAS 109, and SFAS
112, the components of the Company's net deferred income tax assets
were as follows:
- 44 -
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
The valuation allowances listed above relate primarily to loss and
credit carryforwards and postretirement benefits other than pensions.
As of December 31, 1993, approximately $82.4 of the net deferred
income tax assets listed above relate to the benefit of loss and
credit carryforwards, net of valuation allowances. The Company
evaluated all appropriate factors to determine the proper valuation
allowances for these carryforwards, including any limitations
concerning their use and the year the carryforwards expire, as well as
the levels of taxable income necessary for utilization. For example,
full valuation allowances were provided for certain credit
carryforwards that expire in the near term. With regard to future
levels of income, the Company believes, based on the cyclical nature
of its business, its history of prior operating earnings, and its
expectations for future years, that it will more likely than not
generate sufficient taxable income to realize the benefit attributable
to the loss and credit carryforwards for which valuation allowances
were not provided. The remaining portion of the Company's net
deferred income tax assets at December 31, 1993, is approximately
$124.4. A principal component of this amount is the tax benefit
associated with the accrual for postretirement benefits other than
pensions. The future tax deductions with respect to the turnaround of
this accrual will occur over a 30- to 40-year period. If such
deductions create or increase a net operating loss in any one year,
the Company has the ability to carry forward such loss for 15 taxable
years. For these reasons, the Company believes a long-term view of
profitability is appropriate and has concluded that this net deferred
income tax asset will more likely than not be realized despite the
recent decline in profitability.
Certain of the deferred income tax assets and liabilities listed above
are included on the Consolidated Balance Sheet in the captions
entitled Receivables, Prepaid expenses and other current assets, Other
accrued liabilities, and Long-term liabilities.
The Company and its subsidiaries were included in the consolidated
federal income tax returns of MAXXAM for the period from October 28,
1988, through December 31, 1992. The taxable income and loss and tax
credits for the Company and its subsidiaries for the period January 1,
1993, through June 30, 1993, will be included in the 1993 MAXXAM
consolidated federal income tax return.
As a consequence of the issuance of the Depositary Shares on June 30,
1993, as discussed in Note 9, the Company and its subsidiaries are no
longer included in the consolidated federal income tax return of
MAXXAM. The Company and its subsidiaries have become members of a new
consolidated return group of which the Company is the common parent
corporation (the "New Kaiser Tax Group"). The New Kaiser Tax Group
will file a consolidated federal income tax return for taxable periods
beginning on or after July 1, 1993.
The tax allocation agreement between the Company and MAXXAM (the
"Company Tax Allocation Agreement") and the tax allocation agreement
between KACC and MAXXAM (the "KACC Tax Allocation Agreement")
(collectively, the "Tax Allocation Agreements"), terminated pursuant
to their terms, effective for taxable periods beginning after June 30,
1993. Any unused federal income tax attribute carryforwards under the
terms of the Tax Allocation Agreements were eliminated and are not
available to offset federal income tax liabilities for taxable periods
beginning on or after July 1, 1993. Upon the filing of MAXXAM's 1993
consolidated federal income tax return, the tax attribute
carryforwards of the MAXXAM consolidated return group as of
December 31, 1993, will be apportioned in part to the New Kaiser Tax
Group, based upon the provisions of the relevant consolidated return
regulations. It is estimated that the benefit of such tax attribute
carryforwards apportioned to the New Kaiser Tax Group will approximate
or exceed the benefit of tax attribute carryforwards eliminated under
the Tax Allocation Agreements. To the extent the New Kaiser Tax Group
generates unused tax losses or tax credits for periods beginning on or
after July 1, 1993, such amounts will not be available to obtain
refunds of amounts paid by the Company or KACC to MAXXAM for periods
ending on or before June 30, 1993, pursuant to the Tax Allocation
Agreements.
- 45 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
----------------------------------------------------------------------
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
KACC and MAXXAM entered into the KACC Tax Allocation Agreement,
which became effective as of October 28, 1988. Under the terms of the
KACC Tax Allocation Agreement, MAXXAM computed the federal income tax
liability for KACC and its subsidiaries (collectively, the "Subgroup")
as if the Subgroup were a separate affiliated group of corporations
which was never connected with MAXXAM. During 1991, the Company and
MAXXAM entered into the Company Tax Allocation Agreement which became
effective as of January 1, 1991. Under the terms of the Company Tax
Allocation Agreement, MAXXAM computed a tentative federal income tax
liability for the Company as if it and its subsidiaries, including
KACC and its subsidiaries, were a separate affiliated group of
corporations which was never connected with MAXXAM. The federal
income tax liability of the Company is the difference between the
tentative federal income tax liability and the liability computed
under the KACC Tax Allocation Agreement.
The provisions of the Tax Allocation Agreements will continue to
govern for periods ended prior to July 1, 1993. Therefore, payments
or refunds may still be required by or payable to the Company or KACC
under the terms of their respective tax allocation agreements for
periods ended prior to July 1, 1993, due to the final resolution of
audits, amended returns, and related matters with respect to such
periods. However, the 1994 Credit Agreement prohibits the payment by
KACC to MAXXAM of any amounts due under the KACC Tax Allocation
Agreement, except for certain payments that are required as a result
of audits and only to the extent of any amounts paid after February
17, 1994, by MAXXAM to KACC under the KACC Tax Allocation Agreement.
As of December 31, 1993, MAXXAM owed the Company approximately $.1 and
owed KACC approximately $11.6 under the terms of their respective tax
allocation agreements.
Income taxes are classified as either domestic or foreign, based on
whether payment is made or due to the United States or a foreign
country. Certain income classified as foreign is also subject to
domestic income taxes.
The following table presents the Company's tax attributes for federal
income tax purposes as of December 31, 1993. The amounts of such
attributes may change based upon the final 1993 tax returns. The
utilization of certain of these tax attributes are subject to
limitations:
8. Employee Benefit and Incentive Plans
Retirement Plans
Retirement plans are non-contributory for salaried and hourly
employees and generally provide for benefits based on a formula which
considers length of service and earnings during years of service. The
Company's funding policies meet or exceed all regulatory requirements.
- 46 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
----------------------------------------------------------------------
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
Employee pension benefit plans funded status and amounts included in
the Company's Consolidated Balance Sheets are as follows:
(1) Includes plans with assets exceeding accumulated benefits by
approximately $.1 and $.4 in 1993 and 1992, respectively.
The Company also recorded $13.7 of additional pension obligation (not
included in the amounts above) as part of the restructuring reserve
(see Note 3).
SFAS No. 87 requires recognition of a minimum pension liability for
unfunded plans. At December 31, 1993 and 1992, the Company recorded
an after-tax charge to equity of $14.9 and $6.7, respectively, for the
excess of the minimum liability over the unrecognized net obligation
and prior-service cost.
The components of net periodic pension cost are:
- 47 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
----------------------------------------------------------------------
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
Assumptions used to value obligations at year-end, and to determine
the net periodic pension cost in the subsequent year are:
Postretirement Benefits Other Than Pensions
Kaiser adopted SFAS 106 to account for postretirement benefits other
than pensions effective January 1, 1993 (see Note 1). The Company and
its subsidiaries provide postretirement health care and life insurance
benefits to retired employees. Substantially all employees may become
eligible for those benefits if they reach retirement age while still
working for the Company or its subsidiaries. These benefits are
provided through contracts with various insurance carriers. The
Company has not funded the liability for these benefits.
The Company changed certain salaried retiree group insurance benefits
effective January 1, 1994, to provide for additional cost-sharing
features, such as reducing certain reimbursements and requiring future
retiree contributions which will lower salaried retiree medical
expenses.
The Company's accrued postretirement benefit obligation is composed of
the following:
The components of net periodic postretirement benefit cost are:
The 1994 annual assumed rates of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) are 9.5% and
8.0% for retirees under 65 and over 65, respectively, and are assumed
to decrease gradually to 5.25% in 2006 and remain at that level
thereafter. The health care cost trend rate has a significant effect
on the amounts reported. A one percentage point increase in the
assumed health care cost trend rate would increase the accumulated
- 48 -
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
postretirement benefit obligation as of December 31, 1993, by
approximately $96.0 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1993 by
approximately $9.5. The weighted average discount rate used to
determine the accumulated postretirement benefit obligation at
December 31, 1993, was 7.5%.
Postemployment Benefits
Kaiser adopted the new accounting standard on postemployment benefits
effective January 1, 1993 (see Note 1). The Company provides certain
benefits to former or inactive employees after employment but before
retirement.
Incentive Plans
Effective January 1, 1989, the Company and KACC adopted an unfunded
Long-Term Incentive Plan (the "LTIP") for certain key employees of the
Company, KACC, and their consolidated subsidiaries. All compensation
vested as of December 31, 1992, under the LTIP, as amended in 1991 and
1992, has been paid to the participants in cash or common stock of the
Company as of December 31, 1993. Under the LTIP, as amended, 764,092
shares were distributed to participants during 1993, which will
generally vest at the rate of 25% per year. The Company will record
the related expense of $6.5 over the four-year period ending December
31, 1996.
Effective January 1, 1990, KACC adopted an unfunded Middle Management
Long-Term Incentive Plan. KACC also has a supplemental savings and
retirement plan for salaried employees under which the participants
contribute a percentage of their base salaries.
The Company's expense for the above plans was $5.3, $6.6, and $6.5 for
the years ended December 31, 1993, 1992, and 1991, respectively.
- 49 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
----------------------------------------------------------------------
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
9. Stockholders' Equity and Minority Interests
Changes in stockholders' equity and minority interests were:
- 50 -
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
Redeemable Preference Stock
In March 1985, KACC entered into a three-year agreement with the
United Steelworkers of America ("USWA") whereby shares of a new
series of "Cumulative (1985 Series A) Preference Stock" would be
issued to an employee stock ownership plan in exchange for certain
elements of wages and benefits. Concurrently, a similar plan was
established for certain nonbargaining employees which provided for
the issuance of "Cumulative (1985 Series B) Preference Stock."
Series A Stock and Series B Stock ("Series A and B Stock") each
have a par value of $1 per share and a liquidation and redemption
value of $50 per share plus accrued dividends, if any.
For financial reporting purposes, Series A and B Stock were
recorded at fair market value when issued, based on independent
appraisals, with a corresponding charge to compensation cost.
Carrying values have been increased each year to recognize
accretion of redemption values and, in certain years, there have
been other increases for reasons described below. Issuances and
redemptions of Series A and B Stock are shown below.
No additional Series A or B Stock will be issued based on
compensation earned in 1992 or subsequent years. While held by the
plan trustee, Series B Stock is entitled to cumulative annual
dividends, when and as declared by the Board of Directors, payable
in stock or in cash at the option of KACC on or after March 1,
1991, in respect to years commencing January 1, 1990, based on a
formula tied to KACC's income before tax from aluminum operations.
When distributed to plan participants (generally upon separation
from KACC), the Series A and B stocks are entitled to an annual
cash dividend of $5 per share, payable quarterly, when and as
declared by the Board of Directors.
Redemption fund agreements require KACC to make annual payments by
March 31 each year based on a formula tied to consolidated net
income until the redemption funds are sufficient to redeem all
Series A and B Stock. On an annual basis, the minimum payment is
$4.3 and the maximum payment is $7.3. In March 1992 and 1993, KACC
contributed $7.0 and $4.3 for the years 1991 and 1992,
respectively, and will contribute $4.3 in March 1994 for 1993.
Under the USWA labor contract effective November 1, 1990, KACC was
obligated to offer to purchase up to 80 shares of Series A Stock
from each active participant in 1991 at a price equal to its
redemption value of $50 per share. KACC also agreed to offer to
purchase up to an additional 40 shares from each participant in
1994. The employees may elect to receive their shares, accept
cash, or place the proceeds into KACC's 401(k) savings plan. Under
separate action, KACC also offered to purchase 80 shares of Series
B stock from active participants in 1991 and 40 shares in 1994.
Under the provisions of these contracts, in February 1994, KACC
purchased $4.6 and $.8 of the Series A and B stock, respectively.
The Series A and B Stock is distributed in the event of death,
retirement, or in other specified circumstances. KACC may also
redeem such stock at $50 per share plus accrued dividends, if any.
At the option of the plan participant, the trustee shall redeem
stock distributed from the plans at redemption value to the extent
funds are available in the
- 51 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
----------------------------------------------------------------------
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
redemption fund. Under the Tax Reform Act of 1986, at the option
of the plan participant, KACC must purchase distributed shares
earned after December 31, 1985, at redemption value on a five-year
installment basis, with interest at market rates. The obligation
of KACC to make such installment payments must be secured.
The Series A and B Stock is entitled to the same voting rights as
KACC common stock and to certain additional voting rights under
certain circumstances, including the right to elect, along with
other KACC preference stockholders, two directors whenever accrued
dividends have not been paid on two annual dividend payment dates,
or when accrued dividends in an amount equivalent to six full
quarterly dividends are in arrears. The Series A and B Stock
restricts the ability of KACC to redeem or pay dividends on common
stock if KACC is in default on any dividends payable on the Series
A and B Stock.
Preference Stock
KACC Cumulative Convertible Preference Stock, $100 par value ("$100
Preference Stock"), restricts acquisition of junior stock and
payment of dividends. At December 31, 1993, such provisions were
less restrictive as to the payment of cash dividends than the 1989
Credit Agreement provisions. KACC has the option to redeem the
$100 Preference Stocks at par value plus accrued dividends. KACC
does not intend to issue any additional shares of the $100
Preference Stocks.
The 4-1/8% and 4-3/4% (1957 Series, 1959 Series, and 1966 Series)
$100 Preference Stock can be exchanged for per share cash amounts
of $69.30, $77.84, $78.38, and $76.46, respectively. KACC records
the $100 Preference Stock at their exchange amounts for financial
statement presentation and the Company includes such amounts in
minority interests. The outstanding shares of KACC preference
stock were:
Preferred Stock
Series A Convertible - On June 30, 1993, Kaiser issued 17,250,000
of its $.65 Depositary Shares (the "Depositary Shares"), each
representing one-tenth of a share of Series A Mandatory Conversion
Premium Dividend Preferred Stock (the "Series A Shares"). In
connection with the issuance of the Depositary Shares, MAXXAM Group
Inc. ("MGI"), a wholly owned subsidiary of MAXXAM, exchanged a
$15.0 promissory note of KACC (the "MAXXAM Note") for an additional
2,132,950 Depositary Shares.
The net cash proceeds from the sale of Depositary Shares were
approximately $119.3. Kaiser used approximately $37.8 of such net
proceeds to make a non-interest bearing loan to KACC evidenced by
an intercompany note, which matures on June 29, 1996, and is
payable in quarterly installments. The intercompany note is
designed to provide sufficient funds to Kaiser to enable it to make
dividend payments on the Series A Shares until June 30, 1996, the
date on which the outstanding Series A Shares are mandatorily
converted into shares of the Company's common stock. Kaiser used
approximately $81.5 of such net proceeds and the MAXXAM Note to
make a capital contribution to KACC. KACC used approximately $13.7
of the funds it received from Kaiser to prepay the remaining
balance of the Term Loan under
- 52 -
(In millions of dollars, except share amounts)
-------------------------------------------------------------------
the 1989 Credit Agreement and $105.6 of such funds to reduce
outstanding borrowings under the Revolving Credit Facility of the
1989 Credit Agreement.
The owners of Depositary Shares are entitled to receive (when, as,
and if the Board of Directors declares dividends on the Series A
Shares) cumulative preferential cash dividends from the date of
issue, accruing at the rate of $.65 per annum for each of the
Depositary Shares, payable quarterly in arrears on the last day of
each March, June, September and December, commencing September 30,
1993. Holders of Depositary Shares (based on the voting rights of
the Series A Shares) have one vote for each Depositary Share held
of record, except as required by law, and are entitled to vote with
the holders of common stock on all matters submitted to a vote of
common stockholders.
On June 30, 1996, each of the outstanding Depositary Shares will
automatically convert (upon the automatic conversion of the Series
A Shares) into (i) one share of common stock, plus (ii) the right
to receive an amount in cash equal to the accrued and unpaid
dividends payable with respect to such Depositary Share. Automatic
conversion of the outstanding Depositary Shares (and the Series A
Shares) will occur upon certain mergers or consolidations of the
Company (as defined). At any time or from time to time prior to
June 30, 1996, the Company may call the outstanding Depositary
Shares (by calling the Series A Shares) for redemption, in whole or
in part, at a call price per Depositary Share initially equal to
$12.46, declining by $.0018 on each day following the date of issue
to $10.624 on April 30, 1996, and equal to $10.51 thereafter,
payable in shares of common stock having an aggregate Current
Market Price (as defined) equal to the applicable call price, plus
an amount in cash equal to all accrued and unpaid dividends payable
with respect to such Depositary Share.
PRIDES Convertible - On February 17, 1994, the Company consummated
the public offering of 8,000,000 shares of the PRIDES. The net
proceeds from the sale of the shares of PRIDES were approximately
$90.6. The Company used such net proceeds to make a non-interest
bearing loan to KACC in a principal amount equal to $30.0 (the
aggregate dividends scheduled to accrue on the shares of PRIDES
from the issuance date until December 31, 1997, the date on which
the outstanding PRIDES are mandatorily converted into shares of the
Company's common stock), evidenced by an intercompany note, and
used the balance of such net proceeds to make a capital
contribution to KACC in the amount of approximately $60.6.
Holders of shares of PRIDES are entitled to receive (when, as, and
if the Board of Directors declares dividends on the PRIDES)
cumulative preferential cash dividends at a rate per annum of
8.255% of the per share offering price (equivalent to $.97 per
annum for each share of PRIDES), from the date of initial issuance,
payable quarterly in arrears on the last day of each March, June,
September, and December of each year. Holders of shares of PRIDES
have a 4/5 vote for each share held of record and, except as
required by law, are entitled to vote together with the holders of
common stock and together with the holders of any other classes or
series of stock (including the Series A Shares) who are entitled to
vote in such manner on all matters submitted to a vote of common
stockholders.
On December 31, 1997, unless either previously redeemed or
converted at the option of the holder, each of the outstanding
shares of PRIDES will mandatorily convert into (i) one share of the
Company's common stock, subject to adjustment in certain events,
and (ii) the right to receive an amount in cash equal to all
accrued and unpaid dividends thereon (other than previously
declared dividends payable to a holder of record on a prior date).
Shares of PRIDES are not redeemable prior to December 31, 1996. At
any time and from time to time on or after December 31, 1996, the
Company may redeem any or all of the outstanding shares of PRIDES.
Upon any such redemption, each holder will receive, in exchange for
each share of PRIDES, the number of shares of common stock equal to
(A) the sum of (i) $11.9925, declining after December 31, 1996, to
$11.75 until December 31, 1997, plus,
- 53 -
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
----------------------------------------------------------------------
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
in the event the Company does not elect to pay cash dividends to
the redemption date, (ii) all accrued and unpaid dividends thereon
divided by (B) the Current Market Price (as defined) on the
applicable date of determination, but in no event less than .8333
of a share of common stock, subject to adjustment in certain
events. At any time prior to December 31, 1997, unless previously
redeemed, each share of PRIDES is convertible at the option of the
holder thereof into .8333 of a share of common stock (equivalent to
a conversion price of $14.10 per share of common stock), subject to
adjustment in certain events. The number of shares of common stock
a holder will receive upon redemption, and the value of the shares
received upon conversion, will vary depending on the market price
of the common stock from time to time.
Common Stock
On July 18, 1991, the Company issued 7,250,000 shares of its common
stock for net proceeds of approximately $93.2. Three-fourths of
the net proceeds from the offering were used by the Company to
prepay a portion of the promissory notes of the Company (see
"Dividends on Common Stock" below) with accrued interest, payable
to its parent. The remaining balance of such notes payable to
parent that were not prepaid with the net proceeds of the offering,
together with accrued interest, were contributed to the
stockholders' equity of the Company. The remaining one-fourth of
the net proceeds from the offering was used by Kaiser to purchase
common stock of KACC. KACC reduced its Term Loan by an amount
equal to the proceeds it received from Kaiser.
Stock Incentive Plan
In 1993, the Company adopted the Kaiser 1993 Omnibus Stock
Incentive Plan. A total of 2,500,000 shares of Kaiser common stock
are reserved for awards or for payment of rights granted under the
Plan. Six Company executives have received grants of 764,092
shares under the LTIP for benefits generally earned but not vested
as of December 31, 1992 (see Note 8). In 1993, the stockholders
approved the award of 584,300 shares as "nonqualified stock
options" to members of management other than those participating in
the LTIP. These options will generally vest at the rate of 20% per
year over the next five years, commencing May 18, 1994. The
exercise price of these shares is $7.25 per share, the quoted
market price at the date of grant.
Dividends on Common Stock
On January 31, September 16, and December 16, 1991, the Company
declared and paid dividends on common stock of $50.0, $2.9, and
$2.8, respectively. The Company paid cash dividends on common
stock of $2.9 in each quarter of 1992. As required under the 1989
Credit Agreement, on December 15, 1992, KACC issued a Pay-in-Kind
Note (the "PIK Note") to MGI in the principal amount of $2.5,
representing the entire amount of the dividend received by MGI in
respect of the shares of the Company's common stock which it owned.
The PIK Note bears interest, compounded semiannually, at a rate
equal to 12% per annum, and is due and payable, together with
accrued interest thereon, on June 30, 1995.
The indentures governing the Senior Notes and the 12-3/4% Notes
restrict, among other things, KACC's ability, and the 1994 Credit
Agreement restricts, among other things, Kaiser's and KACC's
ability, to incur debt, undertake transactions with affiliates, and
pay dividends. Under the most restrictive of these covenants,
neither the Company nor KACC is currently permitted to pay
dividends on its common stock.
At December 31, 1993, 28,000,000 shares of the Company's common
stock owned by MAXXAM were pledged as security for debt issued by
MGI, consisting of $100.0 aggregate principal amount of 11-1/4% Senior
Secured Notes due 2003 and $126.7 aggregate principal amount of
12-1/4% Senior Secured Discount Notes due 2003.
- 54 -
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
10. Commitments and Contingencies
Commitments
The Company has financial commitments, including purchase
agreements, tolling arrangements, forward foreign exchange
contracts, forward sales contracts, letters of credit, and
guarantees.
Purchase agreements and tolling arrangements include agreements to
supply alumina to Anglesey and to purchase aluminum from that
company.
Similarly, KACC has long-term agreements for the purchase and
tolling of bauxite into alumina in Australia by QAL. These
obligations expire in 2008. Under the agreements, KACC is
unconditionally obligated to pay its proportional share of debt,
operating costs, and certain other costs of QAL. The aggregate
minimum amount of required future principal payments at December
31, 1993, is $73.6, due in 1997. The KACC share of payments,
including operating costs and certain other expenses under the
agreement, was $86.7, $99.2, and $107.6 for the years ended
December 31, 1993, 1992, and 1991, respectively.
Minimum rental commitments under operating leases at December 31,
1993, are as follows: years ending December 31, 1994 -- $24.3;
1995 -- $23.2; 1996 -- $22.3; 1997 -- $21.8; 1998 -- $23.4;
thereafter -- $243.2. The future minimum rentals receivable under
noncancelable subleases was $90.7 at December 31, 1993.
Rental expenses were $29.0, $26.2, and $23.3 for the years ended
December 31, 1993, 1992, and 1991, respectively.
Environmental Contingencies
The Company and KACC are subject to a wide variety of environmental
laws and regulations and to fines or penalties assessed for alleged
breaches of the environmental laws and to claims and litigation
based upon such laws. KACC is currently subject to a number of
lawsuits under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund
Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with
certain other entities, has been named as a potentially
responsible party for remedial costs at certain third-party sites
listed on the National Priorities List under CERCLA.
Based upon the Company's evaluation of these and other
environmental matters, the Company has established environmental
accruals primarily related to potential solid waste disposal and
soil and groundwater remediation matters. The following table
presents the changes in such accruals, which are primarily included
in Long-term liabilities, for the years ended December 31, 1993,
1992, and 1991:
These environmental accruals represent the Company's estimate of
costs reasonably expected to be incurred based upon 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
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)
----------------------------------------------------------------------
(In millions of dollars, except share amounts)
----------------------------------------------------------------------
the next several years and estimates that expenditures to be charged
to the environmental accrual will be approximately $4.0 to $8.0 for
the years 1994 through 1998 and an aggregate of approximately $12.8
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 by amounts which
cannot presently be estimated. While uncertainties are inherent in
the ultimate outcome of these matters and it is impossible to
presently determine the actual costs that ultimately may be
incurred, management believes that the resolution of such
uncertainties should not have a material adverse effect upon the
Company's consolidated financial position or results of operations.
Asbestos Contingencies
KACC is a defendant in a number of lawsuits in which the plaintiffs
allege that certain of their injuries were caused by exposure to
asbestos during, and as a result of, their employment with KACC or
to products containing asbestos produced or sold by KACC. The
lawsuits generally relate to products KACC has not manufactured for
at least 15 years.
At year-end 1993, the number of such lawsuits pending was
approximately 23,400 (approximately 11,400 of which were received
in 1993). The number of such lawsuits instituted against KACC
increased substantially in 1993, and management believes the number
of such lawsuits will continue at approximately the same rate for
the next few years.
In connection with such litigation, during 1993, 1992, and 1991,
KACC made cash payments for settlement and other related costs of
$7.0, $7.1, and $6.1, respectively. Based upon prior experience,
the Company estimates annual future cash payments in connection
with such litigation of approximately $8.0 to $13.0 for the years
1994 through 1998, and an aggregate of approximately $88.4
thereafter through 2006. Based upon 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 2006. The Company does not
presently believe there is a reasonable basis for estimating such
costs beyond 2006 and, accordingly, no accrual has been recorded
for such costs which may be incurred. This accrual was calculated
based upon the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments,
the current state of case law related to asbestos claims, the
advice of counsel, and the anticipated effects of inflation and
discounting at an estimated risk-free rate (5.25% at December 31,
1993). Accordingly, an accrual of $102.8 for asbestos-related
expenditures is included primarily in Long-term liabilities at
December 31, 1993. The aggregate amount of the undiscounted
liability at December 31, 1993, of $141.5, before considerations
for insurance recoveries, reflects an increase of $56.6 from the
prior year, resulting primarily from an increase in claims filed
during 1993 and the Company's belief that the number of such
lawsuits will continue at approximately the same rate for the next
few years.
The Company believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs. While
claims for recovery from one of KACC's insurance carriers are
currently subject to pending litigation and other carriers have
raised certain defenses, the Company believes, based upon prior
insurance-related recoveries in respect of asbestos-related claims,
existing insurance policies, and the advice of counsel, that
substantial recoveries from the insurance carriers are probable.
Accordingly, estimated insurance recoveries of $94.0, determined on
the same basis as the asbestos-related cost accrual, are recorded
primarily in Other assets as of December 31, 1993.
- 56 -
(In millions of dollars, except share amounts)
-------------------------------------------------------------------
Based upon the factors discussed in the two preceding paragraphs,
management currently believes that there is no more than a remote
possibility (under generally accepted accounting principles) that
the Company's asbestos-related costs net of related insurance
recoveries exceed those accrued as of December 31, 1993, and,
accordingly, that the resolution of such uncertainties and the
incurrence of such net costs should not have a material adverse
effect upon the Company's consolidated financial position or
results of operations.
Other Contingencies
The Company is involved in various other claims, lawsuits, and
other proceedings relating to a wide variety of matters. While
uncertainties are inherent in the ultimate outcome of such matters
and it is 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 upon the Company's consolidated financial
position or results of operations.
11. Segment and Geographical Area Information
Sales and transfers among geographic areas are made on a basis
intended to reflect the market value of products.
The aggregate foreign currency gain included in determining net
income was $4.9, $12.0, and $1.2 for the years ended December 31,
1993, 1992, and 1991, respectively.
There were no sales of more than 10% of total revenue to a single
customer for the year ended December 31, 1993. Sales to a single
customer were $135.3 and $155.9 of bauxite and alumina and $144.9
and $160.9 of aluminum processing for the years ended December 31,
1992, and 1991, respectively.
Export sales were less than 10% of total revenue during the years
ended December 31, 1993, 1992, and 1991.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
------------------------------------------------------------------
(In millions of dollars, except share amounts)
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Financial information by industry segment at December 31, 1993 and
1992, and for the years ended December 31, 1993, 1992, and 1991, is
as follows:
- 58 -
(In millions of dollars, except share amounts)
-------------------------------------------------------------------
Geographical area information relative to operations is summarized
as follows:
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
FIVE-YEAR FINANCIAL DATA
CONSOLIDATED BALANCE SHEETS
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(1) Total debt as a ratio of total debt, deferred income taxes, minority
interests, and stockholders' equity.
(2) Excludes the effect of a $150.0 dividend paid in the form of an
intercompany promissory note to parent.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
FIVE-YEAR FINANCIAL DATA
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
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