Document 4m8pmrQZjqqaMwQzGMQ3VKM1

KaiserTech Limited 1987 Annual Report vr " ** I V K*i-'v,Te--H Lir- -tarctCc'-'K'! 'iiM--tS.tr i.ii-. C: r = "* MANAGEMENT'S DISCUSSION AND ANALYSIS OF FlNANCIALCQNOITtON V AND RESULTS OF OPERATIONS (zc : lye . 'I" ' Who We Are: KaiserTo.!: Limited was formed on May i. 1987. following stockholder approval of the reorganization of Kaiser Aluminum & Chem ical Corporation's corporate structure into a holding company form of ownership. As a result, Kaiser Aluminum became the operating ^ subsidiary of KaiserTech Limited, the new holding company, and owners of Kaiser Aluminum common stock automaticallv became owners of - " "f.r" "* KaiserTech common stock. See Note 15 of the financial statements for more information about the reorganization. KaiserTech'Limited is one of the world's leading aluminum producers, operating plants in nine states and seven foreign countries. As a fully inte grated producer, the company mines bauxite, the major aluminum- bearing ore; refines it into alumina, the intermediate material; and produces primary' aluminum, most of which it manufactures into selected fabricated products that are sold to the beverage container, distributor, transportation, aerospace, construction, and consumer durables markets in the n.s. and abroad. During 1987. the company employed an average of about 12,500 persons, down significantly over the past five years due to asset sales, the discontinuation of various businesses, cost reduction programs, and decentralization. '`Discontinued operations" discussed in this report consist of agricul tural chemicals, refractories, international trading, real estate, and indus trial and specialty chemicals. Except for industrial and specialty chemicals, these businesses were sold between 19S4 and 1987 as part of a major cor porate, restructuring program aimed at improving KaiserTech's financial performance, reducing debt, and enhancing stockholder values. The com pany in 19S7 announced its intention to sell its industrial and specialty chemicals business, and expects to complete the sales of the components .of that business during 1988. See Note 2 of the financial statement-, for more information on discontinued operations. I^smanSucceedsMaier: James S. Pasinan. Jr., succeeded Cornell C. Maier as president and chief executive officer of KaiserTech Limited on January I, 1988. after having succeeded Mr. Maier as chairman and chief execujcv-officer of K.nserTech's operating subsidiary. Kaiser Aluminum & CKemical Corpor.ition. on June 26. 1987. Mr. Pasman joined Kaiser Aluminum in Mav of 1987 after 13 years of service with Aluminum Company of America, the last three of which werf as.vice chairman and director. His Alcoa experience also included six years as chief financial officer. Mr. Maier, who retired after more than 38 years with the company, served as Kaiser Aluminum's chiefexecutive officer for more than 15 years. He took on the additional positions of president and chief executive officer of KaiserTech upon its formation. Mr. Maier continues as a mem ber ofthe boards and execurivecommittces of KaiserTech and. Kaiser Alu minum, and serves as a consultant to both companies. * - --nsui unwea and Consolidated Subsidiary Companies THE YEAR IN BRIEF 1987 1&6" Net Sales $1,987,200,000 $1,967,100,000 Loss from Continuing Operations $ (352,700,0001'*' $ (85,000,000) Net Loss $ (362,000,000)'*' $ (39,800,000) Per Common Share: Loss from Continuing Operations $ (7.90)'*' $ (1.91) Net Loss $ (8,11)'** S (.89) Debt-to-Capital Ratio0' 49.6% 52.2% Sales of Aluminum Products' Metric Tons 773,315 7<52,74I Property, Plant, and Equipment Additions $ 81,900,000 $ 93,100,000 (1) Relatedfor discontinued industrial andspecialty chemicals operations. (2) Includes a ^366^00,000 loss provision, both before and aftertaxes (S8jj per share), relating . to the restructuring ofcontinuing operations. This consists prindsaBy ofwrite-downs ofthe electri calproducts manufacturing business and idle and unetonom-.. -.mar/ aluminum-making capacity, provisionforthe loss upon dispositionofoilandgas propemes^and cheresaucddingciftor^mte (3) Total debt as a ratio oftotaldebt, deferredincome taxes, defend income, minority interests, and stockholders'equity at year-end. 198? AT A GLANCE KaiserTech limited was formed on May 1 following stockholder approval of the reorganization of Kaiser Aluminum & Chemical Corporation's corporate structure into a holding company form of ownership. (Note * 15 of the finahciaTstatements contains greater detail.)] ; . f r*-- -X s Wi took asset write-downs and loss provisionson continuing operations ",of$366,1 million^'While this meant the companywouldreport a large loss for theyeat; it helped builda Sinnerbase for the future by eliminating uneconomic or obsolete assets. Opemting performance In1987Improved'to- near breakevertfrom a loss ofvt Wt i*duc*ddtfatby l4H-millibarta$940.oraillion, . We sold various assets--includingEuropeaa aluminumoperations,, oil '._ f. and'gas, foods^cepacL^g^toibecornffscmoferfo^ed^mmunr " company; and^announced'plans to sell our chemicals business. We cut hesdquartemstoff anddecentra&zsd, forming-six largely self-suffiaencBusihess urnts-tor streamlineoperations. . -. -y. ' We edoptede ntettomarketinxstratety co accenruate our strengths and improve profitability -" We are optimistic that KaiserTech's improved competitive ability will be maintained by successfully concluding negotiations now under way for a new labor contract with the United Steelworkers of America, which represents union employees at many of our production facilities. The company's financial results will be aided in 1988 by our continued restructuring and decentralization. The entire cost of our headquarters staff reduction program, for example, was included in 1987's financial results, and the resultant savings are expected to reduce costs and improve cash flow by $12 million annually. In addition to lowering costs, we believe our decentralization program is improving operations at all our production facilities by placing author* ity to make important decisions at the lowest reasonable level. For Kaiserlech to succeed in the intensely competitive aluminum industry, managers and employees must operate their facilities as largely self- sufficient business units serving markets that best suit their particular capabilities. We have given our people the decision-making authority they need to operate in that management style, with a leaner corporate staff to providirthe planhingfahdysi^(:ontrol,"and overall'direction needed to make the reorganization work. We are confident of their success. Through what has unquestionably been the most difficult period in the company's history, our employees have made many important sacri fices and remained,committed to improving KaiserTech's long-term via bility. Much of the progress they've made over the past several years in lowering costs and strengthening production efficiency was offset during that period by price declines. Nowit appears that the company's sharp ened focus on aluminum and on the segments of the aluminum business in which it can best compete, combined with the gains in efficiency achieved within our operations as well as the industry's improved fundamentals, will allow Kaiserlech to more fully realize the benefit of those efiorts.. - We are deeply grateful to you, our stockholders, employees,, and cus tomers, foryour support during this trying period, andwe look forward to reporting to you throughout 1988 that meaningful additional progress is being made, toward increased competitive ability, debt reduction, and sustained profitability. *-.- .'.a i. - r-- AL Alan E. Gore Chairman Kaiserlech Limited James S. Pasman. Jr. . . , A. Stephens Hatcfacrafc.Jn President and Vice President Chief Executive-Officer Kaiserlech Limited and Kaiserlech Limited and President and Chief Operating. Chairman and Chief Executive- - Officer, KaiserAluminum Sc Officer. Kaiser Aluminum Sc Chemical Corporation Chemical Corporation February 26, 1988 4. KaserTecft Limited and Consolidated Subsidiary Companies ALUMINUM INDUSTRY OVERVIEW In terms of demand, shipments, and improved competitive ability, 1987 was the most successful year of the decade for the u.s. aluminum indus* try. Total u.s. producer shipments, favorably influenced by increases in real gnp and industrial production as well as a 38% surge in exports and an 8% dip in imports, moved up 8% from the 1986 level. The rise in u.s. shipments, combined with an increase in foreign demand, provided an overall gain of 5% in 1987 western world aluminum consumption. Compared with 1986, u.s. primary aluminum production during the year grew 10%. The industry's operating rate (annual tons produced divided by annual capacity) averaged 88% for all of 1987 compared with 80% in 1986. By year-end 1987, the operating rate was up to 98%. Reflecting the reactivation of about 600,000 metric tons of idle capacity and the startup of 400,000 tons of new capacity in Canada, Australia, and elsewhere, the western world industry's primary produc tion increased 5 % in 1987. Its average operating rate for the year was 93%, up from 90% in the prior year, and the operating rate at year-end was 94%. Prices for primary aluminum-moved up very sharply in 1987. For instance, the Midwest u.s. market price rose from 53 cents per pound in early January to a high of 88 cents in both October and. December. ALUMINUM OPERATIONS In line with the industry trend, Kaiserlech's shipments increased in 1987. The year-to-year increase was only 1%, however; because 1987's totaldid' not include fourth quarter shipments from Kaiser Aluminium Europe (kae), which was sold late in the yean Excluding- kae,-KaiserTech's 1987 shipments increased by d-5% over 1986. Becausenfbetter1987 prices for primary aluminum,, thepercentageofthecompany's total shipments made in the form of ingot rose'to 16% ofthe total from io%-in:i986. KaiserTech's worldwide annual primary aluminum capacity at year-end 1987 was 690,000 metric tons, down 24% from, the prior year's level be cause of the sale of kae and. its 72,000-con Voerdei WestGermany; smelter; and because of the writing off of idle and uneconomic u.s. capacity. The company's primary metal production in 1987 was higher than in any year since-1981 and totaled 633,328 metric tons for an average operat ing rate of 85%. This compares with output of 577,861 tons or 64% of capacity in 1986. In December 1987, the company's worldwide primary metal production system was operating at 87% of overall capacity. 5. U.S. Aluminum Industry Shipments and Primary Production -. .. 1983-1907 TM ' * Totai Shioniews 'f: *PnmafyPfocuction q ; ,. v In Thousands of Metre Tons -f r KaiserTecn Lnvtec: ana Consolidated Suosidiary Companies TO OUR STOCKHOLDERS, EMPLOYEES, AND CUSTOMERS: The past year was one of major organizational change for the company. We had for some time been moving away from a centralized form of man agement toward one that was more decentralized. In 1987, driven by the belief and experience that the best decisions are those made closest to the plant floor and to the customer, we decentralized into six largely self- sufficient business units--taw materials, primary aluminum, sheet and plate, rod/bar/wire, forgings, and extrusions--with corporate staff-pro viding the framework of overall strategy and direction. This action is making our businesses more entrepreneurial... more agile... more adept at managing change.. .and it is allowing us to downsize our headquarters staff to about 150 people, a decrease of approximately 55% from a year ago. At the same time, we have assembled a team experienced in planning and control to work with our business units and help ensure that per formance goals are met. The year was also one in which we made very substantial progress in reducing our debt, increasing our cash, and improving our results from operations. The net result is that, bv focusingour finandalandmanagerial ,f..... . _ resources on facilities and product lines that offer significant competitive opportunities, we believe we have restructured KaiserTech Limited for a return to sustained profitability. Mainly as a result of plant cost reduction programs and process improvements, savings in salaried and administrative expenses, and better shipment volume from ongoing businesses, KaiserTech's 1987 pre-tax operating loss from continuing operations (excluding the restructuring of operations) improved to 54.6 million from a loss of 594.2 million (exclud ing the write-down of oil and gas reserves) in 1986. Primary aluminum prices increased sharply in 1987 and thus helped operating results some what, bur total realized fabricated products prices moved onlymoderately upward... and there was no net realized price improvement forbeverage " can stock, our highest-volume fabricated-product."--' For all of 1987, KaiserTech had a net loss of 5362^0 million or s8.ii per common share. That includes, in continuingoperations, loss-provisions totaling 5366.1 million from asset write-downs,, and pre-taxnet gains of $63.8 million from asset sales'. It also indude$'-an after-tax loss of' S9.3 million (after 533.9 million ofasset write-downs and loss provisions) from discontinued-operations. 1" The company during the year sold assets that generated total proceeds.. of 5263.5 million. They included KaiserAluminium Europe-Incorpo rated, a wholly owned subsidiary engaged inconrihentaTFufopean alumi num operations; the oil and gas exploration and production business; the food service packaging business; several fabricated products facilities; and miscellaneous real estate assets. 2. We have also reached agreements in principle to sell components of our chemicals business, including the Harshaw/Filtrol Partnership, FarBjest Corporation, and facilities in Louisiana, Mississippi, and Utah. These sales should be completed in the first half of 1988. In addition, we continue to explore possible sales orjoint ventures of some aluminum operations. KaiserTech's consolidated debt was reduced by 5414.6 million during the year to S940.0 million at year-end 1987, mainly with funds received from asset sales. A portion of the proceeds we expect to receive from sales of our chemicals business and other assets will be used to further reduce debt in 1988. Our goal is to lower debt to a level that can be satisfactorily serviced from continuing operations, and provide the base to finance future growth. Western world aluminum supply and demand are expected to be gener ally in balance throughout 1988. Assuming this forecast proves correct, primary aluminum prices are likely to be at relatively high levels for the foreseeable future. KaiserTech's worldwide primary aluminum produc tion business will operate at a higher percentage ofoverall capacity in 1988 than in the prior year, and total shipments are also expected to increase on a year-to-year basis (after excluding 1987 shipments by Kaiser Aluminium Europe). Most importantly, incoming orders remain strong, and price increases for fabricated products tha^, took, effect in late-1987 and early 1988 are significantly improving profit margins on the large major ity of our shipments. Fabricated products price realizations are now near ing the peak previously achieved in 1984. _ Among the company's greatest current strengSis are its raw materials and primary aluminum production businesses, whose competitiveness has been considerably strengthened in recent years. Our Gramercy^Louisiana,.. alumina refinery--part of the raw materials businessunit-^has.signifi- .. cantly increased its throughput, and most of our aluminum smelters have*' done an excellentjob of lowering-their labor,,energy, and other produc tion costs. We believe these pans of our total production system are now in a position to be economically viable at the bottomof normal aluminum industry cycles, and to earn at leasta reasonable profit ih.any environment better than that. . Our two sheet and plate mills and our rod/bar/wire, forgings, and- extrusions facilities have also improved their competitiveness, but further gains in operating efficiency are needed. The Trentwood rolling mill, which, plays a. key role in.overall fabricated products.profitability; in 1988' will benefit further from the S230 million modernization program carried out there over the past several years. This plant's production and ship ments shouldcontinuetheirupward trend, and productmix is also expected to improve this year. We are committed to seeing that Trentwood's product quality becomes a benchmark in our industry. 3. --annum operations are organized into six business units: raw materials, primary aluminum, sheet and plate, rod/bar/wire, fo'gings, and extrusions. A review of each of these activities follows. Raw Materials--Bauxite and Alumina: The company's largest source of bauxite ore for refining into alumina is 49%-owned Kaiser Jamaica Bauxite Company. Mining operations there produced 3,600,594 metric tons in 1987 compared with 3,011,993 tons in 1986. The company's alumina operations--with refineries at Gramercy, Louisiana, and 28.3%-owned Queensland Alumina Limited in Australia --benefited in 1987 from increases in both demand and prices as well as Thfc to eoaqta* iMuxtt* (roa a oWm high NplMtfMmMntaiMoN MftJl CMttt* KaiMr Jamafcs laicxtt* Ciwpeny. wMdi pro duced 3.S mdBcn nutrk taasaf kauxitaln 1SS7, k the Mk *u*pS*r of kModte to the Cnmmty, la., 4i--4ne pint. Thu mMnc opintiofl twptoyi 4S0 Jwcktnc d take* apecki car* la bakf MfMy aamttfva (a aS nvirowMiital .'-l- ji'i, from improvements in process'technology and plant throughput. The two facilities produced at better than rated capacity in 1987 and are expected to operate at a comparable level in 1988. Because of the improving balance in world alumina suppl^and^r^.,,,- demand, management is exploring, the. possibility^restarting theNaih,. Jamaica, refinery of 50%-owned Alumina Partners:of This facility has not operated since mid-l985;b^useoiw re^trre%higB^;'1 production costs and an adequate supply ofalumina from 'othepsquroes^ At year-end 1987, the company's investmentuxahdadvances to'Alpart.?^ totaled $3 2.3 million, and its share of Alpart's debt obligationswas?- S64.3 million. ;^ , ^ Primary Aluminum: KaiserTech?sworldwide primarTalummum. produc-" ion business set new high standards for operating efficiency-in 1987,' due 0 programs that have significantly improved employee involvementand roductivity, lowered energy and material consumption, eliminated. aste, and increased output. These programs, carriedouc overthe'past veral years, have sharply-reduced the business unit's cost structure and takeven point, thus strengthening its ability to compete with newer,. eign production facilities that generally haver the advantage in energy l labor costs. ' Ka4*fTichPrimary afei'jajv .;;;^:.4AIumiiiumJJnlt Production Coat . .5^^1983^987 - - %of8as*'ifearCos '? Bawwarisea---100% 13 14 IS 17 For the second consecutive year, output, cell efficiency, productivity, and cost records were established at several smelters. While the system's energy and alumina costs rose in 1987. other conversion costs dropped from the 1986 level. The Mead and Tacoma, Washington, smelters operated for all of 1987 under a variable electric power rate formula adopted in the prior year by the Bonneville Power Administration (bpa). This formula, which ties the price of power to the price of primary metal and provides for maximum and minimum power prices, allows greater predictability of future power costs and increased competitiveness in times of low metal prices. Due to high metal prices, the power rate reached the maximum allowable price in the fourth quarter of 1987. During 1987, bpa announced a new conservation/modernization pro gram to encourage lower energy consumption. Under the program, which will be in effect for 10 to 12 yean, bpa will pay aluminum pro ducers a half cent for each kilowatt-hour saved. Energy consumption at Mead is expected to drop as much as 15% and at Tacoma by as much as 8% in the next three to five yean as a result of capital spending projects that are now economically feasible because of this program. In 1988, the conservation/modernization payment to the company is expected to be about si.8 million. .. The Ravenswood. West Virginia, smelter buys'energy.under an arrangement that allows the supplier to recover; in periods of high metal , hi 1M7 a mm mHmiiMgimut cqnctpt want kit* ^uHV*ftXnVRlt9lv tWfiu, iMiltir, c- KNOTg wYUV rWVUUC9* mftIVI Awmft ANftOftlBftT* producing pots m that m. Th* tMM wwfcfcir m * Om mm ghwi tm Ir tuck tufc(*ct* as pnb- iR mMrk, dMflnc Mti ' CURp6(i IIVkMtftU VftfuftV nvfftr mMcniopmtorVoni to ** a4dv4JMMaUn3.aMs upunrWMk TNt ptaPfc ****.i&r': nprti Mwt U-- 3 Mm Mill pufHs curpmt tlS* dn6^ snd 1illty HMotiMt)MtottMluyt thtprapram'i iuccmiT Mya Um 3 fofaJ for*mn Wiyrn HJeiLini. "I'm mmi a imw attttud* ut thara. I'm navar aaan aujrarang wv i* ofiorfi prices, reductions in.power costs that were in.e&ctwhen.theingotprice. was below 62.5 cents.per pound. Thus, in the second fialfof 1987, the.. ;. ~ facility began, repaying; to its utility the savings: that were realized in1986, and this requirementcausedRavenswood's overalipowercosts to rise dur ing the year. Assuming primary prices remain arcurreaelevels*additional repayment of up. to S6.5 million in previously realized savings may be made in 1988. The 90%-ownedVqlta Aluminium Company Limited (Valeo), smelter, in Ghana operated at 74% of capacity in 1987, and its production is , ** __ .. *ere unpaired in 1982 and _ w 1 completely from late 1983 to early 1985, as a result ot a widespread African drought that curtailed its hydroelectric power supply. Current water levels are adequate to support an operating rate of about 90% in 1988. Employee commitment to more efficient operations has been and will continue to be a major factor in the primary aluminum business's greatly improved competitive ability. Management has increased employee involvement and cut layers of authority so that more decision-making responsibility has been moved closer to the operating level. It has also put in place a common-sense, minimum-risk capital investment policy which states that projects must be based on proven technology, can't disrupt existing operations, should pay off within one to two years, and must be planned and implemented with the involvement of hourly employees. The success of these policies was demonstrated throughout the system in 1987, particularly at the Mead smelter. In the third quarter. Mead employees restarted a potline under a "self-management" plan they developed that included only minimal supervision. During the year. Mead employees also helped design and build a semi-automatic anode changing device that has improved the facility's operations, and they played a large role in developing a capital spending program now under way to modern ize the plant's rodding room and thus lower operating costs, improve the plant environment, and facilitate housekeeping. KaiserTech expects to further improve its competitive ability in primary aluminum production by continuing the employee involvement and cost control programs that have worked so successfully over the past several Production Capacities Year-End 1987 Totals Bauxite Mining Kaiser Jamaica Bauxite Company (Jamaica, 49% owned) Alumina Partners ofJamaica (Jamaica, 50% owned) World Total Alumina Refining Gramerey, Louisiana Alumina Partners ofJamaica (Jamaica, jo% owned) Queensland Alumina (Australia. 28.3% owned) World Total Primary Aluminum Mead. Washington Ravenswood, West Virginia Tacoma. Washington u.s. Total Volta Aluminium (Ghana. 90% owned) Anglesey Aluminium (Wales, U.K.. 49% owned) Boyne Smelters (Australia, 20% owned) Aluminium Bahrain (Bahrain, 17% owned) Overseas Total World Total Annual Capacity Available to KaiserTech (Metric Tons) 4,200,000 1.356.000 5,556,000 748.000 590,000 774.000 2,112,000 200,000 m.000 73.000 384,000 180,000 55.000 42.000 29,000 306.000 690,000 years. In addition, new emphasis wui oc r.,,*.____ primary products such as foundry ingot and extrusion billet. Fabricated Products: During 1987, the company focused its fabricated products business --sheet and plate, rod/bar/wire, forgings, and extru sions--on market niches where it has especially strong production exper tise, relatively low costs, superior quality, and a meaningful share of the overall market. Fabricated products prices, which are heavily influenced by changes in the ingot price and usually follow these changes with delays of three to six months, moved only moderately higher, in total, during 1987. Prices for a wide variety of fabricated products increased in late 1987 and in the first quarter of 1988, significantly improving the company's anticipated realizations on the bulk of its aluminum shipments. Sht and Plata: Sheet and plate accounts for close to half of KaiserTech's business, and can stock, with approximately $440 million in annual sales, accounts for about half of that. In recent years, a very large portion of KaiserTech's resources has been aimed at improving the company's com petitive ability in sheet and plate products--particularly body, lid, and Aw tnpptay t 0 * W hUiwtactarlnp Iw Swwto Oar*. CwM., maminm a etaMwia tar tht U^. Navy that was racMMd frsw$ abtecksfCOlsffayate> mtwum plate. 0 * H. a h pfactatew wichWni at RMtah, uaad computer* apartted, 4aaia mUng mtchkrn ti thaaa parts. Tha ahwwl mmpUtaMd*yO AH tacattapractaam--awraawntefcy Kaiaar. --Ma- C nf~lKtnMt`Qr MnWCV Matete, tee at Unto* Clt* CaM. tab stock for beverage cans. Sheet and plate products are sold to can pro ducers as well as distributors, manufacturers, and fabricators in such industries as transportation and aerospace. Since 1983. more than S230 million has been invested to improve the production capacity, operating efficiency, and product quality of the Trentwood, Washington, rolling mill, the largest facility of its type in the western u.s. The benefits of this program include a 25% increase in capacity and a substantial reduction in the cost of converting primary metal to flat-rolled products. 9. The installation of state-of-the-art manufacturing equipment and changes in operating methods carried out over the past several years at Trentwood have made the facility one of the world's highest-quality rolling mills. Its sheet and plate products are recognized by major cus tomer groups as having superior gauge, flatness, shape control, and metallurgical properties. Trentwood's production capabilities will be further strengthened in 1988 through the installation of new ingot scalping equipment and oper ating modifications that will allow the rolling of more--and larger-- ingots with improved surface quality. In addition, the board of directors approved plans to install a S29.5 million, high-speed line to coat wide coils at the facility. The new coating KaiserTech Total and Fabricated Products Shipments 1983-1987 Total Shipments Paoncatea Prcaucs Shipments in Metre Tons line is a critical element in Trentwood's overall marketing strategy because it accommodates the can industry's move to expand the production of can lids from wide coated coils. Scheduled for completion in late 1989, the new line and its related handling equipment will help ensure that Trentwood continues to produce a full range of highly competitive can stock materials and that it will be a major factor in wide lid stock--the fastest-growing segment of the total beverage container market. In 1988, Trentwood management intends to capitalize on freight and service advantages provided by the facility's geographical location and expand sales of more profitable products to growing markets in the western u.s. and Asia. Also, new emphasis will be placed on providing plate, heat treat sheet and coil, and common alloy sheet and coil to the aerospace, transportation, and distributor markets. Like Trentwood, KaiserTech's Ravenswood, West Virginia, rolling mill is a major supplier of aluminum sheet for can manufacturing. In addition, this facility is the industry's largest producer of brazing sheet for automotive heat exchangers, mainly radiators, heater cores, and air conditioner evaporators. Ravenswood's other principal products include heavy gauge plate for the aerospace industry and wide and heavy gauge Mai dedrnry vehides avevs slang the mem My tea at Cnanman Car- Paretian's Lang Ufa VeNdeeubeMary plant at MwijseMnt Pa. KMeerTsdi la supplying ana-third at the ah--t rsipdrad by Cnanman to te*d M.150 at the alt- afaminurn body truck* tar the U.S. Pastel Serv ice. A new mal vehicle, wun mi-----------e . c - Wn-Re Ii HH- - - PH-e.. , sVPN ppmoiHniH-- -a m-------r-- ------- rede off Cnanman'* 10 iays 1 body I* de signed te last 24 yean. Kaiearlbch expects to seopty 23 adBen peunds at shaninum cad end sheet par year from the Havanaweed, W.Va^ and 'bsat-essd. VSe*h., 10. common alloy coil used in truck trailer roofs and dump bodies, boats, and similar transportation applications. Ravenswood's technical capabilities were demonstrated in 1987 when its employees and KaiserTech research and development professionals rolled the largest-ever metal matrix composite (mmc) sheet. The customer was an aerospace firm which has a contract with the u.s. Air Force to produce full-scale fighter aircraft tail sections for test purposes, mmcs--a combination of an aluminum powder alloy and a ceramic reinforcement --can achieve weight savings of 25% over conventional aluminum alloys in advanced high-performance aircraft. Ravenswood's demonstration of its commercial capabilities in mmcs could prove significant if testing leads to full-scale production. Ravenswood expects to improve its operating efficiency in 1988 by implementing an improved order management system for its more com monly used products like heavy gauge common alloy coil. This program should allow the facility to strengthen its quality and service performance to major sectors of the aluminum market. RBW, Forgings, Extrusions: The efficiency and product quality of KaiserTech's rod.'bar/wire, forgings, and extrusions businesses have been greatly strengthened over the past several years through equipment mod ernizations and improvements in operating procedures. These businesses, which together account for about 16% of total annual sales, are carrying out their activities in a more entrepreneurial manner under the company's decentralization policy. The company's Newark, Ohio, facility manufactures rod/bar/wire products as well as forging billet for a wide variety of markets including transportation, construction, military ordnance, and aerospace. A capital spending program to improve this plant's capacity to manufacture screw machine stock, as well as the quality of this product, is planned for 1988. Forgings, which service the transportation, aerospace, and ordnance Tlppor Tla, bie^ t Apex, N.fi,nfMkt|tdhr iMpiwittiMpncnmm acraaa the aatSaN. The cflp*. mad* from J/btdi alloy ro draw rod ouppHod by KaiserTech't Newark, Ohio, plant, e famglir to ohoppora who And them tocuring pack age* of main, poultry, choeoa, and moats. Tip* por Tie itoo manufacturaa the food packaging machinal In which the cflpa are uaod. 11. markets where a combination of strength, light weight, and durability is required, are produced by KaiserTech at Oxnard, California, and Erie, PennsyK-ania. Forged aluminum truck wheels and hubs and structural components for aircraft and missiles are examples of the wide range of forgings products. The company's extruded products are manufactured at plants in Los Angeles; Sherman, Texas; and Toronto. Canada, and are sold primarily to the transportation, architectural, distributor, and consumer durables mar kets. Both the Los Angeles and Sherman facilities operate three extrusion presses, and the Sherman plant is in the process of starting up a new, on SNny aluminum truck vdmU mar the md tha production Bn. Th whoto. farfd at Kateartach'i Crto, P., plant, araprada ton madtinad and paOahad, and markatad to warty ad at tha Mfar haavy duty truck maaufacturarm. site remelt capability. Toronto has two presses and in late 1987 acquired a separate extrusion paint line as part of a program to expand product availabilities. Research and Development: A significant number of the operating improvements recently carried out at KaiserTech's plants are a direct result of the company's research and development efforts, conducted mainly at the Center for Technology (err) in Pleasanton, California. During 1987, cft technology helped increase metal recovery and improve furnace operations at KaiserTech's rolling mills. Modifications in rolling processes and lubrication also allowed these facilities to achieve higher rolling speeds along with better shape control and surface appearance. In addition, cft personnel play a major role in several market-oriented teams that demonstrate the company's determination to provide cus- 12. Additions to Plant A Irtvnstmants 1983-1907 investments a Plant in Millions of Oouars SU tomers with superior product quality. In the can stock business, for exam ple, KaiserTech has assembled an interdisciplinary team that combines experience and expertise in r&d, production technology, and marketing. The team's principal task is to monitor and improve product performance and customer satisfaction. It identifies customers' technical requirements and works in tandem with KaiserTech and customer facilities to ensure that these requirements are met. Consistency in metallurgical properties, dimensional tolerances, and surface finish are key to success in this area because if aluminum sheet differs even slightly from specifications it may interrupt the can manufacturing process and thus compromise the efficiency of customer plants. Longer term, the company's competitiveness in the can stock market depends on developing new alloys and fabrication procedures that will provide greater strength and better formability at thinner gauges and tighter gauge tolerances. Because of contributions in these areas made by cft professionals, the company already has in place improved alloys for evolving can bottom and lid designs, allowing further gauge reductions. In addition, the team is engaged in efforts to develop the next generation of alloys, forming techniques, and can designs. The r&d staff at mid-year began operating a new aluminum lithium casting station at err that can produce u.ooo-pound rolling ingots as well as extrusion and forging billets. Dedicated solely to the production of aluminum lithium alloys, the station's design incorporates highly special ized. proprietary equipment. Alloys are being developed there for aircraft, aerospace, and defense applications where aluminum lithium's lightness, superior stiffness, and fatigue resistance can provide significant benefits. Aluminum raaf and ildw MHMitlMBtr Mi f a li I Campaay'* plant at City afladustr*Calf.UtMty mm About 3400 paund* afaiumaaan--afcaut rtOOaamkaatartru- alaaaawd 1.000 paiaidi at cal tor aMaa ami raafs ---k a typical 44Maat -- type traAac. Kakar- Ibdt'sLaa Angelas axtmtlnn plaat ai^pAaa XOtalSdHfaraat extruded aliapeate three UtHty plants In tt*#U.S. Ttentwood euppOea call ter the aide*, and Havanawood the roof cafl. in widths up to 102 India*. 13. KaiserTecn Limned and Consolidated Sucsoary Companies FINANCIAL REVIEW Financial Results: Loss provisions that included asset write-downs were a principal cause of the net losses incurred by the company in each of the past three yean. Operating losses from aluminum activities were a major contributing factor in the net losses experienced in 1986 and 1985, but were not significant in 1987 (excluding the restructuring of operations). The company had a net loss in 1987 of S362.0 million or s8.ll per_ common share, including a net loss of <9.3 million from discontinued operations. Results from continuing operations included loss provisions from, write-downs that totaled *366.1 million, principally for write downs of the company's electrical products manufacturing business and idle and uneconomic primary aluminum-making capacity; a provision for the loss on the subsequent sale of oil and gas properties; and a reduction in corporate staff. In addition, the year's financial results included pre-tax gains of S63.8 million from the sale of Kaiser Aluminium Europe Incor porated, a wholly owned subsidiary engaged in continental European aluminum operations, and the sale of the company's food service packaging business. KaiserTech's 1987 operating loss of *4.6 million (excluding the *366.1 million restructuring provision and the $68.8'million gain from asset sales) was substantially lower than in the prior two years due mainly to the effects of plant cost reduction programs and process improvements, savings in administrative and overhead expenses, and better shipment volume from ongoing operations. Primary aluminum prices increased sharply in 1987 and benefited operating results somewhat, but realiza tions for fabricated products, which make up the bulk of the company's shipments, rose only modestly, in total, from the 1986 level. The company's 1987 tax provision for continuing and discontinued operations, most of which was related to profitable foreign activities, was *47-0 million. KaiserTech's net loss in 1986 was *39.8 million or s.89 per common share. These results included, in continuing operations, a pre-tax loss of *59.4 million from the write-down of oil and gas reserves that have since been sold, a pre-tax gain of *16.9 million from the sale of part of the com pany's interest in Anglesey Aluminium Limited, and a pre-tax gain of s 19.5 million from cancellation of a long-term natural gas supply con tract. They also included income from discontinued operations of *43.2 million, primarily from the disposition of the company's real estate busi ness, adoption of certain provisions of Financial Accounting Standards 87 and 88 relating to employers' accounting for defined benefit pension plans, and cancellation of the gas supply contract. KaiserTech's tax provision for continuing and discontinued operations in 1986 was SI7.0 million. On an after-tax basis, "discontinued operations and nonoperating items, net of the write-down of oil and gas reserves, improved the company's . 1986 financial results by *28.8 million or $.65 per share. 14. KaiserTech Debt and Debt-to-Capital Ratio 1983-1987 Qeot m WJlior.s cl Dollars Deot-to-Cawai Ratio as SUS&4(SLn) $14$0J($*3$) SUS44(S22X} SMQJ)(4&n) - -- -r-r-- vc-vw.ucing cne wnte-uowu ot oil and gas reserves) in 1986 and S153.0 million in 1985 were principally caused by low realized prices that declined 3% in 1986 and 12% in 1985 from prior-year levels. Fabricated products capacity and sales volume were sig nificantly impaired in 1985 during the installation and startup phase of new equipment and operating methods at the Trentwood rolling mill. The company's net loss in 1985 totaled *190.3 million or *4.33 per common share. Of this, s 124.2 million or S2.83 per share was due to asset write-downs and a loss on disposition of the company's interna tional trading business. Results for 1985 included net income from dis continued operations of sn.8 million or $.27 per share, as well as a tax credit from continuing and discontinued operations of *132.7 million. At year-end 1987, the company had net operating loss carryforwards, for tax purposes of S579.7 million. This total will be reduced over a per iod of four yean by the unamonized amount of *129.5 million relating to the 1985 change in the method of accounting for inventories. In addition, the company has *64.4 million in investment tax credit carryforwards which is net of a 35% reduction required by the 1986 Tax Reform Act. The benefits of net loss carryforwards through 1986 have reduced deferred taxes in the financial statements. The company was not able to recognize the benefits of net loss carryforwards in 1987 because recovery is not assured during the carryforward period. In all three years, the charges to operations for depreciation represent the allocation of historical costs incurred in prior years, and are less than if depreciation were based on the current cost of productive capacity. Capital Spemfinc: Improving the competitive ability of KaiserTech's aluminum fabricating network--particularly the Trentwood and Ravenswood rolling mills--has been the major focus of capital spending programs carried out over the past three years. Approximately 63% of the $297.7 million in capital expenditures for continuing operations made during this period has been invested to maintain or strengthen the effi ciency of production processes, and 6% was spent for environmental control at domestic aluminum plants. The remaining 31% of capital expenditures since the beginning of 1985 was spent for oil and gas explo ration and development and by Kaiser Aluminium Europe, both of which were sold in 1987. KaiserTech's total consolidated capital expenditures for continuing operations were reduced to *82.0 million in 1987 from spending of $94.6 million in 1986 and *121.1 million in 1985 when expenditures for the Trentwood modernization were relatively high-. In 1988, the corporation plans to spend close to *150.0 million, up sig nificantly from 1987. About half of the increased amount will be spent to improve existing facilities, and the other half will be spent to expand the company's capabilities with such projects as the wide coating line at Trentwood. Financial Position: KaiserTech paid down its total consolidated debt by *414.6 million during 1987 to a total of *940.0 million at year-end, mainly with funds received from asset sales. Total debt at year-end included * 120.3 million in First Mortgage Bonds; *689.4 million 15. outstanding under a 1986 credit agreement with leading banks; and S130.3 million in other debt and lease obligations. The credit agreement with lending banks includes a term loan that matures at year-end 1992 and a $ 165.0 million revolving credit facility that expires at year-end 1989. No borrowings were outstanding under the revolving credit facility at the end of 1987. Management intends to lower the company's debt to a level that can be satisfactorily serviced from continuing operations, and provide the base to finance future growth. Additional progress toward this goal is anticipated in 1988 through the application of a portion of the funds expected to be received from the sale of chemicals activities as well as cash flow generated from continuing operations. In this regard, the company acquired Chev ron Corporation's 50% share of the Harshaw/ Filtrol Partnership during 1987 to facilitate the sale of the entire partnership in connection with the sale of the industrial and specialty chemicals business. (See Note 2 of the financial statements.) . The company in the past has undertaken various offshore raw material joint ventures on a project-financing basis. At year-end 1987, its share of the debt obligations of affiliates for which it is indirectly responsible through tolling agreements amounted to S281.1 million. The comparable amount was S305.7 million at the end of 19862nd $329.0 million at the end of 1985. During 1987, 1986, and 1985, the company charged to compensation cost sii.8 million, $9.2 million, and $8.9 million for issuance of two series of Kaiser Aluminum preference stock. These shares have been con tributed to certain employee stock ownership plans established for the members of the United Steelworkers of America and certain other employees to compensate for a reduction in wages and certain benefits. During 1987, the company purchased all the shares of another series of preference stock from certain employee benefit plans for $364 million. The value of common stock issued during 1987 totaled S9.I million, primarily from preferred dividends paid in common stock and the exercise of options. The company's book value per common share at December 31,1987, 1986, and 1985, was 214.92, $24.00, and $24.39 respectively. The decline in 1987 reflects primarily the restructuring of operations described earlier. Dividends: KaiserTech Limited during 1987 paid cash dividends of $3.2 million and stock dividends of approximately 227,000 common shares (discussed above) on its $1.53 cumulative convertible 1987 Series preferred stock. In addition, the company's wholly owned subsidiary, Kaiser Aluminum Sc Chemical Corporation, paid cash dividends of $3.3 million (classified in minority interests) to holders of various series of preference stock.______________ _______________________________ No common stock dividends were paid in 1987 or 1986. Preference stockholders of Kaiser Aluminum & Chemical Corporation were paid dividends of $3.7 million in 1986 (also classified in minority interests). In 1985, when the board of directors voted to eliminate the $.15 quarterly common stock dividend in the second quarter, common dividends were $6.5 million and preference dividends were $3.8 million (also classified in minority interests) for an annual total of $10.3 million. 16. SUMMARY OF REVENUES AND INCOME11 (millions ofdollars) Revenues; Net Sales--Aluminum Primary Fabricated Other Total Net Sales Other Total Revenues 1987 1986 198s 1984 1983 $ 191.0 1,679.* 116.4 * 93-3 1,765*4 108.4 1,967.2 1,967-1 97J1*2' 3 4 * 6 7,68 89 .7" $2,084.7 *2,035.8 * 44-3 1,608.0 tit.7 1,774-0 62.3 *1,836.3 * 2x9.4 1,629.3 87.0 1.935-7 32.4 *1,968.1 * 207.1 1,482.5 45-5 X.735-I 81.7"' *X,8x6.8 Loss from Continuing Opsrations Bstars Incoms Taxes and Minority Interests Provision (Credit) for Income Taxes $ (301.9p 44.5 Loss from Continuing Operations Before Minority Interests Minority Interests (346-41 (6.3) Loss from Continuing Operations (352.7) Discontinued Operations--Net of Income Taxes Income from Operations Income (Loss) on Dispositions 13.8 (23.ir Income (Loss) from Discontinued Operations (9.3) Net Loss $ (362.0) * (120.9)"' (43-0) (77-9) (7-X) (85.0) 26. i*** 19-1 45-2 * (39-8) * (364.0)"' (165.7) (198.3) (3-8) (202.x) 16.8"' (5-0) xi.8 s (190.3) s (2x2.2) (150.0) (62.2) (1-4) (63.6) 25-5 (60.7) (35-2) * (98.8) * (185.4)"' (118.I) (67.3) (7) (68.0) 17.1 17.1 * (50.9) (1) Years prior to '.987 restatedfor discontinued industrial and specialty chemicals operations. , (2) Includes gains ofSttijfrom the sale ofthefood service packaging business and $32.7from the sale ofKaiser Aluminium Europe Incorporated. (3) Includes a gain ofS20.2from adoption ofFinancial Accounting Standards (FAS) Nos. 87 and 8$ relating to employers' accountingfir pension plans, St.7 in other revenues and S18.3 in discontinued operations. Abo includes S32.3from cancellation ofa long-term gas supply contract, S19.3 in other revenues and $13.0 in discontinued operations. (4) Other revenues include gains ofS49.3fnm ^ renegotiation ofa natural gas supply contract and a rebate ofenergy charges at the Chalmette reduction plant Lossfrom Continuing Operations Before Income Taxes and Minority Interests includes 5)6.2from closure and write-downs ofcertainfacilities and provisionfor an unfavorable arbitration award. (3) Includes a loss provision ofS366Jfor restructuring ofoperations consisting principally ofwrite-downs ofthe electrical products manufacturing business and idle and uneconomic primary aluminum-making capacity, andprovisionfoe the loss upon disposition ofoil andgas properties. (6) Includes a write-down ofoil andgas reserves of839.4. (7) Includes write-downs ofthe Baton Rouge, Louisiana, alumina refinery, as well as several smaller assets, totaling $20.0 and S9.8 in other costs and expenses and incomefrom discontinued operations, respectively. (8) Discontinued operations consist ofthe agricultuml chemicals, refractories, trading, real estate, and industrial and specialty chemicab divisions. (9) Includes a loss provision ofS33.9 related to certain operations and businesses that were discontinued in recent years. 17. r-ai.sc: MVi .^onwacrw wwwv><w<ui j CONSOLIDATED BALANCE SHEETS December jl &8~ and 1986 (millions ofdollars) ASSETS Current Assets: Cash Receivables: Trade (less allowance for doubtful receivables: S7.2 in 1987 and 54.0 in 1986) Other Inventories Prepaid expenses Current assets of discontinued operations--net Total current assets Investments and Advances--related parties Property, Plant, and Equipment--net Noncurrent Assets of Discontinued Operations--net Other Assets Total Q87 $ 118.7 230.1 96.7 439.0 21.8 44.6 950.9 311.2 858.2 359.1 112.5 $2,591.9 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable Accrued wages, interest, and other liabilities Income taxes pavable Pavable to affiliates Notes payable Long-term debt--current portion S 137.4 193.4 33.5 176.4 52.9 Total current liabilities 593.6 Long-Term Liabilities 156.8 Long-Term Debt 887.1 Deferred Income Taxes 42.7 Deferred Income 45.7 Minority Interests: Subsidiary redeemable preference stock (aggregate liquidation value of s 129.7 at December 31, 1987) Subsidiary preference stocks--cumulative and convertible (aggregate liquidation value of sii.2 at December 31, 1987) 38.9 11.2 Total minority interests 50.1 Stockholders' Equity: Preferred stock--cumulative and convertible, par value si, stated value SI7, authorized 10.000,000 shares, issued 8,235,294 shares (aggregate liquidation value of $140.0 at December 31, 1987) Common stock, 33-1/3 cents par, authorized 100,000,000 shares; issued: 45,309,470 shares in 1987 and 44,823,761 shares in 1986 Additional capital Currency translation adjustment Retained earnings 8.2 15.1 416-9 7.0 368.7 Total stockholders' equity 815.9 Total $2,591.9 The accompanying note: tofinancial statements are an integral pan ofthese statements. 18. 1986 s 93-8 230.4 112.3 602.1 17-4 60.c I,li6.c 289.9 1.354-8 495.9 139-7 53.1960 5 I27.C 217.7 42.7 108.0 26.5 143-2 665.I IO8.3 1,184.9 47-6 47-9 24.1 42-6 66.7 14.? 295.: 27.: 73S.C 1,075-i 53,196.: STATEMENTS OF CONSOLIDATED INCOME For the Yean Ended December js. 1987, jpStf, and t&S (millions ofdollars except share amounts) Revenues: Net sales Other Total revenues Costs and Expenses: Cost of products sold Depreciation Selling, administrative, research and development, and general Interest Other Restructuring of operations Total costs and expenses Loss from Continuing Operations Before Income Taxes and Minority Interests Provision (Credit) for Income Taxes Loss from Continuing Operations Before Minority Interests Minority Interests Loss from Continuing Operations Discontinued Operations--net of income taxes: Income from operations Income (loss) on dispositions Income (Loss) from Discontinued Operations Net Loss Par Common Share: Loss from continuing operations Net loss The accompanying notes tofinancial statements are an integral part oftkese statements. Z9&7 $1,987.2 97.5 2,084.7 1,691.2 88.7 119.7 106.0 14.9 366.1 2,386.6 (301.9) 44.5 (346.4) (6.3) (352.7) 13.8 (23.1) (9.3) 5 (362.0) $ (7.90) (8.11) IpS6 $1,967.1 68.7 2.035.8 I.7I5-2 106.6 128.5 127.5 78.9 2.156.7 (120.9) (43-0) (77-9) (7-1) (85.0) 26.1 19.X 45-2 * (39-8) $ (1.91) (89) 198s SI,774.0 62.3 1,836.3 1,624.7 I0I.2 115.6 122.8 236.6 2,200-3 (364.O) (1*55.7) (198.3) (3-8) (202.1) 16.8 (5-0) II. 3 s (190.3) s (4.60) (4-33) 19. a iAfEMENTS Of CHANGES IN CONSOLIDATED FINANCIAL POSITION For (he Yean Ended December ji, cg8f, i$3d, and 1985 (millions ofdollan) Resources Were Provided By: Continuing operations: Loss from continuing operations Expenses (income) not involving funds: Depreciation Deferred income taxes Equity in undistributed earnings of companies not consolidated' Redeemable preference stock Net loss on asset dispositions and write*downs Other Provided by continuing operations Long-term borrowings Extension of long-term borrowings Capital stock issued (net of expenses) Pension liabilities from restructuring Proceeds from disposition of property and investments Early collection of long-term note Other Total Resources Were Used For Property, plant, and equipment Reduction of long-term debt Discontinued operations--net Capital stock of subsidiaries purchased from (contributed to) retirement plans Dividends Currency translation adjustment Deferred financing costs Increase (decrease) in working capital Total increase (Decrease) In Working Capital--By Component: Cash Receivables Inventories Prepaid expenses Current assets of discontinued operations -- net Accounts payable and accrued liabilities Income taxes payable Payable to affiliates Notes payable Long-term debt--current portion Total The accompanying noces to financial statements are an integral pan ofthese statements. ----- --------------------- Q87 19S6 p} 5(352.7) 88.7 (.7) (17.2) 14.8 280.1 13.0 58.0 136.5 39.5 220.6 13.4 5 479.0 $(85.0) 106.6 (37-6) 1-9 12.6 40.8 39-3 X08.0 120.0 8.2 152.5 30.0 (80.X) *377-9 *(202. IOX. (88. 12. 8. 105(20. 6.` 96.c 7-: 10.; 2.; s 123.2 5 81.9 353.8 72.5 36.4 7.9 20.1 (93.6) 5 479.0 * 93-1 279-2 (24-4) 14-7 (30-5) II.6 34.2 *377-9 * 120.7 81.9 (17-3 (13-0 6.5 (29-0 (26.6 s 123.2 $ 24.9 (15.9) (163.1) 4.4 (15.4) 13.9 9.2 (68.4) 26.5 90.3 $ (93.6) *(I4.3) 48.7 .2 5-3 (27-8) (38.6) (15-3) (8.2) 65.8 18.4 * 34-2 s 71-5 (95-7) (47-9) 3-3 (2x6.9) 73-9 80.9 (9-2) 165.5 (82.0) s (26.6) -- 20. NOTES TO FINANCIAL STATEMENTS (millions of dollars, except sfiare amounts) 1. Summary of Significant Accounting PoOdas Reorganisation: As discussed in Note 15, on May I, 1987, Kaiser Aluminum & Chemical Corporation ("Kaiser Aluminum") was reorganized into the holding company form of ownership with KaiserTech Limited ("KaiserTech" or "the company"), a newly formed Delaware corporation, becoming the holding company for Kaiser Aluminum and the common stockholders of Kaiser Aluminum becoming the common stockholders of KaiserTech. The accompanying financial statements of KaiserTech give effect to the reorganization as if KaiserTech had always been Kaiser Aluminum's immedi ate parent. Accordingly, KaiserTech's financial statements are substantially identical to Kaiser Aluminum's financial statements for periods prior to the reorganization, except that Kaiser Aluminum's outstanding preference stocks are classified as minority interests in the consolidated bal ance sheets and the dividend and accretion requirements of such stocks are shown as minority interests in the statements of consolidated income. Principles of Consolidation: The consolidated financial statements include the statements of the company and its wholly owned subsidiaries. Investments in subsidiaries not consolidated, joint ventures, and 20% or more owned companies are accounted for by the equity method. Intercompany items and transactions are eliminated. Foreign Currency Translation: The company translates the assets and liabilities of certain international companies whose functional currencies are their local currencies using current rates of exchange. The resulting aggregate translation adjustments are reported as a component of stockholders' equity. The results of operations are trans lated at average exchange rates for the period. Gains and losses on forward contracts or other foreign currency transactions except those hedging identifiable foreign currency commitments are included in income. Inventory Valuation: Substantially all inventories are stated at first-in, first-out (fifo) cost, not in excess of market. Other inventories, principally supplies and other lowvalue items, are stated at the lower of average cost or mar ket. Inventory costs consist of material, labor, and manufacturing overhead including depreciation. Finished goods, work in process, and raw materials are not shown separately because they are sold at various stages of processing. Depreciation and Amortisation: 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 as follows: Land improvements Buildings Machinery and equipment 2j years 45 years 10 to 22 years The cost less salvage of retired property, plant, and equipment is charged to related accumulated deprecia tion. Amortization of capital leases is included with depreciation expense for property, plant, and equipment. Income Taxes: Income taxes include provisions for timing differences between income determined for financial reporting and for income tax purposes. Income taxes payable includes deferred amounts related to current assets and liabilities, and other deferred amounts where the timing difference is expected to reverse during the current year. Investment tax credits are recognized as reductions of the income tax provision in the year the properties are placed in service. Retirement Plans: The company adopted the provisions of Financial Accounting Standards (fas) Nos. 87 and 88, relating to employers' accounting for pension plans, effective January I, 1986, except for the deferral until 1989 of.the provisions which would recognize certain accumulated pension benefit obligations and the related intangible asset in the company's Consolidated Balance Sheet, and apply these standards to foreign plans. The current costs of principal domestic retirement plans are funded as accrued (see Note 11). Prior-service costs are funded and charged to operations over periods ranging from 10 to 30 years. Statement ofChanges in Consolidated Financial Position: In 1988, the company plans to adopt the provisions of fas No. 95, which requires a statement of cash flows, in place of a statement of changes in consolidated financial position which the company now prepares on a working capital basis. 2. Discontinued Operations Discontinued operations consist of the agricultural chem icals, refractories, trading, real estate, and industrial and specialty chemicals divisions. Results of discontinued operations were as follows: 1987 &86 ig8s Revenues (includes equity earnings of real estate and industrial and specialty chemicals) Costs and expenses *239.4 223.: *310.6 259.9 *983.5 9*9-2 Income before tax Provision tor income taxes 16.3 J0.7 34-3 2-5 24.6 17-5 Income from discontinued operations * (3.8 s 26.1 * 16.8 The net current and noncurrent assets of discontinued operations have been reclassified to remove them from their historic classifications and to separately identify them at the lower of their book or estimated realizable value. The following is the composition: December 31. 1987 8<S Current assets -- net: Trade receivables--net Other receivables Inventories Current liabilities Other--net * 33-1 4-1 32.8 (23-0) (2.4) * 33-1 J-8 _ 42.4 (24.2) 2-9 Total * 44.6 * 60.0 Noncurrent assets--net: Investments and advances Property, plant, and equipment--net Other--net Total *235-2 128.4 (4-S) *359-1 *164.6 129. t 2.2 *295.9 In the third quarter of 1987, KaiserTech began imple mentation of a plan to sell the industrial and specialty chemicals division, including the 50%-owned Harshav Filtrol Partnership (``Harshaw/Filtrol"). On Septemb 1,1987, KaiserTech purchased the other partner's 50^ share of Harshaw/Filtrol in order to facilitate the sale c the industrial and specialty chemicals operations. The company does not expect to incur a loss from the sale 0 these operations. Prior-period financial statements have been restated to report industrial and specialty chemical operations, including Harshaw/Filtrol, in income (loss from discontinued operations. In December 1987, the company agreed in principle to sell Harshaw/Filtrol for approximately $264.0, with no assumption of Harshaw Filtrol long-term debt by the buyer. During 1987, the company recorded additional write-downs of $33.9 related to certain operations and businesses that were discontinued in recent years. On December 23,1986, Kaiser Aluminum completer the sale of Kaiser Development Company (kdc), at a purchase price based upon the financial position of kdc : November 30, 1986. Kaiser Hawaii Kai Development Company (KHXDC), the principal remaining real estate asset, is included in noncurrent assets of discontinued operations--net at December 31,1987 and 1986. The buyer of kdc has an arrangement with Kaiser Aluminun to manage the operations of khkdc and has an option to purchase the stock of khkdc. On July 1,1985, Kaiser Aluminum implemented a plan to sell, and subsequently sold, substantially all the net assets of the trading division. The pre-tax gain of $54.5 ($19.1 after-tax) on the sale of real estate was recorded as discontinued operations in December 1986. The 1986 provision for income taxes foi discontinued operations (substantially all deferred) pri marily offsets the tax benefits of the net operating losses generated by 1986 continuing operations. Estimated pre tax losses of $9.5 were recognized ($5.0 after-tax) for trading in. 1985 to reflect the anticipated losses on sale and the estimated losses from operations until disposition Summary Harshaw/Filtrol financial information as of December 31, 1987 and 1986, and for the years ended 22. December 31, 1987, 1986, and 1985, follows:3 Harshaw/FTttrol Partnership Summary Financial Position Current assets Property, plant, and equipment -- net Other assets Total assets Current liabilities Long-term debt Partners' equity Total liabilities and partners' equity Company's investment in partnership (reclassified to discontinued operations) December yu 1987 1986 *127.9 129.1 34-9 *224.3 220.9 37-4 *291.9 *272.6 * 47-2 J2-3 292.4. *292.9 * 34-3 55-4 282.9 *272.6 *252.9 * 79-9 Summary of Operations 25*7 Revenues Costs and expenses Provision for income taxes *302-4 288.8 4-1 Net income (loss) * 9-5 Company's equity in earnings (loss) (reclassified to discontinued operations) * 7-3 1986 *264.0 253.3 4.3 * 5-9 * 3-0 198s *259.9 264.5 3-2 * (7-8) * (4-2) 3. Other Revenues and Expenses and Restructuring of Operations Other revenues in 1987 include gains of si6.x from the sale of the food service packaging business and $52.7 from the sale of Kaiser Aluminium Europe Incorporated, and in 1986 include gains of $19.5 from the cancellation of a long-term gas supply contract and 516.9 from the sale of part of the company's interest in Anglesey Alu minium Limited (Anglesey). Restructuring of operations costs and expenses in 1987 include a loss provision of 5366.1 consisting principally of write-downs of the electrical products manufacturing business; idle and uneconomic primary aluminum making capacity, including the remainder of the Chalmette, Louisiana, smelter; and a provision for the loss upon disposition of oil and gas properties. . Other costs and expenses in 1986 and 1985 include $59.4 from the write-down of oil and gas reserves, and S2II.0 from a write-down of the Baton Rouge, Louisi ana, alumina refinery as well as several smaller assets, respectively. 4. Investments and Advances--Related Parties Investments are principally accounted for by the equity method. Consolidated retained earnings includes undis tributed earnings of all companies accounted for by the equity method of 5232.s and $199.6 at December 31. 1987 and 1986. Included in the December 31, 1987, amount is $92.6 from 50% or less owned companies. Summary combined financial information is provided below for investees within aluminum operations, most of which supply and process raw materials primarily on a toll basis for their participants. The company's equity earnings (losses) before income taxes of such toll opera tions included in cost of products sold were 580.2, $17.1. and s(ll.s) in 1987, 1986, and 1985, respectively; and its investments in such operations were $288.0 and 5266.3 at December 31, 1987 and 1986. Aluminum Companies Summary Financial Position Current assets Property, plant, and equipment--net Other assets Total assets December jr. 1987 1986 * 682.2 2,578.2 260.0 * 674.6 2.677.7 169.3 *2.420.4 *2.522.1 Current liabilities Long-term debt Other liabilities Deferred income taxes Stockholders' equity * 397-5 820.7 48.1 58.9 1.095-2 Total liabilities and stockholders' equity *2,420.4 * 492.4 874.4 48.6 38.3 2.067.9 *2.522.1 Company's investment in combined companies * 307-7 * 285.3 23. Aluminum Companto* Summary of Operations Revenues Costs and expenses Provision (credit) for income taxes Net income Company's equity in earnings (loss) 1987 *1.072.3 967.1 33-7 * 71-4 * J44 1986 * 935-7 909.4 10.2 s I6.I * 9.4 198s * 1.099.0 1.048.8 (2.9) * 53-3 * (12.6) The relationship between the company's equity in earn ings and the summary net income is attributable to the various percentage ownerships in the entities. Alumina Partners ofJamaica (Alpart), a 50%-owned partnership, has an alumina plant in Nain, Jamaica. At December 31. 1987 and 1986. investments and advances include $32.3 and s32.5 for Alpart, which is accounted for by the equity method. The company is obligated to pay 564.3 and S72.4 of Alpart's debt at December 31, 1987 and 1986, as discussed in Note 12. Production of alumina at Alpart was temporarily suspended in August 1985 due to the continuing adverse economic conditions impacting the aluminum industry. Management believes that market conditions have improved and will continue to improve; and that operating costs at Alpart can be reduced sufficiently to permit economic operation of the facility in the future. The company's policy is to continue normal depreciation for temporarily closed facilities. The company plans to adopt the provisions of fas No. 94, requiring full consolidation of all majority-owned subsidiaries, in 1988. Prior years will be restated in accord ance with the pronouncement. If the standard had been adopted at December 31,1987, total assets and total lia bilities would not have changed significantly. The company and its affiliates have interrelated opera tions. The company provides its affiliates with services such as financing, management, and engineering. The company's significant activities with its aluminum affiliates include the acquisition and processing of bauxite and alumina. Purchases from these affiliates were $409.9, $338.9, and $306.4 in 1987,1986, and 1985, respectively S. Property, Plant, and Equipment and Lons-Tarm Leasee December jr. 1987 &8t Land and improvements Buildings Machinery and equipment Construction in progress * 392 219.0 1.359.6 29-7 * 150.: 367.. 2,I36.< 50. Total property--at cost (includes idle facilities: *215.3 in 1986) Accumulated depreciation (includes idle facilities: *130.8 in 1986) Property, plant, and equipment--net I.687.5 2.705- 809.3 * 858.2 1.350-' *1.354. The idle facilities shown above consist of the company's Chalmette, Louisiana, aluminum smelter which had bee: temporarily closed because of high energy and other cost and the market conditions for primary aluminum. As discussed in Note 3, the company wrote off the remain der of the Chalmette smelter in 1987 as part of the company's restructuring program. Property, plant, and equipment included capital leases consisting principally of buildings at December 31, 1987' and 1986, of $15.4 and $16.5 (net of accumulated amortization of $12.5 and $15.3). Rental expense was $35.3, $37.8, and $37.7 in 1987, 1986, and 1985, respectively. The future minimum renta commitments under noncancellable leases at December 31,1987, were as follows: Total Operating Commitment: Lease: Qipic. Leas 1988 1989 1990 1991 1992 1993 and after Total Less imputed interest Obligations under capital leases * 20.9 20.1 18.1 16.5 15-5 326.5 *417.6 * 18.9 18.3 16.3 14.7 U-7 308.2 *390.1 * 2. I. I. I. I. 18. 27 8 siS 24. 6. Lottf-Ttrm ObflfatioM Long-term debt (all of which are obligations of Kaiser Aluminum or its subsidiaries and have not been assumed or guaranteed by KaiserTech), interest rates111, and maturity schedule at December 31,1987, are summarized in the following table: December jr. 4b, * r a . 52 Due: First Mortgage Bonds (8.2J%-ii.<525%) maturing through 1996 1986 Credit Agreement: Term Loan (variable rate--8.7% at December 31. 1987) Revolving Credit 5% Subordinated Guaranteed Sinking Fund Debentures Obligations under Capital Leases--Buildings (j.oeT.-9.6%) Swiss Franc Bonds (5.5%) Pollution Control and Economic Development Facilities Obligations (fixed and variable rates) Other Borrowings (variable and fixed rates) Total V)88 J9S9 1990 J99T 1992 S987 Total r986 Totdl x 6.2 s 18.9 t 19.3 x 28.9 X X7.4 s 29.6 *120.3 x 167.2 28.1 100.0 100.0 100.0 361.3 t.o .8 9 ( * 1.0 14.1 2.0 2.0 2.0 2.0 22.0 9-J 6.1 SJ2.9 3-2 3-4 *128.3 4-1 5 x 126.8 3-0 5 *135.3 2.6 .1 *404.4 46.9 1-7 * 91-3 689.4 18.7 30.0 69.3 12.3 940.0 887.1 40.0 16.5 19-6 26.6 72-0 99-1 1.328.1 Less amount due within one year Long-term debt J2-9 *887.: 143-2 *1.184-9 (I) Kaiser Aluminum has entered into S140.0 ofinterest rate swap agreements having the effect offixing at approximately 12% the interest cost ofvariable rate debtfor one to two and one-halfyearsfrom December JI. 1987. In March 1986, Kaiser Aluminum entered into a credit agreement with banks holding $1,008.0 of Kaiser Alumi num's outstanding debt, providing for an extension of the debt as a term loan maturing December 31, 1992, and the establishment of a $165.0 revolving credit facility _ which expires December 31,1989. Kaiser Aluminum is required to make minimum principal payments of $3.8 for the first three quarters of 1988 and $16.7 for the fourth quarter and $100.0 for each of the years 1989-1991 with the final balance of $361.3 due in 1992. The maxi mum aggregate amount of loans under the above term loan and revolving credit facility may not exceed $825.0 and $725.0 on and after December 31,1987 and 1988. As part of the 1986 refinancing, Kaiser Aluminum agreed to pay supplemental interest on certain credit obligations to their original maturity, principally 1987. Such interest expense totaled $6.5 and $11.6 in 1987 and 1986. Substantially all of Kaiser Aluminum's domestic plant properties now owned or to be acquired by Kaiser Aluminum are subject to the lien of Kaiser Aluminum's First Mortgage Bond Indenture ("Indenture"). The cap ital stock of Kaiser Bauxite Company and Kaiser Jamaica Corporation (wholly owned subsidiaries) is also pledged as collateral under the Indenture. The amount of loans outstanding under the 1986 credit agreement together with certain other obligations of Kaiser Aluminum are secured by a pledge of collateral which includes principal domestic facilities, inventories, accounts receivable and notes receivable. The capital stock of khkpc is also pledged as collateral. 25. Kaiser Aluminum's status at December 31, 1987. with respect to the principal covenant provisions (as defined) of the 1986 credit agreement, was: Covenant Compliance Limit Status Minimum working capital $ 310.0 Minimum consolidated net worth i.oco.o Maximum consolidated indebtedness 1,650.0"' Maximum ratio of consolidated . indebtedness to total capital 63.5 % Maximum aggregate investments from January 1.1986, through December 31, 1987 s 15.0 Maximum capital expenditures (including dis* continued operations) in 1987 t6o.81 2 * 367-4. t.091-3 I.1J4-7 J3.J% s t.7 . 86.4 (1) This compliance limit becomes St.sso.o on December ji, 1988. (2) This compliance limit becomes 60.01S, SS-0%, and j2.S% at the end ofeachfiscal quarter during 1988.1989, and 1990-1992, respectively. There are also restrictions on Kaiser Aluminum regarding liens, mergers, common stock dividends and stock repurchases, issuance of preferred stock, equipment leases, and transactions with (including loans or advances to) affiliates (including the company). Under the restric tions, no common stock dividends could have been paid in 1987. As of December 31, 1987, availability to the company of the net assets of Kaiser Aluminum is restricted, subject to specific permitted transactions as described in the Indenture and 1986 credit agreement. In connection with Kaiser Aluminum's 1986 credit agreement with its banks, the Indenture was amended to: (i) provide that the First Mortgage Bondholders share in the proceeds' of certain asset sales and financings; (ii) provide for an increase in the annual interest rate on the bonds of 2%; and (iii) generally conform the financial covenants of the Indenture to those of the 1986 credit agreement. In addition, the First Mortgage Bondholders share in the collateral granted to the banks pursuant to the 1986 credit agreement. _________ Kaiser Aluminum is required to prepay debt and other obligations from the net cash proceeds of asset disposi tions as follows: 85% of the first $200.0; 70% of the next $200.0; and 55% of all subsequent amounts. This provision does not apply to sales of assets in the ordinary course of business. Kaiser Aluminum is also required to prepay debt and other obligations equal to 53.13% of tht first $80.0 of net cash proceeds from the sale of equity and 53.13% of the net cash proceeds from the sale of subordinated debt. The aggregate required prepayment from sales of equity and subordinated debt will not exceed $58.8. The 1986 credit agreement and the amend ment to the Indenture provide for the allocation of these prepayments among Kaiser Aluminum's bank debt. Firs Mongage Bonds, and cenain other obligations. During 198b and 1987, Kaiser Aluminum received $423.9 in net cash proceeds of asset and other dispositions of which $391.4 was applicable to the first $400.0 of proceeds mentioned above. There were no outstanding borrowings at December 31,1987, against the $165.0 1986 revolving credit facil ity. Interest on the revolving credit facility is tied to pre vailing shon-term market rates. Interest expense for continuing operations was $106.0,- $127.5, and SI22.8 in 1987, 1986, and 1985, respectively; amounts are net of interest costs of $2.2, $2.4, and $6.1 which were capitalized. During these same periods, interest expense for discontinued opera tions was $15.4, $22.1, and $25.3, respectively. 7. Minority Intorests--Redeemable Preference Stock In March 1985, Kaiser Aluminum entered into a threeyear agreement with the United Steelworkers of Americ (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 employ ees; Under these arrangements, 4,900,000 shares of the Series A Stock and 1,100,000 shares of the Series B Stock have been reserved for issuance. Series A Stock and Serie B Stock ("Series A and B Stock") each have a par value 26. of si per share and a liquidation and redemption value of S50 per share plus accrued dividends, if any. For financial reporting purposes. Series A and B Stock is recorded when issued at its fair value (sis pet share in 1987 and $10 per share in 1986) based on independent appraisal with a corresponding charge to compensation cost. In February 1988,788,266 shares ofSeries A and B Stock are to be issued to the employee stock ownership plans with respect to 1987 compensation. In February 1987 and 1986, 878,207 and 929.923 shares of Series A and B Stock were issued to the employee stock ownership plans with respect to 1986 and 1985 compensation. Total shares outstanding (giving effect to the February 1988 contribution) at December 31, 1987, are 2,293.281 of Series A and 303,116 of Series B. While held by the plan trustee. Series A Stock is enti tled to cumulative annual dividends, when and as declared by the Board of Directors, payable in Series A Stock on or before March I, 1990, in respect to years through December 31,1989, based on a formula tied to Kaiser Aluminum's pre-tax income from aluminum operations; and payable in stock or in cash at Kaiser Aluminum's option on or after March 1,1991, in respect to yean commencing January 1,1990, based on a similar formula. When distributed to plan participants (gener ally on separation from Kaiser Aluminum), the Series A Stock is entitled to an annual cash dividend of *5 per share, payable quarterly, when and as declared by the Board of Directors. Holders of the Series B Stock are entitled to comparable dividends. Redemption fund agreements require Kaiser Alumi num to make annual payments by March 31 each year commencing in 1986 based on a formula tied to consoli dated net income until the redemption funds are suffic ient to redeem all Series A and B Stock. On an annual basis, the minimum payment is S4.3 and the maximum payment is 57.3. In March 1986, Kaiser Aluminum paid S3.2 for the last nine months of 1985. Kaiser Aluminum contributed 54.3 in March 1987 and will contribute S4.3 in March 1988. The plan will distribute the Series A and B Stock in the event of death, retirement, or in other specified circumstances. Kaiser Aluminum may also redeem such stock at S50 per share plus accrued divi dends, if any. After December 31,1987, at the option of the plan-participant, the trustee shall (i) redeem stock at its redemption value to the extent funds are available in the redemption fund, or (ii) redeem stock at its redemp tion value on a five-year installment basis with interest at market rates for distributed shares earned after December 31, 1985. The Series A and B Stock are entitled to the same vot ing rights as Kaiser Aluminum's Common Stock and to certain additional voting rights under certain circum stances including the right to elect, along with other Kaiser Aluminum si preference stockholders, two direc tors whenever accrued dividends have not been paid on two annual dividend payment dates, or when accrued dividends in ah amount equivalent to six full quarterly dividends are in arrears. The Series A and B Stock restrict the ability of Kaiser Aluminum to redeem or pay divi dends on its Common Stock if it is in default on any divi dends payable on the Series A and B Stock. 27. 8. Stockholders' Equity and Minority Interests--Other Preference Stocks Changes in stockholders' equity and minority interests were as follows: Minority Interna Stockholders 'Equity Redeemable Preference Stocks Other Preference Stocks Preferred Stock Common Stock Currency Additional Translation Capital Adjustment Balance. January i. 1985 Net loss Dividends on common stock (s.15 per share) Acquisition of Distec Corporation (150,000 shares) Supplemental retirement plan contributions (103,000 shares) Conversions (9.718 preference shares into 37.400 common shares) Stock options exercised (184.450 shares) Redeemable preference stock issued as compensation Translation adjustments s 8.9 $44-1 (-9) *14.6 *279-8 *(32.4) .1 2.0 1-7 1.0 .1 2.6 29-0 Balance. December 31. 1985 Net loss Supplemental retirement plan contributions (111,156 shares) Conversions (5,786 preference shares into 11,345 common shares) Stock options exercised (427,868 shares) Redeemable preference stock issued as compensation Redeemable preference stock accretion Translation adjustments 8.9 43-2 (.6) 9-2 6.0 14.8 287.1 1.4 .6 .1 6.1 (3-4) 30-5 Balance. December 31. 1986 Net loss Conversions (13,338 preference shares into 51.456 common shares) Stock options exercised (207,022 shares) Preferred stock issued (8.235,294 shares) Preferred stock dividends: Cash Common stock (227.231 shares) Preference stock repurchased from pension plans (600.000 shares) Redeemable preference stock to be issued as compensation Redeemable preference stock accretion Translation adjustments- . 24-1 - 11.8 3-o Balance. December 31. 1987 *38.9 42.6 C-4) (30.0) SI 1.2 S8.2 S8.2 14.9 .1 .1 SI5.I 295.2 27.I 1-4 2-9 119.2 4-6 (6.4) *416.9 (20.1) * 7-0 Retained Earnings * 977-3 (190.3) (-J) 781.0 (39-3) (2.6) 733.6 (362.0) (3-2) (4-7) * 368.7 28. The outstanding shares of other Kaiser Aluminum pref erence stocks held by parties other than the company, in descending order of seniority, were: Outstanding December 1987 Preference. Cumulative Convertible, 9*100 par: 4-1/8% 4-3/4% (1957 Series) 4-3/4% (1959 Series) 4-3/4% (196b Series) Preference. 15.25 Cumulative Convertible {1984Series), si par -- $50 stated value 18,449 22.704 39.913 21.466 t986 32.924 2S.6I4 44.709 22.623 600,000 Kaiser Aluminum's Cumulative Convertible Preference Stocks, sioo par value ("sioo Preference Stocks"), restrict acquisition ofjunior stock and payment of divi dends. At December 31, 1987, such provisions were less restrictive as to the payment of cash dividends than the 1986 credit agreement provisions. At its option, Kaiser Aluminum may redeem its sioo Preference Stocks at par value plus accrued dividends. At December 31, 1987, the 4-1/8% and 4-3/4% (1957 Series, 1959 Series, and 1966 Series) sioo Prefer ence Stocks were convertible into 439,157 shares of Common Stock of KaiserTech at prices of $27.96, 524.89. S24.72, and $25.34, respectively. In September 1987, the company purchased all 600,000 shares of the $5.25 Cumulative Convertible (1984 Series) Preference Stock, si par value ("1984 Series Stock"), from certain employee benefit plans for S36-4.These shares each had a preference in liquidation of $50 and were convertible into 2.963 shares (a total of 1,777,800 shares) of Common Stock of KaiserTech. 9.Stock Option Plan At December 31, 1987 and 1986,1,321,263 and 1,528,285 shares of KaiserTech Common Stock were reserved for issuance to key employees pursuant to the employee stock option plan, under which 213,613 and 509.735 options were exercisable. Options outstanding at December 31, 1987, of 731,313 shares, included 103,000 nonqualified options and 628,313 incentive options at prices ranging from $8.8i to *16.19 per share. In 1987. options for 89,100 shares expired or were can celled. On May 1,1987. die Kaiser Aluminum Stock Option Plan became the Stock Option Plan of the company. The prifce of all options is the market price of common stock at the date of grant. Options are exercisable on conditions determined by the stock option committee, but generally not before one year nor more than six years from date of grant. 10. Income Taxes--Continuing Operations The provisions (credits) for income taxes consist of the following: US Federal Foreign State Total 1987 Current Deferred * 6.7 *28.7 9.0 s .1 * 23.3 15-7 Total * 6.7 *37-7 1 .1 * 44.5 1986 Current Deferred Total * 24 (66.7) * (64-3) *12.3 9-7 *22.0 * (-7) * 14.6 i (57-0) * (-7) * (43-0) 1985 Current Deferred Total * 4.0 (176.0) *(172.0) s 6.3 1-3 ( 8.1 *(1.8) *(1.8) * 9.0 (174.7) *(t6S-7) Income taxes are classified as domestic or foreign based on whether payment is made or due to the u.s. or a foreign country. Certain income classified as foreign is subject to domestic (u.s.) income taxes. Tax provisions (credits) applicable to consolidated and unconsolidated companies' results are shown below: 1987 1986 193s Consolidated companies Unconsolidated companies (primarily in cost of products sold) SI9.7 24.8 Total *44-5 5(51.0) 5(165.3) 8.0 *(43-o) {.4) *(I65-7) The tax effects of timing differences are: &7 1986 Operating loss carryforwards Pension expense deferred for * 6.7 tax purposes Investment tax credits Depreciation 9.6 Plant write-downs Exploration and development costs Capitalized interest, property taxes, and other costs Undistributed earnings of subsidiaries and affiliates Inventory valuation method Other (-6) s(40.0) (12.9) (<S-3) 4J-0 (5-1) (190) (1.6) 3-J (13-7) (4.6) Total sij.7 *(57-0) W8s *<I4.3-X) (6.6) 22.2 (82.8) 11.2 to.7 7 U-8) 17.8 *(174.7) The company had net operating loss carryforwards for tax purposes of $579.7 (which expire in 1999 to 2002) at December 31, 1987. Such carryforwards will be reduced over a period of four yean by the unamortized amount of $129.5 relating to the 1985 change in the method of accounting for inventories from last*in, first-out (LifO) to first-in, first-out (FIFO). In addition, the company had investment tax credit carryforwards of $64.4 which is net of a 35% reduction required by the 1986 Tax Reform Act and which expire in 1992 to 2001. The investment tax credit carryforwards have been recognized in the financial statements as a reduction of deferred income taxes. The benefits of net loss carryforwards through 1986 have pre viously been recognized in the financial statements as a reduction of deferred income taxes. No benefit was rec ognized for the 1987 net loss because recovery is not assured during the carryforward period. At December 31, 1987, net loss carryforwards for financial statement pur poses (for which no tax benefit has been recognized) approximated $459.0. In December 1987, the Financial Accounting Stand ards Board issued a new statement on accounting for income taxes ("fas No. 96"). Although the company is not required to implement fas No. 96 until 1989, early and retroactive application is permitted. The company has not determined when it will implement fas No. 96 or which transition method it will elect. However, pre liminary analysis indicates that implementation of fas No. 9<5 would not have had a significant effect on retained earnings at December 31, 1987. The provision (credits) for income taxes are different from the amounts computed by applying the u.s. statu tory federal income tax rate of 40% for 1987 and 4<5%' for 1986 and 1985. The differences are summarized as follows: 1987 1986 1985 Credits at statutory rates *(120.8) Increase (decrease) resulted from: Domestic losses for which no u.s. income tax benefit is available 177.7 Investment tax credits Difference in foreign and u.s. tax tates (13.8) Percentage depletion Difference in basis on sale of affiliate Foreign tax deductions and credits Other 1.4 Provision (credit) for income taxes * 44-5 *(55-6) (3-4) 3-2 (J-S) 4.1 7-0 7-2 *(43-0) *(167.4) (6.6) 2.3 (4-2) 4-9 4-3 - *(i<5j.7) It is the company's intent that undistributed earnings of consolidated and unconsolidated subsidiaries and joint venture companies, in most cases, will continue to be reinvested. Undistributed earnings on which the com pany has not provided taxes which may be payable upon distribution were $173.5, *178.2, and $199.2 at Decem ber 31, 1987, 1986, and 1985, respectively. 11. Retirement and Bonus Plans Effective January I, 1986, the company adopted certain provisions of fas Nos. 87 and 88 relating to employers' accounting for pension plans, for all u.s. pension plans. This accounting change decreased the 1986 net loss by $10.9 (s.24 per common share). Prior years financial statements were not restated. As permitted by the Stan dards, the company has deferred application of the Standards to its foreign pension plans and has deferred 30. adoption of the provisions which would recognize cer tain accumulated pension benefit obligations and the related intangible asset in the compands Consolidated Balance Sheet. The company's domestic retirement plans are contrib utory for salaried employees and noncontributory for hourly employees. Foreign retirement jdans are princi pally noncontributory. A consolidated presentation of accumulated benefits and net assets would not be mean ingful because foreign plans use various methods of fund ing and benefits determination. For foreign plans, the excess of vested benefits over the total of balance sheet accruals and plan assets is not significant. In all domestic plans, except for plans representing less than i % of the total accumulated benefit obligation and less than 2% of the plan assets at fair value, the benefit obligations exceed the plan assets. Employee pension benefit plans status at December 31, 1987 and 1986, is as follows: December jz. IS87 1986 Accumulated benefits obligation: Vested employees Nonvested employees *(697.6) (5I.I) Accumulated benefit obligation Additional amounts related to projected salary increases (748.7) (3S-4-) Projected benefit obligation Plan assets (principally fixed income obligations and common stocks) at fail value (784.1) 49^*4 Plan assets less than projected benefit obligation Unrecognized net gain Unrecognized net obligation (287.7) (43-7) 196.3 *(727.8) (49.1) (776.9) (60.J) (837.4) 479.6 (337-8) -(9-4) 2JX-2 Unfunded accrued pension liability included in the Consolidated Balance Sheet (principally in long-term liabilities) *(134.6) $( n<5.o) The components of net periodic pension cost for 1987 and 1986 are as follows: 1987 1986 Service cost--benefits earned during the year Interest cost on projected benefit obligation Return on assets--actual --deferred gain (loss) Amortization of unrecognized net obligation (1986 adjusted for *14.3 reduction in 1983 cost to minimum) *14.7 63.6 (38.6) (11.6) 17.3 us.i 66.a. (62.4) 9-4 - 3.6 Net periodic pension cost *43-4 *32. t Assumptions used to value obligations at year-end. and to determine the net periodic pension. cost in the subsequent year, are: = 1987 1986 Discount rate ~ Expected long-term rate of return on assets Rate of increase in compensation levels 8.5% to.o% 6.0% 8.0% 11.0% 6.0% The costs of the benefit plans for 1985 amounted to S74.2. During 1987, the company recorded curtailment losses of S39.5 to reflect the shutdown of five plant locations. The recorded loss reduced unrecognized net obligation. In September 1986, Kaiser Aluminum deferred the payment of *33.7 (out of $47.1) in contributions to cer tain pension plans pursuant to a minimum funding stan dard wayr received from the Internal Revenue Service. Durin^ft87, the company paid the first installment of *5.6 and prepaid *15.8. At December 31, 1987, *12.3 remains to be funded (59.5 in long-term liabilities). The waiver permits payment in installments with interest up to five years. The contribution for 1984 made in September 1985 included 2,173,913 shares (3.8%) of common stock of KDC (a majority-owned subsidiary at that time) at a total value of $13.0. Under terms of the contribution, the company repurchased the shares for $14.7 in September 1986. The company and its subsidiaries provide certain health care and life insurance benefits for retired employ ees. Substantially all employees may become eligible for those benefits if they reach retirement age while still working for the company. Those benefits are provided through administrative services contracts with various 31. insurance carriers. The company pays the cost of provid ing these benefits as incurred. The cost of these benefits was S30.5, S26.6, and S23.1 for 1987, 1986, and 1985, respectively. The company also has an executive bonus plan and has a supplemental retirement plan for salaried employees under which the participants contribute a percentage of their base salaries. The company's contributions (1987, si.7; 1986, si.6; and 1985, si.8) toward these plans are generally based on earnings and net worth. There were no contributions to the executive.bonus plan during the past three years. The company's contributions to the sup plemental retirement plan for 1987 will be substantially all made in the form of the company's Common Stock. 12. Commitments and Contingencies The company has financial commitments, including pur chase agreements, tolling arrangements, forward foreign exchange and forward sales contracts, letters of credit, and guarantees. Purchase agreements and tolling arrangements include agreements for the tolling of alumina into aluminum by Volta Aluminium Company Limited (Ghana) (90% owned); and for the supplying of alumina to and purchasing of aluminum from Anglesey (Wales) (49% owned). Kaiser Aluminum also has long-term agreements negotiated as part of arranging financing for certain joint ventures of which it is a member. These contracts include agreements for the purchasing and tolling of bauxite into alumina by Queensland Alumina Limited (qal) (Austra lia) (28.3% owned); for the purchasing of alumina from Alpart (50.0% owned); and for the purchasing and toll ing of alumina into aluminum by Boyne Smelters Lim ited (bsl) (Australia) (20.0% owned). These obligations expire in 2008, 2021, and 2007, respectively. Under the agreements, Kaiser Aluminum is unconditionally obli gated to make payments sufficient to pay its proportional share of debt, operating, and certain other costs of these joint ventures. The aggregate minimum amount of required principal payments at December 31, 1987, is S28I.I (*24.6, 1988; $28.0, 1989; S48.2, 1990; $88.3, 1991; 572.7,1992; *19-3. thereafter). At December 31, 1987, other assets of Kaiser Aluminum include *4.9 of debt repayment in the form of a purchase of interests in outstanding notes of an affiliate. Kaiser Aluminum's share of payments, including operating costs and certain other expenses under the agreements, was 5129.9, 5136.6, and s146.9 in 1987, 1986, and 1985, respectively. The company is engaged in various litigation and arbi tration proceedings. While there are uncertainties inher ent in the ultimate outcome of such proceedings, management believes that the resolution of such uncer tainties will not materially affect the company's financial position or results of operations. 13. GaocrapNc Area Information The company now operates solely in the aluminum busi ness. Discontinued operations consist of agricultural chemicals, refractories, trading, real estate, and industrial and specialty chemicals. See Note 2. Export sales from continuing operations totaled *197.9, *82.o,.and 546.3, in 1987, 1986, and 1985, respectively. 32. ucugraphic area information relative to continuing oper ations is summarized as follows: 1987 1986 :98s Net Sales to Customers: Domestic Foreign *1.447-1 540-1 *1.486.3 480.3 *1,4512 322.8 l:.:raenterprise Sales and Transfers: Domestic Foreign Total Sales Eliminations .`.et Sales 1,987-2 1.967.1 1.774.0 12.5 399-0 4H.J 2,398.7 (4II-5) SI.987.2 9-8 347-5 357-3 2,324.4 (357-3) *1.967.1 13.: 241.6 254.7 2,028.7 (254.7) *1.774-0 Income (Loss) from Continuing Operations Before Income Taxes and Minority Interests: Domestic Foreign Total * (333-0) 31.1 1 (301.9) s (200.0) 79.1 * (120.9) * (318.J) (45-5) * (364.0) Identifiable Assets at December 31: Domestic Foreign Discontinued Operations--net Total Investments and Advances Included in Identifiable Assets: Domestic Foreign Total *1.769-9 418.3 *2,072.4 768.0 *2,165.1 660.6 403.7 *2,591.9 355-9 *3.196.3 409.9 *3.235-6 * 311.2 s 311.2 * 289.8 s 289.9 * 1.4 299.8 s 301.2 The consolidated financial statements include foreign lia bilities of 5223.2, 5344.8, and 5510.5 for 1987, 1986, and *985, respectively. The aggregate foreign currency gain or (loss) included in determining net income for 1987 and *986 was 5(13.5) and 5.4. 14. Earnings (Loss) Par Common Shars Primary earnings (loss) per common share is computed by dividing net income (loss) available for Common Stock by the weighted average number of shares of Com mon Stock outstanding and, if dilutive. Common Stock equivalents (options). Fully diluted earnings (loss) per common share is computed by dividing adjusted net income by the weighted average number of shares of Common Stock outstanding, and, if dilutive, common stock equivalents (options), and shares issuable upon con version of debentures and Preferred and Preference Stocks. In all three years fully diluted earnings per share was antidilutive; and, as a result, the number of shares used in both computations of earnings (loss) per com mon share were 45,052,631, 44,594,619, and 43,926,611 in 1987, 1986, and 1985, respectively. 15. The Clor* Agreement and Merger Agreement and Related Matter* On April 28, 1987, holders of Kaiser Aluminum's Com mon Stock and Series A and B Stock approved an agree ment dated as of December 15, 1986, as amended, between Alan E. Clore and Kaiser Aluminum ("Clore * Agreement"), including the transactions contemplated thereby, and adopted a related Merger Agreement provid ing for the reorganization of Kaiser Aluminum into the holding company form of ownership with KaiserTech as the holding company for Kaiser Aluminum. At the same time, the holders of Kaiser Aluminum's Common Stock and Series A and B Stock together with the holders of each series of Kaiser Aluminum's sioo Preference Stocks, voting in relation to their respective series also approved amendments to the Restated Certificate of Incorporation of Kaiser Aluminum whereby the shares of sioo Prefer ence Stock would be convertible into shares of the Com mon Stock of KaiserTech following the reorganization, rather than into shares of the Common Stock of'Kaiser Aluminum, on the same terms and conditions as such shares were then convertible into shares of the Common Stock of Kaiser Aluminum. 33. In the reorganization completed on May i, 1987, each outstanding share of the Common Stock of Kaiser Alu minum was converted into a share of the Common Stock of KaiserTech and Kaiser Aluminum became a subsidiary of KaiserTech. The Series A and B Stock, the 1984 Series Stock, and the $100 Preference Stock remained outstand ing as shares of Kaiser Aluminum. The shares of 1984 Series Stock and sioo Preference Stock became convert ible into shares of the Common Stock of KaiserTech. On May 1,1987, under the Clore Agreement, Mr. Clore purchased from KaiserTech a new issue of 8.235,294 shares of si.53 Cumulative Convertible (1987 Series A) Preferred Stock of KaiserTech ("1987 Series Stock") in exchange for securities issued by the United States Government having a market value of s 140.0. Each share of 1987 Series Stock is entitled to dividends at an annual rate of s 1.5 3, payable quarterly in cash or Kaiser Tech Common Stock, has a liquidation value of $17, has one vote, and is convertible into one share of KaiserTech Common Stock at the election of the holder. Mr. Clore also received warrants to purchase, in certain limited cir cumstances and prior to May 1, 1989, up to 2,000,000 shares of Common Stock of KaiserTech for S23 per share. In connection with the Merger Agreement, Kaiser Tech contributed $25.0 of the proceeds from the 1987 Series Stock to Kaiser Aluminum for repayment of debt. The Clore Agreement provides that for five years fol lowing the reorganization KaiserTech shall have a Board of 14 directors of whom eight shall be nominated for election by Mr. Clore, five shall be nominated for election initially by Kaiser Aluminum's current Board of Direc tors and thereafter by those initial directors and their suc cessors in office (the "Continuing Directors") and one shall be. so long as required by the company's collective bargaining agreement with the uswa, a person nomi nated for election by the uswa. The Clore Agreement provides that for five years, except with the approval of a majority of the Continuing Directors, neither Mr. Clore nor certain other individuals or entities (the "Restricted Group") will acquire more than 66-2/3% of the combined voting power of all KaiserTech securities then outstanding except pursuant to a Merger Transaction (as defined in the Clore Agree ment). Any such Merger Transaction must also be approved by a majority of the Continuing Directors and by a majority of the shares held by persons who do not beneficially own 20% or more of the shares of Kaiser Tech entitled to vote generally in the election of directors (the "Unaffiliated Shares"). The Clore Agreement also provides that the Restricted Group may not engage in any transaction with Kaiser Tech or its subsidiaries (with certain exceptions) unless such transaction has been approved by a majority of the Continuing Directors, or if there are none then in office, by a majority of the Unaffiliated Shares. All of the shares of Common Stock of KaiserTech and the 1987 Series Stock presently owned by Mr. Clore and his affiliates (the "Clore Group") have been pledged to lenders of the Clore Group. The Clore Group has dis closed that it has defaulted under various borrowing arrangements under which funds were obtained to carry its investments in the Common Stock of KaiserTech and 1987 Series Stock. As a result of its defaults, the Clore Group is seeking to dispose of all or a portion of its Common Stock of KaiserTech and 1987 Series Stock. Members of the Clore Group have also defaulted under agreements relating to the purchase of shares of Com mon Stock of KaiserTech. KaiserTech has retained investment advisors to explore available opportunities to assist the Clore Group in dis posing of all or pan of the shares of the Common Stock of KaiserTech or 1987 Series Stock held by the Clore Group if that is in the best interests of KaiserTech's stockholders. On January 13,1988, the Clore Group disclosed that Mr. Clore and members of the Clore Group are engaged in discussions in connection with a possible sale of all or a portion of the shares of Common Stock of KaiserTech and 1987 Series Stock owned by members of the Clore Group. There can be no assurance that any agreement will be reached, the possible terms thereof or, if such an agreement is reached, whether such transaction will be consummated. 34. INDEPENDENT AUDITORS' OPINION The Stockholders and the Board of Directors of KaiserTech Limited: We have examined the consolidated balance sheets of KaiserTech Limited and its consolidated subsidiary com panies as of December 31, 1987 and 1986, and the related statements of consolidated income and changes in consol idated financial position for each of the three years in the period ended December 31, 1987. Our examinations were made in accordance with generally accepted audit ing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. We did not examine the financial statements of companies represent ing 29% of the investments accounted for by the equity' method at December 31, 1986 and 1985. The 1986 and 1985 financial statements of these companies were exam ined by other auditors whose reports thereon have been furnished to us, and our opinion expressed herein, insofar as it relates to amounts included for these companies- for 1986 and 1985, is based solely upon the reports of the other auditors. In our opinion, based upon our examinations and the reports of other auditors referred to above, such consoli dated financial statements present fairly the financial position of KaiserTech Limited and its consolidated subsidiary companies at December 31,1987 and 1986, and the results of their operations and the changes in their financial position for each of the three years in the period ended December 31, 1987, in conformity with generally accepted accounting principles consistently applied during the period except for the change, with which we concur, in 1986 in the method of accounting for defined benefit pension plans as described in Note ir to the financial statements. (-` O' Oakland, California February 10, 1988 35. OTHER FINANCIAL INFORMATION [Unaudited} Mineral Reserve Data In October of 1979 the Government ofJamaica granted to Kaiser Bauxite Company a mining lease for the min ing of bauxite sufficient to supply Kaiser Aluminum's then-existing Louisiana alumina refineries at their capaci ties of 1,656,000 metric tons per year for a period of 40 yean commencing February 1980. In addition, the company's share of proved bauxite reserves held by an aluminum affiliate total about 53,300,000 tons, and the company has contractual rights to an additional 175.000,000 tons. 0parating and Financial Data1 2 1987 1986 1985 Aluminum tonnage (metric): Capacity at year-end Primary production Sales: Primary Fabricated 690,000"' 903,000 923.000 633.328"' 577.861 521,886 124.833 74*591 37*218 648.682 688,150 636,956 Total sales Average number of 773.525" 7<S2.74I employees 12,521 13.096 Number of stockholders: Preferred and preference 1,878 Common t3*276 I.403 14.242 Additions (millions of dollars): Property, plant, and equipment S81.9 *93-t Investments and advances .1 1-5 674.174 13*454 955 16,942 SI20.7 4 19*4' 198} 1982 1981 i 1980 1979 1978 923,000 1,053,000 1,033,000 1,012.000 1,004.000 1,004.000 1.003,000 538.662 417.289 617,566 940.119 992.353 973.670 908.243 169.369 571.827 74M96 144.471 602.972 747.443 215.753 566.377 782.130 168.621 670.483 839.104 251.402 717.347 968.749 229.683 756.342 986,025 211,285 733.974 945-59 16.234 17.248 20,688 26.250 28,042 28,951 28.985 I.052 19.429 1.109 20.691 1.251 22.425 1.377 22.912 1.755 23.085 2.773 24.004 3.059 23,836 *232.4 1.6 *177-8 1.2 *204.6 60.2 *290.6 44.6 *164.8 29-3 *141-4 12.7 *143.7 12-5 (1) Includes the U.S. plants and the company's share of Volta Aluminium Company Limited, Anglesey Aluminium Limited, Boyne Smelters Limited, and Aluminium Bahrain, (2) Includes the US. plants, Kaiser Aluminium Europe's Voerde smelter (for thefirst nine months of1987), and the company's share of Volta Aluminium Company Limited, Anglesey Aluminium Limited, Boyne Smelters Limited, and Aluminium Bahrain. 36. Quarterly Financial Data'" Quarterly financial data for 1987 and 1986 is summarized as follows:* 2 3 4 5 6 1987 Quarters Ended Continuing operation]: Net sales Gross profit Income (loss) from continuing operations Net income (loss) Per common share data: Earnings (loss): Primary-- Continuing operations Net income (loss) Fully diluted-- Continuing operations *' Net income Price range (NYSE): High Low Close -=. 1986 Quarters Ended Continuing operations: Net sales Gross profit Loss from continuing operations Net income (loss) Per common share data: Earnings (loss): Primary-- Continuing operations Net income (loss) Price range (NYSE): High Low Close Mar. 31 fun. 30m Sep jo'" Dec. 31u> Year t 485.1 62.1 * 522.6 83.O (360.x) (389.1) * 523.x 95-3 12-9 13-4 * (.72) (-69) * (8.03) (8.67) Jfc w s .28 .31 * 456.4 55-6 28.0 44-8 *1.987.2 296.0 (352.7) (362.0) l * -55 * (7-90) 92 (8-II) .22 52 25 83 *18-3/8 13-3/4. 16-3/8 *19-3/8 15 -*18 *23-1/4 17-5/8 20-1/2 *21-3/4 7-3/4 22-2/8 * 23-1/4 7-3/4 ti-i/3 - Mar. 3110 Jun. 30 Sep. 30 Dec. 3r" Year * 466.4 60.0 (5.1) 16.$ * 492-7 55-3 (32.6) (30-6) ( 525-0 83-3 (2.6) (3*2) * 483-0 53-3 (44-7) (22.6) *1.967.1 251-9 (85.0) (39-3) - * (.12) 37 * (-73) (69) * (.06) (07) r (x.oo) * (l.9l) (51) (89) *23-1/4 16 22-1/4 *23 17-1/2 18-3/8 *18-3/8 13-1/2 17-1/2 *18-1/8 I2-t/2 13-7/8 * 23-1/4 12-lf2 13-7/8 (:) Restatedfor discontinued industrial and specialty chemicals operations. (2) In June $87, Kaiser Aluminum providedfor losses of$387.0, both before and after taxes, relating to the restructuring ofits operations. The loss provision oj $334.3 in continuing operations consistedprincipally ofwrite-downs ofthe electricalproducts manufacturing business and idle and uneconomic primary aluminum-making capacity, andprovisionfor the loss upon disposition ofoil and gas properties. The loss provision of$J2.S in discontinued operations related to certain operations and businesses that were discontinued in recent years. tir (3) Includes a pre-tax gain ofStdjfrom sale ofthefood servicepackaging business. In September 1987, Kaiser Aluminum providedfor losses ofS13.0, both before and after taxes, relating to the restructuring ofcorporate staff, Sll.6 in continuing operations and $L4 in discontinued operations. (4) Includes a pre-tax gain of$32.7from the sale ofKaiser Aluminium Europe Incorporated. (5) Includes a pre-tax gain ofS20.2 (St8.3 in discontinued operations)from adoption offAS Nos. 87 and 88 relating to employers' accountingfor pension plans. Includes a pre-tax gain ofS32.3from cancellation ofa long-term gas supply contract (S13.O in discontinued operations). (6) Includes a pre-tax write-down ofoil and gas reserves of$39.4 and an after-tax gainfrom disposition ofdiscontinued operations ofSt9.1. 37 Consolidated Saianca Sh**ts (millions of dollars) ASSETS tgS? Current Assets: Cash Receivables Inventories Prepaid expenses Current assets at discontinued operations -- net t 118.7 316.8 139-0 IS.8 1-6 Total current assets 950.9 investments and Advances 311.1 Property, Plant, and Equipment -- at cost Accumulated depreciation I.667.5 809.3 1986 * 93-8 3H-7 602.1 17-1 60.0 1.116.0 289.9 2.703-3 1.330.7 I&S * 108.1 . 291-0 601.9 12.X 87.8 1.103.9 301.2 2.539.3 t.m.9 19U t 36.6 359-7 619.8 8.3 301.7 1.339-6 322.J 2.629.3 1.108.6 19S3 * 24.3 4*8.9 631.1 J-2 230.7 '1.370.7 309.5 2.452.8 1.046.7 tpil * 32-9 511-7 709-9 23.0 240.6 1.528.1 338.1 2.383.6 X.023.2 * 71-5 303.2 895-5 29.0 3J0.8 1.653.0 580.9 2.206.7 913-6 1980 * 63.1 400.0 788.0 38.7 287.1 1.576.9 l6j.7 1.997-6 931-3 1979 * UM 112.9 631.9 35-1 231.2 1.185.5 390.9 r.938.1 911.J 197f s 66.0 128.3 563.1 7-0 213.2 1.317.6 338.1 1.821.8 8JJ.1 Property, plant and equipment -- net 858.2 Noncurrent Assets of Discontinued Operations--net 3J9-I Other Assets IU.5 1.331-3 295-9 139-7 1.391.1 322.: 1X4.0 t.521.2 355.1 82.1 I.106.: 500.3 96.6 1.358 1 90.3 93-8 1.263.1 175-3 66.1 1.066.3 3J8.2 86.3 1.026.6 320.4 44.6 966.4 268.: 48.3 Total 12.591.9 *3.196-3 *3.235.6 *3.640.8 *3.683.2 *3,809.2 11.038.J *3.553-9 *3,268.0 *2.939-1 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accruals Income taxes payable Notes payable long-term debt -- current *507-2 33-5 *152-7 H.7 26.J portion Ji-9 123.2 *105.9 27.1 92.3 161.6 *170.6 J08.3 257.8 79.6 *525-7 147.7 ttl.5 33-8 *162.9 206.9 238.6 38.6 *191-9 261.7 30J.2 *531-3 332.0 31.1 71.2 63-5 *531-7 289.3 31.0 53-t *487.5 202.~3 30.3 56.2 Total current liabilities 393-6 665.1 687.2 916.3 821.7 917.0 1.136.0 957-9 908.1 776.3 Long-Term Liabilities 156.8 108.3 103.0 3-0 40.6 13-6 38.0 31.1 Long-Term Debt 887-1 I.184.9 1.236.1 11222.0 1.104.J 1.016.4 908.1 721.1 791-0 838.1 Deferred Income Taxes li-7 7-6 27.6 123.3 272.J 322-9 301.8 163.8 231.3 2:1.3 Deferred income 13-7 17-9 JO. I J2-3 51-5 Minority Interests 50. t 66.7 52.1 "" 14-1 U-7 16.0 16.9 22.3 48.2 ji.j Stockholders' Equity: Preferred and preference stocks Common stock Additional capital Currency translation adjustment Retained earnings Total stockholders' equity Total 3.2 .15-1 116.9 7-0 368.7 S15.9 *2.391.9 U-9 295-2 27-1 738.6 * I.075.S *3.196-3 , 11.8 287.1 (3D 781.0 11.6 279.8 H-5 273-9 H.1 269.3 (32.1) 977.8 (16.5) -- 1.102.3 M79.6 1.079.J 1.239-8 t.371.7 1.163.3 *3.235-6 *3.640.8 *3,683.2 *3.809.2 U-3 268.4 1.3J2.0 1.634.7 *.038.5 11.1 256.5 1.287.0 1.557-6 *3.553-9 13-7 223-7 __ - -- 1.04S.J 1.28J.9 S3.268.0 13-1 203.1 841.9 1.05S.4 *1.939-1 (t) Years prior to tgi? restatedfor discontinued industrial and specialty chemicals operations. 39. Ten*Year Saiactad Financial Data1" Statamaflts of Consolidated Incoma (milHon* of dollars) Ravanuas: Net >ales . Other Total revenues Costs and Expansas: Cost of products sold Depredation Selling, administrative, research and development, and general Interest Other Restructuring of operations T97 1986 198s 198* 198} 198Z 1981 1980 1979 1978 *1.987.2 97-5 *1.967-1 68.7 *:.774.0 62.3 *1.935-7 *1.735-1 32-4 81.7 *1.333.5 359.7 *2.163.2 tit.6 *2.425.5 119.1 *2.255 3 87.5 *1.910.7 77-7 2,084.7 2.033.3 1.836.3 1.968.1 I.816.8 2.193-2 2.274-3 2.544.6 2.342.S 1.988.4 1.691.2 88.7 119.7 106.0 14-9 366.J I.7I5-1 106.6 128. J 127-5 78.9 1.624.7 101.2 115.0 122.8 236.6 1.827.9 I0I.0 - 1.655.5 90.2 114.8 105.8 113.3 23.3 88.5 62.2 1.903.5 96.1 113-7 112.5 90.3 t.937-7 76.1 129-3 59-8 1-7 1.371.0 73-6 128.3 50.0 10.5 1.730.8 68.9 119-4 52.7 11-7 1.530.8 69.6 95.3 60.7 23.0 Total costs and expenses Income.(loss) from continuing operations before income taxes and minority interests Provision (credit) for income taxes income (loss) from continuing operations before minority interests Minority interests Income (loss) from continuing operations Discontinued operations -- net of income taxes: Income from operations Income (loss) on dispositions Income (loss) from discontinued operations Net income (loss) 2.386.6 2.156.7 2.200.3 2.180.3 2.002.2 2.326.1 2.205.6 2.133.4 I.983-S 1.779-9 (3t.9) 44. J (120.9) (43-0) (364.0) (1657) (212-2) (150.0) (185.4) (118.1) (132.9) 11.9 69.2 5.8 4II.2 167.1 359-3 157-4 208.5 95-4 (346.4) ( (77-9) (7-1) (198.3) (3-8) (62.2) C-4) (67.3) (-7) (144.3) (.7) 63.4 (9) 244.1 (1.8) 201.9 (2-4) 1*3-2 (2.6) (352-7) (85-0) (202.1) (63.6) (68.0) (145.5) 62.5 241.3 199.5 110. j 13-8 (23-0 26-1 I9-: 16.8 (J.o) 25-5 (60.7) 17-1 7.6 62.5 SO. 3 51.8 46.0 (9-3) 45-2 11.3 (35-2) 17.1 7.6 62.5 50.3 51.8 46.O * (362.0) * (39-8) *(190.3) * (98.8) * (50.9) * (137-9) $ 125.0 t 191.6 * 251.3 * 156.5 Par Common Shara Data: Average number of shares (000): Primary Fully diluted Earnings (loss): Primary Fully diluted Dividends Book value Market price (NYSE): High Low Close > Price earnings ratio (range: high-low) Return on average invested capital (?)- Debt-to-capital ratio (To)- 45.053 4J.053 44.595 44.595 43.927 43.927 43.393 43*593 43.233 43.233 43.098 43.098 42.899 44.426 41.586 44.185 40.575 44.093 39.969 43-912 t (8.U) * (8.II) * 14.92 * (-89) * (4-33) * (-89) '* (4-33) * 24.00 * 1$ * 24-39 * (2-26) * (2.26) t .60 * 28.32 * (1.18) * (1.18) * .60 * 31.68 * (3-20) * (3-20) 1 .80 * 33-94 * 2.91 s 2.84 * 1.40 * 37-95 * 7-04 * 6.68 % 1.30 * 36.69 s 6.19 * 5-77 S MO * 31.26 * 3-92 * 3.64 1 0.85 S 26.4! *23-1/4 7-3/4 tt-t/8 define *23-1/4 12-1/2 13-7/8 define *18-3/8 12*5/8 17 define *22-1/2 12-3/4 14-5/8 define *22-5/8 14-7/8 19-3/4 define *17 1I-I/2 15-1/8 define *27-l/2 I4-I/2 I5-t/4 9-5 *30-1/4 15-3/8 H-3/4 4-2 *22-1/8 I7-I/4 19-1/4 4*3 $20-1 '4 14 17-1! 5-4 negative 49-6 2.4 52.2 negative 55-2 negative 51-7 negative 42.2 negative 41-8 6.9 39-7 14.2 30.7 13-1 35-9 9.7 41.1 (t) Years prior to ipS7 restatedJar discontinued industrial and specialty chemicals operations. (z) Average invested capital divided into net operating profit (the sum ofnet income, the after-tax cost ofinterest, and change in deferred taxes). (3) Total debt as a ratio oftotal debt, dejerred income taxes, deferred income, minority interests, and stockholders' equity at year-end. 38 CORPORATE INFORMATION Domestic Operations (partial list) JKSfclfr & City O/'i'Mf:.-;: California Cupertino # Industrial Foil Lbs Atigclc^ Extrusions Oalifand . Corporate Headquarters Oxnard `y Forgings i Pleasanton r R & D Indiana ...Bedford . Scrap Reclamation -Louisiana . Graniercv Alumina Ohio ' Belpre i Newark "Toledo Foil Laminating Rod. Bar & Wire Coated Coil Oklahoma "Tulsa Maiincsi Pennsylvania Erie Forgings . Texas `Sherman Extrusions 4 . " Washington -Mead Primary Aluminum Tacoma Primary Aluminum Trentwood Sheet & Plate West Virginia Ravcnswood Primarv Aluminum. Sheet A' Plate Worldwide Operations Kaiser Tech Limited, through 'iihsiJ: .ries or atriliares. participate- m the following operation', in these countries: Australia Boyne Smelters Limited (ao"o owned) Queensland Alumina Limited (aS.j";>) Bahrain Aluminium Bahrain {17%) Canada Kai'cr Aluminum & Chemical ofCanada. Ltd. (100%) Ghana Volta Aluminium Companv Limited (oo"ii) Hindustan Aluminium Corporation (26.6"T.) Jamaica Alumina Partners of Jamaica (5o"l.) Kai'er Jamaica Bauxite Companv (4o"i>) United Kingdom Anglesey Aluminium Limited (49*'o) Auditors: Deloitte Haskins & Sell-. Oakland. Transfer Agents and Registrars: Morgan Shareholder ServicesTrust Companv. New York (all clas-.es of stock: also dividend-paying and conversion agent). Bank ot America N.T. A' S. A.. San Francisco (all classes ot stock; also conversion agent). The First National Bank ot Chicago. Chicago (common stock transfer agent). Harris Trust and Savings Bank. Chicago (common stock regi-trar). Common Stock Listing: KaiscrTcch Limited common stock is listed on the New York. Midwest, and Pacific stock exchanges. KLU is the ticker tape symhol. Form 10-K: The corporation's Form iq-k annua! report to the Securities and Exchange Commission, including financial statements, may be obtained without charge bywriting to tiie Corporate Secretary. KaiserTecli Limited. 300 Lakeside Drive, Room 2036 KB. Oakland, CA 94643-  CORPORATE INFORMATION KAISERTECH LIMITED Directors Alan E. Clote Chatman ofthe Board, KaiserTech Limited1 James S. Pasman, Jr. President and ChiefExecutive Officer, KaiserTech Limited and Chairman and Chief Executive Officer, Kaiser Aluminum & Chemical Corporation1 John R. Beckett Director and Retired Chairman ofthe Board, Transamerica Corpotutiotr3 Jonathan A. Bulkley President and ChiefExecutive Officer, Bulkley Capital Partners, Ltd. andJesup & Lament Securities Croup, Inc. Guy de Chabaneix Financial Advisor1 A. Stephens Hutchcraft, Jr. Vice President, KaiserTech Limited and President and ChiefOperating Officer, Kaiser Aluminum & Chemical Corporation Charles A. Lynch Chairman ana Chief Executive Officer, DHL Airways, Inc' Cornell C. Maier Consultant to, and Former President and ChiefExecutive Officer of, KaiserTech Limited and Consultant to, and Fomer Chairman and Chief Executive Officer of, Kaiser Aluminum & Chemical Corporation1 Lawrence C. McQuade Fomer Director and Executive Vice President of W. R. Grace &Co.u John E. Merow Chairman and Senior Partner, Sullivan & Cromwell, Attorneys1 Paul D. Rusen President, Employee Ownership, Inc and Retired Director ofDistrict 23, United Steelworkers ofAmerica Fred R. Sullivan Fomer Chairman and President, Kidde, Inc1 Raymond S. Troubh Financial Consultant and Senior Advisor to Salomon Brothers Inc1 Eugene E. Trefethen, Jr. Honorary Director Corporate Officers Alan E. Clore Chairman ofthe Board James S. Pasman, Jr. President and ChiefExecutive Officer Edward M. Quinnan Vice President and Chief Financial Officer David L. Perry Vice President and General Counsel A. Stephens Hutchcraft, Jr. Vice President David G. Schmidt . Vice President and Controller John A. Moore Vice President and Secretary John T. La Due Treasurer Assistant Corporate Officer Raymond F. Gaxavaglia Assistant Secretary. 'Member. Audit Committee `Member. Executive Committee 'Member, Executive Competuadon and Stack Option Committee 40. KAISER ALUMINUM A CHEMICAL CORPORATION Directors James S. Pasman, Jr. A. Stephens Hutchcraft, Jr. Alan E. Clore Guy de Chabaneix Charles A. Lynch' Cornell C. Maier Lawrence C. McQuade' Paul D. Rusen Raymond S. Troubh' Eugene E. Trefethen, Jr. Honorary Director Corporate Officers James S. Pasman, Jr. Chairman ofthe Board and ChiefExecutive Officer A. Stephens Hutchcraft, Jr. President and ChiefOperating Officer Joseph A. Bonn Vice President John R. Cady Vice President Robert E. Cole Vice President Jesse D. Erickson Senior Vice President F. Joseph Haydel, Jr. Vice President Richard L. Humphrey Vice President Robert W. Irelan Vice President John T. La Due Treasurer John A. Moore Vice President, Secretary, ar. Deputy General Counsel Howard M. Nelson* Senior Vice President and President, Kaiser Chemicals David L. Perry Vice President and General Counsel Jon P. Pierce Vice President Edward M. Quinnan Vice President and Chief Financial Officer David G. Schmidt Vice President and Controlle James E. Sparkman* Vice President Assistant Corporate Office Charlie Alongi Assistant Controller Raymond F. Garavaglia Assistant Secretary Bruce D. Oliver* Assistant Secretary Gordon V. Rogers Assistant Secretary Norman L. van Patten Assistant Treasurer 'Member. Executive Compcnwtior and Stock Option Committee `Retiring in March 1988 300 Lakeside Drive Oakland, California 94643 ' V1\I t 1988 ANNUAL REPORT KAISER ALUMINUM'S PRINCIPAL GOALS IN SERVING OUR MARKETS ARE TO CONTINUE # TO STRENGTHEN OUR PRODUCT QUALITY, OUR SERVICE TO CUSTOMERS, AND OUR PLANT OPERATING EFFICIENCY. I WE HAVE MADE EXCELLENT PROGRESS TOWARD THESE COALS AND ARE COMMITTING THE HUMAN .AND FINANCIAL RESOURCES NEEDED TO ASSURE SUCCESS IN THE FUTURE OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS iCuntinue* on :* who we are Kaiser Aluminum ^ Chemical Corporation is one of the world's leading aluminum companies, operating a total of 22 plants in ten states and six foreign countries. As a felly integrated producer, the company mines bauxite, the major aluminum-bearing ore; refines it into alumina, the intermediate material; produces primary alumi num; and manufactures selected fabricated products. Alumina is sold to Kaiser primary aluminum plants and to outside customerprimary aluminum is sold to Kaiser fabrication plants and to others; and fabricated products are sold-- either directly or through distribu tors-- to the beverage container, transportation, aerospace, con struction, and consumer durables markets in the U.S. and abroad. Atyeanend t988, the company employed about 10,500 persons. roughly 150 of whom were on the corporate staff. These totals are down significantly over the past five years due to asset sales, the discontinuation of various busi nesses, cost reduction programs, and decentralization. KaiserTech Limited, Kaiser Aluminum's parent, became a sub sidiary of YIAXXAM Inc. on Octo ber 28, 1988. In addition to Kaiser Aluminum, YIAXXAM operates through a separate subsidiary. The Ricific Lumber Company, which Ls a leading producer of redwood lumber and other forest pro|Lcts. Other MAXXAM subsidiaries are ijjpngaged in real estate manage ment and development. SEIDL -\ME!) GIAiKM -\N cs CEO ^ John M. Seidl was named chairman and chief executive officer of Kaiser Aluminum and KaiserTech Limited on January 23, rgSg, succeeding James S. Pasman, Jr. Additionally, he has been nominated to serve on the board of .YIAXXAM Inc. Seidl, 49, had been president, chief operating officer, and a direc tor of Enron Corp., Houston, Tfcxas, an international energy company with about S9 billion in assets. Seidl was a member of the faculty of the Graduate School of Business at Stanford University from 1974 to t978. He Joined .Virumas Company in rgy7 as a director and later became a member of its executive committee. He joined the management team of the com pany in 1978, serving in a variety of top posts until the takeover of Naromas by Diamond Shamrock in late 1983. He Joined Houston Natural Gas (which later became Enron] as senior vice president for corporate development in 1984. A tg61 graduate of the U.S. Military Academy at West Point, Seidl received both a master's degree and a Ph.D. in polit ical econ omy and government from Harvard ; University. He served a-* d-puty assistant secretary for program sys- 1 terns in the Department of Health, Education and Welfare, and as dep uty assistant secretary, program development and budget, in the ' Department of the Interior. 4-_ - .4U OQMKlUXy C .* [Thousand] ciJatlini Net Sales Income (Loss) From Continuing Operations Net Income (Loss) Debt-to-Capital Ratio*1 Sales of Aluminum Products--Metric lbns Property, Plant, and Equipment Additions Successor'" TWo Mouths faded December)!, 19U *298,100 * 28,100 S 28,100 37-2% 97,145 s I3,J00 Predecessor'" Tea Mouths Ended October jt. tptS *1,921400 s 144,700 * 175,700 38x1% 6*7435 * 80,800 Kir Ended December )i. iji?" $24X32,900 * (343,500) * (354.900) 50.5 773,515 * 86,6oo` (t) See Note t to financial statements brx description of Successorsad Predecessor (ll Restated far the adoption of Fimncixl Accounting Smvbrd No. ^ requiring fall cnnsnlufrtinn nl mnjnrityaMnreri ifaMUrix. U) Includes a *360,joo lots provision, both before and alter taxes, relating to the restructuring of continuing operations, consisting principally of writedowns ot the electrical products manufacturing business, idle and uneconomic primary ahuninum production capacity, and a provision far the loss upon disposition of oil and pa properties. It) Total debt as a atio of total debt, deferred income taxes, deferred income, minority interests, redeemable preference stock, and stockholders' equity. TABLE OF CONTENTS Management's Discussion and Analysis Begins on Inside Front Cover and Continues on Pages 4. through 20 Letter from the Chairman and the President 2 Aluminum Industry Overview 4 Kaiser Aluminum Businesses 5 Raw Materials 6 Primary Aluminum products 8 Flat-Rolled Products 10 Extruded Products 12 Rod, Bat; and Wire 14 Forgings 16 Financial Review 18 Financial Statements 22 Notes to Financial Statements 26 1 For Kaiser Aluminum, 1988 was a year of ownership change, contin ued strategic accomplishment, and very profitable results. On October 27, shareholders approved the merger of Kaiser Aluminum's parent, Kaisexlfcch Limited, with a subsidiary of MAXXAM Inc., resolving an own ership uncertainty which had per sisted for several years. With that done, we turned our full attention to the challenge of making Kaiser Aluminum the best, most marketdriven, customer-responsive sup plier in the industry. We are not yet where we want to be. But we believe we have the people, plants, and focused strategy to get us there. Operationally and financially, 1988 was an excellent year. The company moved solidly into the black, posting its third highest annual net income even This per formance resulted from a strong aluminum market and from pro gress made in reducing costs and in concentrating corporate resources on facilities, markets, and product niches offering competitive oppor tunities and financial rewards. Kaiser Aluminum is a very different company from the one which existed earlier this decade. While aluminum always has been the core business, we were diversified into a number of nonaluminum businesses. In recent years, we have determined that we should stick to what we do best--produce and sell aluminum. Within aluminum, we should focus on specific opportunities rather than compete so broadly across the board. Our strategy is: lb continue to be a fully inte grated producer--mining bauxite, refining it into alumina, smelting alumina into aluminum, and man, ufacturing aluminum into a range of fabricated products. lb be market-driven, provid ing customers with the best possi ble product quality and service. lb treat all employees fairly and to demand from them the level of productivity which will ensure that we meet corporate goals for quality, customer service, and cost-competitiveness. lb be among the low-cost producers in times of economic downturn so that we can serve cus tomers profitably and maintain stability of operations. lb allocate capital to those areas which promise the best returns from both a financial and product quality standpoint. lb reduce total debt of Kaiser Aluminum and KaiseiTfech and to refinance it on a basis mote in keepingwith our long-term assets and strategies. The facts as they relate to these strategic points are as follows: -Asa fully integrated alumi num produce^ we are divided by product category into six decentral ized business units or divisions-- raw materials, primary aluminum, fiat-rolled products, extruded prod ucts, rod/bar/wire, and forgings. These business units are more market-driven, more innovative, mote entrepreneurial, and more capable of managing change as a result of decentralization. Corpo rate staff provides the framework for overall strategy and direction as well as centralized corporate finance, but the business units are largely self-sufficient. For us, being market-driven means being positioned with the products our customers need, when they need them, lb do this, we have focused on those aluminum-consuming product areas in which our capability is strongest and which offer solid growth potential for our customers and, therefore, for us. These include beverage containers, a market where demand continues to grow; aerospace, which is benefiting from high demand for new commercial' aircraft; and transportation, where the amount of aluminum used in cars, trucks, shipping containers, and boats continues to rise because of the metal's versatility and light weight. We also have expanded our alumina sales and diversified the line of primary aluminum products we market to others. - Any organization is only as good as the people it employs. We are extremely proud of the perform ance of our people throughout the difficult period which the industry and the company experienced------beginning in the early 1980s. Dur- - 2 mg a pan of that period, the alumi num industry was depressed severely. Overlapping a portion of that span were more than three years of uncertainty over corporate "* ownership. The tough-but-honest decisions made then--to reduce overhead, streamline work, and demand mote in terms of both quality and output--are paying off. Our goal to become a lowcost producer has been strength ened for the long term by facility modernizations, retrofit technol ogy, and process-control improve ments; by large and permanent reductions ofjalaried personnel at corporate hr Quarters and plant locations; by implementation of variable salary pfcths which share profits in good timesbut reduce personnel expenses when alumi num prices are low or business per formance is less than satisfactory,by improvements in labor produc tivity and implementation of a semi-variable wage scale for most of Kaiser Aluminum's unionized employees; and by variable-rate power supply contracts for our prin- cipal domestic primary aluminum rnd fabricating facilities. * The efficient allocation of capital is one of senior manage ment's most important functions. In the past several years, the com pany has spent approximately sajo million modernizing the flat-rolled oroducts plant at "Bentwood, Wash- ^ton, so that it can competewith the best--now and in the future; currently, we are rounding out that modernization with the installa tion of a new wide coil coating line and other supporting projects. In the tod/bar/wire business, we are constructing ncfemtnufacturing facilities at Macon, Gdttgia, and Jackson, Tennessee, to improve the service, quality, and economics of our finishing operations. And in forgings, we are adding a facility at Greenwood, Sooth Carolina, so that we can penetrate further the automotive forgings market. A major priority during 1989 is urfcfmance debt. Kaiser Alumi num debt has been reduced to approximately S410 million as of February 28 fibm approximately S940 million at year-end 1987-- a reduction of about 56%. Sepa rately, KaiserTfech debt stands at $925 million. It is our plan to use cash from operations and from selected asset sales, together with existing cash balances, to reduce the separate debts of Kaiser Alumi num and Kaiserlbch to the point that they can be refinanced with new borrowings having more appro priate maturities and less restric tive covenants. As we said at the beginning of this letter; 1988 was a year of sig nificant achievements. We believe the current industry environment offers os an excellent opportunity to improve further our product quality and customer service, to strengthen further our operating efficiency, to increase further our share of markets that are key to our future, and to achieve superior returns on invested capital. Those are K^per Aluminum's goals, and they are the measures by which we stand ready to be judged. Chief Executive Officer Chief Operating Officer March to, 1989 3 ALUMINUM INDUSTRY OVERVIEW Gains in the nation's teal gross national product and industrial pro duction, combined with 338% jump in aluminum ingot and mill products exports and a 14% drop in imports, helped U.S. aluminum producers achieve an outstanding year in 1988. Tbtal U.S. producer shipments increased to 7,397,714 tons, up slightly from the level of the prior year; which was 8% above total 1986 shipments. Primary alu minum production in the U.S. jumped 18% on a year-to-year basis as the industry's operating rate (annual tons produced divided by annual rated capacity) surged past 100%. It averaged 101% for all of. 1988, compared with 88% in 1987. Even with the sharp gain UM988 U.S. aluminum production, both producer and consumer inventories $1.20 at the end of the year remained near the low levels of yearend 1987^ v `The improvement in U.S. shipments during the year and increased foreign demand created an overall gain of 3% in western world aluminum consumption in 1988, compared with an increase of 5% in 1987. Western world primary production moved up 7% in 1988 as previously idle capacity was restarted and new capacity was brought on stream. The average operating rate foe the western wodd industry was 97% in 1988, up from 93% in 1987, and the operating fltte at year-end wa*99%. . .^. As a results! low inventory levels and strong demand, primary aluminum prices were sigz^S-. candy higher in 1988 after posting sharp gains in 1987- In 1988, the Midwest U.S. market piice for ingot ranged from a low of s.88 per pound in January to a high of si.30 in JuncuJt-elosed at year-end 1988 at si.^Tln 19877 the Midwist U.S. JC* - market price had increased from s.53 pet poun&n early January to^.a high of s.88 in both October and December. metal. This shipment total was 10% above 1987 shipments of '697,721 tons (after excluding 1987 shipments by Kaiser Aluminium Europe, a business sold in the . fourth quarter of that year). Due to the improvement in 1988 ingot prices, increased production at Kai ser smelteis, and lower internal pri mary metal needs, the percentage of shipments made in the form of ingot rose to 36% of the total from 16% in 1987.. Primary metal production by Kaiser Aluminum in 1988 reached 640,983 metric tons, for an average operating rate of 95.7%. This compares vgh outpufijpt 633^28 tons or 85% of annual capacity in 1987. At the end of the year, the company's worldwide primary aluminum production system was operating at 98.1 % of its rated capacity. *9 32 3s 38 (Near prices and inventories Average Yearly U.S. Midwest Market Price ;pnce per pound! B IPAI Primary Inventories 1000$ metric tons! KAISER OPERATIONS Kaiser Aluminum was a fullfledged participant in the strong aluminum market in 1988. Ship ments of primary and fabricated products rose to 764,580 metric tons as a result of greater primary aluminum production as well as the stronger overall demand for AjUOCA nJLUiVUiNUM CUCJUNtbbtb i Kaiser Aluminum serves its customers through six largely self-sufficient business units or divisions that operate on a decentralized basis. These are: taw materials, primary aluminum products, flat-rolled products, extruded products, rod/bar/wire, and forgings. A review of each follows. RAW MATERIALS PRODUCTION CAPACITY ,Metric Tonsl Bauxite Mining Kaiser Jamaica Bauxite Company, Jamaica (49% owned)'" Alumina Partners of Jamaica (Alpart), Jamaica ($o% owned) Tbtal Alumina Refining Gramercy, Louisiana Alumina Partners of Jamaica (Alpart), Jamaica (50% owned) Queensland Alumina Ltd., Australia (28.3% owned) Tbtal (r) While Kaiser owns 49% of KJBC. it receives ail of KJBC's output. (a) Dedicated fully to the Alpart refinery. Annul Rated Capacity Available to Kaiser Aluminum 4*200,000 1.200,000* 5,400,000 748.000 500.000 774^00 2,022,000 PRIMARY ALUMINUM PRODUCTION CAPACTTY iMemcTonsi1" Mead, Washington Tacoma, Washington .Annui Sates Capacity Available to Kaiser Aluminum 200,000 73*000 UJ. Tbtal 273,000 Volta Aluminium Co. Ltd. (Valeo), Ghana (90% owned) Anglesey Aluminium Ltd., Wales (49% owned) Boyne Smelters Ltd., Australia (20% owned) Aluminium Bahrain, Bahrain [n% owned) 180,000 55.000 41.000 29.000 Overseas Tbtal 305,000 Wjrid Tbtal 578,000 (i) A smelter at Ravenswood, West Vispnia, was sold in February 1984 and, theretote, is not shown in this able. lOLIf M PEL CORPOK \ILM` RAW MAIEiv! \L> WITH BUD1A UlUTNLY SUPERVISOR, ATGRAMERCY PLANETARY KILN W1IERE ALUMINA IS CALCINED: "WE'VE MADE OUR ALUMLNA AND BAUXITE OPERATIONS MORE ^ COMPETITIVE BY INCREASING PRODUCTIVITY AND MAKING TECHNOLOGICAL IMPROVEMENTS. NOT ONLY DOES THAT ENABLE US TO IMPROVE OUR SERVICE TO OUR CUSTOMERS, BOTH INTERNAL AND EXTERNAL, IT ALSO WILL ALLOW US TO MAXIMIZE OUR EARNINGS POTENTIAL IN 1989 AND BEYOND." ,\ RAW MATERIALS--BAUXITE AND ALUMINA Kaiser Aluminum's aw mater* ids division mines bauxite, an aluminum-bearing ore, and then -refines it into alumina, the inter mediate material from which aluminum is made. Strong worldwide alumina demand and prices, and significant /; improvements in productivity and plant process technologyrRm*"bined to produce outstanding oper* ' ational and financial results for the division in 1988. The division participates in the international bauxite/alumina business through: * 49%-owned Kaiser Jamaica Bauxite Complny (KJBC), Kaiser's largest source of bauxite ore; A wholly owned alumina refinery at Gramercy, Louisiana, which obtains its bauxite from KJBC; 28.3%-owned Queensland Alumina limited (QAL) in Austra lia, which refines Australian bauxite into alumina,* and * 50%-o^aed Alumina Ban ners of Jamaica (Alpart), which mines bauxite and refines it into alumina. At KJBC, sales revenues and volumes increased in 1988, and . employees achieved the milestone of three million work-hours with out a lost-time accident. Produc mercy, and QAL over the next two tion is expected to increase further ytafSftb maintain the facilities' and the total volume of bauxite high opeating rates, implement shipped by KJBC is expected to increase by about 15% in 1989. further process technology improvements, sarisf^afety and Gramercy and QAL set ptoduc- environmental control responsibil tionrecoids in 1988, opeating at " ities, and refurbish production better than 100% of their rated ? \ equipment at Alpart. annual capacities. These bc&ities Up to now, the majority of the are expected to produce at even ~ division's alumina has been con higher levels in 1989 to help simply sumed by Kaiser Aluminum smelt the strong alumina market anOB* . ers. Now, however the division's pared during t|^yean strategy ha&shifted toward supply The bauxite mines and alu- ing more alumina to third parties. mina refinery of Aipait, Jointly - . In 1989, for the first time, mer owned with Reynolds Metals ~ C^j^any, are being prcpSresl for .. *-< chant market alumina sates are expected to exceed internal alu- a restart of operations in mid-1989.. * minx transfers. Consequently, the Kaiser Aluminum and Hydro dxvisj^jk is rapidly evolving from an Aluminium i&, a Norwegian com organization principally responsive pany, have announced their inten to internal demands to one ori tions to purchase Reynolds' 50% ented to customer needs in the share of Alpart. The purchase world alumina and bauxite markets. would result in Kaiser Aluminum having majority ownership in, 100 and management responsibility for; Alpart. Alport's operations were sus pended in 198s, largely due to low alumina prices. At that rime, excel lent progress was being made in ' reducing operaring costs at Alpart, and Kaiser Aluminum intends to maximize the operation's poten tial to become a major competi tive force in the merchant or open market. The refinery is expected 85 36 37 88 89 ,est. to increase production to the i,ooo,ooo*metric*ton-per*yeax ate in the third quarter ^ - 990. Capital expenditure vhich will rise in 1989, will be used to AlUMNA-OPER-VuNC RATE AND SALES % of Rated Capacttv Utilization* 1 External Sales Internal Transfers Includes Kaiser Aluminum s share or Alpart's capacity. expand capacity at KJBC, Gra- 7 DICK HUMPHREY, CORPORATE VP PRIMARY ALUMINUM, WITH STAFr CNC.INEER SUE STE|ER AND i ITERATOR DOUG TARUP AT THE MLAD SMELTER: "HIGH INGOT PRICES WERE A MAJOR FACTOR IN njS8 RECORD EARNINGS. EQUALLY IF NOT MORE IMPORTANT IS THE PROGRESS WE MADE IN STRENGTHENING THE BASIC STRUCTURE OF OUR BUSINESS. WITH FULL- CAPACITY OPERATION A REALITY, AND CONTINUED PROGRESS IN PRODUCTIVITY AND COST CONTROL, WE ARE IN POSITION TO BE AN * EFFECTIVE, LONG-TERM COMPETITOR IN PRIMARY ALUMINUM." * --: V w iJ The primary alummam products division reduces alumina into pri* maty aluminum metal for use by the company's fabricating plants and for sale to others. 1988 was an excellent year for primary aluminum products. Divi sional financial results benefited from improvements in operating efficiency and all-time-high ingot prices. New highs were recorded in other areas as well. For example, employees at the Valeo smelter in Ghana set a new industry standard for safety by working six million hours without a lost-time accident ...employees at Anglesey in Wales and Mead, Washington, established their highest monthly operating rates, and set energy efficiency records...Mead posted its best-ever safety record...and Anglesey pro duced its highest volume of valueadded products. Responding to 8* 85 86 87 88 DinontiNT.vJDPiooccncwAr KAISER-MANACED SMELTERS I Production in 000s Metnc Tons Employees Hourly Salaried 8 strong aluminum demand, the divi- . sion operated at 95.7% of capacity, and metal output reached mote than 640,000 metric tons. Of this total, more than 275,000 metric tons were sold to outside customers. The high ingot prices of 1988 made Kaiser a relatively high-cost producer, because the cost of alu mina and other raw materials rose with the Upswing in aluminum prices, and some labor and power costs are indexed to ingot prices. But while the company experi ences higher costs when ingot prices are high, it benefits from lower costs when ingot prices drop. This ability to compete throughout aluminum price cycles means the division should be able to continue to operate its smelters at virtually full capacity in times of economic downturn. Tb market this full produc tion, the division is continuing to emphasize three key strategies: Selling more value-added products. For example, at Anglesey and Valeo, virtually all capacity for billet is sold through 1989. Selling to a more diversified customer base, such as trade mer chants, other aluminum producers, end-users, and the London Metal Exchange terminal market. In 1989, the division plans to market about 340,000 metric tons of metal to outside customers. Selling products forward-- Le., for future delivery--on a firmprice basis in order to manage the risk of a downturn in ingot prices. Approximately one-half of 1989 production available for sale to third parties has been pre-sold. In technological advances, the division has perfected and in stalled retrofit technology in all the smelters it manages (Mead, Tkcoma, Anglesey, and Valeo). This technology--which includes the redesign of the cathodes and anodes that conduct electricity through reduction cells, improved "feed" systems that add alumina to the cells, and the computerized Celtrol* system that controls energy flow in the cells, resulting in more efficient energy use-- allows Kaiser to compete with the industry's newer smelters. The division licenses this tech nology and sells technical assist ance to other producers around the globe, and expects to expand its technical sales effort in 1989. The primary aluminum prod ucts group plans to spend about S25 million of capital in 1989. These expenditures will be aimed at improving process control sys tems and carrying out other proj ects to increase efficiency and productivity. DICK EVANS, VP AND DIVISION GENERAL MANAGER. FLAT ROLLED PRODUCTS (LEFT, WITH VP AND WORKS MANAGER RAY MILCHOVKH AT THE TRENTWOOD S-STAND COLD MILL: "WE ARE DETERMINED TO TAKE FULL ADVANTAGE OF OUR ADVANCED TECHNOLOGY. GEOGRAPHICAL LOCATION, AND SPECIALIZED PRODUCT MIX TO IMPROVE FURTHER OUR SALES .AND SERVICE TO CUSTOMERS IN THE BEVERAGE CAN, AEROSPACE, TRANSPORTATION. .AND INDUSTRIAL MARKETS." 5 The Oat-rolled products division, :he largest of Kaiser's fabricated products businesses, is focused on serving the needs of customers in three principal aluminum markets: * Beverage containers, a growth market in the U.S. and overseas, especially in Asia; * The aerospace sector which .s benefiting from increasing de mand for commercial aircraft; and * The tooling plate and com mon alloy coil segments of the distributor market, where usage is rising because of the high level of U.S. industrial activity. The company's ability to serve these markets effectively has been greatly strengthened by the modernization and quality and service commitments made at its Bentwood, Washington, rolling mill. The division's general market.ng environment has been aided over the past two years by higher world demand for fabricated prod ucts and the depreciation of the U.S. dollar, which have contrib uted to a major increase in U.S. exports of Oat-rolled products arid decrease in imports. These trade developments, together with higher output and improved quality and costs at "Bentwood, have substan tially strengthened that mill's rela tive competitive position. Management is aggressively ursuing a strategy to take full ivantage of "Bentwood's advanced technology, geographical location, and specialized product mix to improve further its sales and profit potential. Average price realizations on all products increased about 14% during 1988, despite only modest increases in beverage can stock, the division's single largest product line. Further increases in average prices are expected in 1989. "Bentwood's ability to manu facture products with superior gauge, flatness, shape, and metal lurgical properties is the result of a five-year, S250 million capital spending program that has provided state-of-the-art hot and cold rolling equipment and improvements in operating methods. The plant's capacity, product quality, and operating efficiency were strengthened in 1988 through the installation of fully computer ized equipment that simultane ously scalps the bee and sides of an ingot to produce a mirror-like sur face. The new equipment is allow ing the plant to cast and process an increased number of widen longer, and thicker ingots. In 1988, Bentwood's produc tion volume rose for the fourth con secutive year. Employees made progress in lowering costs and strengthening product quality, cus tomer service, and product mix. The single largest capital project currently under way at Bentwood is the installation of a $30 million, high-speed, wide-coil coating line to accommodate the can industry's move to expand pro duction of lids from wide coated coils. Scheduled for completion in mid-1990, the new line and its related handling equipment will ensure Bentwood's capability to produce a full range of highly com petitive can end stock materials. New projects currently being engi neered for 1989-91 installation include modernization of equip ment for producing heat-treat products. The Oat-rolled products capital spending and marketing strategies are supported by the division's advanced research and develop ment activities conducted at the Center forTechnology (CFT) in Pleasanton, California. Personnel at CFT use their scientific and technological skills to enhance the company's competitive position in the important can stock and aerospace markets. This is accom plished by developing and ensuring the practical implementation of improvements in plant process technology that lower production costs and/or strengthen product quality, and by working with operating and sales personnel to enhance existing products and develop new ones. TTUNT.VOOD MARK! SEGMENTS -: iis BY REVENUES Can Stock >0% ATI- Heat Treat :So X ATI* Common AIlov 22 Jo Products (or the Aerospace. Transportation, and Industrial markets tl EXTRUDED PRODUCTS The extruded products division operates soft alloy extrusion facilities in Los Angeles, California; Sherman, Tbxas; and Tbronto, Canada; and a cathodic protection business located in TUlsa, Okla homa, that also extrudes both aluminum and magnesium. All facilities have fabricating capabili ties and finishing operations. The division's major markets are transportation, to which it pro vides extruded shapes for use in building trucks, trailers, and ship ping containers; durable goods; defense; and building/construction. It serves these markets directly and through distributors. Because of the regional nature of the industry, each of the extruded products division's businesses operates on a semiautonomous basis, seeking to develop additional niche markets having special tolerance and valueadded fabricating requirements. Metal procurement, technology, and marketing efforts are shared by the businesses, all of which MARSHS VOLUME 3 Transportation 43 B Distribution B Export io" B Building-Construction 9i - 8 Other i 12 operate under the name of Kaiser Aluminum Extruded Products. The rapidly rising cost of billet during 1988 created situa tions that were favorable to long term sales agreements, and the division entered into several such arrangements. During 1988, extruded prod ucts acquired a plating facility and a painting business in Tbronto to complement the existing Tbronto extrusion plant. In Sherman, a new remelt facility was successfully brought on line and a null distribu tion system to support the service center industry was established. The addition of a remelt and cast ing operation at Sherman, which allows the plant to supply its own billet requirements and to sell bil let on the open market, represents significant progress toward the division's efforts to enhance its cap abilities to serve the product and service demands of its customers. In addition, h allows the use of resulted scrap instead of new metal, thus lowering production costs. For 1989, the Los Angeles plant is studying installation of its own remelt and casting facility, as well as expansion of its press capability. The extruded products divi sion's strategy for the future is ou of value-added growth and creation of new regional businesses. ILMOWEN.VP, EXTRUDED PRODUCTS, ATTHE LOS ANGELES i PLANT: "OUR VISION OF THE FUTURE IS ONE OF GROWTH -BOTH VALUE-ADDED I GROWTH, AND NEW- REGIONAL BUSINESSES. THE PURSUIT OF A NICHE MARKETING i STRATEGY, COMBINED WITH AN ORGANIZATIONAL i i CULTURE THAT i 4 L ED COYNE Yt> ROD, BAR. ANIHYIRE iRIGHT], WTU iPLANT MANAGER JACK O'DELL AT TEE NEW MACON FACILITY- " L9.SS WAS A TURNING POLVE WE BEGAN A siS MILLION SPENDING PROGRAM TO INSTALL STATE OF-THE-ART CAPABILITY AT NEW PLANTS IN MACON AND IACKSON. THIS WILL BUILD ON STRENGTHS AT NEWARK. REDUCE COSTS, LMPROVE THE QUALITY'OF PRODUCTS WE SELL TO OUR CUSTOMERS AND THE SERVICE WE OFFER THEM, AND INCREASE CAPACITY BY 25o. 19S9 WILLBE OUR 'YEAR OF TRANSITION' TO MORE FOCUSED OPERATIONS IN A MULTI-PLANT ENVIRONMENT.'' >1 flOD/ BAR, AND WIRE ffce tod. bar, and wire (RBW) divfcfwi.u . :n is based in.Newark, Ohio, is the second largest manu{jctorer of aluminum rod, bar, and wire products in the U.S. Its prod* ct mix consists of screw machine stock, redraw rod, forging stock, god coiled wire products. These product- :re sold to customers In the consumer durables, transportation, aerospace, ord nance, and other markets. In 1988, RBW began a $27.5 million capital spending program that carries forward a business strategv of; 5 .. -iifying and focusing manufacturing operations; Lowering production costs; Increasing capacity by about 25%; and Improving product quality and customer service. As 'it of this market-driven strategy, several product finishing operations are being expanded and relocated into new state-of-the-art facilities at Macon, Georgia, and Jackson, Tennessee. At Macon, far example, equipment will range from a computerized tensile tester forch. .ing product quality to an automated wire processing line that combines drawing, straight ening, burnishing, cutting, and packaging into a single, contin uous operation. The Newark facility operated near capacity in 1988 and expects continued strong demand-for its principal products in 1989. Newark will continue to operate its modem remelt facilities, its io-inch mill, and its 66oo-ton indirect extrusion press--the largest indirect press in the U.S. In 1988, Newark's capabil ity was upgraded to produce forging stock with a diameter of up to 23 inches in order to meet customers' requirements for this larger size. The product mix at Newark will be simplified to match competitive strengths in billet, forging stock, and hard-alloy redraw rod. Newark also will supply taw materials to Macon and Jackson, as well as to the company's forging plants in Erie, Pennsylvania, and Oxnard, California. Macon and Jackson each will focus on a single product line, tar geted to specific customer needs, in order to improve the service, quality, and economics of finish ing operations. The Macon facility, called Georgia Wire Products, will be dedicated to producing coiled wire products, including weld wire and screw machine stock wire prod ucts, for a variety of end uses tang ing from fasteners to zippers to cable TV coaxial cables. Produc tion of both coiled wire and screw machine wire is expected to be fully operational in mid-1989. The Jackson facility, named Thnnalum, will concentrate on manufacturing screw machine stock and other extruded rod and bar products for customers in the automotive, aerospace, electronics, consumer durables, and ordnance markets. It should begin operations in 1989 and be finishing all of the division's screw machine stock rod and bar products in 1990. 1989 will be a year of transi tion to simplified and focused manufacturing operations in a multi-plant environment, lb assure customers of a continued high level of product quality and service dur ing the transition to the new facili ties, dual or duplicative operational capability is generally being main tained at Newark until the new facilities have proven their ability to meet fully their customers' qual ity and service requirements. 99 84 3s 86 37 88 CHMimr as measured by cam-free PERfOR.MA.NCE % of Orders Shipped FOE BERNAT VP, FORGINGS, AT ERE, WHERE THIS COMPUTER AIDED DESIGN AND MANUFACTU RING ;CAD CAM! SYSTEM IS USED tomakIdiesfor AEROSPACE PARTS, WHEELS. AND MORE: FORGINGS The forging division operates pro duction facilities at Erie, ftnnsylvania, and Oxnard, California, and is adding an si i million facility at Greenwood, South Carolina. The division's strategy is to continue to grow as a major supplier of high* quality forged parts to customers in the transportation, aerospace, ord nance, machinery and equipment, and marine markets. The high strength-to-weight advantages of forged aluminum parts, as well as efficient produc tion techniques and improved quality measures, have enabled the division to expand and pene trate high-volume market applica tions for its products. Both the Erie and Oxnard plants have expanded their capabil ities and product lines in response MARKET SECMENTS--i^iESH. 8Y REVENUES B Commerciil Transportation B Aerospace B Ordnance B Machinery and Equipment 1 Marine to specific customer needs. The Erie plant, for example, is using its computer-aided design and manu facturing (CAD-CAM) systems to design and produce dies for structural aerospace parts, for automotive and truck parts, and for complex parts for the ordnance market. The Oxnard plant is the pri mary supplier of machined and assembled forged aluminum hubs sold to the major truck manufac turers in the U.S. and Canada. Its increased availabilities and strate gic Southern California location have also established Oxnard as a significant supplies of hand forgings to the aerospace market. Another important customer is the medical technology market. One example of such products is the forged rotor of a centrifuge, a piece of equipment widely used by hospi tals and medicaliscientific research facilities to test blood samples by spinning them at high speeds, thus separating blood components. Heavy emphasis on federally mandated automotive safety equip ment, as well as the continuing need for strong, lightweight parts that result in fuel savings, have pro vided the forging business unit with additional opportunities to increase its participation in the automotive market Recognizing that a low-cost, focused facility would be required to serve cus tomers in this market, die division is building the new plant at Green wood. It is scheduled to be in opera tion in the second half of 1989. 16 ruWCiAL Rjlv itW FINANCIAL RESUIJS 1988 On October 28,1988, a subsidiary of MAXXAM Inc. acquired Kaiser* Tfech Limited and its operating subsidiary Kaiser Aluminum & Chemical Corporation. The acqui sition has been recorded as a pur chase with Kaiser Aluminum financial results reported for the ten months ended October 31, 1988 (Predecessor) and for the two months ended December 31,1988 (Successor). During the fust ten months of 1988, production and shipments increased significantly from 1987 levels. While taw material, energy, and labor costs increased during this period, Kaiser Aluminum real ized higher prices both for primary metal and for fabricated products. These factors and the effects of process improvements and cost reduction programs at the plants, coupled with savings in overhead and administrative expenses and lower interest expense, resulted in income from comintring opera tions of S144.7 million and net income of si75.7 million for the ten-month period. Net income included a loss from discontin ued operations of s$.o million (see Note 4) and an extraordinary income tax benefit of S36.0 million (see Note 12). In accounting for the purchase. Successor recorded the assets and liabilities of Predecessor at esti mated fair values. Inventories were adjusted to fair market values and investments in plant and equip ment were adjusted also (see Note 2). At the same time. Successor adopted the last-in, first-out (LIFO) method for financial report ing purposes for valuing sub stantially all product inventories. Kaiser Aluminum continued to experience favorable results from operations during November and December. Minor effects on the income statement which were caused by purchase accounting adjustments to asset values tended to be offsetting. For the two-month period. Successor reported net income of $28.1 million. These earnings excluded the operating results attributable to all assets reclassified in the purchase transac tion as assets held for sale (see Note 4). The principal assets reclassified were the smelter and rolling mill in Ravenswood, West Virginia, which have been sold subsequently. In 1988, Kaiser Aluminum adopted the provisions of Financial Accounting Standard No. 94, which requires full consolidation of all majority-owned subsidiaries (see Note 3). Previously, the Com pany did not consolidate subsidi aries that were less than wholly owned. The 1987 financial state ments and the 1986 balance sheet have been restated. 18 ''h and 1987 Loss provisions including asset write-downs were the primary cause of the net losses incurred by Kaiser Aluminum during 1986 and 1987. Operating losses from aluminum activities (before loss provisions) u t.'re a contributing factor in the . .oss experienced in 1986, but were not significant in 1987. The net loss in 1986 was $32.7 million. Results from continuing operations before taxes included a loss of $59.4 million associated with the write-down of oil and gas - :Tves which have been sold sub sequently, a gain of si6.9 million from the sale of part of the Kaiser Aluminum interest in Anglesey Aluminium Limited, and a gain of si9.5 million resulting from the cancellation of a long-term natural .ua* supply contract. Kaiser Alumin...:. recorded a gain from discon tinued operations of $45.2 million, primarily from the disposition of a real estate business and the adop- 240 don of certain provisions of Finan cial Accounting Standards 87 and 88 relating to employer accounting for defined benefit pension plans. The operating loss of $94^2 million (excluding the write-down of oil and gas reserves) occurred prin cipally because of low prices throughout the aluminum industry. The net loss in 1987 was $354.9 million. The losses from continuing operations before taxes included loss provisions of $366.1 million, principally attributable to the electrical products manu facturing business, idle and uneconomic primary aluminum production capacity, and oil and gas properties, most of which have been sold subsequently. In addi tion, the financial results included a gain before taxes of $68.8 million from the sale of Kaiser Aluminium Europe Incorporated and the sale of a food service packaging business. The operating income of $3.3 mil lion in 1987 (excluding the $366.1 million restructuring provision and the $68.8 million gain from asset sales) was a substantial improve ment over the loss of $94.2 million in 1986 due to several factors. Proc ess improvements and cost reduc- C VTT.U SPESriNC ,m millions otdo||irs. don programs as well as savings in overhead and administrative expenses contributed substantially. Shipment volume horn the remain* ing production facilities improved and primary aluminum prices increased sharply. In all three years, depredation based upon replacement cost would have been higher than depre ciation based upon acquisition cost .of the assets. CAPTIAL SPENDING Most of the $277.0 million in cap ital spending during the past three years has been to improve effi ciency and expand capacity. One of these projects was the installation of equipment at the Ttentwood roll ing mill in Spokane, Washington, to allow the plant to cast signifi cantly larger ingots from which important flat-rolled products are made; another involved initial spending for a new, high-speed, wide-coil coating line at the same facility. Portions of the Mead, Washington, smelter were modern ized, lowering operating costs and improving the plant environment. In addition, a program to convert to large, energy-saving anodes began at the Valeo smelter in Ghana. Last year, spending was autho rized to build three new production facilities. The rod, bar, and wire division is expanding in Macon, Georgia, and Jackson, Tfennessee, and the forging division is expand ing in Greenwood, South Carolina. These plants are expectetLto be completed during 1989. FINANCIAL POSITION During 1988, Kaiser Aluminum used cash from operations and from asset sales to reduce debt by $334.6 million to S606.2 million on December 31. This total included $5064 million outstand ing under a 1986 credit agreement with a group of banks and $99.8 million in other debt and lease obli gations. The credit agreement with the banks includes a term loan that matures at year-end 1992 and a $165.0 million revolving credit facility that expires at year-end 1989. No borrowings were out standing under the revolving credit facility at the end of 1988. Cash and equivalents as of December 3:, 1988, were $209.5. Cash flow from operations is expected to be suffic ient to meet planned capital expenditure requirements and scheduled debt repayments. Historically, Kaiser Aluminum has participated in several offshore joint ventures. As of December 31, 1988, debt obligations of affiliates for which the Company is respons ible and which were not recorded on the balance sheet amounted to $257.6 million. 20 wr iw < uNv-UiVix, Kiiser Aluminum & Chemical Corporation *"d Subsidiary Companies motions or dollars- REVENUES: Net sales--aluminum Primary Fabricated Other Ibtal net sales Other Total revenues Income (loss) from continu ing operations before income taxes and minority interests Provision [credit) for income taxes Income [loss) from continu ing operations before minority interests Minority interests Income (loss) from continumg operations Discontinued operations -- net of income taxes:" Income from opera tions Income (loss) on dispositions Income [loss) from discon tinued operations Income (loss) before extraor dinary item Extraordinary income -- tax benefit-' Net income (loss) Successor Two Months Ended December it. 1908 SI 10.0 152-3 35.8 298.1 114 5309-5 s 47.5 18.3 29a (I.I) 28.1 28.1 s 28.1 lea Months Ended October jt. 1988 1987 Predecessor Yitsn Ended December;!. 1986 1985 Mi s 472-7 1,317-1 131.6 1,9214 46.3 81,967.7 s 206.7 1,679.8 - 1164 2,002.9 94-811' s 2,097.7 * 93-3 1,7654 1084 1,967.1 68.7"' s 24)35.8 * 44-3 1,608.0 12 r.7 1,774.0 62.3 s 1,836.3 s 2194 1,629.3 87.0 1,935*7 324 s 1,968.1 s 252.7 1024 S (294.0)" 46.8 s (120.9)*' (43.0) s (364.0)*' (165.7) S (212-2) (150.0) I5O.3 (5-6) 144.7 (340.8) (2-7) (343-5) (77.9) (77.9) (198.3) (198.3) (6241) (62.2) 5-9 (10.9) (5-0) 139-7 36.0 S 175-7 11.7 (23-ir (114) 1354-9) 26.r1' * 3 * * * * *196.8"' 19.1 (5.0) 45-2 11.8 -- (32.7) (186.5) 25-5 (60.7) (35-2) (974) 5 (354.9) s (32.7) s (186.5) S (974) (i) Restated for the adoption of Financial Accounting Standard (fas) No. 94 requiring full consolidation of majority-owned subsidiaries. (l\ Includes gains of SI6.1 from the sale of the food service packaging business and 152.7 from the sale of Kaiser Aluminium Europe Incorporated. (3) Includes a gain of 120.2 bom adoption of Fas Nos. 87 and 88 relating to employer accounting for pension plans, si.7 in other revenues and st 8.5 in discontinued operations. Also includes 132.$ from cancellation of a long-term gas supply contact, S19.5 in other revenues and s r 3.0 in discontinued operations. U1 Includes a loss provision of *366. t for restructuring of operations consisting principally of write-downs of the electrical products manufacturing business and idle and uneconomic primary aluminum production capacity, and provision for theloss upon disposition of oil and gas properties. ($) Includes a write-down of oil and gas reserves of $59.4. (61 Includes write-downs of the Baton Rouge. Louisiana, alumina refinery, as well as several smaller assets, totaling S211.0 and 59.8 in other costs and expenses and income from discontinued operations, respectively. 1*1 Discontinued operations consist of the agricultural chemicals, refractories, trading, real estate, and industrial and specialty chemicals divisions. (81 Includes a loss provision of S33.9 related to certain operations and businesses that were discontinued in recent years. (9) The extraordinary tax benefit results from utilization of net operating loss carryforwards by domestic operations. 21 CONSOLIDATED BALANCE SHEETS, DECEMBER 31,1988 AND 1987 Kiixt Aluminum A Chemical Corporation and Subsidiary Companies .millionsot dollars) ASSETS Current assets: Cash and cash equivalents Receivables: Hade (less allowance for doubtful receivables: $7.6 in 1988 and $7.2 in 1987} Other Inventories Prepaid expenses Assets held for sale Current assets of discontinued operations -- net Tbtai current assets Investments and advances -- related parties Property, plant, and equipment -- net Noncurrent assets of discontinued operations -- net Other assets Ibtal LIABimES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable Accrued wages, interest, and other liabilities Income taxes payable Payable to affiliates Long-term debt -- current portion Total current liabilities Long-term liabilities Long-term debt Deferred income taxes Deferred income Minority interests Redeemable preference stock--aggregate liquidation value of si 304 at December 31,1988 Stockholders' equity: Preference stock--cumulative and convertible, par value sioo, authorized 1,000,000 - shares; issued: 103,314 shares in 1988 and 112,532 shares in 1987 Preference stock-- cumulative and convertible, par value si, stated value $50, authorized 10,000,000 shares; issued: 600,000 shares [aggregate liquidation value of S30.0 at December 31,1988) Common stock, par value 33 `/j cents, authorized 100,000,000 shares; issued: 44,899,320 shares in 1988 and 1987 Additional capital Currency translation adjustment Retained earnings Total stockholders' equity Tbtai The accompanying notes to financial statements are an integral pan of these statements. SuccesMt 198! s 209.5 2644 56.9 4514 4-3 336.6 353-5 668.9 58.7 S2 404.2 s 15143 200.3 59.6 177-6 117-0 705-5 188.2 489.2 12.0 62.1 7.8 .6 15.0 8974 264 947.2 S2404.2 22 Predectjjot '.98? s. 131-7 230.2 80.7 479-9 20.5- 44*6 987.6 2044 950.5 292.3 111.9 $2,546.7 s 151.0 202.2 36.7 133-9 53-5 577-J 160.3 887.3 65.6 45-7 114 38.9 11.2 .6 15.0 351-6 5-2 3i?6.6 760.2 $2,546.7 STATEMENTS OF CONSOLIDATED INCOME lUiser Aluminum & Chemical Corporation and Subiidiarjr Companies tuitions otdolbisl REVENUES: Net sales Other "Ibtal revenues COSTS AND EXPENSES: Cost of products sold Depreciation Selling, administrative, research and development. and general Interest Other Restructuring of operations Ibtal costs and expenses Income lloss) from continuing operations before income taxes and minority interests Provision (credit) for income taxes Income (loss) from continuing operations before minority interests Minority interests Income (loss) from continuing operations Discontinued operations -- net of income taxes: Income (loss) from operations Income (loss) on dispositions Income (loss) from discontinued operations Income (loss) before extraordinary item Extraordinary income -- tax benefit Net income (loss) TWo Months Ended December 31,198! $298.1 II4 309.S 2i6.7 7-7 I4.6 8.2 4.8 262.0 47-5 I8.3 29.2 (I.I) 28.1 28.1 s 28.1 The accompanying notes to financial statements are an integral part of these statements. to Months Ended October; 1.1988 Predecessor Yur Ended December 31,198', Yen Ended December ;t. $1,9214 46.3 X,967.7 I4624 69.6 89.7 69.6 23.7 1,715.0 $2,002.9 94-8 2,097.7 1,692.7 97-7 1143 106.1 14.8 366.x 2,391.7 $1,967.1 68.7 2,035.8 * 1,715.2 106.6 128.5 127.5 78.9 2,156.7 252-7 1024 150-3 (5-6) I44.7 (294.0) 46*8 (340.8) (2-7) (343*5) (120.9) (43-0) (77-9) (77-9) 5*9 (IO.9) (5-o) 139-7 36.0 $ 175-7 11.7 (23.1) (114) (354-9) S (354-9) 26.1 19.1 45.2 (32.7) s (32.7) 33 Sira tMris i S Or CuiNSGuDAi cO CASH n-Ow'S . KtiifT Alnmim.m A. f-hmicd Cnp(i...inn Suhwdimf rnenomire .millions oidolUnl OPERATING ACTIVITIES: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation Deferred income taxes Net (gain) loss on asset dispositions and write-downs Equity income, net of dividends received Exchange loss Increase in redeemable preference stock Increase in minority interests Changes in: Receivables Inventories Other assets Accounts payable and accrued liabilities Income taxes payable Other liabilities Net cash provided by operating activities INVESTING ACTIVITIES: Proceeds from disposition of property and investments Redemption fund for preference stock Capital expenditures Net cash provided by investing activities FINANCING ACTIVITIES: . Repayments of long-term debt and notes payable Dividends paid Contributed capital Long-term borrowings Capital stock issued Redemption of preference stock Net cash used by financing activities Effect of exchange rate changes on cash Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period OTHER CASH FLOW INPORMAnON: Interest paid (net of amount capitalized) Income taxes paid The accompanying notes to financial statements an an integral pan of these statements. Socceuor TWo Montill fnArA December ji, 19JS S 38.1 Predecessor Tea Months Ended October ji, 1988 Har Ended December 51. war S 175-7 *(354-9) 7-7 l-x) 12.6 1.2 1.0 17.0 (5-7) 11.6 9.6 12.5 (8.8) 86.7 204. .1 (13-5) 7.0 (28-3) (*) (284) 65-3 144.2 S209.5 * 74 3-2 69.6 (1-4) (6-3) (44-6) 4.6 8.0 5-6 (37-0) 186.7) (6-0) 28.5 20.3 48.5 178.8 236.5 7-2 (82.1) 161.6 (293.8) (29.1) 64 (H-5) (328.0) .1 12.5 I3I-7 s 1442 s 76.3 52.9 97-7 6.9 350.8 U5-9) 4,6 11.8 24 29-7 172.6 (6i.o) (13.0) (6-7) 75-1 300.1 220.6 (4-3) (86.7) 129.6 (474-9) (4-1) 25.0 47.2 -7 (406.1) .6 24.2 107.5 * 131.7 s 117.2 42.3 24 Kaiser Aluminum A Chemical Corporation and Subsidiary Companies .nilboraoldollanl RESOURCES WERE PROVIDED BY: Continuing operations: Loss from continuing operations Expenses (income) not involving funds: Depreciation Deferred income taxes Equity in undistributed earnings of companies not consolidated Redeemable preference stock Net loss on asset dispositions and write-downs Provided by continuing operations Long-term borrowings Extension of long-term borrowings Capital stock issued (net of expenses) Proceeds from disposition of property and investments Early collection of long-term note Other Tbtal RESOURCES WERE USED FOR: Property, plant, and equipment Reduction of long-term debt Discontinued operations -- net Capital stock of subsidiaries purchased from retirement plans Dividends Currency translation adjustment Deferred financing costs Increase in working capital Tbtal INCREASE .DECREASE! IN WORKING CAPITAL - BY COMPONENT: Cash and cash equivalents Receivables ^ Inventories Prepaid expenses Current assets of discontinued operations -- net Accounts payable and accrued liabilities Income taxes payable Payable to affiliates Notes payable Long-term debt -- current portion Tbtal The accompanying notes to financial statements ate an integral pan of this statement. Heat Ended Deemster ji.ifU * (77-9) 106.6 (37-6) 1-9 9-2 40.8 43.0 108.0 120.0 8.2 152.5 30.0 146.3) * 4*5-4 S 93-1 279-2 (24-4) 14-7 3-7 l3-5) 11.6 68.0 S 415.4 s (.6) 39.6 424 34 (27.8) (51-9) 1*5-3) (1.6) 65.8 14.0 s 68.0 25 Kaiser Akunioam 3t Chemical Corpocraoa and Subsidiary Companies Imillioaa of dollars, except share amounts) I. THEMERGER On October 27,1988, the stockholders of Kaiserlfcch Limited ("Kaiserlfcch") approved and adopted an Amended and Restated Agreement and Plan of Merger, dated as of May 22,1988, by and among MAXXAM Group Inc. ("MAXXAM"), Kaiserlfcch Acquisition Cor* potation ("Kaiserlfcch Acquisition"), and RaiserTfech providing for the merger (the "Merger") of Kaiserlfcch Acquisition with and into Kaiserlfcch. Kaiser Aluminum & Chemical Corporation is a subsidiary of Kaiserlfcch and is referred to as "Predecessor" prior to the Merger and "Successor" after the Merger. Predecessor and Sue* cessor are also referred to collectively as "Kaiser Alumi num" or the "Company." MAXXAM is a wholly owned subsidiary of MAXXAM Inc The acquisition of Kaiserlfcch by MAXXAM was financed by $925.0 principal amount of Senior and Sen* ior Subordinated Increasing Rate Notes due 1991 issued by Kaiserlfcch. The Company plans to use cash from operations and from selected asset sales, together with existing cash balances, to reduce debt to the point that outstanding borrowings of Kaiserlfcch and Kaiser Aluminum can be refinanced with new borrowings having more appropriate maturities and less restrictive covenants. BASIS OF PRESENTATION MAXXAM acquired control of Kaiserlfcch on October 28,1988. However; for financial reporting purposes, the Merger is deemed to have occurred on October 31,1988. The nse of a date for financial reporting purposes which is three days later than the date of the Merger does not affect significantly the financial statements of either Predecessor or Successor. The Merger has been accounted for as a purchase as of October 31,1988. Push-down accounting has been applied to reflect the MAXXAM investment in Kaiser lfcch equity securities as stockholders' equity of Kaiser lfcch at November 1,1988. This push-down adjustment has also been reflected in stockholders' equity of the Company (see Note 10). Accordingly, Successor has recorded the assets and liabilities of Predecessor at estimated fair values. The excess of appraised fair market value of net assets acquired over purchase price was allocated to noncurrent assets. Because of these adjustments, the accompanying consolidated financial statements of Successor are not directly comparable to those of Predecessor. The values assigned by Successor to Predecessor net assets are based upon preliminary esti mates and may be revised during 1989, as additional information is obtained. The following table compares Predecessor and Suc cessor October 31,1988 balance sheets. The changes reflect the revaluations and changes in stockholders' equity described above. ,tuUioasot dollars* Current assets Investments and advances Property, net Discontinued operations--net Other assets lbtal assets Current liabilities Long-term liabilities Long-term debt Other noncurrent liabilities Minority interests Redeemable preference stock Stockholders' equity lbtal liabilities and stockholders' equity Predecessor Successor October 1988 Berore Pureruse Adjustments Purchase Adjustments October 1933 .Alter Purchase Adjustments St.073.9 151-3 950-4 s 225.3 115-7 (188.3) SI.299.1 368.0 662.1 99-6 107.9 S2484.1 s 628.0 tsr.r 640.9 106.3 14-4 41-7 901.7 (99-6) 147-0) 60.9 * 193-9) S2.39O.2 * (47-5) s 580.5 37-6 188.7 (15.6) 615.3 (106.3) 18.8 14-4 60.5 19.I 920.8 S2484.I * (93-9) S2.390.2 Successor anticipates that it will retain Predecessor tax basis for the assets and liabilities acquired. Because the fair values of certain assets acquired are higher than the tax basis, a portion of the depreciation expense for financial reporting purposes will not be deductible for tax reporting purposes, lb the extent that the lower tax basis reduces the fair value of certain assets and liabili ties, such reductions have been taken into consideration in determining fair values. 26 3- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting policies of Predecessor were the same as those of Successor unless stated otherwise. Principles of Consolidation: The consolidated financial statements include the statements of the Company and majority-owned subsidiaries. In 1988, the Company adopted the provisions of Financial Accounting Standard (fas) No. 94, which requires full consolidation of all majority-owned subsidiaries. Previously, the Company did not consolidate less-than-wholly owned subsidiaries. The 1987 financial sutements and the 1986 balance sheet have been restated. Other 1986 financial state ments and financial statements of prior years have not been restated because the effects would not be signifi cant. Investments in subsidiaries not consolidated, joint ventures, and 20%-or-more-owned companies are accounted for by the equity method. Intercompany items and transactions are eliminated. Foreign Currency Translation: The Company translates the assets and liabilities of certain international compan ies using local currencies at current rates of exchange. The resulting aggregate translation adjustments are reported as a component of stockholders' equity. The results of operations are translated at average exchange rates for the period. Gains and losses on forward con tracts or other foreign currency transactions, except those hedging identifiable foreign currency commit ments, are included in income. Inventory Valuation: Substantially all Successor product inventories are stated at last-in, first-out (ufo) cost, not in excess of market. Substantially all Predecessor product inventories are stated at first-in, first-out (fifo) cost, not in excess of market. Other inventories of both Successor and Predecessor; principally supplies and other low value items, are stated at the lower of average cost or market. Inventory costs consist of material, labor; and manufac turing overhead, including depreciation. Finished goods, work in process, and raw materials are not shown separately because they are sold at various stages of processing. Depreciation and Amortization: Property at year-end 1988 is stated at Successor cost, which includes record ing Predecessor property at fair value--net (see Note 2) at October 31,1988. Predecessor property is stated at historical cost. Because of the differences in valuations. certain aspects of the financial statements (for example, depreciation expense) are not comparable. Depreciation is computed principally by the straightline method at rates based upon the estimated useful lives of the various classes of assets. The principal esti mated useful lives by class of assets are: Land improvements Buildings Machinery and equipment Successor 5 to 15 yean IS to 30 yean to to 22 yean Predecessor 15 yean 45 yean to to 22 yean The cost less salvage of retired property, plant, and equipment of Predecessor was charged to related accumulated depredation. Amortization of capital leases is included with depreciation expense for property, plant, and equipment. Income Taxes: Kaiserlbch and the Company are included in the consolidated federal income tax return of MAXXAM Inc. Pursuant to a tax-sharing agreement between KaiserTfech and MAXXAM Inc., provisions for income taxes for Kaiserlfcch and the Company represent an allocated portion of the MAXXAM Inc. consolidated tax provision. Income taxes include provisions for timing differences between income determined for financial reporting and for income tax purposes. Income taxes payable includes deferred amounts related to current assets and liabilities, and other deferred amounts where the timing difference is expected to reverse during the current year. Investment tax credits are recognized as reductions of the income tax provision in the year the properties are placed in service. Retirement Plans: Predecessor adopted the provisions of eas Nos. 87 and 88, relating to employer accounting for pension plans, effective January 1,1986, except for the deferral of the provisions which would recognize certain accumulated pension benefit obligations and the related intangible asset in the Consolidated Balance Sheet and would apply these standards to foreign plans. Successor has applied all provisions effective November 1,1988. The current costs of principal domestic retirement plans are funded as accrued (see Note 13). Prior-service costs are funded and (for Predecessor) charged to operations over periods ranging from 7 to 30 years. 27 Statement of Consolidated Cash Flows: In 1988, the Company adopted the provisions of eas No. 95, which requires a statement of cash flows in place of a statement of changes in financial position. The 1987 statement of changes in consolidated financial position has been replaced with a statement of cash flows comparable with 1988; as permitted by tvs No. 95,1986 has not been replaced. Cash and Cash Equivalents: The Company considers all money market funds, commercial paper; treasury bills, and other short-term investments with maturities of 90 days or less to be cash equivalents. Cash and cash equi valents include restricted amounts totaling $31.6 at December 31,1988. 4. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS Assets held for sale consist of the estimated net realiz able values of all assets expected to be sold within the next yean Assets held for sale include (i) assets that were classified as current/noncurrent assets of discontinued operations -- net in Predecessor financial statements; and (iil other assets in continuing operations that have been specifically identified for sale. Results from opera tions and disposals of assets classified as "held for sale" will not be included in the Statements of Consolidated Income of Successor. Such amounts result in the reallo cation of the purchase price. The composition of assets held for sale was: Ttade receivables -- net Other receivables Inventories Investments and advances Property, plant, and equipment -- net Current liabilities Other--net Tbtal Successor Decanter 31.198! s 3-6 9.8 173-1 71-9 170.6 I189.3) l3-i) *336-6 In February 1989, the Company sold aluminum pro duction facilities at Ravenswood, West Virginia, and Bedford, Indiana, and a regional data center at Colum bus, Ohio, to the Ravenswood Aluminum Corporation ("rac"), a new corporation formed by Stanwich Partners Inc., an investment company. The Company will sell 28 alumina to rac under a three-year supply agreement and will provide certain technical services for a similar period, rac will convert a smaller amount of primary aluminum into fabricated products for the Company over a three-year period. The net assets of these facil ities ate included in Successor assets held for sale at December 31,1988. Discontinued operations of Predecessor consist of the agricultural chemicals, refractories, trading, real estate, and industrial and specialty chemicals divisions. Results of discontinued operations were: Revenues (includes equity earning of real estate and industrial and specialty chemicals) Cons and expenses Income before taxes Provision lot income taxes Discontinued operations -- income from openoons Predecessor TeaMonths Ended October 31, 1988 Yean Ended December 31. J98t :>;6 sij.8 *136.6 *310.6 7.6 123.1 *S9-9 84 13.J 50.7 *-3 1.8 14.6 S S9 s 11.7 s 16.1 The net current and noncurrent assets of Predecessor discontinued operations have been reported separately at the lower of book or estimated realizable value. The composition is: * Current assets--nee Trade receivables--net Other receivables Inventories Cuxrent liabilities Other--net Tbtal Noncurrent assets--nee Investments and advances Property, plant, and equipment--net Other--net Tbtal Predecessor December ji. :j8' s 33.1 4.1 32.8 (23.0) |2-t) s 44.6 SI 684 II84. (4-5) S191-3 In the third quarter of 1987, RaiserTfcch and Kaiser Aluminum began implementation of a plan to sell the industrial and specialty chemicals division, including the 50%-owned Harshaw/Filtrol Partnership ("Harshaw/ Filtrol"). On September 1,1987, KaiseiTfech purchased the other 50% share of Harshaw/Filtrol in order to facil itate the sale of the industrial and specialty chemicals operations. In May 1988, KaiserTfech and Kaiser Alumi num completed the sale of a major portion of Harshaw/ Filtrol to Engelhard Corporation for approximately si 1a.o in cash. The net cash proceeds were divided equally between KaiserTfcch and the Company. The remaining portion of Harshaw/Filtrol, consisting of a Quid cracking catalyst business, is currently held for sale. In July 1988, the Company sold the indus trial chemicals operations in Louisiana to a newly formed corporation, LaRoche Chemicals Inc., for approximately s 113.9. During 1987, the Company recorded additional write-downs of $33.9 related to certain operations and businesses that were discontinued in prior years. On December 23,1986, Kaiser Aluminum com pleted the sale of Kaiser Development Company (kdc), at a purchase price based upon the financial position of kdc at November 30,1986. Kaiser Hawaii Kai Development Company (khkdc), the principal remaining real estate asset, is included in Successor assets held for sale at December 31,1988, and Predecessor noncurrent assets of discontinued operations -- net at December 31,1987. The buyer of kdc had an agreement with Kaiser Alumi num to manage the operations of khkdc and had an option to purchase the stock of khkdc. In 1988 the buyer exercised the option to purchase khkdc, and the sale was concluded in January 1989. The gain before taxes of S54.5 ($19.1 after taxes) on the sale of real estate was included in discontinued operations in 1986. The 1986 provision for income taxes for discontinued operations (substantially all deferred) offsets substantially all of the tax benefits of net operat ing losses generated by 1986 continuing operations. 5. OTHER REVENUES AND EXPENSES AND RESTRUCTURING OF C'EFATIONS .. Other revenues in 1987 include gains of $16.1 from the sale of the food service packaging business and $52.7 from the sale of Kaiser Aluminium Europe Incorporated, and in 1986 include gains of S19.5 from the cancellation of a long-term gas supply contract and si6.9 from the sale of pan interest in Anglesey Aluminium Limited (Anglesey). Restructuring of operations costs and expenses in 1987 include a loss provision of $366.1 consisting principally of write-downs of the electrical products manufacturing business; idle and uneconomic primary aluminum production capacity, including the remainder of the Chalmette, Louisiana, smelter; and a provision for the loss upon disposition of oil and gas properties. Other costs and expenses in 1986 include S594 from the write down of oil and gas reserves. 6. ^VESTMENTS AND ADVANCES - RELATED PARTIES Investments are accounted for primarily by the equity method. Retained earnings include undistributed earn ings of companies accounted for by the equity method amounting to nil and $134.3 at December 31,1988 and 1987. Summary combined financial information is pro vided below for unconsolidated aluminum investments owned 50% or less, most of which supply and process raw materials for various participants. The equity earn ings (losses) before income taxes of such operations are included in cost of products sold. Such information is presented on the historical basis of accounting of the investee companies, except that amounts representing Successor investment and equity earnings include pur chase adjustments. ALUMINUM COMPANIES SUMMARY FINANCIAL POSmON December ji. 198S December j:. :;i- Current assets Property, plant, and equipment--net Other assets Tbtal assets S 762-4 1444-4 145*1 52,352.0 s 570.8 1485.1 158.3 52.2144 Current liabilities Long-term debt Other liabilities Deferred income taxes Stockholders' equity Ibtal liabilities and stockholders' equity s 388.0 799-1 49-1 36.1 14*79-5 52,351. 5 338.3 820.5 48.I 30.1 977.2 52,214.2 Company investment in combined companies s 3S3-S 5 199-4 19 ALUMINUM COMPANIES SUMMARY OF OPERATIONS i9 19*7 1966 Revenues Costs and expenses Provision for income taxes Net income 93i-9 33-9 s 1564 *903.8 855-2 8a s 404 *935-7 9094 10.2 s 16.1 Company equity in earnings S 30UJ * 94 (i) Successor equity ia earning tor the two months ended December 31, 1988. was s IO-2 and Predecessor equity in earnings tor the ten months ended October 31,1988 was *$9.3. The relationship between the Company equity in earn ings and the summary net income is attributable to the various percentage ownerships in the entities. Tbtal assets and total liabilities of consolidated subsidiaries which were accounted for by the equity method prior to 1988 were S2304 and S105.0 at December 31,1988 (S206.2 and $88.2 at December 31,1987). The Company equity in earnings of such companies was S58.9 and S244 for 1988 and 1987. As described in Note 3,1986 operations information has not been restated. Alumina Partners of Jamaica (Alpart), a 50%-awned partnership, owns an alumina refinery in Nain, Jamaica. At December 31,1988 and 1987, investments and advances include $68.7 and $32.3 for Alpart, which is accounted for by the equity method. The Company was obligated to repay $56.2 and S64.3 of Alpart debt at December 31,1988 and 1987, as discussed in Note 14. Production of alumina at Alpart was suspended temp orarily in August 1985 due to adverse economic conditions. The Company policy is to continue normal depreciation for temporarily closed facilities. In Decem ber 1988, the Company undertook to restart production at Alpart. The restart is expected to take about six months. The Company and Hydro Aluminium a.s of Oslo are negotiating with Reynolds Metals Company ~ (the other 50% partner in Alpart) to purchase the Rey nolds share of Alpart. The purchase is expected to close by March 31,1988 and would result in the Company having a majority ownership of Alpart, as well as man agement responsibility for the facility. The Company and affiliates have interrelated opera tions. The Company provides its affiliates with services such as financing, management, and engineering. Signifi cant activities with affiliates include the acquisition and processing of bauxite and alumina. Purchases from these affiliates were S62.2 and S287.2 in the two months ended December 31,1988 and the ten months ended October 31,1988; and S272.0 and S338.9 during 1987 and 1986. '. PROPERTY. PLANT. .AND EQUIPMENT .AND ' LONG-TERM LEASES - Land and improvements Buildings Machinery and equipment Construction in progress Tbtal property--at cost Accumulated depreciation Property, plant, and equipment--net Successor December st.ioSS s 28.1 93.8 548-4 7-3 676.6 7-7 Predecessor December ;i. :?3* s 68.0 278.8 1.531-2 30.7 1.908.7 958.2 *668.9 s 950.5 Property, plant, and equipment included capital leases consisting principally of buildings at December 31,1988 and 1987, of $2.3 and $154 (net of accumulated amorti zation of $12.5 at December 31,1987). Rental expenses were S3.6 and S20.9 in the two months ended December 31,1988 and the ten months ended October 31,1988; and S35.3 and S37.8 during 1987 and 1986. The future minimum rentals receivable under noncancellable subleases were S764 at December 31,1988. The future minimum rental commitments under noncancellable leases at December 31,1988 were: Tout Commitments 1989 1990 1991 1992 1993 19942nd after * 19-3 17.8 16.7 15.8 tj.6 312.7 Tbtal Less imputed interest *397-9 Obligations under capital leases"' li) Includes *15.0 related to assets held lot sale.' Operating leases * 17-5 16.0 I4.9 I3.9 13-7 2964 *3724 Capital leases S 1.8 1.8 1.8 1.9 1-9 16.3 25-S 7-8 SI7.7 30 3. LONG-TERM OBLIGATIONS Long-term debt, interest tates{i), and maturity schedule at December 31,1988 are summarized in the following table: Cut: 1986 Credit Agreement-- firm Loan (variable rate-- 9.5% at December 31, 1988) First Mongage Bonds (8.2J%-11.62$%) Swiss Franc Bonds (5.;%) Pollution Control and Economic Development Facilities Obligations (fixed and variable rates) Other Borrowings (variable and fixed rates) Ibtal Successor 199* wd >9^9 :o 1991 1991 >99) After Predecessor Dwemoet ;i. >9iS >91Toul Toui s 108.5 *100.0 SI 00.0 *197.9 i-3 i-3 2.2 26.2 2.6 3.6 si 17-0 3.8 7 s 106.8 3-0 .7 5105.9 2.7 .7 *227.5 % *2.8 3 *3.1 S44.I 1.8 *4S-9 *506.4 33-o 59-0 7.8 606a S689.4 120.3 30.0 69.3 31.8 940.8 Less amount due within one year 117.0 53-S Long-term debt *48941 *887.3 It) Kaiser Aluminum has emend into si 15.0 of internet ate swap agreements having the effect of fixing at approximately 1t.8% the interest cost of variable an debt for one and a half years from December 31,1988. In March 1986, Kaiser Aluminum entered into a credit agreement with banks holding si,008.0 of Kaiser Alumi num outstanding debt, providing for an extension of the debt as a term loan maturing December 31,1992, and the establishment of a $165.0 revolving credit facility which expires December 31,1989. Kaiser Aluminum is required to make minimum principal payments of S21.1 in 1989, and sioo.o for each of the years 1990 and 1991 with the final balance of $285.3 due in 1992. The maxi mum aggregate amount of loans under the above term loan and revolving credit facility may not exceed $725.0 on and after December 31,1988. As pan of the 1986 refi nancing, Kaiser Aluminum agreed to pay supplemental interest on certain credit obligations to the original maturity, principally 1987. Such interest expense was $6.5 in 1987. The amount of loans outstanding under the 1986 credit agreement together with certain other obligations of Kaiser Aluminum are secured by a pledge of collateral, which includes principal domestic facilities, inventories, accounts receivable and notes receivable. 31 I The status of Kaiser Aluminum at December 31, 1988, with respect to the principal covenant provisions (as defined) of the 1986 credit agreement, was: CmoiBt Compliance limn Sums Minimum working capital Minimum consolidated net worth Maximum consolidated indebtedness Maximum ratio of consolidated indebtedness to total capital Maximum aggregate investments from January 1,1986 through December 31,1968 Maximum capital expenditures (includ ing discontinued operations) in t988 S 2000 1,0000 MSo-o s 568.6 1,280.0 896-3 6oo%`" r 41.2* s 25.0 176.3 * 3-t 87.0 (i | This compliance limit becomes 5 5,0% at the end of each fiscal quartet doting 1969, and 51.5% in 1990-1992. The 1986 credit agreement restricts Kaiser Aluminum liens, mergers, common stock dividends and stock repur chases, issuance of preferred stock, equipment leases, and transactions with (including loans or advances to) affiliates (including KaiserTfech). At December 31,1988 retained earnings of SI9.5 were available for payment of dividends on common stock. At December 31,1988 Kaiser Aluminum is required to use 55% of net cash proceeds from asset sales to pre pay debt. This provision does not apply to sales of assets in the ordinary course of business. Kaiser Aluminum is also required to prepay debt and other obligations equal to 53.13% of the first s8o.o of net cash proceeds from the sale of equity and 53.13% of the net cash proceeds from the sale of subordinated debt. The aggregate required prepayment from sales of equity and subordinated debt will not exceed ss8.8. The 1986 credit agreement pro vides for the allocation of these prepayments to the Kaiser Aluminum bank debt and certain other obli gations. During 1986,1987, and 1988, Kaiser Alumj; num received s 646.5 in net cash proceeds of asset and other dispositions and applied S459.8 of such proceeds to prepay debt. In February 1989, the Company prepaid an additional s 151.6 of debt, of which 5874 was classified as current at December 31,1988. There were no outstanding borrowings during 1988 against the $165.01986 revolving credit facility. Interest on the revolving credit facility is based on prevailing short-term market rates. In October 1988, Kaiser Aluminum prepaid the remaining s 103.0 of First Mortgage Bonds outstanding. Interest expense for continuing operations was 58.2 and S69.6 in the two months ended December 31,1988 and the ten months ended October 31,1988; and S106.1 and $127.5 in 1987 and 1986. These amounts are net of interest costs of s.5, $1.8, $2.2, and S24 which were capitalized. 9. REDEEMABLE PREFERENCE STOCK In March 1985, Kaiser Aluminum entered Into a threeyear agreement with the United Steelworkers of America (uswa) whereby shares of a new series of "Cumulative (1985 Series A) Preference Stock" would be issued to an employee stock ownership plan in exchange for certain elements of wages and benefits. Concurrently, a similar plan was established for certain nonbaxgaining employ ees which provided for the issuance of Cumulative (1985 Series B) Preference Stock. Series A Stock and Series B Stock ("Series A and B Stock") each have a par value of si per share and a liquidation and redemption value of S50 per share plus accrued dividends, if any. For financial reporting purposes, Series A and B Stock was recorded by Predecessor when issued at fair value (S15 per share in 19882nd 1987 and sio per share in 1986) based on independent appraisal with a corres ponding charge to compensation cost. Carrying values were increased each year to recognize accretion of redemption values. The outstanding Series A and B shares were revalued by a Successor purchase adjustment at October 31,1988 to give effect principally to acceler ated redemptions expected to result from disposal of the 3i 1  Ravenswood facility (see Note 4). Issuances and redemp tions of Series A and B shares in 1988,1987, and 1986 are shown below. Year-end shares outstanding give effect to shares issued for that year's compensation in February of the following yean SHARES: Beginning of year Issued Redeemed End of year 19$! 198* 1986 3,S96,397 1,808,131 788,266 (130,624) 939.934 878,207 1,607,236 3.596.397 1,808,131 No additional Series A or B Stock will be issued based on compensation earned in 1989 or future 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 Series B stock bn or before March 1,1990, in respect to years through December 31,1989, based on a formula tied to Kaiser Aluminum profit before tax from aluminum oper ations; and payable in stock or in cash at the option of Kaiser Aluminum on or after March t, 1991, in respect to years commencing January 1,1990, based on a similar formula. When distributed to plan participants (gener ally on separation from Kaiser Aluminum), the Series A and B Stock 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 Kaiser Alumi num 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 pay* ment is S4.3 and the maximum payment is $7.3. In March 1988 and 1987, Kaiser Aluminum contributed $4.3 for the years 1987 and 1986 and will contribute 7.3 in March 1989 for 1988. In April 1988, Kaiser Alumi num entered into a two-and-one-half-year agreement with the uswa whereby Kaiser Aluminum would make additional contributions to the Series A redemption fund of (i) S2.0 each in March 1989 and 1990; and (ii) an addi tional amount equal to 8.5% of the redemption value of all shares of Series A Stock distributed from the Trust occasioned by the sale of any plant covered by the agreement to the extent there is not enough money in the redemption fund to redeem the shares presented for payment. The plan will distribute the Series A and B Stock in the event of death, retirement, or in other specified cir cumstances. Kaiser Aluminum 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 redemption fund. Under the Tut Reform Act of 1986, at the option of the plan participant, the Company must purchase distributed shares earned after December 31,1985 at redemption value on a five-year installment basis with interest at market rates for distributed shares earned after December 3 r, 1985. The obligation of the Company to make such installment payments must be secured. The Series A and B Stock are entitled to the same voting rights as Kaiser Aluminum Common Stock and to certain additional voting rights under certain circum stances including the right to elect, along with other Kai ser Aluminum si preference stockholders, two directors whenever accrued dividends have not been paid on two annual dividend payment dates, or when accrued divi dends in an amount equivalent to six full quarterly divi dends are in arrears. The Series A and B Stock restrict the ability of Kaiser Aluminum to redeem or pay dividends on Common Stock if the Company is in default on any. dividends payable on the Series A and B Stock. 33 to. STOCKHOLDERS' EQUITY Changes in stockholders' equity were: PREDECESSOR: Balance, January t, 1986 Net loss Dividends--preference stocks Supplemental retiremem plan contributions (1 13,156 shares) Conversions (5,786 preference shares into 23,345 common shares) Stock options exercised (437,868 shares) Translation adjustments Redeemable preference stock accretion Balance, December 31,1986 Net loss Dividends--preference stocks Conversions (7,561 preference shares into 28,503 common shares of Kaiser Aluminum) Conversions (5,757 preference shares into 22,953 common shares of KaiserTfcch) Stock options exercised (46,650 shares) Contributed capital Redeemable preference stock accretion Translation adjustments Balance, December 31,1987 Net income Conversions (1,914 preference shares into 7,615 common shares of KaiserTfcch) Dividends: Preference stock Common stock Redeemable preference stock accretion Employee compensation (stock options) paid by KaiserTfcch Translation adjustments Balance, October 31,1988 Eliminate Predecessor retained earning* Push-down MAXXAM basis Purchase adjustment SUCCESSOR: Balance, November 1,1988 Net income Conversions (7,304 preference shares into cash) Redeemable preference stock accretion Balance, December 31,1988 Preterence Snxks stooPin Preference Stock ;St Part Common Stock SI34 S .6 SI4.8 (.6) .1 12.6 .6 14.9 1-8) Addinoiul Capital *316.5 14 .6 6.1 324.6 Currency TnnjUnon Adornment ' *(34) Reamed Earning S781.O. 133.7) (3-7) v 30.5 (6.0) 27.1 738.6 (354-9) 14-1) .8 (.6) IU .6 .1 .6 5-0 .6 *5-0 351.6 (31.9) 5-3 13-0) 376.6 175.7 (-2) a 11J3 (>.7) U .6 15.0 358.2 516.9 21.8 (4.0) (35-1) (6-3) (5-3) 516.9 (516.9) 8.3 1-5) s 7.8 .6 15-0 896.9 5 S .6 si 5.0 *8974 28.1 (1.7) s 26.4 ri M 34 The outstanding shares of Kaiser Aluminum preference stocks, in descending older of seniority, were: Preference, Cumulative Convertible, sioo pan 4-,;4%(i9J7 Series) 4-v*% (I9J9 Series) 4-v4% (1966 Series) Preference, si par, s$.3j Cumulative . Convertible (1984 Series) -- s$o stated value Successor Outstanding December}!, 1988 26,949 31,176 33,960 31,309 600,000 Predecessor Outstanding December}!. 1987 38449 33,704 39,913 31466 600,000 Kaiser Aluminum Cumulative Convertible Preference Stocks, sioo par value ("sioo Preference Stocks"), restrict acquisition of junior stock and payment of divi dends. At December 31,1988, such provisions were less restrictive as to the payment of cash dividends than the 1986 credit agreement provisions. Kaiser Aluminum has the option to redeem the sioo Preference Stocks at par value plus accrued dividends. The Company does not intend to issue any additional shares of the sioo Prefer ence Stocks. The 4'8% and 4-3/4% (1957 Series, 1959 Series, and 1966 Series) sioo Preference Stocks can be exchanged for cash of S69.30, S77.84,578.38, and S7646, respectively. In September 1987, KaiserTfech purchased all 600,000shares of the Kaiser Aluminum S5.25 Cum ulative Convertible (1984 Series) Preference Stock, si par value ("1984 Series Stock"), from certain employee bene fit plans for S36.4. These shares each have a preference in liquidation of 550. n. STOCK OPTION PLAN On May 1,1987, the Kaiser Aluminum Stock Option Plan became the Stock Option Plan of KaiserTbch. New options to purchase Kaiserlfech Common Stock on the same terms and conditions were substituted for all thenoutstanding Kaiser Aluminum options, and all subse quent grants were made pursuant to the Stock Option Plan of KaiserTfech. As part of the Merger, all outstand ing KaiserTfech stock options were redeemed for the dif ference between S19.375 per share and the option prices (S8.81 to S13.94 per share) and the Stock Option Plan was cancelled. The redemption cost was expensed by the Company in the ten-month period ended October 31,1988. . i2. INCOME TAXES - CONTINUING OPERATIONS The provisions (credits) for income taxes consist of: SUCCESSOR: TWomonths ended December 51,1988 Current Deferred fetal PREDECESSOR: fen months eojed October 31,1988 Current Deferred fetal 198? Current Deferred fetal 1986 Current Deferred fetal us. FedenJ Fomgn State total 7.5 s.t s 17.6 7 .7 S18.3 S.I s 18.3 S 36.J s 36.j *75-6 S.7 Ml S7S-* *-7 S 103.8 Ml SIQ1-4 *33-3 S.I S 334 s 6.7 7-7 144 s 6.7 S.I s 46.8 S 34 S13.3 (66.7) 9-7 *(64,3) S22.0 s(.7) S 14Jt 157-0) *(-7) *143-0) Income taxes are classified as domestic or foreign based on whether payment is made or due to the U.S. or a for eign country. Certain income classified as foreign is sub ject to domestic (U.S.) income taxes. During the ten months ended October 31,1988, the Company reported an extraordinary gain of $36.0 resulting from the utilization of net operating loss carryforwards by domestic continuing and dis continued operations. . Tix provisions (credits) applicable to consolidated and unconsolidated companies are: Successor TWo Months Ended December}!. 1988 Consolidated Companies Unconsolidated Companies (primarily in cost of products sold) fetal SI3.9 44 $18.3 Predecessor fen Months Ended October}!. 1988 Yeats Ended December;:. 1987 . 1g86 S 90.3 S43.8 *151-0) I3.I s 102.4 4o 546.8 8.0 *(43-0) 35 The tax effects of timing differences are: Operating loss carryforwards Pension expense deferred for tax purposes Investment tax credits Depreciation Plant write-downs Exploration and development costs Capitalized interest, property taxes, and other costs Undistributed earnings of subsidiaries and affiliates Inventory valuation method Other Ibtal ' The Company had net operating loss carryforwards for tax purposes of $3x7.8 (which expire in 1998 to 2001) at December 31,1988. Such carryforwards will be reduced over a period of two years by the unamortized amount of $61.3 relating to the 198s change in the U.S. federal income tax method of accounting for inventories from last-in, first-out (ufo) to first-in, first-out (FIFO). In addi tion, the Company had investment tax credit carry forwards of $64.9 which is net of a 35% reduction required by the 1986 Thx Reform Act and which expire in 1991 to 200X. As a result of the KaiserTbch ownership change, sub stantial limitations are imposed by the Internal Revenue Code on the future use of these carryforwards. In certain circumstances, the amount of the limitation may be increased by gains economically accrued on or before the date of ownership change but recognized for tax purposes within the five-year period following such ownership change. The benefits of net loss and investment tax credit carryforwards through 1986 were recognized previously in Predecessor financial statements as a reduction of deferred income taxes. No benefit was recognized for the 1987 Predecessor net loss because recovery was not Successor Two Months Ended December ji. !9iJ *-7 S.7 Ten Months Ended October JI, 19J! *(*) (-3) *U) Predecessor Yean Ended December i. 19ST I9i6 s 6.7 8.3 (.6) 5(40.0) 112-9) (6-3) 43-0 lS-0 1*9-3) 11.6) 3-5 (13-7) 14-6) SI4-4 S(J7.0) assured during the carryforward period. Similarly, no tax benefit has been recognized by Successor for these carryforwards. In December 1987, the Financial Accounting Stand ards Board issued a new statement on accounting for income taxes ("eas No. 96"). Although the Company is not required to implement eas No. 96 until 1990, early and retroactive application is permitted. The Company . has not determined when eas No. 96 will be adopted or which transition method will be elected. Preliminary analysis indicates that the effects of adopting eas No. 96 could vary significantly depending on the transition method applied. 36 The provisions (credits) for income taxes are different from the amounts computed by applying the U.S. statutory federal income tax rate 0*34% for 1988,40% for 1987, and 46% for 1986. The differences are summaririffas follows: Provision (credits) at statutory rates ss. Increase (decrease) resulted from: -Sac Tu bejMgt of parent company losses ^ Domestic losses ior which no U.S. income tax benefit is available Difference in foreign and U.S. tax rates Percentage depletion ? ' Difference in basis on sale'df affiliate jBL Foreign tax deductions and credits Investment tax credits Other Provision (credit) faeincome taxes Successor ^ T'*0 Months Ended December 3:, 1988 SI 6.2 *J' (7-5) >9-1 ... 1-7) 2^ (14) SI8.3 Ten Months Ended Octobers). 1988 * 8J.9 (3-oJ IJ-0 13-8) .1 ^ 3-6 4.6 SI 02.4 Predecessor Yens Ended December :i t9dr I96 *("7.6) *(3S;6) 176.$ l*3-S) 14 S 46.8 3-1 (S-S) 4-1 7.0 134) 7.2 *(43-0) Undistributed earnings on which the Company has not provided taxes whidl may be payable upon distribution were nil, S173.5, and si78.*** December 31,19^, 1987, and 1986, respectively. The U.S. federal income tax con sequences of undistributed gaming* through October 31,1988 have been considered in the valuation of the Company investment in joint venture companies. ~ 13. RITIRLNKNT AND BONUS PLANS " Effective January 1,1986, Predecessor adopted certain provisions of fas Nos. 87 and 88 relating to employer accounting for pension plans, for all U.S. pension plans. This accounting change decreased the 1986 net loss by si0.9. Prior years financial statements were not restated. Predecessor deferred application of provisions of the Standards relating to foreign pension plans and retogni-~ tion of certain accu4Hed pension benefit obligations in the Consolidated Balance Sheet. Successor has applied all provisions of the Standards. Retirement plans have been contributory for salaried employees and noncontributory for hourly employees. In all plans, except for plans representing less than 1% of the total accumulated benefit obligation and less thjp 1% of the plan assets at fair value, the benefit obligations exceed the plan assets. Employee pension benefit plans status at December 31,1988 and 1987 is: $r Smttmot December 31. . 1988 Accumulated benefit obligation; Vested employees Nonnested employees --- *(686.3) (54-6) Accumulated benefit obligation Additional amounts related to projected salary increases - (740-9) (33-5) Plotted benefit obligation Plan assets (principally fixed income obligations and common stocks) at fair value-- (7744) JI6.6 Elan assets less than projected benefit obligation (257.8) Unrecognized gains and obligations: Net gains Net obligation Net unrecognized gains and obligations Unfunded accrued pension liability indudedin the Consolidated Balance Sheet (principally in long-term liabilities) ' 5(257-8) Predecessor Decease! 5(697.6) (Si-0 1748.7) T354) (784-1) 4964 (287.7) 143-7) 196.8 * S3-1 5(134-6) In connection with the sale of the Ravenswood and Bedford plants in February 1989 (see Note 4), rac will assume projected benefit obligations of S7*.6 included in the above total at December 31,1988. 37 The components of net periodic pension cost for 1988,1987, and 1986 are: '"i Successor - "fro .la Morels Haded Morels Ended Dotmbajl, October}!, 1988 198! Service cost -- benefits earned during the period Interest cost on protected benefit obligation Return on assets: Actual Deferred gain (loss) Amortization of unrecognized net transition obligation (1986 adjusted for SI4.3 reduction in 1985 cost to minimum) s 1.9 l*3-o) 4.6 -- 9-7 S*-0 (38.1) 12-3 Net periodic pension cost s. * 3-9 * 3J-9 Predecessor ....-- Tg _ * fan Ended frcemberji. 1987 1986 *14.7 63.6 S IJ.I 684 (38-6) (ri.6) 17-3* 454 =' (6*4) 94 3.6 s 33.1- Assumptions used to value obligarionsjjttear-end, and The Company and subsidiariesprovide certain to detexmine the net periodic pension cdffin the subse- health caie,aSH life insurance benefits for retired employ quern year; are: 2-- ees. Substantially all employees may becomej^igible Discount rate Expected long-term rate of return on assets Rate of increase in com* pensation levels SueceiMr 1988 8.5% IOX>% 6.0% Predecessor 1987 J96 8.5%' 8.0% 10J0% 11.0% 6.0% 6.0% for those benefits if they reach retirement age while still working for the Company. Those benefits are provided through administrate services contracts with* variooi iiwiimw* carriers. The Company pays th&cost of providing these benefits as incurred. The ibst ofthese benefits was $5^and 527.3 for the two months ended December 31,1988 and the ten months ended October 31,1988; and 530.5 and 526.6 for 1987 and 1986. During 1988 and 1987, Predecessor recorded curtail ment losses of s6.i and S39.5 to refleci the shutdown or sale of plant locations. The recorded loss reduced unrec ognized net obligation. The Company also has an executive bonus plan and has supplemental retirement plans for salaried employ' ees under which the participants contribute a percent age of their base salaries. The Company contributions toward these plans are generally based on earnings and net worth. Expense of these plans was 52.8 and s 14.1 for the two months ended December ji, 1988 and the-ten months ended October 31,1988; aiSsi.y and si.6 fat ^ 1987 and t986. There were no contributions to the exec utive bonus plan during 1987 and 1986. 38 4. COMMITMENTS AND CONTINGENCIES The Company has financial commitments, including purchase agreements, tolling arrangements, forward foreign exchange and forward sales contracts, letters of credit, and guarantees. Purchase agreements and tolling arrangements include agreements to supply alumina to Anglesey (Wales) (49% owned) and to purchase aluminum from this company. Similarly, Kaiser Aluminum has long-term con tracts which support financing for certain joint ventures in which the Company is a partner. These contracts include agreements for the purchase and tolling of baux ite into alumina by Queensland Alumina limited (qai.) (Australia) (28.3% owned); for the purchase of alumina from Alpart (50.0% owned); and for the purchase and tolling of alumina into aluminum by Boyne Smelters Limited (bsl) (Australia) (20.0% owned). These obliga tions expire in 2008,2021, and 2007, respectively. Under the agreements, Kaiser Aluminum is obligated uncon ditionally to pay proportional shares of debt, operating, and certain other costs of these joint ventures. The aggre gate minimum amount of required principal payments at December 31,1988 is S257.6 (528.1,1989; 548.5, 1990; 588.4,1991; 573-2,1992; 59.2,1993; sio.2 there after). At December 31,1988, other assets of Kaiser Aluminum include s8.o of debt repayment in the form of a purchase of interests in outstanding notes of an affili ate. The Kaiser Aluminum share of payments, including operating costs and certain other expenses under the agreements, was 534.3 and SH3.3 in the two months ended December 31,1988 and the ten months ended October 31,1988; and si29.9 and si36.6 in 1987 and 1986. The Company is engaged in various litigation and arbitration proceedings. While there are uncertainties inherent in the ultimate outcome of such proceedings, management believes that the resolution of such uncer tainties will not affect materially the Company financial position or the results of operations. 1 >;. GEOGRAPHIC AREA INFORMATION The Company now operates solely in the aluminum business. Predecessor discontinued operations con sisted of agricultural chemicals, refractories, trading, real estate, and industrial and specialty chemicals (see Note 4). Export sales from continuing operations were 593.3, and S349.2 in the two months ended December 31,1988 and the ten months ended October 31,1988; and si97.9 and 582.0 in 1987 and 1986. 39 Geographic area information relative to operations is summarized as follows: NET SALES TO CUSTOMERS: Domestic Foreign INTRAENTERPRISESALES AND TRANSFERS: Domestic Foreign * TOTAL SALES Eliminations NET SALES INCOME ,LOSSI FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTERESTS: Domestic Foreign Tbtal IDENTIFIABLE ASSETS AT DECEMBER 51: Domestic Foreign Discontinued Operations--net Assets Held for Sale Tbtal INVESTMENTS AND ADVANCES INCLUDED IN IDENTIFIABLE ASSETS: Domestic Foreign Tbtal SuCBMOf TWo MontIn Ended December jt, I9il S 2044 93-7 298.1 1.6 92.x 93-7 391-8 193-7) s 298.1 * 33-5 44> * 47-S SI419.8 647.8 336.6 *24044 S .X 353-4 * 353-S Ten Months Ended October jt. 1918 *1,550.8 370.6 1,9214 8.7 454-0 462.7 2,384.1 (462.7) St.9214 s 163.8 88.9 * 253.7 The consolidated financial statements include foreign liabilities of S3114, $345.2, and S383.5 for 1988,1987, and 1986, respectively. The aggregate foreign currencygain or (loss) included in determining net income was 5(5.4) and 5(14.2) in the two months ended December 31, 1988 and the ten months ended October 31,1988; and 5(13.5) and s*4 in 1987 and 1986. Sales to a single fabricated products customer were S304 and S266.9 in the two months ended December 31, 1988 and the ten months ended October 31,1988. Predecessor %an Ended December 31. :9i- :?86 SI447.I S5S-8 2,002*9 SI 486.8 480.3 1,967.1. 12.5 399.0 411.5 24144 1411-5) *2.002.9 ' 9.8 347.5 357.3 2.3244 135~3) s 1.967.1 * 1330.1) 36.1 S (294.0) * 1,769.5 440.3 336.9 *2,546.7 s 2044 s 2044 s (200.0) 79.1 * (120.9) *2,0724 806.7 355-9- *3,235.0 s .1 182.5 s 182.6 40 t-WLILNuLN 1 .1.UUU.uKS REPOru THE STOCKHOLDERS AND THE BOARD OF DIRECTORS OF KAISER ALUMINUM A CHEMICAL CORPORATION: We have audited the accompanying consolidated balance sheet of Kaiser Aluminum & Chemical Corporation ("Successor," a subsidiary of MAXXAM Inc) and subsid iary companies as of December 31,1988 and the related statements of consolidated income and consolidated cash flows for the two-month period then ended. We have also audited the accompanying consolidated balance sheet of Kaiser Aluminum & Chemical Corporation ("Predecessor," a subsidiary of KaiserTbch Limited) and subsidiary companies as of December 31,1987 and the related statements of consolidated income for the tenmonth period ended October 31,1988 and the years ended December 31,1987 and 1986, consolidated cash flows for the ten-month period ended October 31,1988 and the year ended December 31,1987, and changes in consolidated financial position for the year ended December 31,1986. 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 did not audit the 1986 financial statements of certain investees. Predeces sor's investment in which is accounted for by the equity method. Predecessor's equity of S83.7 million in the net assets of those investees at December 31,1986, and of s.6 million in the 1986 net losses of those investees is included in Predecessor's 1986 consolidated financial statements. The 1986 financial statements of those investees were audited by other auditors whose reports thereon have been furnished to us, and our opinion expressed herein, insofar as it relates to amounts included for those investees for 1986, is based solely upon the reports of such other auditors. We conducted our audits in accordance with gener ally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements ate free of material misstatement. An audit includes exam ining, 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 presenta tion. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based upon our audits and the repons of other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Successor and subsidiary companies at December 31,1988 and the results of their operations and their cash flows for the two-month period then ended, and the financial position of Predecessor and sub sidiary companies at December 31,1987 and the results of their operations for the ten-month period ended Octo ber 31, 1988 and the years ended December 31,1987 and 1986^their cash flows for the ten-month period ended October 31,1988 and the year ended December 31,1987, and the changes in their financial position for the year ended December 31,1986 in conformity with generally accepted accounting principles. As discussed in Notes 1 and 2 to the consolidated financial statements, MAXXAM Inc. acquired KaiserTfech Limited in a purchase transaction deemed to be effective as of October 31,1988. Push-down accounting has been applied to the financial statements of Succes sor, and Successor has recorded the assets and liabilities of Predecessor at estimated fair values. Accordingly, the consolidated financial statements of Successor are not comparable to those of Predecessor. As discussed in Note 3 to the consolidated financial statements, in 1988 Predecessor changed its consolida tion policy for majority-owned subsidiaries to conform with Financial Accounting Standard (FAS) No. 94, and also changed to a statement of cash Sows in place of a statement of changes in financial position to comply with FAS No. 95. The 1987 consolidated financial state ments and the 1986 consolidated balance sheet have been revised from those previously issued to reflea these changes. As discussed in Note 13, in 1986 Predecessor changed its method of accounting for defined benefit pension plans to conform with FAS Nos. 87 and 88. Oakland, California March 20,1989 41 Kaiser Aluminum ft. Chemical Corporation and Subsidiary Companies Aluminum tonnage (metric): Capacity at Yen-end Primary production Saks: Primary Fabricated Tbtal sales Avenge number of employees Number of stockholders-- preferred and preference Additions (millions of dollars): Property, plant, and equipment Investments and advances Successor TWo Months Ended December)!, :98s Thr Months Ended October)!, 1988 Predecessor Vears Ended December tt. 198? 1986 1985 198a <9*3 1982 1981 1980 [979 57840a1! 93.314 690,00a1! 6904)00 903,000 9334300 9334)00 14)534)00 14334300 14124300 14044)00 1404400 547,669 633.338 $77Ml 531,886 538,663 417489 617,566 940,119 993,353 973.670 31,687 43458 97443 226,356 44W79 667435 114.833 648,682 773.S15 74.591 688450 763,741 37418 636,956 674.174 169,369 571.827 741.196 44471 602,973 747443 315,753 566,377 783,130 168,621 670483 839.104 351402 717,347 968,749 229,683 756,343 986435 11,246 11468 I34>96 13454 16434 17448 20,688 26450 28442 28,951 1.033 1,878 1403 955 1452 1,109 1451 1,377 1,755 3.773 *13.5 $80.8 i-3 $86.6 .1 $93-1 1-5 $120.7 4 $3314 1.6 $177.8 14 $204.6 60l2 $290u6 44-6 $164.8 19-3 13.7 (l) Includes the U.S. plants and the Company's share of Volta Aluminium Company Limited, Anglesey Aluminium Limited. Boyne Smelters Limited, and Aluminium ^hr*in 41 Quarterly financial daia iunaudited) Kaiser Aluminum A. Chemical Corporation and Subsidiary Companies Amountsfor the last two months of the last quarter of 1988 are those of Succcssor^Amounts for the first month of the last quartSf uf 1988 and for each of the other quarters comprising 1988 arid 1987 are those of Predecessor. 1988 Quartets Ended Marti fun. 30-' Predecessor re- Month of October lea Months Ended October 31 Successor TwMoctas faded December ;i Continuing operations: Net sales Gross profit Income (k s) from continuing operations Net income (loss) 198' Quarters Ended $520.0 IO8.I 3<>-3 38.1 Mar. jt * $ 540*2 126.7 41.1 33*0 lun. jO'>' .$663.9 __ - '$197.3 174-5 "" 49*7 62.2 . 834 Sep. 50- - 41.1 214 Dec. 3li" X si,9214 459*0 ' $ 298.I . 714 144-7' 175*7 1987 28.1 28.1 Continuing operations: Net sales Gross profij* Income (loss) from continuing operations Net income (loss) $488.2 65.I s 5264 86.3 (30.7) (29.^. (358.3) ' (387.3) S5274 ** 99.0 I3.9 14*9 - S46O.9 59*8 #b- 46.8 $2,002.9 3 io-s j? (343*5) (354*9) __JS- (t) Includes a gain before tax of si.7 from disposition of varion^hemical businesses. ............ . w<* w -* Ill Restated forth* adoption ol Financial Accounting Standard No. 94 requiring foil consolidation 0! mafority-owaed sabAfiaries. In June >?*>, Ksiw Aluminum provided far Iikih nf i;Ita both hrfatr and after am. glaring to the testrucming of operations. The baa provision of n t-t-t in continuing operations consisted principally of writedowns of the electrical products manufacturing business and idle and uneconomic primary aluminum production capacity, and provision far the loss upon disposition of oil and gas properties. The loss provision *f *33.5 in discontinued operations related to certain operations and businesses that trore discontinued in recent yean. (4) Includes a gain before tax of St 6.1 from sale of the food service packaging business. In September 1987. Kaisir Aluminum provided far both before and after tax losses of si 343. relating to the restructuring of corporate staff, sil-d in continuing operations aod $1.4 in diaconrinued operations 15) Includes a gain before tax of S51.7 from the sale of Kaiser Aluminium Europe Incorporated. aw. 43 S iAji cMEN 15 OF LONSOUDAi tD INCOME Kaiier Aluminum *. Chemical Coipoaboa and Subsidiary Companies .millions of doflanl Saccetaot Predecessor TWo Months 'Em Months tnM Ended _____________ _________________ fan Ended December!). Oecemberji. October 31, 1988 1988 198T" 1986 1985 1984 1983 1981 1981 1980 :3-5 REVENUES: Net sales Other Tbtal tntnues COSTS AND EXPENSES: Cost of products sold Depredation Selling administrative, research and development, and general Interest Other Restmctaringof operations *298.1 114 309.5 nb.7 7.7 * I*S14 46.3 1,967.7 14614 69.6 s 2,002.9 * t.967.1 * 1.7740 * 1.935.7 1 1,735-1 * 1433-5 32,16341 *2425.5 *2255.3 94^ 68.7 61.3 324 81.7 359-7 111.6 119.1 87.5 24J97-7 14)35.8 1436-3 1,968.1 1,816.8 2,1932 14748 2,5446 2.342.8 1,691.7 97-7 >.7152 106.6 - 14147 101.1 1.817.9 1014) >,655-5 90.2 W5 96.1 >.937-7 76.1 1,871.0 73.6 1.730.8 68.9 14.6 89-7 "4-3 118.5 115.0 II4.8 105.8 113.7 129.3 128.3 1194 8.1 69.6 106.1 117-5 121.8 II3.3 88.5 111.5 59-8 $0,0 52.7 4*8 23-7 14.8 78.9 236.6 13-3 61.2 90.3 1.7 10.5 11.7 366.1 Tbtal costs and expenses Income [loss) from continuing operations before income taxes and minority interests Provision (credit) for income taxes Income (loss! from continuing operations before minority interests Minority interests Income (loss) from continuing operations Discontinued operations-- net of income taxes: Income from operations Income (loss) on dispositions Income (loss) from discontinued operations Income (lossl before extraordinary item Extraordinary income--tax benefit Net income (loss) Debt-to-capital ratio (%>J> 161.0 1.715-0 1,391.7 2,156.7 2.200.3 1,180.3 2*002*2 1,326.1 2.205.6 1,1334 1.983.5 * 47-5 252.7 II94.0I (110.9) 1364-0) (122-2) (185-4) (232-9) 692 411.2 359-3 18.3 1024 46.8 (43-o' (16S.7) (IS043) (118.1) 11.9 5-8 167.1 157.4 192 (Ml 18.I 150.3 15-61 1340-8) (1.7) (77-9) 1*98.3) (61-2) (67.3) (144-8) 634 1441 201.9 144-7 (343-5I (77.9) 1198.3) (61.2) (67.3) (144.8) 634 244.I 201.9 5-9 I10.9I 11-7 (*3.xl X6.I 19.1 16.8 (S-o) 15-5 (60.7) 17.1 7.6 61.5 50.3 51.8 (S-o) (114) 452 11.8 (35-2) I7.I 7.6 62.5 50.3 51.8 28.1 139-7 * (354-9) * (32-7) * I186.5) t (974) (50.2) (1372) 125.9 2944 253.7 $ 18.1 372 36.0 * 175-7 380* * (354-9) * 132-7) * (186.5) s (974) * (50.1) * U372) * 115.9 * 2944 * 2532 50.5 51.8 552 51-7 422 41.8 39.7 30.7 35.9 (11 Restated for the adoption of Financial Accounting Standard No. 94 requiring full consolidation of majority-owned subsidiaries. 31) Total debt as a ratio of total debt, deferred income taxes, deferred income, minority interests, redeemable preference stock, and stockholders' equity. i EN- i cAR SELLl i cl) FINANCIAL DATA. CONSOLIDATED BALANCE SHEETS Kaiser Aluminum A. Chemical Corporation and Subsidiary Companies {millions ai dollars) ASSETS: Current asseu: Cash and cash equivalents Receivables Inventories Prepaid expenses Assets held for sale Current assets of discontinued operations--net Tbul current assets Investments and advances Property, plant, and equipment--at cost Accumulated depreciation Property, plant, and equipment--net Noncurrem assets of discontinued operations--net Other assets lbtal Successor 1988 * *09-5 3*1-3 4SM 4-3 336.6 1-3*3-1 3S3-5 676.6 7.7 668.9 58.7 11404-1 Predecessor I98t>" 1986'" 1985 1984 1985 1981 1981 1980 1979 * 131-7 310-9 479-9 *0-5 * 107-J 333-6 644.3 15-5 * .108.1 194-0 601.9 11.1 - t 36.6 359*7 649J U s 14.8 478.9 631.1 5-* * 31-9 5*1-7 709.9 *3-0 * 74-5 3034 895-5 194> s 63.1 40&O 788.0 38.7 * 1414 44*-9 634.9 35-1 *. 44-8 604) 87.8 304.7 130.7 140.6 350-8 187.1 131.2 987.6 1,160.9 1,103.9 1-359-6 1-370-7 1.518.1 I.6534) 1.576.9 I48S-S 1044 181.6 3014 3*1-5 309-S 338.1 580.9 465-7 390-9 1,908.7 9584 1-943-8 148^.9 1-539-3 1,144.9 1,619.8 1,108.6 1451-8 14146.7 1,383-6 141154 1406.7 943.6 1-997.6 931-3 1,938.1 911-5 950-5 1455-9 1-3944 1-5*1-* 1406.1 1,3584 I463.I 14166.3 1,016.6 191.3 111.9 *1-548-7 *95-9 139.7 *3-*35-0 311.1 1144 *3435-6 355-t 814 *3,640.8 500.3 96.6 *3,6834 490-8 93-8 *3-8094 475-3 664 *44)38.5 358*1 86.8 *3-553-9 3104 44-6 *34684) LIABILITIES AND STOCKHOLDERS' EQUTTY Current liabilities: Accounts payable and accruals Income taxes payable Notes payable Long-term debt--current portion lbtal current liabilities Long-term liabilities Long-term debt Deferred income taxes Deferred income Minority interest Redeemable preference stocks Stockholders' equity: Preferred and preference stocks Common stock Additional capital Currency translation adjustment Retained earnings lbtal stockholders' equity lbtal * 5*8-9 59*6 117.0 705.5 1884 489.1 13-0 61. t 84 15-0 8974 164 947-1 S34O4.I * 487.1 36.7 53-5 * 4594 41-7 16-5 147.6 * 405-9 *74 9*-3 161.6 * 470.6 108.3 157.8 79.6 * 5*5-7 U7-7 114,5 33-8 S 461.9 106.9 138.6 38.6 * 494-9 161.7 305-1 74-* * 531-3 33*- 31.1 63.5 * 534-7 189.3 31m 53-1 577.3 6764 687.1 916.3 811.7 947-0 1,136-0 957-9 908.1 160.3 110,3 1034) 43-0 40.6 43-6 38.0 314 887.3 1.184.9 1436.1 1,104,5 141164 908.1 711.1 7944> 65.6 61.9 17.6 113.3 171-5 3*1-9 304-8 163.8 131.8 45-7 47-9 50-1 5*-3 54-5 114 11-3 38.9 14.1 8-9 11.8 15-0 351-6 5-* 376.6 134 14.9 314.6 17-1 738.6 13.8 148 316.5 134) 7814) 14-7 14.6 3094 13*4) 977.8 14-7 14-5 173-9 116.5) 1,101.8 16.0 144 169.3 1,179-6 16.9 14-3 1684 1,3514) 11*3 14.1 156-5 148741 484 13-7 113-7 14148.5 7604 *1,546-7 1,1184 *3-*3S-0 1.111*7 *3435-6 1483.9 *3,640.8 1.3894 *3-6834 U79-3 *3,8094 1,651.6 *44338-5 1-579-9 *3,553-9 1-334-1 *3,168.0 III Restated for adoption of Financial Accounting Standard No. 94 requiring full consolidation of majority-owned subsidiaries. 45 DOMESTIC OrLR.\r:-. >\S PARTIAL list STVTE -\ iTTY California Los Angeles Oakland Oxnard Pleasanton Georgia Macon LouisianaO- r Gramercy^. Ohio ' Newark -.Tbledok' I?. v* Oklahhmi Uilsa, '* Pennsylvania '* Erie Shuth j Carolina "Greenwood '3?1: .;"Texas ' ^TShipnan ;R_ i' - "Tennessee, . Jackson `.'^feshington 7#cad Jhcoma ^rentwood v)i`iS.\: n Extruded Products Corporate Headquarters Forgings R&.D 0 Rod, Bar, and Wire Alumina Rod, Bar, andWire Coated Co3 Extmded Products, Cathodes Forgings Eotgings Extmded Products Rod, Bar, and Wire Primary Aluminum Primary Aluminum Flat-Rolled Products = f WORLDWIDE OPERATIONS 4 Kaiser Aluminum &. Chemical Corporation, through subsidiaries or affiliates, participates in the following operations in these countries: Australia Boyne Smelters Limited (20% owned) Queensland Alumina Limited (28.3%) Bahrain Aluminium Bahrain {17%) Canada Kaiser Aluminum &. Chemical of Canada, Ltd. (ioo%) Ghana Volta Aluminium Company Limited (90%) Jamaica Alumina Partners of Jamaica [50%) Kaiser Jamaica Bauxite Company 149%) Wales, U.K. Anglesey Aluminium Limited (49%) As of February 28,1989 AUDITORS. Deloitte Haskins & Sells, Oakland. TRANSFER AGENTS AND REGISTRARS Morgan Shareholder Services Thist Company, New York (all classes of stock; also dividend-paving and conversion agent). Bank of America N.T. & S.A., San Francisco (all classes of stock; also conversion agent). FORM 10-K: The corporation's Form 10-K annual report to the Securities and Exchange Commission, including financial statements, may be obtained without charge by writing to the Corporate Secretary, Kaiser Aluminum & Chemical Corporation, 300 Lakeside Drive, Room 2023, Oakland, CA 94643. Design: Corporate Graphics Inc, Los Angeles, New York, London Rioiogxaphy: NikoUy Zurek, San Francisco Printing: George Rice & Sons, Los Angelo DIRECTORS JohnM.SeidI . Chairman of the Board and Chief Executive Officer, Kaiser Aluminum & Chemical Corporation and KaisctTfcch limited; nominated as Director; MAXXAMInc. A. Stephens Hutchcxaft, Jr. President and Chief Operating Officer, Kaiser Aluminum & Chemical Corporation and Kaiserffech limited John B. ConnaHy Tfexas Lawyer and Businessman; Former Governor of Tfccas and U. S. Treasury Secretary Charles E. Hurwitz Chairman of the Board and Chief Executive Officer; MAXXAM Inc., MAXXAM Group Inc., and Federated Development Company; Chairman of the Board, The Pacific Lumber Company William C. Leone President and Director, MAXXAMInc; Chairman of the Board and Chief Executive Officer, Horizon Corporation; Chief Executive Officer; The Pacific Lumber Company Ezra G. Levin Joseph J.Bemat Partner; Kramer; Levin, Vice President and Nessen, Kamin, & General Manager; Frenkel; Thistee, Forgings Federated Development Company; Director; MAXXAMInc, MAXXAM Group Inc, ... and UMB Bank and JosephA. Bonn Corpfcte Vice .President, Strategic Banning 5 Thist Company " Robert E. Cole Barry A. Munitz ' Vice Chairman of the Board and Director; ' ^.Corporate Vice President, Government Affaire MAXXAMInc; Edward J. Coyne President and Thrstee, Vice President and Federated Development General Manager; Rod, Company; Chairman of Bar; and Wire the Board and Chief Executive Officer; United Financial Group, Inc Richard B. Evans Vice President and General Manager; 1 Flat-Rolled Products Paul D. Rusen President, Employee Ownership, Inc; Retired Director, District 23, United Steelworkers of F. Joseph Haydel, Jr. Corporate Vice President and General Manager; Raw Materials America Richard L. Humphrey C. V. Wood Assistant to the Chairman and Director; Lorimar Tblepictures, Corporate Vice President and General Manager; Primary Aluminum Products Inc; Director; MAXXAMInc, Horizon Corporation, and Drew Industries Inc Robert W.Irelan Corporate Vice President, Public Relations CORPORATE OFFICERS AND DIVISION GENERAL MANAGERS JohnM.Seidl Chairman of the Board and Chief Executive Officer John T. La Due Corporate Treasurer John A. Moore Corporate Vice President, Secretary, and Deputy General -Counsel A. Stephens Hutchcraft, Jr. President and Chief Operating Officer James T. Owen Vice President and General Manager; Extruded Products David L. Perry Corporate Vice President and General Counsel Jon P. Pierce v,-. - Corporate Vice President, Human Resources David G. Schmidt Corporate Vice President and Controller ASSISTANT CORPORATE OFFICERS Charlie Alongi Assistant Controller Raymond F. Garavaglia Assistant Secretary Ross Hambly Assistant Treasurer John Wm. Niemand II Assistant Secretary Gordon V. Rogers Assistant Secretary Norman L. van Patten Assistant Treasurer 46 Oakland, CA 94643