Document qmgYQ59MJpdEz0O9ybOmwro1x

Ivm0j\ ru-oiviUN UM & CriuvikJYL CORPORATION 1988 ANNUAL REPORT / PLAINTIFF'S EXHIBIT KR-19e KAISER ALUMINUM'S PRINCIPAL COALS IN SERVING OUR MARKETS ARE TO CONTINUE TO STRENGTHEN our product Quality, OUR SERVICE TO CUSTOMERS, AND OUR PLANT OPERATING EFHCIENCY. WE HAVE MADE EXCELLENT PROGRESS TOWARD THESE GOALS AND ARE COMMITTING THE HUMAN AND FINANCIAL RESOURCES NEEDED TO ASSURE SUCCESS IN THE FUTURE. ^r* MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continues on 4. through in* WHO WE ARE. Kaiser Aluminum is 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 folly 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 customers; primary aluminum is sold to Kaiser fabrication plants and to others; and fabricated products are sold -- eitfierdire- tly or through distribu tors-- to the beverage container, transportation, aerospace, con struction, and consumer durables markets in the U.S. and abroad. Atyearend 1988, 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 .VLA.XX.V-Vl Inc. on Octo ber 28, 1988. In addition to Kaiser Aluminum, V1AXXAM operates through a separate subsidiary. The Pacific Lumber Company, which is a leading producer of redwood lumber and other forest ptoiLcts. Other VLYXXAVl subsidiaries are engaged in real e-ute manage ment and development. `TiOLXAMLiK HLRUAN.xCEO John VL SeidI was named chairman and chief executive officer of Kaiser Aluminum and KaiserTech Limited on January 23, 1989, succeeding James S. Pasman, Jr. Additionally, he has been nominated to serve on the hoard of VLAXXA.YI Inc. SeidI, 49, had been president, chief operating officer, and a direc tor of Enron Corp., Houston, Tbxas, an international energy company with about 59 billion in assets. SeidI was a member of the faculty of the Graduate School of Business at Stanford University from 1974 to 1978. He joined Nat mas Company in r97^ as a directi and later became a member 1 >f its executive committee, ffe joined the management tejm of the com pany in 1978, serv ing in a variety of top posts until the takeover of N'ammas by Diamond Shamrock in late 1983. fie joined Houston Natural Gas ^which later became Enron) as senior vice president for corporate development in 1984, A 196 r graduate of the U.S. .Military Academy at West Point, SeidI received both a master's degree and a Ph.D. in polit ical eco omv and government from Harvai University. He served as J puty assistant secretary tor program sy tems in the Department of Health Education and Welfare, and as dep uty assistant secretary, program development and budget, in the Department of the Interior. Kaiser Aluminum & Chemical Corporation and Subsidiary Companies Jhousjndsoi Jollaisi Net Sales Income (Loss)From Continuing Operations Net Income (Loss) ' Debt-to-Capital Ration Sales of Aluminum Products--Metric liras Property, Plant, and Equipment Additions Successor'" TWo Months Ended December)!, 1988 -$298,100 $'28,100 s 28,ZOO 37-3% 97,14s s 13,500 Predecessor'" Ten Months Ended October 51, 1988 $1,921,400 s 144,700 $ 175,700 38.0% 667,435 $ 80,800 \ Em December l? $2,002,90 * 1343,50 $ (354,90 50.* 773,5i $ 86,<kx (i) See Note i to financial statements for a description of Successorand Predecessor. (a) Restated for the adoption of Financial Accounting Standard Mo. 94 requiring full consolidation of majoriryosrnedsubsidiaries. (3} Includes a 4360,100 loss provision, both before and aftertaxes, relating to the restructuring ofcontinuing operations, consistingprincipally of writedowns of the electrical products manufacturing business, idle and uneconomic primary aluminum production capacity and a provision for the loss upondisposition of oil and gas properties. (4) Total debt as a ratio of total debt, deferred income taxes, deferred income, minority interests, redeemabfc preference stock, and stockholders' equity. ' `....................... - .. X^BLE OF CONTENTS . Management's Dismission 4 5 < B^RolIedProducts andAnalysisBegiiisraUIimsiaijefc\r^'vJ'.;-!;.%'^ Avv--'J;>::r.(rc~;^-: '.-^r--yV. I> c.-' FCmroIMn*t CovetAamn#d] OCnonnStiMinuAes#M.. v t l t 7^' * ^ Pages 4 thiraughib 10 ; -l J : f;< *; h: :-^,r Letter from the Chairman and the . President 2 -r;f Bod, Bat and Wire T4 .=> ' .v,,V'.-,. . VV*.' * v-`:%r'. v.'' ' (' . KaiserAlnminurn Businesses f ' FinancialStatement* 22 Raw Materials 6---- . ~ RTntee tn Financial Srorf>m,n PrimaryAluminum Products 8 H-,... ^\.r ~~ * A LETTER FROM THE CHAIRMAN AND THE PRESIDENT: For Kaiser Aluminum, 1988 was a Within aluminum,, we should focus year of ownership change, contin on specific opportunities rather ued strategic accomplishment, and than compete so broadly across very profitable results. theboard. On October 27, shareholders Our strategy is: approved the merger of Kaiser lb continue to be a fully inte Aluminum's parent, KaiserTfech grated producer--mining bauxite, Limited, with a subsidiary of refining it into alumina, smelting MAXXAM Inc., resolving an own alumina into aluminum, and man ership uncertainty which had per ufacturing aluminum into a range sisted for several years. With that of fabricated products. done, we turned our full attention Tb be market-driven, provid to the challenge of making Kaiser ing customers with the best possi Aluminum the best, most market- ble product quality and service. driven, customer-responsive sup . Tb treat all employees fairly plier in the industry. We are not and to demand from them the level yet where we want to be. But we of productivity which will ensure - believe.we have thepeople, plants,,^,,^ thatwe.meet corporate goals for... and focused strategy to get us there. quality, customer service, and Operationally and financially, cost-competitiveness. 1988 was an excellent year. The Tb be among the low-cost company moved solidly into the producers in times of economic black, posting its third highest downturn so thatwe can serve cus annual net income ever. This per tomers profitably and maintain formance resulted from a strong stability of operations. aluminum market and from pro Tb allocate capital to those gress made in reducing costs and in areas whichpromise the best concentrating corporate resources .... returns frombothafinancial and on facilities, markets, and product product quality standpoint. niches offering competitive oppor . * Tb reduce total debt of Kaiser tunities and financial rewards. Aluminum and KaisezTbch and ' .Kaiser Aluminumis a very to refinance it on a basis morein differentcompany from the one, ;, - keeping withomlong-term assets - - which existed earlierthis decade. ,, and strategies..;.-u While aluminum always has The facts as they relate to these been the core business, we were strategic points are as follows: diversified into a number of non As a fully integrated alumi aluminumbusinesses. In recent num producer; weare divided by . -- years, we have determined that product category into six decentral we should stick to what we do ized business units or divisions-- best--produce and sell aluminum. raw materials, primary aluminum, flat-roiled products, extruded prod ucts, rod/bar/wire, and forgings. These business units are more market-driven, more innovative, more entrepreneurial, and more capable of managing change as a result of decentralization. Corpr rate staff provides the framewori for overall strategy and direction as well as centralized corporate finance, but the business units a largely self-sufficient. * For us, being market-drive: means being positioned with th products our customers need, when they need them. Tb do this, we have focused on those aluminum-consuming product areas in which our capability is - strongest and which offer solid "'* -v'- - *-- ' 'V? v * * , j, ,. i*, vt growth potential for our custom and, therefore, for us. These incl beverage containers, a market where demand continues to gro aerospace, which is benefiting fc high demand for new commerci aircraft; and transportation, wht the amount of aluminum used i ' cars, trucks^ shipping container: - and boats continues to rise beca ' " of the metal's versatility andlig weight. We also have expanded c ' alumina sales and diveEsified th line of primary aluminum prodi we market to others.. .. ... - Any organization is only; good as thepeople it employs. \ are extremely proud of the perfc ance of our people throughout t .... difficult periodwhich, the utdui and the company experienced' beginning in the eariy 19803. D~ mg a part 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 more in terms of both quality and output--are paying off. Our goal to become a lowcost producer has Seen strength ened for the long term by facility modernizations, retrofit technol ogy, and process-control improve ments; by large and permanent reductions ofsdlaried personnel at corporate heap^artersand plant,. locations; by implementation of variable salary pfcfitrwhich share profits in good times but 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 and fabricating facilities. : * The efficient allocation of. : capital is oneof senior manage ment's most important functions. In the past several years, the com pany has spent approximately $250 million modernizing.the flat-rolled nroducts plant atHentwood, Wash- `gton, 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 fcSEEL CHAIRMAN AND CHEF EXECUTIVE OFFICER ENS HUTCHCRAFT. IR.. PRESIDENT .AND CHEF OPERATING OFFICER and other supporting projects. In As we said at the beginning oi the tod/bar/wire business, we are this letter; 1988 was a year of sig constructing neifemannfacturing facilities atMacon, Georgia, and nificant achieveBfents. We believe "eat.h, e current industry environment Jack5on,Tfennessee,to improvethfc^^ii-offewns an excellentopportunity service, quality, and economics of to improve further our product ; our finishing operations. And in - quality and customer service, to forgings, we are adding a facility strengthen further our operating at Greenwood, South Carolina, efficiency to increase furtlxer our so that we can penetrate further share of markets that are key tobu. the automotive forgings market. future, and to achieve superior * A major priority during 1989 returns on invested capital. Those is to^efinance debt. Kaiser Alumi are Aluminum's goals, arid num debt has beenreduced to ' they arethe measures by whibHL| ,, approximately S410 million as of - we stand ready to be'judged. February a8%rii approximately -1 S940 million at year-end 1987-- " ' a reduction of about-56%. Sepa- rmk - rarely, KaiserTfech debt stands at - S925 million. It is our plan to use?-**^ - John MLSeidl" "^^ cash fromoperations and from ';Ij- Chairman and * selected asset sales, together with ChiefExecutive'Officer existing cash balances, to reduce the separate debts of Kaiser Alumi num and KaisetTfech to the point that they can be refinanced with new borrowings having more appro priate maturities and less restric A. Stephens Hutchcraft; Jc. President and tive covenants. Chief Operating Officer March 10,1999 T ALUMINUM INDUSTRY OVERVIEW Gains in the nation's real gross national product and industrial pro duction, combined with a 38% 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 ioo%Tft averagetT idi% foralloP'""" 1988, compared with 88% in 1987. Even with the sharp gain UU988 U.S. aluminum production, both producer and consumer inventories at the end of the year remained near the low levels of year- end 1987^ - 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 forthe western world industry was 97% in 1988, up from 93% in 1987, and the operating rite 'atyeaiidM^99%.7:-;,:i;-'''' ..... As a resnltEl low inventory levels and strong demand, primary ahunmum prices were signifi-. * .. .%* candy higher in 1988 after posting sharp gains in 1987. In 1988, the Midwest U.S. market price for ingot tanged from a low of s.88 per pouisd in January to a high of $1.30 in JuneJfc-dosed at year-end 1988 at $i.^; In 1^87, the Midwwt U.S. matkefprice had increased from 5.53 perpoundin early January to-^-- a high ofs.88 in both October and December. metal. This shipment total was 10% above 1987 shipments of 697,7^1 tons (after excluding 19 shipments by Kaiser Altuniniur Europe, a business sold in the fourth quarter of that year). Due to the improvement in 1988 ing prices, increased production at 1 set smelters, and lower internal mary metal needs, the percents of shipments made in the form ingot rose to 36% of the total n 16% in 1987. Primary metal production 1 Kaiser Aluminum in 1988 read 640,983 metric tons, for an aver age operating rate of 95-7%. Th: compares vwgrit outpqg^f 633,3: tons or 85% of annual capacity 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 $2 8s 88 NGCfTTRICESAND INVENTORIES Average Yearly US. Midwest Marker Price iprice per pound! IPAI Primary inventories looos metric cans! 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 aluminumproductioa as.wellas the stronger overall demand for KAISER ALUMINUM BUSINESSES Kaiser Aluminum serves its customers through six largely self-sufficient business units or divisions that opetate on a decentralized basis. These are: raw materials, primary aluminum products, flat-rolled products, extruded products, rod/bar/wire, and forgings. A review of each follows. RAW MATERIALS PRODUCTION CAPACITY ,Memc1bnsl Bauxite Mining Kaiser Jamaica Bauxite Company, Jamaica (49% owned)11' Alumina Banners of Jamaica (Alpart), Jamaica(50% ownedj Tbtal 'Alumina Refining Gnmercy, Louisiana Alumina Partners of iamaica (Alpart), Jamaica (50% owned) Queensland Alumina Ltd, Australia {28.3% owned) Tbtal (1) While Kaiser owns 49% of KIBC.it receives all of KJBC's output. (a) Dedicated fully to the .Alpart refinery. Annual Rated Capac Avaihble Kaiser Alumtm 4^00,0( I.2004X 5,400/X 748,0c " 560,0c ' 774,0c 2,021,0c .. ?**',' *' * PRIMARY .ALUMINUM PRODUCTION CAPACITY iMemcTonsl1" Annual RatedCapac: Available Kaiser Aiumimi Mead, Washington Thcoma, Washington 200*00 73&0 U.S. Tbtal 2734 Volta Aluminium Co. Ltd (Valeo), Ghana (90% owned) Anglesey Aluminium Ltd, Wales (49% owned) Boyne Smelteis Ltd, Australia (20% owned) ; Aluminium Bahrain, Bahrain (17% owned) .180,06 . ',42430 29-00 . OverseasTbtai -,l ; v. '305430 World Tbtal - -;S78,oo (r) A smelter at Ravenswood, West Virginia,was sold in ftbtuaiy 1989 and, therefore, is not shown " this table. is; g nr im [OEITUDEL COR Ft 'K MEM' RAW MATER! \L" WITH BURY Mi INLY MI'ERA ISOK AF GRAMERlY PLANETAR'S KILN WHERE ALUMINA IS CALCINED"WEA E MADE OUR .ALUMINA AND BAUXITE OPERATIONS MORE COMPETITIVE BY INCREASING PRODUCTIVITY AND M.AKING TECHNOLOGICAL IMPROVEMENTS. NOT ONLY DOES THAT ENABLE US TO IMPROVE OUR SERVICE TO OUR CUSTOMERS, BOTH INTERNAL AND EXTERNAL, IT ALSO WILL ALLOW US 5!?^> 10 MAXIMIZE OUR EARNINGS POTENTIAL IN 1989 AND BEYOND" 1 RAW MATERIALS--BAUXITE AND ALUMINA Kaiser Aluminum's raw mater* iais 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 technology,Jom- ~ bined to produce outstanding oper ational and financial results for the division in 1988. The division participates in the international batmte/aliuniha; business through: V > 49%*owned Kaiser Jamaica BaiLxiteCompy(KJBCl, Kaiser's largest source ofbauxite 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 iff. bauxite into aIumina;ancL... j ' 50%-ov^ned Alumina Part ners of Jamaica (Alpart), which ; mines bauxite and-refines it.'. f into alumina.- <:';` AtKJBC, sales revenues and... volumes increased in 1988, and. - employees achieved themilestone of threemillion Work-Hours with out a lost-time accident. Produc tion is expected to increase further, and the total volume ofbauxite mercy, and QAL over the next tw yearSfto maintain the facilities' high operating rates, implement shipped by K)BC is expected to further process technology increase by about 15% in 1989. Gramercy and QAL set produc improvements, satisfjntafety and environmental control responsibi tion-records in 1988, operating at ' r better than 100% of their rated= . annualcapadties. These fatuities are expected to produce at even ' higher levels in 1989 to help supply the strong alumina market ant hies, and refurbish production equipment at Alpart- Up to now, the majority of tin division's alumina has been con sumed by KaiserAluminum smel ers. Now, howeveg. the division's strategy bqgjshffted toward supply The bauxite mines and alu mina refinery afAdpait, Jointly ing more alumina to third parties, in 1989, for the fist time, owned with Reynolds Metals , chant market alumina sales axe.' ay, are *rp^w exceed imemal alu:, a Jr_e__s.t_a__r_t oitf o'p__e_d2^n*ia__n_s__i_n__m__ idj-_1_98_9. t_ain* transfers. ConriequentIy,the Kaiser Almninnm and HytfiS drvisjjjfris rapidly evolving from ai Aluminium a.s, a Norwegian com organSation principally respoztsiv pany, have announced their intern dons to purchase Reynolds'30% . to internal demands to one ori-- Vt-ST' ented to customer needs in thef' share of Alpart. The purchase world alumina and bauxite market would result in Kaiser Aluminum having majority ownership in, fand management responsibility ,;f for> Alpart. _ 'ir-j-c-V-; ' Aipart's pended in i985,largely due to low alumina prices. At that dine, excel lent progress was being made ur f; ` L - ' redadngqperating.costsaurAl^kr^f^T andKaiserAluminum mtends'teC-f . maximize the operatibtfspoten.-. j rial to become a major competi- ' ' :7` - rive fotce in the merchant or opes- market.The refineryis expected: to increase production to the 1,ooo,ooo-metric-ton-per-year rate in the third quarter of 1990. Capital expenditures, which will rise in 1989, will be used to jj-ft;-;- ALUMINA--OPERATING RATEAND SALES ofRateACapacicy Utilisation* 1 Bxtrmal'Sales Internal Transfers -Includes Kaiser Aluminum's share of Aipaits capacity. expand capacity at KJBC, Gra- f PRIMARY ALUMINUM PRODUCTS The primary aluminum products strong aluminum demand, the divi end-users, and the London Metal division reduces alumina into pri sion operated at 95.7% of capacity, Exchange terminal market. In mary aluminum metal for use by and metal output reached more 1989, the division plans to marke the company's fabricating plants than 640,000 metric tons. Of about: 340,000 metric tons of met and for sale to others. this total, more than 275>oo6 to outside customers. 1988 was an excellent year for metric tons were sold to outside Selling products forward-- primary aluminum products. Divi customers. Le., for future delivery--on a finr. sional financial results benefited The high ingot prices of 1988 price basis in order to manage the from improvements in operating made Kaiser a relatively high-cost risk of a downturn in ingot prices efficiency and all-time-high ingot prices. New highs were recorded in produce^ because the cost of alu mina and other raw materials rose Approximately one-half of 1989 production available for sale to other areas as well. For example, with the upswing in aluminum third parties hasbeen pre-sold. employees at theValeo smelter in prices, and some labor and power In technological advances, Ghana set a new industry standard' costs are indexed to ingot prices. the division has perfected and in for safety, by working sixmillion . But while the company experi stalled retrofit technology in all hours without a lost-time accident. ences higher costs when ingot the scneltezs it manages (Mead, ...employees at Anglesey in Wales prices are high, it benefits from Thcoma, Anglesey, and Valeo). - andMeadrWa3hington,.established^^5*,ijJowercpsts^henJiig^giice^dioifc^^^^^gi^IhWjiischr^og^^wlriiffi include their highestmonthly operating . This ability to compete the redesign of the cathodes and rates, and set energy efficiency . records...Mead posted its best-ever safety record...and Anglesey pro throughout aluminum price cycles .means the division should he able, to continue to operate its smelters ` anodes that conduct electricity through reduction cells, improver "feed" systems that add alumina duced its highest volume of value- at virtually full capacity in times of the cells, andthe computerized added products. Responding to economic downturn. Celtrol system that controls Tb market this full produc- energy flaw in the cells, resulting - don, the division is continuing to in more efficient energy use-- emphasizethieekeystrategies: * ;v allows Kaiserto compete witfct . Y,. Selling more,value-added -u ' > ANV'' _ ',S . products, for example^ at Anglesey the industry's newer smelters. Y;Xliedivision licenses this tec and Valovvirtnally. all capacity for Y-Y.Y nology and sells technical assist- billetis sold through 1989.' ...... . ancc tQ other producers around tf , Selling to a more diversified ; globe,,and expects to expand its customerbase, suchas trade rner^^YryY^techraic^salesiffibtt in 1989. chants, otheraluminum prodn T^eprimaryduminumpioc v - nets group plans to spend about S25 million ofcapital in 1989^ These expenditures will beaixnet atimprovingprocess control sys 84 3; 86 87- , EMPLOYMENTANDPRODUCTIONAT . XAISIR-MANACED SMEUKS " Production in 000s Metric Tons Employees Houriy Salaried tems andcarryingout otherproj ects to increaseefficiency and productivity. 8 DICK HUMPHREY, CORPORATE VP, PRIMARY ALUMINUM, WITH STAFF ENGINEER SUE STEfER AND uI'ERATOR DOUG TARLIP ATTHEMLAD SMELTER: HIGH [NG(TT PRICES WFRF A MAIOR FACTOR IN' RECORD EARNINGS. EQUALLY IF NOT MORE IMPORTANT IS THE PROGRESS UT MADE INSTRENGTHENING THE BASIC STRUCTURE OF OUR BUSINESS. WITH FULLCAPACITY OPERATION A REALITY', AND CONTINUED PROGRESS IN PRODUCTIVITY AND COST CONTROL, WE ARE IN POSITION TORE AN EFFECTIVE. LONG-TERM COMPETITOR IN PRIMARY ALUMINUM." /N AT THE TRENTWOOD ; STAND COLD MILL: WE ARE DETERMINE!) TO TAKE FULL Ai WANTAGE 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." flat-rolled products The flat-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 strengthenedby the modernization and quality and service commitments made at its Itentwood, Washington, rolling mill. The division's general market.ng environment has been aided , over the past two yearsby.higher world demand for fabricated prod ucts arid the depreciation of the U.& dollar; which have contrib uted to a major increase inU.S^ exports of flat-rolled products and ' decrease in impoits-These trade developments, together with higher -output and improvedqualityand costs at"Bentwood, havesubstan tially strengthened that mill's rela tive competitive position- ;... Management fa aggressively -utsuing a strategy to take fall 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 metalluigical properties fa the result of a five-year, $250 million capital spending program that has provided state-of-the-art hot and cold rolling equipment and improvements in operating methods. The plant's capacity, product quality," and operatingeffiriency ., _ v were strengthened in 1988 through the installation of folly computer ized equipment that simultane ously scalps the face and sides of an ' fagotto produce a minor-like sui- ; face. The new equipment is allow ingthe plant to cast and process an increased number of wider, longer, and thicker ingots. In 1988, 'bentwood's produc tion volume rose for the fourth con secutive yean Employees made progress in lowering costs and strengthening product quality, cus tomer service, and product mix. The single largest capital project currently under way at "bentwood is the installation of a S30 million, high-speed, wide-coil coating line to accommodate the . can industry's move to expand pro duction of lids from wide coated coils. Scheduled for completion fa mid-1990, the new line and its related handling equipment will ensure "Bentwood's capability to produce a full range of highly com petitive can end stock materials. New projects currently being engi neered for 1989-91 installation include modernization of equip ment far producing heat-treat products. The flat-rolled products capita spending and marketing strategies are supported by the division's advanced research and develop ment activities conducted at the Center for Technology (CFT) in Pleasanton; California. Personnel at CFT use theirscientific and . ,, T-* technological skills to enhanet the company's competitive position in the important can stock and aerospace markets. This fa accom plished by developing and ensuring the practical implementation o improvements in plant process technology that lower production costs and/or strengthen product ..." quality, and by working with operating and sales pesonnelmf.- to enhance existing products-: CipW. 5. -- and develop new ones. TRENTTOOD MARKETSEGMENTS--i$is BYREVENUES B Can Stock >0% ATI- Heat Treat i8b 3 ATT Common Alloy 22% Products far the Aerospace. Transportation, and Induserrai markets EXTRUDED PRODUCTS The extruded products division operate under the name of Kaiser operates soft alloy extrusion facili Aluminum Extruded Products. ties in Los Angeles, California; The rapidly rising cost of Sherman, Ifexas; and Tbronto, billet during 1988 created situa Canada; and a cathodic protection tions that were favorable to long business located in Thlsa, Okla term sales agreements, and the homa, that also extrudes both division entered into several aluminum and magnesium. All such arrangements. facilities have fabricating capabili During 1988, extmded prod ties and finishing operations. ucts acquired a plating facility and The division's major markets a painting business in Lbronto to are transportation, to which it pro complement the existing Tbronto vides extruded shapes for use in extrusion plant. In Sherman, a new building trucks, trailers, and ship remelt facility was successfully , ping containers; durable goods; brought on line and a mill distribu defense; and building/construction. tion system to support the service It serves these markets directly and center industry was established. . ft^^The addition of a remeit and cast-.^*^ Because of the regional . ing operation at Sherman, which nature of the industry, each of allows the plant to supply its own the extmded products division's billet requirements and to sell bil businesses operates on a semi-.autonomous basis, seeking to develop additional niche markets having special tolerance and value- 1 fabricating requirements., .. Metal procurement, technology, \ nMflfpftng pffiirfc 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, it allows the use , of remelted scrap instead of by the businessesrill ofwhich -V - new metal, thns lowering ' ' *' - t'. . , . ` .'v - .. production costs. ,, ,, . For 1989, the Los Angeles plant is studying installation of its own . remelt andcastingfatilityias well. ' ~ as expansionofits press capabifity.:; '. The extmdedproducts diyi-;':, Sion's strategy for the future is one of value-added growthand creation of newregionafbusinessesiif-?^^- - MARKETS SERVED--ijis -3Y VOLUME. a Transportation 43" S Distribution i;" B Export-10% Building,'Construction9a'o B Other 23% *" ' Tt"1' " IIMOWEN.VP, EXTRUDED PRODUCTS, AT THE LOS ANGELES PLANT ' OUR VISION OF THE FUTURE IS ONE OF GROWTH -BOTH VALUE-ADDED GROWTH, AND NEW REGIONAL BUSINESSES. THE PURSUIT OF A NICHE MARKETING STRATEGY, COMBINED WITH .AN ORGANIZATIONAL CULTURE THAT ED COYNE VP. ROD, BAR. AND WIRE I RIG ITT. WITH HAN'T MANAGER LACK O DELL AT TI IE NEW MACON FACILITY -1988 WAS A TURNING POINT: WE BEGAN A $28 MILLION SPENDING PROGRAM TO INSTALL STATE-OF-THE-ART CAPABILITY'AT NEW PLANTS IN MACON .AND JACKSON. THIS WILL BUILD ON STRENGTHS AT NEWARK. REDUCE COSTS, IMPROVE THE QUALITY'OF PRODUCTS WE SELL TO OUR CUSTOMERS AND THESERMCE \\L OFFER THEM, AND INCREASE CAPACITY' BY 19S9 WILL BE OUR YEAR OF TRANSITION' TO MORE FOCUSED OPERATIONS IN A MULTI-PLANT ENVIRONMENT." flOD, BAR, AND WIRE "Xhe rod. bar, and wire (RBW) div; Irion, \v . .n is based in.Newark, Ohio, is the second largest manu* :|r feftnwr of aluminum rod, bar, and that combines drawing, straight ening, burnishing, cutting, and packaging into a single, contin uous operation." The Jackson facility, named Tfennalum, will concentrate on manufacturing screw machine stock and other extruded rod and viie products in the U.S. Its prod* The Newark facility operated bar products for customers in the act mix consists of screw machine stock, redraw rod, forging stock, near capacity in 1988 and expects continued strong demand for its automotive, aerospace, electronics, consumer durables, and ordnance tad coiled wire products. These product :re sold to customers fat the consumer durables, principal products in 1989. Newark will continue to operate its modem remelt facilities, its 10-inch mill, markets. It should begin operations in 1989 and be finishing all of the division's screw machine stock rod transportation, aerospace, ord and its 66oo-ton indirect extrusion and barproducts in 199a. nance^ and other markets. press--the largest indirect press in 1989 will be a year of transi In 1988, RBW began a S27.5 the U.S. In 1988, Newark's capabil tion to simplified and focused ./.Xi million capital spending program that carries forward a business. - strategy ofc ' ity was upgraded to produce forging stock with a diameter of np to 23 inches in order to meet customers' manufacturing operations in a y;: ' .multi-plant environment. Tb assure customers of a continued high level fidying ^requirements,forthis larger srze.^*^sfe-^of product qualityand service dur manufacturing operations; The product mix at Newark will be ing the transition to the new facili Lowering production costs; Increasing capacity by about 25%; and simplified to match competitive strengths in billet, forging stock, and hard-alloy redraw nxLNewark ties, dual or duplicative operational - capability is generally being main- tained at Newark until the new >. Improving product quality and customer service. also will supply raw materials to Macon and Jackson, as well as to - facilities have proven their ability to meet fully their customers' qual As 'rt of this market-driven strategy, several product finishing ^ operations are being expandedand the company's forging plants in Erie, Pennsylvania, and Oxnard, California. ity and service requirements. .* relocated into new state-of-the-art ^54 "L `Macon and Jackson each will . - facilities atMacon, Georgia, and. y ; focus on a singleproduct lu^';tar-i;: ;:;v; Jackson,Tfennessee. AtMacon, , . geted to specific qistomerneed^^J^ V; example, equipment will range fcom a computerized tensile tester fctchC'Mingproductqualityto an . in order to improve the service, '3A,.> quality, and economics offiaish.4^i^r: ^Htomared wireprocessingline - : - Georgia Wire Products,,wilI fe-y. dedicated to producing coiledwire products, including weld,wire and: - nr. - screwmachinestockwire prod It ucts, for a variety of end uses rang QUALITYAS MEASURED BYOALM-FHEE. ing from fasteners to zippers to PERFORMANCE t % of Orders Shipped cable TV coaxial cables. Produc W- tion of both coiled wire and screw V machine wire is expected to be & fully operational in mid-1989. FORGINGS The forging division operates pro to specific customer needs. The duction facilities at Erie, Pennsyl Erie plant, for example, is using its vania, and Oxnard, California, and computer-aided design and manu is adding an si i million facility at facturing (CAD-CAM) systems Greenwood, South Carolina. The to design and produce dies for division's strategy is to continue structural aerospace parts, for to grow as a major supplier.of high- automotive and track pacts, and quality forged parts to customers in for complex parts for the the transportation, aerospace, ord ordnance market. nance, machinery and equipment, The Oxnard plant is the pri and marine markets. macy supplier of machined and The high strength-to-weight - assembled forged aluminum hubs advantages of forged aluminum sold to themajor track manufac- > . .s' parts, aswell as efficient produc- . turers in the U.S. and Canada. Its . don techniques andimproved increased availabilities ford strata' ' quality measures, have enabled gic Southern California location ;; trate high-volume market applica tions for its products. Both the Erie and Oxnard plants have expanded theircapabil ities and product lines in response ; " '* '!- , - - < '.'a ,t* -V-V-C V. '' " rv'T h MARKEISEGM"--------- -- BY REVENUES' B Machinery and Equipment . -iK>v a significant supplier of hand foigrags to the aerospace market. Another important customer is the medical technology market. One example of such products is the fotged rotor of a centrifuge, a piece of equipment widely used by hospi tals and medical/scientific research facilities to test blood samples by ? spinningthem at high speeds^ thns : 1 separating blood components. V. ' Heavy emphasis on federally ` man` dt *ated automotive s"afet.y>*e* .q-*u*.Ti,pmest,as well as the continuing ;;;. - needfarstrong, -videdthefotgingbusinessunifc with additional opportunities to increase its participation inthe automotive market.Recognizing that a low-cost, focused facility would be required to serve cus tomers in this market, the division is building the new plant at Green wood. It is scheduled to be in opera tion in the second half of 1989. "jt.t Kiv _.cV.C. >'v t I-,.,. i fOEBERNAT, VP, FORGINGS, AT ERIE, WHERE THIS COMPUTERAIDED DESIGN AND MANUFACTURING CAD-CAM! SYSTEM IS USED TO MAKE DIES FDR AEROSPACE PARIS. WHEELS AND MORE. FINANCIAL REVIEW FINANCIAL RESULTS 1988 On October 28,1988, a subsidiary of iVlAXXAM Inc. acquired KaiserTfech 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 first ten months of 1988, production and shipments increased significantly from 1987 levels. While raw 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 continuing opera tions of S144.7 million and net income of S175.7 million for the ten-month period. Net income included a loss from discontin ued operations of S5.0 million. (see Note 4) and an extraordinary income tax benefit of $36.0 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 pamings excluded the operating results attributable to all assets reclassified in the purchase transac tion as assets heldfor sale (see Note 4). The principal assets reclassified were the smelter androlling mill in Ravenswood, West Virginia, which have been sold subsequently. In 1988, KaiserAluminum 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. and 1987 tion of certain provisions of Finan Lass provisions including asset cial Accounting Standards 87 and write-downs were the primary cause 88 relating to employer accounting of the net losses incurred by Kaiser for defined benefit pension plans. Aluminum during 1986 and 1987. The operating loss of $94.2 million Operating losses from aluminum (excluding the write-down of oil activities (before loss provisions) and gas reserves) occurred prin were a contributing factor in the cipally because of low prices . loss experienced in 1986, but throughout the aluminum were not significant in 1987. industry. The net loss in 1986 was $32.7 The net loss in 1987 was million. Results from continuing $354.9 million. The losses from operations before taxes included a continuing operations before taxes loss of $59.4 million associated ., : included loss provisions of $366.1 - with the write-down of oil and gas million, principally attributable - : :ves which have been sold sub to the electrical products manu- sequently, a gain of 516.9 million*^ facfuring busiriessHdle arid" from the sale of part of the Kaiser ' uneconomic primary aluminum Aluminum interest in Anglesey production capacity, and oil and gas Aluminium limited, and a gain of properties, most of which have S19.5 million resulting from the been sold subsequently. In addi cancellation of a long-term natural tion, the financial results included gas supply contract. Kaiser Alumin.; :. recorded a gain from discon a gain before taxes of $68.8 million from the sale of Kaiser Aluminium tinued operations of $45.2 million, Europe Incorporated and the sale of primarily from the disposition of a a food service packaging business. real estate business and the adop- ' - The operating income of S3.3'tnil-: 240 ' . lion in 1987 (excluding the $366.1'' million restructuring provision and -- the $68.8 million gain from asset' sales) was a substantial improve- ~ ` 160 ' ment over the loss of $94.2 million' iri"rg86 due to several factors. Procno :. ess improvements and cost reduc-'1' 80 . 40 84 *5 36 87 88 ^W.USPENrKC tin millions or dollars! tion programs as well as savings in overhead and administrative expenses contributed substantially. Shipment volume from the remain ing production facilities improved and primary aluminum prices increased sharply. In all three years, depreciation based upon replacement cost would have been higher than depre ciation based upon acquisition cost .of the assets. CAPITALSPENDING ^ , Most of the S277.0 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 Trentwood 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^oil 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-savinganodes began at the Valeo smelterin 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, Tennessee, and the forging division is expand ing in Greenwood, South Carolina. These plants are expected to be completed during 1989. FINANCIAL POSITION During 1988, Kaiser Aluminum used cash from operations and from asset sales to reduce debt by S334.6 million to $606.2 million on December 31. This total included 55064 million outstand ing under a 1986 credit agreement with a group of banks and S99JI 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 31, 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;!,'' 1988, debt obligations of affiliates for which the Company is respons ible and which were not recorded on the balance sheet amountedto $257.6 million. 20 SUMMARY OF REVENUES AND INCOME Ksiser Aluminum &. Chemical Corporation and Subsidiary Companies million* of dollars' REVENUES: Net sales--aluminum Primary Fabricated Other Total net sales Other Total revenues Income [loss) from continu ing operations before income taxes and minority interests Provision (credit) for income taxes Income (loss) bom cominti* ing operations before minority interests Minority interests Income (loss) from continuing operations Discontinued operations -- net of income taxes?" Income from opera tions Income (loss) on dispositions Income (loss) from discontinued operations Income (loss) before extzaordinary item , Extraordinary income -- tax benefit" Net income(loss) Successor Two Months Ended December 51. W8 Ten Months Ended October ;t. 1988 Predecessor Yeats Ended December 31. 19*7 1986 I9*( si 10.0 152.3 35-8 198.1 11.4 S309.5 S 472.7 1,317.1 131-6 1,9214 46.3 81,967.7 s 206.7 1,679.8 H64 2,002.9 94.8"' s 2,097.7 * 93-3 1,765.4 IO84 1,967.1 68.7"' S 2,035.8 * 44-3 1,608.0 121.7 1,774.0 62.3 s 1,836.3 S 2T9.4 1,629.3 8743 1*935.7 324 s 1,968.1 s 47-5 18.3 s . 252.7 .. s (294.o)f4, 1024 46.8 S (MO^)" (43-0) s (364.0)*' - (165-7) S (212.2) - (150.0) 29.2 (I.I) 28.1 150.3 ls-6) 144.7 (340.8) (4-7) (343-5) (77-9) ' ' r (198-3) (77.9) (198.3) (622) (622) 5-9 (10.9) -- - ' ` ' _ V 'vw-:-"(s.o)-= 28.1 139.7 * J<4 $ 28.1*' fr s ~i75-r'w 11-7 ... - 26.I,j (23-ir 5* . 19.x. ,, _ ._ (114) 4549 (354*9) ^''(32-7) - a j-v- i.....: (354-9) ' Sr- fa.7) . v ~ 16,*8*"*- - v (5-oJ '4 - , .t r ir.8 ' (186.5)- 25*5 (60.7). (35*2): -m (97-4) . s (186.5) ~ s (974). (<) Restated for the adoption of Financial Accounting Standard (fas) No. 94 returning fall consolidation of majority-owned subsidiaries. (1) Includes gains ofsi6.t from the sale of the food service packaging business and 551.7 from the sale of Kaiser Aluminium Europe Incorporated. (3) Includes a gain of szoj from adoption of fas Nos. 87 and 88 relating to employer accounting for pension plans, s 1.7 in other revenues and 518.5 in discontinued operations. Also includes 132.5 from cancellation of a long-term gas supply contracr.si9.5 in otherrevenues and 013.001 discontinuedoperations. (4) Includes a loss provision'd S366. r for restructuring of operations consisting principally of write-downs of the electricalproducts manufacturingbusiness and idle and uneconomic primary aluminum production capacity, and provision forthe lost upon disposition of oiland gas properties. (5) Includes a write-down of oil and gas reserves of S594. (61 Includes write-downs of the Baton Rouge. Louisiana, alumina refinery, as well as several smaller assets, totaling sarz-o and*9.8 in othercosts and expensesand income from discontinued operations, respectively. (7) Discontinued operations consist of the agricultural chemicals, refractories, trading, real estate, and industrial and specialty chemicals divisions, (81 Includes a loss provision of 533.9 related to certain operations and businesses that were discontinued in recent yearn (9) The extraordinary tax benefit results from utilization of net operating loss carryforwards by domestic operations. IX CONSOLIDATED BALANCE SHEETS, DECEMBER 31,1988 AND 1987 Kaiser Aluminum &. Chemical Corporation and Subsidiary Companies millions ot sollarsi ASSETS Current assets: Cash and cash equivalents Receivables: Tfade [less allowance for doubtful receivables: S7.6 in 1988 and $7.2 in 1987) Other Inventories Prepaid expenses Assets held for sale Current assets of discontinued operations -- net Ibtal current assets Investments and advances -- related parties Property, plant, and equipment -- net Noncurrent assets of discontinued operations -- net Other assets Tbtal Successor s 209.5 2644 56.9 451-4 4-3 336.6 353-5 668.9 58.7 $24042 Predecessor s 131.7 2302 80.7 479.9 20.5 44-6 987.6 2044. 950.5 292.3 lll.g $2,546.7 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:-*-^ > - ^ Accounts payable Accrued wages, interest, and other liabilities Income taxes payable Payable to affiliates Long-term debt--current portion . ... .. ... s 151.0 200.3 59-6 177-6 117.O Total current liabilities Long-term liabilities 705-5 188.2 Long-term debt 489.2 Deferred income taxes "} , r- Deferred income . , , ..' ** ........... Minority interests i ' . ...V Redeemable preference stock--aggregate liquidation valueof siBO^atDecemberji, 1988 _ _ - ' 62.r . 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, parvalue si, stated value S50, authorized io,ooo,ooo shares; issued: 600,000 shares (aggregate liquidation value of $30.0 at December 31,1988). Common stock, parvalue 33V3 cents, authorized 100,000,000 shares; issued: 44,899,320 shares in 1988 and 1987 Additional capital Currency translation adjustment Retained earnings 7-8 - .6 XS.it 897-4 264 Ibtal stockholders' equity 947.2 Tbtal $2,404.2 $ 151.0 202.2 ,36.7 133-9 53-5 577-3 160.3 887.3 . . . 65.6 .45-7 tii%- r . ;> 38.9 '`A-r-hii-' 'll.2: : -rat i.v.ra J6 15.0 351-6 SJ. 376.fr 760.2 $2,546.7 The accompanying notes to financial statements am an integral part oi these statements. STATEMENTS OF CONSOLIDATED INCOME Kaiser Aluminum &. Chemical Corporation and Subsidiary Companies millions nrdolUnl REVENUES: Net sales Other Tbtal revenues COSTS AND EXPENSES: Cost of products sold Depreciation Selling, administrative, research and development. and general Interest Other Restructuring of operations Tbtal costs and expenses Income (loss) from continuing operations before income ,^,.iflxes.attd.minority interests..-.,-^,.-.,.v^..; Provision(credit) for income taxes Income (Iossf 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) Successor Two Months Ended December ji, 1988 Tea Months Ended October ;t. 1988 Predecessor Year Ended December jt. igSr 8fear Eaat December >1. $298.1 II.4 309.J $1,921.4, 4<5.3 1/967-7 $2,002.9 94-8 2,097.7 $1,967. 68. 2/03 S-t 226.7 7-7 14.6 8.2 4.8 262.0 -,`V- 47.5 ' * X8.3 29.2 (I.I) 28.1 1,462.4. 69.6 1692.7 97-7 I,7T 5.: ro6.< 89.7 69.6 23.7 "4-3 106.1 14.8 366.r 128.C t27-5 78.5 1,715-0 2,39 r-7 2,156.7 ' 253.7"-""`"f**- (194.0)"'-- "~--(r2cig 102.4 46.8 (43-c 150.3 (5-6) (340.8) {2.7) (77-9 144.7 (343-5) (77-9 28.1 s 28.1 5-9 (10.9) ri.7 (23.1) (5-o) 139.7 r 36.0 . .. (354-9) s 175-7- * (354-9) 26.1 19-r ' ' 45^2 (32|r $ (32-7 The accompanying notes to financial statements are an integral part of these statements. .... ____ .... _______ . -i.  STATEMENTS OF CONSOLIDATED CASH FLOWS Kaiser Aluminum &. Chemical Corporation and Subsidiary Companies .millions of dollars) Successor Two Months Ended December 31.19$8 Predecessor Tea Months Ended October 31,1988 Year Ended Qxember 31.191)7 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 writedowns 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 Net cash provided by operating activities s 28.x 7-7 (*) 12.6 1.2 1JO 17.0 (5*7) n.6. 9.6 12.5 .-^-.-*-^.(84)-., 86.7 * 175-7 69.6 U-4) (6-3) (44.6) 4*6 8.0 5-6 (37-0) (86.7) 16-0) 28.5 20.3 48.5 178.8 *(354-9) 97-7 6.9 350.8 (15-9) 4.6 ix.8 2.4 29.7 172.6 (61.0) (*3-o) (6.7) - 75-1 300.1 INVESTING ACTIVITIES: Proceeds from disposition of property and investments Redemption fund for preference stock Capital expenditures Net cash provided by investing activities 204 -.r 1*3-5) 7.0 236.5 7-2 (82.1) 161.6 220.6 - (4-3) (86.7) 129.6 FINANCING ACTIVrnES: 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 ...... ,, ` >s (28-3) (293-8) .... . , h- ...... .. (29-1) . 6-4 ' v-. ;1-' T - V't ' .' 'V '/ t" (-1) (11.5) (28-4) ' - (328.0) , . , ' .. ,.l 1474-9) 14-1) 2S-0 47-2 .1 C--7 V 7 - (406.1) .6 Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period ' 65;J 41 `V'Mxy . X3r.7 S209.5 ' s 144a 'i 24^2 :iQ7-5 s-131.7 OTHER CASHFLOW INFORMATION: Interest paid (net ofamountcapitalized) Income taxes paid -/v -* S 7-43-2- * 76.3- 52-9 s 117.2 42-3 The accompanying notes to financial statements are an integral pan of these statements. 24. STATEMENT OF CHANGES IN CONSOLIDATED FINANCIAL POSITION Kaiser Aluminum & Chemical Corporation and Subsidiary Companies smiilionsof dollars) 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 bom 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 v Receivables -a:-; Inventories_ . - '' . ' 1- Prepaid expenses Current assets of discontinued operations -- net.............. .............. - ------- -------- Accounts payable and accrued liabilities :'3 SjZ'.ijL.. Income taxes payable ,v,_- Payable to affiliates r Notes payable " ~ .' .----------- Long-term debt --current portion ' .......... Tbtal The accompanying notes to financial statements are an integral paitof this statement. "r!? psjr'B - MtOMI December jt. 1944 * (77.9) 106.6 137.6) 1.9 9-* 40.8 43-0 ro8.o 12ojo 8.2 152-5 30.0 (46-3) *415*4 * 93-r 279-2 (244) 14.7 .3-7 (3-5) zi.6 68.0 S4IS-4, -'gS. s C-6) - 39-6 " 34. (27^8) lyj&r -- . . - 6r& T4-OV $ 68jx t- zr  NOTES TO FINANCIAL STATEMENTS Kaiser Aluminum & Chemical Corporation and Subsidiary Companies (millions oi dollars, except share amounts) '.THE MERGER On October 27,1988, the stockholders of Kaiserlfech limited ("Kaiserlfech") approved and adopted an Amended and Restated Agreement and Flan of Merger, dated as of May 22,1988, by and among MAXXAM Group Inc. ("MAXXAM"), Kaiserlfech Acquisition Cor poration ("Kaiserlfech Acquisition"), and Kaiserlfech providing for the merger (the "Merger") of Kaiserlfech Acquisition with and into Kaiserlfech. Kaiser Aluminum & Chemical Corporation is a subsidiary of Kaiserlfech and is referred to as "Predecessor" prior to the Merger and "Successor" after the Merger: Predecessor and Suc 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 Kaiserlfech by MAXXAM was financed by $925.0 principal amount of Senior and Sen- . ior Subordinated Increasing Rate Notes due 1991 issued by Kaiserlfech.The Company plans to use cash from - opeiations'aiid'fiom.selected:asset salevtogethet with .. ,, existing cash balances, to reduce debt to the point that outstanding borrowings ofKaiserlfech and Kaiser Aluminum can be refinanced with new borrowings having more appropriate maturities and.less restrictive covenants. BASIS OF PRESENTATION MAXXAM acquired control of Kaiserlfech on October 28,1988. However for financial reportingpurposes, the ' Merger is deemed to have occurred on October 31,1988. . * The use of a date for financial reportingpurposes which ' is three days later than the date of the Merger does not. affect significantly the financial statements of either . Predecessoror Successor TheMerger has-been accounted for as a purchase as ' of.Octoberjr, 1988^ Push-down accounting has been . : applied to reflectthe MAXXAM investment in KaiserTfech equity securities as stockholders' equity of KaiserTfech at November 1, X988.This push-down adjustment has also been reflected in stockholders' equity of the Company (see Note 10). Accordingly, Successor has recorded the assets and IiabilitiesofPredecessorat 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. millionsot dollars' Current assets Investments and advances Property, net Discontinued operations--net Tbtal assets Current liabilities Long-term liabilities Long-term debt Other nonctuient liabilities Minority interests Redeemable preference stock Stockholders' equity Ibtal liabilities and stockholders' equity- Predecessor Successor October;!. tjlM Benue Purchase Adnistments Purchase Adjustments October :oaj Alter Purchase Adjustments SI.073.9 -...A5*.3 9SO-4 s 225.3 . "5-7 (288.3) SL r299.Z 368.0 662.1 99.6 (99*4) .-'-(47-0). -fLJf.l-.- 00*9 S2.484.1 * 193-9) 52,390-2 s 628.0 151.1 640.9 106.3 14-* 41-7 901.7 5 (47-Si 37.6 (IS-6) (106.3) 18.8 19.1 5 5*0-5 188.7 625.3 14-4 60.5 920.8 52484.1-. * (93-9) 52,3902 Successor anticipates that k will retain Predecessortax. basis for the assets andliabilities acquired. Because the fair values of certainassfets acquired are higher than,the tax basis, a portion of the depreciation expense for ' financial reporting purposes will not be deductible for tax repoRmg purpose&lb the extent that the lower tax . basis reduces the fairvalue of certain assets and liabili ties, suchreductions have beentakeninto consideration in determining fair values. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES certain aspects of the financial statements (for example Accounting policies of Predecessor were the same as depreciation expense) are not comparable. those of Successor unless stated otherwise. Depreciation is computed principally by the straight- line method at rates based upon the estimated useful Principles of Consolidation: The consolidated financial lives of the various classes of assets. The principal esti statements include the statements of the Company and mated useful lives by class of assets are: majority-owned subsidiaries. In 1988, the Company adopted the provisions of Financial Accounting Standard Successor Predecessor (fas) No. 94, which requires full consolidation of all majority-owned subsidiaries. Previously, the Company did not consolidate less-than-wholly owned subsidiaries Land improvements Buildings Machinery and equipment 5 to 15 yean 15 to 30 yean 10 to 22 yean 25 years 45 years to to 22 year The 1987 financial statements and the 1986 balance sheet have been restated. Other 1986 financial state The cost less salvage of retired property, plant, and - ments and financial statements of prior years have not ' equipment of Predecessor was charged to related been restated because the effects would not be signifi accumulated depreciation. Amortization of capital ;; cant. Investments in subsidiaries not consolidated, joint leases is included with depreciation expense for property ventures, and 20%-or-more-owned companies are ,;plant, and equipment: . v -v... s. accounted for by the equity method. Intercompany items and transactions are eliminated. Income Taxes: KaiseiTfech and the Company arc *; ..... . ..... - 1"- r Foreign Currency Translation: The Company translates ^included hvthe consolidated federal incometax return^ of MAXXAM Inc. Pursuant to a tax-sharing agreement the assets and liabilities of certain international compan between KaisetTfech and MAXXAM Inc^ provisions for ies using local currencies at current rates of exchange. income taxes for KaiserTbch and the Company represent The resulting aggregate translation adjustments axe reported as a component of stockholders' equity. The an allocated portion of the MAXXAM Inc: consolidated tax provision. - SA-; results of operations are translated at average exchange Income taxes include provisions for riming differences rates for the period. Gains and losses on forward con between income determined for financial reporting and tracts or other foreign currency transactions, except for income tax purposes. Income taxes payable includes those hedging identifiable foreign currency commit deferred amounts related to current assets and liabilities, ments, are included in income. ^ ~ and other deferred amounts where the timing difference is expected to reverse during the currentyear. Investment Inventory Valuation: Substantially all Successor product :: - taxcredits arerecognized as reductions of the inconretax inventories are stated at last-in, firstborn (lifo) cost, notin' - provision in the yearthe properties ate placed in servfarc excess of market. Substantially all Predecessorproduct -v inventories are stated at first-in, first-out (fifo) cost, not Retirement Plans: Predecessor adoptedthe provisions^? in excess of market. Other inventories of both Successor. . eas Nos. 87and 88, relating to employer accounting foi|$ and Predecessor; principally supplies and other low value - I - pension plans, effectiveJanuary.r,,t986,.except forthe||| items, are stated at the lower of average cost or market. - deferral oftheprovisions which-would recognize certajnl Inventory costs consist of material, labor; and manufac- 7 - . accumulated pensionbenefit obligations and tire related turing'overhead,' including depreciation. Finished goods,. intangible asset in the Consolidated Balance Sheet aiwEj work in process, and raw materials are not shown separately because they are soldat various stages of processing. would apply these standards to foreign plans. Successor . has appliedallprovisions effective November 1, _s ^.Thecunentcostsof:principaldomestic,retirement planst are funded as accrued (see Note 13). Prior-service costs- Depreciation and Amortization: Property at year-end 1988 is stated at Successor cost; which includes record- are funded and(for Predecessor) chargedtaoperarions- over periodsrangingfrom 71030years. ' ing Predecessor property at fair value--net (see Note 2) at October 31,1988. Predecessor property is stated at ' historical cost. Because oi the differences in valuations, Statement of Consolidated Cash Flows: In 1988, the Company adopted the provisions of has No. 95, which requites a statement of cash flows in place of a statement of rhangp<; 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 fas 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 year. Assets held for sale include (i) assets that were classified as current/noncurrent assets of discontinued operations -- net in Predecessor financial statements; and (ii) 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: . ^ -j... Successor December 31,198S "Bade receivables --net Other receivables . Inventories Investments and advances. Property, plant, and eqtripment--net ..... . Current liabilities ,.. Other--net .......................... .. - -=^ ~. s 3.6 9.8 173-r 71.9 27<x6 1189-3) (3-ri Tbtal 5336.6 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 ("sac"), a new corporation formed by Stanwich Partners Inc., an investment company. The Company will sell 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 are included in Successor assets held forsale 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: Predecessor _ , , ,. TenMonths Ended October v, 1988 YesrsEnded December 31. __ _ 1987 1986 Revenues (includes equity earnings of real estate' and industrial and specialty chemicals) Costs and eapenses'^--4^ * S15.S S23646 5310.6 wtrr-ssnss vrj- v-. 7.6-.- >323.1- V2J9-9- Income before taxes Provision for income taxes 13.5 50*7 1.3 1.8 24.6 Discontinued operations -- income from operations '' S 5-9 S ri.7 s 26.1 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: ,j ..3 .,f if_^altirlrMeInIIt aisitsielsts nne|.t-: Hade receivables--nee Other receivables Inventories - Current liabilities-- Other---net " * V**,**1 1 "A- - . - Predecessor December 31;. I98-A 4 -" - -- - - * 33it. 4.1 . 32.8 - , 123-0) '".(241 , ,, Tbtal s 4t6T Noncurrent assets--netr 1 Investments and advances Property, plant, and equipment---net . Other--net - . si 684. 1284. (4-S),,. Tbtal 5X92-3' In the third quarter of 1987-, KaiserTfech and Kaiser Aluminum began implementation of a planto sell the industrial and specialty chemicals division; including the 50%-owned Harshaw/Filtzol Partnership ("Harshaw/ Filtrol"). On September 1,1987, KaiserTbch.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 Hashaw/ Filtrol to Engelhard Corporation forapproximately $212.0 in cash. The net cash proceeds were divided equally between KaisetTfech and the Company. The remaining portion of Harshaw/Filtrol, consisting of a fluid 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 noncuzrent 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 (S19.1 after taxes) on the sale of real estate was'induded in discontinued operations in 1986. The 1986 provision for income taxes for discontinued operations (substantially all deferred) - offsets substantially all of the"tax benefits ofnet operat ing losses generated by 1986 continuing operations. 1 5. OTHER REVENUES AND EXPENSES AND RESTRUCTURING , - OF OPERATIONS----- ~---------- ------- . Other revenues ia.1987 include gains ofsi6.i from the sale of the food service packaging business and S52.7 from the sale of Kaiser Aluminium Europe Incorporated, and in 1986 include gains of s19.5 hornthe cancellation of a long-term gas supply contract and si<>.9 hum the sale of part 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 electricalproducts 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 andgas properties. Other costs and expenses in 1986 include $594 from the write down of oil and gas reserves. s. INVESTMENTS AND ADVANCES - RELATED PARTES Investments are accounted for primarily by the equity method. Retained earnings include undistributed earn ings of companies accounted for by the equity method amounting to nil and si34.jat December 31,1988 and 1987. Summary combined financial information is pro vided below for unconsolidated aluminum investments owned 50% or less, most of which supply and process raw materials for various participants. The equity earn ings (losses) before income taxes ofsuch operations are included in cost of products sold. Such information is presettted on'the historical basis of accounting of the " investee companies, exceptthat amounts representing Successor investmentand equity earning* include pur chase adjustments. ALUMINUMCOMPANIES SUMMARY FINANCIAL POSITION December}!. 19S8 December }:. 198^ Current assets Property, plant, and equipment--net Other assets . , - . -------Tbtal assets------- --------------- s 762.4. v, -<,`-1,444-4> -wv 14S-* , 5 570-8 1,485.4,158.3 52,2142: Current liabilities' Long-term debt Other liabilities Deferred income taxes Stockholders' equity Tbtal liabilities and stockholders' equity s 38&0 ............... _492-. ; - 36.1 W9.5,,, --. t ; " - ;-- 'sr,3S2a^ ' * 338-3 . 820.5 : 48.I 3QLE 977-2 yj- a?' 52,2 T42^7 Company investment in combined companies * 3S3-5 S 199-$ 29 aluminum companies summary of operations 19*8 1987 Revenues Costs and expenses Provision for income taxes 31,122.2 931-9 33-9 3903.8 855-a 8.z Net income s 1564 3 4O4 1986 *935-7 9094 iaz s 16.1 Company equity in earnings 3 30a) S 94 [I) Successor equity in earnings for the two months ended December 31, [988. was sro.2 and Predecessor equity in earnings for the ten months ended October 31,1988 was 359.3. 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 52304 and s 105.0 at December 31,1988 (5206.2 and 588.2 at December 31,1987). The Company equity in earnings ofsuch companies was 558.9 arid' 5244 for 1988 and 1987. As described in Note 3,1986 operations information has not been restated. Alumina Partners of Jamaica (Alpart), a 50%-owned partnership, owns an alumina refinery in Nain, Jamaica. At December 31,1988 and 1987, investments and advances include 568.7 and S32.3 for Alpart, which is accounted for by the equity method. The Company was obligated to repay s56a and 564.3 of Alpart debt at December 3i,.i988 and 1987, as discussed in Note 14. Production of alumina at Alpart was suspended temp orarily inAugust 1985 due to adverse economic condirionsLThe 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 negotiatingwith 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 562.2 and 5287.2 in the two months ended December 3 r, 1988 and the ten months ended October 31,1988; and 5272.0 and 5338.9 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;:. 1988 3 28.1 92.8 548-4 7-3 676.6 7-7 Predecessor December:9s- 3 68.0 278.8 1,531-2 30.7 1,908.7 958.2 s668.9 s 950.5 Property, plant, and equipment induded.capital leases-jp.*^ consisting principally of buildings atDecexnber3i, 1988 and 1987, of S2.3 and S154 (net of accumulated amorti zation of S12.5 at December 31,1987). Rental expenses were 53.6 and 520.9 in the two months ended December 31,1988 and the ten months ended October 31,1988; and S35.3 ands37-8 during 1987 and 1986. The future minimum rentals receivable under noncancellable subleases were 5764 at December 31,1988. The future minimum rental commitments under noncancellable leases at December 31,1988 were: = Total ` Operating , fYrnimmnwigi: .,C . Leases 1989 - " '-*"19-3 3 17.5 1990 is., ar - ' 17.8 l6ja - 1991 16.7 .. 149 1992 , - - . .. -15-8 - 134 1993 ........................... .. ,, . ..- I5*d -,,s. . - ;&-*. " * 1994 and after " " r " 312-7 13-7..., 2964 Tbtal *397-9 33724 Less imputed interest Obligations under capital leases1" (i) Includes si$-o related to assets held forsale. Capital-Leases'. S X.8 r.8 T.& r-9 r.9. 16-3' 2y-y ' r-8 sir-7 3 S. LONG-TERM OBLIGATION'S Long-term debt, interest rates(i), and maturity schedule at December 31,1988 are summarized in the following table* Cue: 1986 Credit Agreement-- Tferm Loan (variable rate-- 9.5% at December 31, 1988) Fine Mongage Bonds (8.25%-! 1.625%) Swiss Franc Bonds (J.5%) Pollution Control and Economic Development Facilities Obligations (fixed and variable rates) Other Borrowings (variable and fixed rates) Tbtai Successor .9S9 :;9o !99I 199+ jod !992 1993 After Predecessor December ;i. !9s8 Total :*r Tou S108.5 s 100.0 SIOOjO *197.9 2.3 3-3 2,2 26a S506.4. 33- 5689^ 120.3 300 2.6 3.8 3.6 $117.0 7 s 106.8 3-0 2.7 7 S105.9 .7 ' S227.J 52.8 3 53-1 S44.I 1*8 545.9 . 59-0 7.8 606.2 69.3 31.8 940.8 1 *$ 1 .Lessamount due-within one-year^-'-*''***^Long-term debt ' '117^0 S489.2 53-5 *887.3 (1) Kaiser Aluminum has entered into sns-oof interest rate swap agreements having the effect of fixing at approximately 1 r the interest cost of variable ate debt for one and a half years from December 31,1988. In March 1986, Kaiser Aluminum entered into a credit agreement with banks holding s 1,008.0 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 5165.0 revolving credit facility '' which expires December 31, 1989. Kaiser Aluminum is required to make minimum principal payments of 521.1 in 1985C and $100.0 for each of the years 1990 and 1991 with the finalbalance of $285.3 due in i992.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 part 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 underthe 1986 credit agreementtogether 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 status of Kaiser Aluminum at December 31, 1988, with respect to the principal covenant provisions (as defined) of the 1986 credit agreement, was: Cwenant Compliance Limit Status 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 31,1988 Maximum capital expenditures (includ ing discontinued operations) in 1988 $ 2000 r ,000.0 1,550.0 s 568.6 1,280.0 898.3 6o.o%`" 41.2% s 25.0 276.3 s 3-t 87-0 [i} This compliance limit becomes 55.0% at the end of each fiscal quarter during 1989, and 52.$% in 1990-1992. The 1986 credit agreement restricts Kaiser Aluminum liens, mergers, common stock dividends and stock repur- - chases, issuance of prefenedstock, equipment leases, and transactions with (including loans or advances to) affiliates (including Kaiserifech). At December 31,1988 retained earnings of $19.5 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 $58.8. 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 Alumi 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 ST51.6 of debt, of which S87.4 was classified as current at December 31,1988. There were no outstanding borrowings during 1988 against the S165.01986 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 $8.2 and $69.6 in the two months ended December 31,1988 and the ten months ended October 31,1988; and S106.1 and S127.5 in 1987 and 1986. These amounts are net of interest costs of s.5, $1.8, szjz, and S2.4 which were capitalized. 9. REDEEMABLE PREFERENCE STOCK In March 1985, Kaiser Aluminum entered into a three- year agreement with the United Steelworkers of America (uswa) whereby shares of a new series of "Cumulative (1985 Series A) Preference Stock" would be issued to an employee stock ownership plan in exchange forcertain elements of wages ana benefits. Concurrently, a similar plan was established for certain nonbargaining 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 ($15 per share in 1988 and 1987 and sio per share in 1986) based on independent appraisal with a corres ponding charge to compensatura cost. Carrying values -/ were increased each year ro recognize accretion of J .. - redemption values. The outstanding Series A and B . . shares were revalued by a Successorpurchase adjustment at October 31,1988 to give effect principally to acceler ated redemptions expected ro result from disposal of the -4 ..;y 5,>',!/. ' - : :VtV r- :t-` 32 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 1988 198? 1986 2,596,397 1,808,131 241463 788,266 (230,624) 929,924 878,207 2,607,236 2,596,397 1,808431 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 on 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 aliumnum operations; and payable in stock or in cash at the option of Kaiser Aluminum on or after March 1,1991, 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 S5 per share, payable quarterly, when and as declared by the Board of Directors. Redemption fund agreements requireKaiser 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 sufficientto redeem all Series _ _ ' A and B Stock. On an annual basis, the minimum payment 1S.S4.3 and the maximum paymeutis S7.3. In March 1988 and 1987, Kaiser Aluminum contributed S4.3 forthe years 1987 and 1986 andwill contribute S7.3 . . in March 1989 for 1988. In April 1988, Kaiser Alumi num entered into a two-and-one-half-yearagreement ` ... with the uswa whereby KaiserAluminum would make additional contributions to the Series A redemption fund of (i) S2.0 each in Match 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 thete 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 S50 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 Thx 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 31,1985. 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.v 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. iiW;- m- tsi - Sch. ;S.c " *?* -US'.-- ;o. STOCKHOLDERS' EQUITY Changes in stockholders' equity were: PREDECESSOR: Balance, January i, 1966 Net loss Dividends--preference stocks Supplemental retirement plan contributions (112,156 shares) Conversions (5,786 preference shares into 22,345 common shares) Stock options exercised {427,868 shares) Translation adjustments Redeemable preference stock accretion Balance, December 31,1986 Net loss Dividends--preference stocks . Conversions (7,581 preference shares into 28,503 common shares of Kaiser Aluminum) " Conversions {5,757 preference shares into 22,953 common shares of KaiseiTfech) Stock options exercised {46,650 shares) ___^Contributedcapital..,.,,; 5..... Redeemable preference stock accretion ' Translation adjustments Balance, December 31,1987 Net income Conversions (1,914 preference shares into 7,6 r 5 common shares ofKaiserTfech) . Dividends: Preference stock Common stock Redeemable preference stock accretion . . Employee compensation (stock options) paid by KaiserTbch Translation adjustments ; Balance, October 31,1988 1 ; Eliminate Predecessorretained earnings . 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 Piewrmct Stocks [JlOoPari Pretettaa Stock ;St Part Common Stock Addittonai Capital Cunencv Translation Adiusnnent Hetatsec Earamr SI 3.2 s .6 SI4.8 4316.5 (.6) 2-4 .6 .1 6a 12.6 .6 14.9 324.6. *(3-4) S78l.^ 132-(3-- 30.5 27.1 16.. 738.0 (354-9 (4.1: (.8) .8 (.6) -- - 11*2 .1 - . ...._ L - .6 tj-o .6 .6 15-0 . . 352-6 (sr.9) (3*c 5.2 376-0 ' 175-7 Wa * . .. j .... .... 6.4 II.Q .... (2-7) .6 . -15x1 :- 358^ ' SiVri": " .. 516.9. 21^ - (4-c (25-1 (6.3 (5-2) 516.9 (516-9 ' 8-3 (-5) S 7.8 .6 IJ-O 896.9 ... . . 5 '' * J V ~"?> .>* ^ .i 1 -r . '' ' S .6 SI5XT 58974 -- . r/'r^ziS.i .. . ` ' -" (2-71 S: 264 - 34 The outstanding shares of Kaiser Aluminum preference stocks, in descending order of seniority, were: Preference, Cumulative Convertible, sioo pan 4-</% 4-'4.% (1957 Series) 4-v*% (1959 Series) 4-Ki% (1966 Series) Preference, si par, 55.2s Cumulative . Convertible (1984 Series)--$50 stated value Successor Outstanding December ;t, 1988 26,949 21,176 33.98o 21,209 600,000 predecessor Outstanding December 51. 1987 28449 22,704 39,913 21466 6004*00 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 $100 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, 577.84, S78.38, and 57646, respectively. In September 1987, KaiserTfech purchased all 600,000 shares of the Kaiser Aluminum S5.35 Cum- ulative Convertible (1984 Series) Preference Stock, si par value l"1984 Series Stock"), from certain employee bene fit plans for S364. These shares each have a preference in liquidation of S50. II. STOCK OPTION PLAN On May 1,1987; the Kaiser Aluminum Stock Option Plan becametfie-Stock Option Plan of Kaiserlbch. New options to purchase Kaiserlbch Common Stock on the same terms and conditions were substituted for all thenoutstanding Kaiser Aluminum options, and all subse quent giants were made pursuant to the Stock Option Plan of KaiserTfech. As part of the Merger, all outstanding Kaiserlfech stock options were redeemed forthe dif ference between SI9.375 per share and the option prices (58.81 to 513.94 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- u. INCOME TAXES - CONTINUING OPERATIONS The provisions (credits) for income taxes consist of: SUCCESSOR: Tvw months ended December 31,1988 Current Deferred Ibtal PREDECESSOR: Ten months ended October 31,1988 Current Deferred Ibtal 1987 Current Deferred ' Ibtal ' 1986 Current Deferred Ibtal " U.S. federal Foreign State Total S17.J 5.1 5 t7-6 7 7 SI 8.2 s .1 5 18.3 S26.5 s 26.5 575-6 5.7 (4) 575-2 s.7 sro2^ U) SI024 s 6.7 *32-3 7-7 "s 6.7" ^^40-0 S.I 5 324 *+4', S.I~ 5 46.8 5 24 SI2.3 (66.7) 9.7 (84-3) 5224) *f-7) $ 140 (57-0} Sf-7) 5(43-0) 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 monthsended.October 31,1988, the Company reported an extraordinary gain of 536.0 tP resulting from the utilization of net operating loss carryforwards bydomesticcontinuing and discontinued operations. . Thx provisions (credits) applicable to consolidated p|ii and unconsolidated companies are: J r --Successor - -- ------ Predecessor -m TWo ' Months Ended December 31, - /Bn Months Ended October}!, T&ars Ended "'W December!!. - -< 1988 1988 1987 ' t986.:;. Consolidated Companies Unconsolidated Companies (primarily in cost of products sold) Ibtal 5134 5 90-3 5424 5f52-0) 44 SI8.3 I2.I $IQ24 40 $46*8 8jO 5(43-0) The tax effects of timing differences ate: 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 Tbtal Successor Two Months Ended December 31, 1988 *7 S-7 Fen Months Ended October 31, 1988 S(.I) (-3) sU) Predecessor Yens Ended December u. :$8t :?ao s 6.7 5(40.0) 1*2-9) 16-3) 8.3 43.0 iS-1) t*9-3) li-6) 3-S U3-7) MS) {4-6) SI4-4 S(S7-o) The Company had net operating loss carryforwards for assured during the carryforward period. Similarly, no tax purposes of $317.8 (which expire in 1998 to 2001) at tax benefit has been recognized by Successor for these x- Decembers i,i988..Such amyforwanfeiwill:be.teduced^?4T4.3^cariyforwaids.^^.s#^4!w'^^^s--^.<-''*ife.i~4 over a period of two years by the unamortized amount In December. 1987, the Financial Accounting Stand of $61.3 relating to the 1985 change in the U.S. federal ards Board issued a new statement on accounting for income tax method of accounting for inventories from income taxes ("eas No. 96"). Although the Company is last-in, first-out (ufo) to first-in, first-out (mo). In addi not required to implement ess No. 96 until 1990, early tion, the Company had investment tax credit carry and retroactive application is permitted. The Company forwards of $64.9 which is net of a 35% reduction has not determined when fas No. 96 will be adopted or required by the 1986 Tkx Reform Act and which expire which transition method will be elected. Preliminary in 1991 to 2001. As a result of the Kaiserlbch ownership change, sub analysis indicates that the effects of adopting ns No. 96 could vary significantly depending on the transition stantial limitations are imposed by the Internal Revenue .methodapplied. -*? Code on the future use of these carryforwards, hr certain circumstances, the amount ofthe limitation may be increased by gains economically accruedon or before . the date of ownership change but recognized for tax purposes within the five-year period following such ownership change. The benefits of net loss and investment tax credit carryforwards through 1986 were recognized previously inPredecessor financial statements as a reduction of deferred income taxes. No benefit was recognized for the 1987 Predecessor net loss because recovery was not 36 The provisions (credits) for income taxes are different from the amounts computed by applying the U.S. statutory federal income tax rate 0134% for 1988,40% for 1987, and 46% for 1986. The differences are summarizes follows: Provision (credits) at statutory rates >3. Increase [decrease) resulted from: ^ Thx benefit of parent company losses -ijgjr Domestic losses ior which no U.S. income tax benefit is available Difference in foreign and U.S. tax rates Percentage depletion gSES Difference in basis on salebf affiliate JHL Foreign tax deductions and credits Investment tax credits Other Provision (credit) fotincome taxes Successor Two Months Ended December 3:. 1988 SI 6.2 Ten Months Ended Octoberj!. 1988 s 85.9 (7-5) l3-o) -9.1 ... (7) 2.6 15-0 (3-3) .1 2? 3.6 fi-4) a. sr8.3 4.6 S1024 Predecessor Years Ended Dreemberu 1987 I$a6 *133-6) t76-S 1*3-3) *4 s 46.8 3-2 (5-3) 4-* 7-0 13-4) 7.2 *(43-o) Undistributed earnings on which the Company has not provided taxes/whidrmay be payable upon dismbmioa were nil, S173.5, and $i78dggt December.31,19^ 1987, and 1986, respectively. The U S. federal income tax con sequences of undistributed earnings through October 31,1988 have been considered in the valuation oflfie Company investment in joint venture companies." 13. RETIREMENT AND BONUS PLANS * Effective January 1,1986, Predecessoradopted 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 s 10.9. Prior years financial statements were not restated. Predecessor deferred application ofprovisions of the Standards relating to foreign pension plans and recognition of certain accudBj|ped 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, hi all plans, except for plans representing less than 1% of the total accumulated benefit obligation and less thjgi 1% of the plan assets at fairvalue, the benefit obligations exceed the plan assets. Employee pension benefit plans - status at Decembersr, i988 andi987 is:' -'--Hr ` Decembers:, 1988 Accumulated benefit obligation: Vested employees Nonvested employees ag- *(686.3) (34-6) Accumulated benefit obligation Additional amounts related to projected salary increases .... . (740-9) 133-3). Projected benefit obligation Plan assets (principally fixed income obligations and common stocks) . atfaiivalueT-' .......................... " ' ' ' [774-4) 516.6 Plan assets less than projected bene-fitobiigation (237.8) Unrecognized gains and obligations: Net gains . ,, . su Netnbligation -.i- Net unrecognized gains and obligations ... .... . ... . Unfunded accrued pension liability _ included in the Consolidated Balance Sheet (principally in long-term liabilities) *(257.8) Predecessor Decemoex u. *1697.6) (5*-*) 1748.7) T3S-4) (784.*) 496-4. (287.7) (43-7); 196.8! rs3-i *(*34-6) In connection with the sale of the Ravenswood and Bedford plants in February 1989 (see Note 4j, rac will assume projected benefit obligations of572.6 included fit the above total at December 31,1988. 37 The components of net periodic pension cost for 1988,1987, and 1986 are: Service cost -- benefits earned during the period Interest cost on projected 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) Net periodic pension cost -- Successor TWo Months Ended December 31, 1988 s 1.9 104 (13.0) 4,6 S 3-9 Ten Months Ended October 31, .-988 * 9-7 5zx> 138-8) 12.3 *35-9 Predecessor Kin Ended December 31. 1987 :98s SI4.7 63.6 s is-r 66.4 {38.6) jfi.6) (6z4) 9-4 17-3 ' *45-4 3-6 S32.r- Assumptions used to value obligationajWjear-end, and to determine the net periodic pension coffin the subse- The Company and subsidiaries provide certain health care aw life insurance benefits for retired employ* quent year, are: i-. ees. Substantially all employees may become^igible Successor - Predecessor for those benefits if they reach retirement age While 19' -- 1987-.......- 'prow^d^through MminismtfeserviceScont^s with*1 Discount rate Expected long-term rate of return on assets Rate of increase in com pensation levels 8.5% 10.0% 6.0% 8.5% 7 lOM% 6*% 8.0% nx>% 6.0% variotn insurance carriers. The Company pays thrjbCost of providing these benefits as incurred. The &st ofthese benefits was $5.7 and $27.3 for the two months ended December 31,1988 and the ten months ended October ' 31,1988; and $30.5 and S26.6 for 1987 andT986. During 1988 and 1987, Predecessor recorded curtail ment losses of s6.i and $39.5 to reflect 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 petcent. age of their base salaries.The Company contributions toward these plans are generally based on earnings and net worth. Expense of these plans was $2.8 and S14.1 for*.-, the two months ended December^ 1988 and thetten ^ months aidedOctobet 3r, 1988;21851.7 andsi.6 fa* - " 1987 and 1986.There were no contributions to die exc~ utive bonus plan daring 1987 and 1986. V'i; 5 38 u. COMMITMENTS AND CONTINGENCIES The Company has Hnanciai 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 toiling of baux ite into alumina by Queensland Alumina Limited (qal) (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 expirein2008, 302r, and2007, 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 5257.6 (528.1, T989; 548.5, 1990; 5884,1991; S73.2,1992; 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 5113.3 in the two months ended December 31,1988 and the.ten months ended October 31,1988; and 5129.9 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. it. 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 S93.3, and S349.2 in the two months ended December 31,1988 . and the ten months ended October 31,1988; and S197.9 and 582.0 in 1987 and 1986. Geographic area information relative to operations is summarized as follows: NET SALES TO CUSTOMERS: Domestic Foreign INTRAENTERPRISE SALES AND TRANSFERS: Domestic Foreign * TOTAL SALES Eliminations NET SALES , . . ... Successor Tvhj Months Endtd 1988 s 2044 93-7 298.1 1.6 90,1 93*7 39t*8 (93-7) s- .298.1 Ten Months Ended 1988 si,5jo.8 370.6 1,9214 Predecessor YfcraEftdcd December;:. :?86 51447.1 555-8 2,002.9 SI 486.8 480.3 1,967.x 8.7 454-0 462.7 2,384.x (462.7) 51,9214.. . I2.S 399.O 4Xl-5 24144 (4*1-5) $2,002.9 9.8 34.7.5 357.3 2,3244 (357-3) $1,967.1 INCOME iLOSSI FROM CONTINUING OPERATIONS BEFORE INCOMETAXES ' AND MINORTTY INTERESTS: - Foreign M`^ 33*St^, 14*0 Tbtal S 47-5 ................. 88.9 s 2S2.7 1330-*);^ ^ t (200-0) 36.1 '79-i* s (294x1) s (120.9) tDENTTHABLE .ASSETS AT DECEMBER 31: Domestic Foreign ' Discontinued Operations--net Assets Held for Sale Tbtal ' S1419.8 647.8 ' . -. 336.6 $2404.2 $1,769.5 .......... 440.3 336.9 ' $2,546.7 $2,0724 806.7 355-9 $3,235.0 INVESTMENTS AND ADVANCES INCLUDED IN IDENTIFIABLE ASSETS: ' Domestic'"''-v-: Foreign5:^ ''' ' " Tbtal .~ - '"'"s' "```'.T*' ' 353-4 353-5 V.i. C " i ` ;' *' '$ 2044' $ 2044 $ -r 182.5; s 182.6- The consolidated financialstatements indnde foreign liabilities of S3 r 14, S24SJ, and $383.5 for 1988,1987, , and 1986, respectively. The aggregate foreign currency,,, .....-----............. - gain or (loss) included indetermining net income was - \ s{54) and s{14^2) in the two months ended December 31, ";r - 1988 and the ten months ended'October3 r, 1988; and $(13.5) and S4 in 1987 and 1986. ' Sales to a single fabricated products customer were $304 ands266.9 in the two months ended December 31,. 1988 and the ten months ended October 31,1988. *. - ... ->.v, , .. - V , -W V* -r 40 INDEPENDENT AUDITORS' REPORT THE STOCKHOLDERS AND THE BOARD OF DIRECTORS OF KAISER ALUMINUM A CHEMICAL CORPORATION: financial position of Successor and subsidiary companies at December 3 x, 1988 and the results of their operations We have audited the accompanying consolidated balance and their cash flows for the two-month period then sheet of Kaiser Aluminum & Chemical Corporation ended, and the financial position of Predecessor and sub ("Successor," a subsidiary o! MAXXAM Inc.) and subsid sidiary companies at December 31,1987 and the results iary companies as of December 31,1988 and the related of their operations for the ten-month period ended Octo statements of consolidated income and consolidated ber 31, 1988 and the years ended December 31,1987 and cash flows for the two-month period then ended. We have 1986, their cash flows for the ten-month period ended also audited the accompanying consolidated balance October 31,1988 and the year ended December 31,1987, sheet of Kaiser Aluminum & Chemical Corporation and the changes in their financial position for the year ("Predecessor," a subsidiary of KaiserTfech Limited) and ended December 31,1986 in conformity with generally subsidiary companies as of December 31,1987 and the accepted accounting principles. related statements of consolidated income for the ten- As discussed in Notes 1 and 2 to the consolidated month period ended October 31,1988 and the years financial statements, MAXXAM Inc. acquired Kaiser- ended December 31,1987 and 1986, consolidated cash Ifech Limited in a purchase transaction deemed to be flows for the ten-month period ended October 31,1988 effective as of October 31,1988. Push-down accounting and the year ended December 31,1987, and changes has been applied to the financial statements of Succes in consolidated financial position forthe year ended sor, and Successor has recorded the assets and liabilities December 31,1988. These financial statements are of Predecessor.at estimated fair values. Accordingly, , the responsibility of the Company's management. Our the consolidated financial statements of Successor responsibility is to express an opinion on these financial are not comparable to those of Predecessor. statements based on our audits. We did not audit the As discussed in Note 3 to the consolidated financial 1986 financial statements of certain investees. Predeces statements, in 1988 Predecessor changed its consolida sor's investment in which is accounted for by the equity tion policy for majority-owned subsidiaries to conform method. Predecessor's equity of S83.7 million in the net with Financial Accounting Standard (FAS) No. 94, and assets of those investees at December 31,1986, and of also changed to a statement of cash flows in place of a s.6 million in the 1986 net losses of those investees is statement of changes in financial position to comply included in Predecessor's 1986 consolidated financial with FAS No. 95. The 1987 consolidated financial state statements. The 1986 financial statements of those ments mid the 1986 consolidated balancesheet have investees were audited by other auditors whose reports been revised from those previously issued to reflect thereon have been furnished to us, and our opinion these-changes........... .. ' TA Z: '/vTT expressedherein, insofar as it relates to amounts -..... ..... -- As discussed in Note 13, in 1986- Predecessor . DAT.-,. included for those investees for 1986, is based solely changed its method of accounting for defined benefit upon the reports of such other auditors. pension plansm conform with EAS Nos. 87 arid 88. > 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 are : free oi material misstatement. An audit includes exam ining, on a test basis, evidence supporting the amounts ' < ,^**v*^\ -itt -*.** ... . .. Oakland,California March 20,1989 ,.v >",.* -...... , t ,v * v? : A- ; 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 andthe reports of other auditors provide a reasonable basis for our opinion. In our opinion, based upon our audits and the reports of other auditors, such consolidated financial statements present fairly, in all material respects, the OPERATING AND FINANCIAL DATA (UNAUDITED) Kaiser Aluminum & Chemical Corporation and Subsidiary Companies Successor TV) Months Ended December 31, 1988 Ten Months Ended October 31, 1988 Predecessor tears Ended December 31. 198T I9S6 1985 [98a 1983 1981 1981 1980 '979 aluminum tonnage (metric): Capacity at veai-end Primary production Sales: Primary Fabricated 578,0001*! 93,34 690,0001') 690,000 547,669 633,328 9034X 577,861 9i34o 521,886 92340 14)534)00 14)33,000 14)124)00 1,004^000 1,00^000 538,662 4x7489 617,566 940,1x9 992,353 973,670 51,687 45458 1x6,356 441,079 124833 648,681 74591 688,150 37418 636,956 169,369 571.817 144471 602^72 215,753 5,377 168,621 670483 251402 7X7,347 229,683 756,342 Tbtai sales Average number of 97445 667435 773,515 762,741 <74174 741,196 747443 782,130 839,104 968,749 9864125 employees 11,14s Number of stockhoIders-- . 1- preferred and preference - I4>33 ?i. Additions (millions of 11468 134)96 13454 16434 17448 20,688 26450 284)42 18,951 -1,878 1403 955 I4>S2 1,109 1451 1,377 1,755 2,773 dollais): Property, plant, and -> equipment Investments and SI3.5 sSo.8 S86.6 *93-1 S120.7 *2324 $177.8 1204^ *290.6 $164^ .. SI414 . - a.dvanc*e*s. ,V . 1-3 .1 , , 1*5 Ij6 14 602 . ... 446- , 29.3 12.7 (i) Includes the U.S. plants and the Company's sham of Volta Aluminium Company limited, Anglesey Aluminium Limited, Boyne Smelters Limited, and Aluminium Bahrain. \ 42 QUARTERLY FINANCIAL DATA (UNAUDITED) Kaiser Aluminum & Chemical Corporation and Subsidiary Companies Amountsfor the last two months of the last quarter of 1988 are those of Successor. Amounts for the first month of the last quartl^bf 1988 and for each of the other quarters comprising 1988 arid 1987 are those of Predecessor. 1988 Quarters Ended Continuing operations: Net sales Gross profit Income (It s) from continuing operations Net income (loss) S" 198? Quarters Ended Mar. ;t iun.30- $520.0 108.1 3-3 38-1 Mat jt # 540-2 126.7 41.1 33-o lun. jo"1 Predecessor -- StP-IQ . Month or Oaobet S663.9 174-5 62.2 . 83.2 SepLjo^ - ` SI97-3 49-7 Jl.l 214 Dee-jlit' Ten Months Fryfcj Octoberjr -W Sr,92I4 459-0 144-r 175-7 1987 Successor Two Months Ended December 31 s 298. r . 7x4 28.1 28.1 Continuing operations: Net sales Gross profile Income (loss)lrom continuing operations ... Net income (toss). S488.2 65.I (30.7) $ 526.4 86.3 (358.3) S5274 99.0 13-9 - S460.9 59-8 4JEt 6 $2,002.9 J ^-3101 ` (343-5) 5 (t) Includes a gain before tax of si.7 from disposition of various cnemial businesses. ` Ms-- ""* . l*> Restated fortheadoprionof Financial Accounting Standard No. 94 requiring fall consolidation of mafority<iwredsubfiiHtries. ~*(3)In June 1987, Kaiser Aluminum provided tor losses of 53874). both before and after taxes, rotating to the restructuring of operations. The tow provision of $554.5 in continuing operations consisted principally oi writedowns ol the electrical products manufacturing bnsinesa ajjd idle and uneconomic primary aluminum production capacity, and provision for the loss upon disposition of oil and gas properties. The loss'provision of S33.5 in discontinued operations related to certain operations and businesses chat were discontinued in recent years. (4) Includes a gain before tax oi S16.1 from sale of the food service packaging business. In September 1987. Kaiser Aluminum provided for both before and after tax losses of si 343, relating to the restructuring of corporate staff, sri.b in continuing operations and si-4in discontinued operations. (5) Includes a gain before tax of S53.7 from the sale of KaiserAInminium Europe Incorporated. sec?- asfc - TEN-YEAR SELECTED FINANCIAL DATA STATEMENTS OF CONSOLIDATED INCOME Kaiser Aluminum & Chemical Corporation and Subsidiary Companies . millions of dollars) Successor TWo Months Ended December}!. 1988 Ten Months Ended October 31. 1988 Predecessor _________ _________________ ____________fears Ended December; i. I987-" 1986 1985 1984 198; 1982 1981 1980 '9T? REVENUES: Net sales Other Tbtal revenues COSTS AND EXPENSES: Cost of products sold Depreciation Selling, administrative, research and development, and general Interest Other Restructuring of operations - S198.t 114 309-5 s 1,9214 46.3 1,967.7 s 2,001.9 s 1.967-1 s 1,774-0 * 1,935-7 11,735-1 * 1-833.5 *2,1634 *2425.5 *2455-3 94dJ 68.7 62.3 324 81.7 359-7 111.6 119.1 37.5 24297-7 24235.8 1,836.3 1,968.1 1,816.8 2,1934 . 2474-8 2,544-6 2.342.3 236.7 7-7 14624 69.6 1,692.7 97-7 1.71S-* [06.6 1,624.7 101^ 1,817.9 101.0 I^5S-5 902 1.903-5 96.1 1,937-7 76.1 1,871.0 73-6 1.730.8 68.9 I4.6 89.7 84 69.6 4.8 *3-7 , *14-3 to6.i 14^ 366.1 128.5 127.5 78.9 1154) 122.8 236.6 114.8 113.3 *3-3 ioy.8 88.5 62.2 123.7 rii-T 90.3 129-3 59-8 2.7 128.3 5042 ia-5 1194J2.7 rr.r 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) horn continuing operations -' .. -Discontinued operations-- net of income taxes: . Income fromopetarions Income (loss) on dispositions ' Income (loss) from discontinued operations Income(loss) before. ' extraordinary item- ` Extraordinary income-tax benefit 2620 ' 47-5 18.3 29.2 (Ml 38.1 28.1 ii7tj*0 *,39i-7 2456.7 2.200.3 2,180.3 2*0024 1,326.1 1405.6 U334 1,983.5 252.7 1024 P94*) (120.9) (364-0) (*!*-*) (1854) l*3*-9) 46.8 (43-0) (165-7) (15042) (n8.i) 11.9 694 5.8 4114 167.1 3S9-3 137.4. 150-3 (5.6) .. 144-7 (3408) (2-7) (343-5) .. 5-9 11-7 (77-9) (198-3) - (77-9) (i9-3) 26.1 16.8 (624!) (624) 2S-5 (67-3) (144.8) 634 244.1 (67-3) 17-1 -------------- - (144,8) '-<34 244.1 - .7-6 " 62.5 5013 (KX9) 1*3-1) "* - 19.I (S-o) (<0.7) 15-0] * 139-7 [114) * (354-9) * 45-* 11.8 (3*-7) S (186.5) s (3S-2) (974). I7-I. . 7-6 . .dl-T.V 62.5,... . -: so.3 , * (J02) (1374 125-9 ^*944. 3621 101,9 7 - 201.9 51.8. 51.8 ; ! 253-7 Net income (loss) Debt-to-capttal ratio (%)W s 28.1 37-3 * I7S-7 3822 * 1354-9) * (32.7) SJ186.5) s (974) * 15<*2) * l*37-2)_ *..125-9 * 2944. * 153-7;, 50-5 Si.8 55-* 51-7 424 41.8 39.7 30.7 35-9 (t) Restated for the adoption of Financial Accounting Standard No. 94 requiring full consolidation of majority-owned subsidiaries. (a) Total debt as a ratio of total debt, deferred income taxes, deferred income, minority interests, redeemable preference stock, and stockholders' equity. 44 TEN-YEAR SELECTED FINANCIAL DATA CONSOLIDATED BALANCE SHEETS Kaiser Aluminum & Chemical Corporation and Subsidiary Companies .millions ot doilais! ASSETS' Current assets: Cash and cash equivalents Receivables Inventories Prepaid expenses Assets held for sale Current assets of discontinued operations--net Successor 1988 Predecessor 1967--= 1986'' 1 1985 1984 1983 1981 tgfrt 198c 1919 $ 209.5 321.J 4514 4-3 336.6 s 131.7310.9 479-9 20-5 5 107.5 333-8 644.3 15-5 5 108.1 294-0 601.9 IXI 5 36.6 359-7 649.8 8.8 5 I4.8 478.9 6314 5-2 5 32-9 521.7 709.9 23-0 s 74-5 3034 895.S 29m s 63. r 400.0 788.0 38-7 * 1414 442-9 634-9 3I-i 446 60m 87.8 304-7 230.7 240.6 3jo 287.1 1314 Tbtai current assets Investments and advances 1,323.1 353-5 987.6 2044 1,160.9 182.6 1,103.9 30iJt 1.359-6 322-5 1.370.7 309.S 1,528.1 338.1 1.653-0 580-9 1,576.9 465-7- 1485-5 390-9 Property, plant, and equipment--at cost Accumulated depreciation 676.6 7-7 1,908.7 958-2 2,943-8 1487.9 539-3 1,144-9 2429.8 1,108.6 2452J 14146.7 2,383.6 141254 2406.7 943-6 1,997.6 931-3 1.938.1 911-5 Propertv, plant, and equipment--net Moncurrent assets of discontinued opeianons--net 668.9 950-5 292.3 M55-9 1.3944 . .. 295-9 322.1 1,5214 355.1 1406.1 500.3 1,3584 490.8 1463.1 14166.3 - 475-3 3584 14126.6 .}< 3204 . Other assets ... . ____ -- --L.--.-58.7- -------- III.9 - ------139-7 r~- 824-T r.~: 96^ .. 93-8-' '-"664--tt"3 ; 86Ji?w,\ Tbtai 52,546.7 53435-0 *3435-6 53,6408 534834 53^094 *44138.5 53.553-9 53468m LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accruals Income taxes payable Notes payable Long-term debt--current portion s 528-9 59.6 II7.0 Tbtai current liabilities Long-tetm liabilities 705.5 1884 Long-term debt Deferred income taxes 489J Deferred income Minority interest 1X0 Redeemable preference stocks 62.1 Stockholders' equity: . Preferred and preference stocks Common stock Additional capital ' Currency translation adjustment Retained earnings I", 84 15a) 8974 264 Tbtai stockholders' equity .. Tbtai .947-2 524042 5 487.I 36.7 53-5 5 4594 42-7 26.5 147.6 5 405-9 . 274 92-3 161.6 5 470-6 5 525.7 I08.3., 257.8 147-7 II4.S 79-6 33.8 5 462.9 206.9 238.6 38.6 * 494-9 261.7 3054 744 * 531-3 332m 31.x 63.5 * 534-7 289.3 31m 53-1 577.3 676.2 687.2 916.3 821.7 947m 1,136m 957.9 908.1 160.3 XI0.3 X03.0 43-0 40.6 - 43.6 38m " 314 y 887.3 I.184.9 1436.1 1422m 1404,5 I4II64:; . 908.I 7214 79441 65.6 4S-7 114 61.9 47-9 n-3 27.6 50.1 123.3 51-3 272.5 322^"5'. 3048 54-5 ' : ' . -re 263^ 231.8 : : 38.9 24.X 8^ II.8 15m - 351-8 5-2 376.6 134 14.9 324.fr 27.1 738.6 ... 13-*............. 14.T- - ~ - *4-7 148 144 14-5 3*6.5' 3094- 273.9 (34) (324) (16.J) 781m 977-8 I,I02JJ 16m 16.9 . 22.3 144,- re." I*?:-'~-~rel4.l: 269.3- . 2684. 256.5 1479-6 1,352m 14874* 484^ 1325s 2234?' ?* 14*48-5 7602 53,548-7 1,1184. 1422.7 *3435-0 53435-6 1483.9. J.3894 53,640^ 53,6834 1,479-3 53,8094 1,651-6 S44138.5 1,579-9 53,553-9 r.334-1 53468m' (i) Restated for adoption of Financial Accounting Standard No. 94requiring fall consolidation ot majority-owned suhrirtline1 CORPORATE INFORMATION Kaiser Aluminum & Chemical Corporation and Subsidiary Companies DIRECTORS Ezra G. Levin Joseph J. Bemat James T. Owen John M. Seidl Chairman of the Board and Chief Executive . -Office* Kaiser _ ><T.\ Aluminum & Chemical Corporation and Kaiserlfech Limited; nominated as Directo* MAXXAMInc. Bartne* Krame* Levin, Nessen, Kamin, & Frankel; Trustee, ....Federated Development Company; Directo* MAXXAMInc., MAXXAM Group Inc, and UMB Bank and --Thist Company Vice President and General Manage* JosepEA-Bonh CorpSIrte Vice .President, Strategic Manning 'Robert E. Cole Vice Presidentand General Manage* ExtmdedProdncrs DavidL Berry Corporate Vice President and General Counsel Jon P. Pierce A. Stephens Hutchcraft, Jr. President and Chief Operating Officer, Barry A. Munitz Vice Chairman of the Board and Directo* .Corporate Vice President/Govemmerrt Affairs Corporate Vice President, Human Resources Kaiser Aluminum & Chemical Corporation MAXXAMInc.; President and Thistee, Edward J. Coyne Vice President and David G. Schmidt Corporate Vice and KaiserTfech limited Federated Development General Manage* Rod, Presidentand Controller 7 Company; Chairman of - Ba* andWire : ' ' John B. Connally the Board and Chief Tfexas Lawyer and : ' ` Executive Office* " RichardB. Evans V ASSISTANT " ' *' ^/^^Bnsineisiitansjfonnetv.^^^United Finandjd^^'^^^^"^-'-'''~--'--'-'''S (sa^ss^-asCORPC^^ Governor of Tfexas and U. S. Tieasury Secretary 5. Group, Inc. Paul D. Rusen 1 General Manage* Flat-Rolled Products Charlie Alongi Assistant Controller Charles E. Hurwitz Chairman of the Board and Chief Executive President, Employee Ownership, Inc; Retired Directo* District 23, F. Joseph Haydel, Jr.. Corporate yice 7 President General Raymond F. Garavagiia Assistant Secretary 7 Officer, MAXXAMInc., United Steelworkers of Manage* Raw Materials Ross Hambly MAXXAM Group Inc., America and Federated Development Company; . . ;-C.V.Wbod Chairman, ofthe Board, . 7 'Assistant to thev,J ' The Ricific Lumber-. Chairman and Directo* 'i'- Company 7777' 7 LorimarTfclepictures, Richard L. Humphrey Corporate Vice President and General >*-' Manage* Primary .7 Alunrimun Products'- Assistant Doeasurer John Win. Niemand II Assistant Secretary-1;'7` . GofdoaV Rogers " Assistant Secretary Inc; Directo* - " ; William C. Leone . r. `. MAXXAMInc, RobertWhelan " Corporate Vice * 7,v . Norman EvarrBatten .4 President and Directo* Horizon Corporation, President, Public Assistant Iteasurei ',7t.. MAXXAMInc.;.. . . Chairman.of theBoard and Drew Industries Inc . Relations'" ' 7, and ChiefExecutive- ;< , ^-y=5*r- -r*-: . ' Office* Horizon 7 7.7 . T77 CORPORATE OFFICERS Corporation; Chief. Executive Office* The BatificLumber Company ' AND DIVISIONGENERAL. MANAGERS John M. Seidl ' Chairman of the Board JohnA Moore ^F' Corporate Vice . .... President, Secretary. `;^-'Tand Deputy^GeneraT and Chief Executive Officer Counsel A. Stephens Hutchcraft, Jr. President and Chief Operating Officer 46 CORPORATE INFORMATION' DOMESTIC OPERATt AS PARTIAL LIST sTATf \ i'iTr California Los Angeles Oakland Oxnard Pleasanton Georgia Macon Louisiana^' Gramerctfp. Ohio Newark Toledo^' ,-V Oklahoma Tlilsa, I Pennsyl^ani.i . Erie -V South-* Carolina L Greenwood a*--*: ' ./Texas ' r Sfiqpnan 'Tennessee, . Jackson `. \$ashington -Mead .3hcoma ^entwood Extruded Products Corporate Headquarters Forgings R&D Rod, Bar, and Wire Alumina v*7&- Rod, Bar, and Wire Coated Coil Extruded Products, Cathodes Forgings Forgings Extmded Products Rod, Bar, and Wire Primary Aluminum Primary Aluminum Flat-Rolled Products WORLDWIDE OPERATIONS Kaiser Aluminum & Chemical Corporation, throughsubsidiaries oraffiliates participates iit the following operations in these countries: Australia Boyne Smelters Limited (20<. owned) Queensland Alumina Limited (28.3"b) Bair ram Aluminium Bahrain (17%) Canada Kaiser Aluminum &. Chemical of Canada, Ltd. (too%) Chana Volta .Aluminium Company Limited (90'u) famaica Alumina Partners of Jamaica (50%) Kaiser Jamaica Bauxite Company (49%) Wales, (J K. Anglesey Aluminium Limited (49".,) As of February 28, 1989 AUDITORS Deloitte Haskins &. Sells, Oakland. TRANSFER AGENTS AND REGISTRAR^ Morgan Shareholder Sere ices Trust Company, New York (all classes of stock; also dividend-pa\ ing and conversion agent). Bank of America \.T. & S.A., San Francisco (ail classes of stock; also conversion agent). FORM io-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 Photography; NikoIayZurek,Sag Francisco -Priming:George Rice &,Sons, Los Angeles Kaiser Aluminum & Chemical Corporation 300 Lakeside Drive Oakland, CA 94643 ' .* *'* : ' v ( . ^f W-:' . .; W\-V-V -'v;.- ';' . . -'7:''.;:fi?V. .' - ~:.;T -c *-.. ' - y -v V.: '-'XT ' ^ :; V f^ ,ry,-v- . - .-- . - : - .. . : . . --: =>; i.r'v . -i 'J::f; - J.'^'or-'- -''- '--v---o^-K'^^TSasv- ' ' - 'V-' -" * 'X- ~ ' - . 1 5 r - .y V UV ; *-.V.j' ;.: ^ .* ''-5-'* - .* *'" -.ws 11 ' ., * - ` *T i-'.'-T, f 'Vrijti. . -r^? ,r 1 . ~;-f- .-.'