-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P9sMDrcPEwHvGkL8QRLUyfp5Ep7JG5wkOywf5B0JB6W/pNm3jwYCEfXZMAuANpKT npusEU2eV76LgNT2k2e1RQ== /in/edgar/work/0000900421-00-000049/0000900421-00-000049.txt : 20001110 0000900421-00-000049.hdr.sgml : 20001110 ACCESSION NUMBER: 0000900421-00-000049 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KAISER ALUMINUM & CHEMICAL CORP CENTRAL INDEX KEY: 0000054291 STANDARD INDUSTRIAL CLASSIFICATION: [3334 ] IRS NUMBER: 940928288 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03605 FILM NUMBER: 757019 BUSINESS ADDRESS: STREET 1: 6177 SUNOL BOULEVARD CITY: PLEASANTON STATE: CA ZIP: 94566-7769 BUSINESS PHONE: 5104621122 MAIL ADDRESS: STREET 1: 6177 SUNOL BLVD CITY: PLEASANTON STATE: CA ZIP: 94566-7769 FORMER COMPANY: FORMER CONFORMED NAME: PERMANENTE METALS CORP DATE OF NAME CHANGE: 19660905 10-Q 1 0001.txt KACC THIRD QUARTER 10-Q ----------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 Commission file number 1-3605 KAISER ALUMINUM & CHEMICAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-0928288 (State of incorporation) (I.R.S. Employer Identification No.) 5847 SAN FELIPE, SUITE 2600, HOUSTON, TEXAS 77057 (Address of principal executive offices) (Zip Code) (713) 267-3777 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ------ At October 31, 2000, the registrant had 46,171,365 shares of Common Stock outstanding. ----------------------------------------------------------------- KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS -------------------- CONSOLIDATED BALANCE SHEETS (In millions of dollars)
September 30, December 31, 2000 1999 ------------------------------ ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 46.5 $ 21.2 Receivables: Trade, net 200.9 154.1 Other 176.1 112.8 Inventories 433.8 546.1 Prepaid expenses and other current assets 111.6 145.6 ------------------------------ Total current assets 968.9 979.8 Investments in and advances to unconsolidated affiliates 73.6 96.9 Property, plant, and equipment - net 1,128.1 1,053.7 Deferred income taxes 462.7 438.2 Other assets 679.2 634.3 ------------------------------ Total $ 3,312.5 $ 3,202.9 ============================== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 258.3 $ 231.7 Accrued interest 24.8 37.7 Accrued salaries, wages, and related expenses 96.7 62.1 Accrued postretirement medical benefit obligation - current portion 51.5 51.5 Other accrued liabilities 155.9 170.0 Payable to affiliates 74.4 84.6 Long-term debt - current portion 1.5 .3 ------------------------------ Total current liabilities 663.1 637.9 Long-term liabilities 830.0 727.3 Accrued postretirement medical benefit obligation 668.9 678.3 Long-term debt 957.8 972.5 Minority interests 98.3 96.7 Redeemable preference stock 17.7 19.5 Commitments and contingencies Stockholders' equity: Preference stock .7 1.5 Common stock 15.4 15.4 Additional capital 2,268.6 2,173.0 Accumulated deficit (198.9) (205.1) Accumulated other comprehensive income - additional minimum pension liability (1.2) (1.2) Less: Note receivable from parent (2,007.9) (1,912.9) ------------------------------ Total stockholders' equity 76.7 70.7 ------------------------------ Total $ 3,312.5 $ 3,202.9 ==============================
The accompanying notes to interim consolidated financial statements are an integral part of these statements. KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED INCOME (LOSS) (Unaudited) (In millions of dollars)
Quarter Ended Nine Months Ended September 30, September 30, ------------------------------ ------------------------------ 2000 1999 2000 1999 ------------------------------ ------------------------------ Net sales $ 537.1 $ 520.3 $ 1,645.3 $ 1,524.7 ------------------------------ ------------------------------ Costs and expenses: Cost of products sold 461.6 458.9 1,401.5 1,392.7 Depreciation and amortization 19.8 20.9 59.0 69.4 Selling, administrative, research and development, and general 25.2 28.4 77.3 82.6 Labor settlement charge 38.5 - 38.5 - Other non-recurring operating items, net (10.9) 24.1 (22.5) 24.1 ------------------------------ ------------------------------ Total costs and expenses 534.2 532.3 1,553.8 1,568.8 ------------------------------ ------------------------------ Operating income (loss) 2.9 (12.0) 91.5 (44.1) Other income (expense): Interest expense (27.0) (27.3) (83.6) (82.4) Other - net (5.0) (21.9) (1.4) (19.3) ------------------------------ ------------------------------ Income (loss) before income taxes and minority interests (29.1) (61.2) 6.5 (145.8) Benefit (provision) for income taxes 11.2 21.1 (2.5) 49.9 Minority interests 1.2 1.3 2.5 4.1 ------------------------------ ------------------------------ Net income (loss) $ (16.7) $ (38.8) $ 6.5 $ (91.8) ============================== ==============================
The accompanying notes to interim consolidated financial statements are an integral part of these statements. KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (In millions of dollars)
Nine Months Ended September 30, ------------------------------ 2000 1999 ------------------------------ Cash flows from operating activities: Net income (loss) $ 6.5 $ (91.8) Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization (including deferred financing costs of $3.3 and $3.2) 62.3 72.6 Non-cash impairment and restructuring charges 22.3 19.1 Gains - real estate related (2000); sale of interests in AKW L.P. (1999) (39.0) (50.5) Equity in loss (income) of unconsolidated affiliates, net of distributions 17.2 (2.0) Minority interests (2.5) (4.1) Increase in receivables (110.1) (5.0) Decrease (increase) in inventories 103.8 (10.7) Decrease (increase) in prepaid expenses and other current assets 21.6 (35.2) (Decrease) increase in accounts payable (associated with operating activities) and accrued interest (29.1) 10.3 Increase (decrease) in payable to affiliates and other accrued liabilities 24.2 (1.1) Increase in accrued and deferred income taxes (8.7) (56.4) Net (used) provided by long-term assets and liabilities (27.2) 28.2 Other 14.2 (.9) ------------------------------ Net cash provided (used) by operating activities: 55.5 (127.5) ------------------------------ Cash flows from investing activities: Capital expenditures (196.5) (40.3) Increase in accounts payable - Gramercy-related capital expenditures 42.9 - Gramercy-related property damage insurance recoveries 73.0 - Net proceeds from disposition of property and investments 66.5 70.4 Other 1.3 .1 ------------------------------ Net cash (used) provided by investing activities (12.8) 30.2 ------------------------------ Cash flows from financing activities: (Repayments) borrowings under revolving credit facility, net (10.4) 7.7 Repayments of long-term debt (4.3) (.4) Capital stock issued - 1.4 Decrease in restricted cash, net - .7 Dividends paid (.3) (.4) Redemption of minority interests' preference stock (2.4) (1.4) ------------------------------ Net cash (used) provided by financing activities (17.4) 7.6 ------------------------------ Net increase (decrease) in cash and cash equivalents during the period 25.3 (89.7) Cash and cash equivalents at beginning of period 21.2 98.3 ------------------------------ Cash and cash equivalents at end of period $ 46.5 $ 8.6 ============================== Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest $ 93.2 $ 91.8 Income taxes paid 9.6 11.2
The accompanying notes to interim consolidated financial statements are an integral part of these statements. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (In millions of dollars, except prices and per share amounts) 1. GENERAL Kaiser Aluminum & Chemical Corporation (the "Company") is the principal operating subsidiary of Kaiser Aluminum Corporation ("Kaiser"). Kaiser is a subsidiary of MAXXAM Inc. ("MAXXAM"). MAXXAM and one of its wholly owned subsidiaries together own approximately 63% of Kaiser's Common Stock with the remaining approximately 37% publicly held. The foregoing unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 1999. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of the Company's consolidated financial position and results of operations. Operating results for the quarter and nine-month periods ended September 30, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. LABOR DISPUTE, SETTLEMENT AND RELATED COSTS As previously reported, prior to the settlement of the labor dispute discussed below, the Company was operating five of its U.S. facilities with salaried employees and other employees as a result of the September 30, 1998, strike by the United Steelworkers of America ("USWA") and the subsequent "lock-out" by the Company in January 1999. The labor dispute was settled in September 2000. A significant portion of the issues were settled through direct negotiations between the Company and the USWA and the remaining issues were settled pursuant to an agreed-upon arbitration process. Under the terms of the settlement, USWA members generally returned to the affected plants during October 2000. The new labor contract, which expires in September 2005, provides for a 2.6% average annual increase in the overall wage and benefit packages, results in the reduction of at least 540 hourly jobs at the five facilities (from approximately 2,800 on September 30, 1998), allows the Company greater flexibility in using outside contractors and provides for productivity gains by allowing the Company to utilize the knowledge obtained during the labor dispute without many of the work-rule restrictions that were a part of the previous labor contract. The Company has recorded a one-time pre-tax charge of $38.5 in its results for the quarter ended September 30, 2000, to reflect the incremental, non-recurring impacts of the labor settlement, including severance and other contractual obligations for non-returning workers. During the period of the strike and subsequent lock-out, the Company continued to accrue certain benefits (such as pension and other postretirement benefit costs/liabilities) for the USWA members, which accruals were based on the terms of the previous USWA contract. The difference between the amounts accrued for the returning workers and the amounts agreed to in the settlement with the USWA will result in an approximate $33.6 increase in the Company's accumulated pension obligation and an approximate $33.4 decrease in the Company's accumulated other postretirement benefit obligations. In accordance with generally accepted accounting principles, these amounts will be amortized to expense over the employees' expected remaining years of service. As a part of the USWA settlement agreement, the Company has agreed to redeem all of its Cumulative (1985 Series A) and Cumulative (1985 Series B) Preference Stock (approximately 353,800 shares outstanding at September 30, 2000). The total cash required to complete the redemption is approximately $17.7. Approximately $12.0 has previously been funded into redemption funds (included in Other assets). The redemption is expected to be completed late in the first quarter of 2001. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivative instruments as assets or liabilities in the balance sheet and to measure those instruments at fair value. Under SFAS No. 133, the Company will be required to "mark-to- market" its hedging positions at each period-end in advance of recording the physical transactions to which the hedges relate. Changes in the fair value of the Company's open hedging positions resulting from the "mark-to-market" process will represent unrealized gains or losses. Such unrealized gains or losses may change, based on prevailing market prices at each subsequent balance sheet date, until the transaction date occurs. Such changes will be reflected as an increase or reduction in stockholders' equity through either comprehensive income or net income, depending on the nature of the hedging instrument used. To the extent that changes in fair value of the Company's hedging positions are initially recorded in other comprehensive income, such changes will reverse out of other comprehensive income (net of any fluctuations in other "open" positions) and will be reflected in net income when the subsequent physical transactions occur. As of September 30, 2000, the amount of the Company's other comprehensive income adjustments are not significant so there is not a significant difference between net income and comprehensive income. However, differences between comprehensive income and net income may become significant in future periods as a result of SFAS No. 133. In general, SFAS No. 133 will result in material fluctuations in comprehensive income, net income and stockholders' equity in periods of price volatility, despite the fact that the Company's cash flow and earnings will be "fixed" to the extent hedged. This result is contrary to the intent of the Company's hedging program, which is to "lock-in" a price (or range of prices) for products sold/used so that earnings and cash flows are subject to reduced risk of volatility. Adoption of SFAS No. 133 is required on or before January 1, 2001. The Company plans to implement SFAS No. 133 as of January 1, 2001. 2. INCIDENT AT GRAMERCY FACILITY In July 1999, the Company's Gramercy, Louisiana alumina refinery was extensively damaged by an explosion in the digestion area of the plant. A number of employees were injured in the incident, several of them severely. As a result of the incident, alumina production at the facility was completely curtailed. Construction on the damaged part of the facility began during the first quarter of 2000. Initial production at the plant is currently expected to commence during the middle of the fourth quarter of 2000. Based on current estimates, full production is expected to be achieved during the first quarter of 2001. The Company has received the regulatory permits required to operate the plant once the facility is ready to resume production. The cause of the incident is under investigation by the Company and governmental agencies. The U.S. Mine Safety and Health Administration ("MSHA") has issued 24 citations and proposed that the Company be assessed a penalty of $.5 in connection with its investigation of the incident. The citations allege, among other things, that certain aspects of the plant's operations were unsafe and that such mode of operation contributed to the explosion. The Company disagrees with the substance of the citations and has challenged them and the associated penalty. It is possible that other civil or criminal fines or penalties could be levied against the Company. However, as more fully explained below, based on what is known to date and discussions with the Company's advisors, the Company believes that the financial impact of this incident on operating results (in excess of insurance deductibles and self-retention provisions) will be largely offset by insurance coverage. Deductibles and self-retention provisions under the insurance coverage for the incident total $5.0, which amounts were charged to Other non-recurring operating items, net (see Note 8) in the third quarter of 1999. The Company has significant amounts of insurance coverage related to the Gramercy incident. The Company's insurance coverage has five separate components: property damage, clean-up and site preparation, business interruption, liability and workers' compensation. The insurance coverage components are discussed below. Property Damage. The Company's insurance policies provide that it will be reimbursed for the costs of repairing or rebuilding the damaged portion of the facility using new materials of like kind and quality with no deduction for depreciation. In 1999, based on discussions with the insurance carriers and their representatives and third party engineering reports, the Company recorded a minimum expected property damage reimbursement amount of $100.0. The amount was classified as a receivable in Other assets, as such proceeds, when received, are being invested in property, plant and equipment. During the quarter and nine-month periods ended September 30, 2000, Gramercy-related capital spending was approximately $102.0 and $159.0, respectively. During the quarter and nine- month periods ended September 30, 2000, $49.0 and $73.0 of the insurance proceeds received were recorded as a reduction of the minimum property damage receivable based on the percentage of minimum expected costs to be funded by insurance proceeds to the total rebuild costs estimated at the beginning of the project. The balance of the minimum property damage receivable of $27.0 is expected to be reduced during the last three months of 2000 as insurance recoveries are received and construction continues. Clean-up and Site Preparation. The Gramercy facility incurred incremental costs for clean-up and other activities during 1999 and has continued to incur such costs during 2000. These clean-up and site preparation activities have been offset by accruals of approximately $25.0, of which $.1 and $11.0 were accrued during the quarter and nine-month periods ended September 30, 2000, respectively, for estimated insurance recoveries. Business Interruption. The Company's insurance policies provide for the reimbursement of specified continuing expenses incurred during the interruption period plus lost profits (or less expected losses) plus other expenses incurred as a result of the incident. Operations at the Gramercy facility and a sister facility in Jamaica, which supplies bauxite to Gramercy, will continue to incur operating expenses until full production at the Gramercy facility is restored. The Company will also incur increased costs as a result of agreements to supply certain of Gramercy's major customers with alumina, despite the fact that the Company had declared force majeure with respect to the contracts shortly after the incident. The Company is purchasing alumina from third parties, in excess of the amounts of alumina available from other Company-owned facilities, to supply these customers' needs as well as to meet intersegment requirements. The excess cost of such open market purchases is expected to be substantially offset by insurance recoveries. However, if certain sublimits within the Company's insurance coverage were deemed to apply, the Company's results could be negatively affected. In consideration of the foregoing items, as of September 30, 2000, the Company had recorded expected business interruption insurance recoveries totaling $130.6, of which $23.8 and $89.6 were recorded during the quarter and nine-month periods ended September 30, 2000, respectively, as a reduction of Cost of products sold. These amounts substantially offset actual expenses incurred during the periods. Such business interruption insurance amounts represent estimates of the Company's business interruption coverage based on discussions with the insurance carriers and their representatives and are therefore subject to change. Depreciation expense for the first six months of 1999 was approximately $6.0. The Company suspended depreciation at the facility starting in July 1999 since production had been completely curtailed. However, in accordance with an agreement with the Company's insurers, during the third quarter of 2000, the Company recorded a depreciation charge of $12.8 representing the previously unrecorded depreciation related to the undamaged portion of the facility for the period from July 1999 through September 2000. However, this charge did not have any impact on the Company's operating results as the Company has reflected (as a reduction of depreciation expense) an equal and offsetting insurance receivable (incremental to the amounts discussed in the preceding paragraph) since the insurers have agreed to reimburse the Company this amount. Once production at the facility is restored, normal depreciation will commence. Such depreciation is expected to exceed prior historical rates primarily due to the capital costs on the newly constructed assets. Liability. The incident has also resulted in more than ninety individual and class action lawsuits being filed against the Company and others alleging, among other things, property damage, business interruption losses by other businesses and personal injury. The aggregate amount of damages sought in the lawsuits and other claims cannot be determined at this time; however, the Company does not currently believe the damages will exceed the amount of coverage under its liability policies. Workers' Compensation. While it is presently impossible to determine the aggregate amount of claims that may be incurred, the Company currently believes that any amount in excess of the coverage limitations will not have a material effect on the Company's consolidated financial position or liquidity. However, it is possible that as additional facts become available, additional charges may be required and such charges could be material to the period in which they are recorded. Timing of Insurance Recoveries. From the date of the Gramercy incident through September 30, 2000, the Company had expended or incurred costs or losses associated with the Gramercy incident (that were not capital expenditures) totaling $155.6, consisting of clean-up, site preparation and business interruption costs. From the date of the Gramercy incident through September 30, 2000, $134.0 of insurance recoveries related to these costs had been received. In addition, during the second and third quarters of 2000, the Company spent approximately $150.0 on Gramercy-related construction activities and received insurance recoveries of $73.0 for capital expenditures related to the minimum property damage receivable. Gramercy-related capital spending prior to the second quarter of 2000 was not significant. The Company continues to work with the insurance carriers to maximize the amount of recoveries and to minimize, to the extent possible, the period of time between when the Company expends funds and when it is reimbursed. However, the Company will likely have to continue to fund an average of 30 - 60 days of property damage and business interruption activity, unless some other arrangement is agreed with the insurance carriers, and such amounts will be significant. The Company believes it has sufficient financial resources to fund the remaining construction and business interruption costs on an interim basis. However, no assurances can be given in this regard. Other. During the third quarter of 2000, the Company incurred approximately $11.5 of normal recurring maintenance expenditures for the Gramercy facility (which amounts were reflected in Other non-recurring operating items, net - see Note 8) that otherwise would have been incurred in the ordinary course of business over the next 1 to 3 years. The Company chose to incur these expenditures now to avoid normal operational outages that otherwise would have occurred once the facility resumes production. 3. INVENTORIES The classification of inventories is as follows:
September 30, December 31, 2000 1999 ------------------------------ Finished fabricated aluminum products $ 86.6 $ 118.5 Primary aluminum and work in process 134.9 189.4 Bauxite and alumina 91.8 124.1 Operating supplies and repair and maintenance parts 120.5 114.1 ------------------------------ Total $ 433.8 $ 546.1 ==============================
Substantially all product inventories are stated at last-in, first-out (LIFO) cost, not in excess of market. Replacement cost is not in excess of LIFO cost. Inventories at September 30, 2000, have been reduced by a $7.5 LIFO charge primarily associated with the Company's exit from the can body stock product line (which amount was reflected in Other non-recurring operating items, net - see Note 8) in the third quarter of 2000. 4. CONTINGENCIES ENVIRONMENTAL CONTINGENCIES The Company is subject to a number of environmental laws, to fines or penalties assessed for alleged breaches of such environmental laws, and to claims and litigation based upon such laws. The Company currently is subject to a number of claims under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. Based on the Company's evaluation of these and other environmental matters, the Company has established environmental accruals primarily related to potential solid waste disposal and soil and groundwater remediation matters. At September 30, 2000, the balance of such accruals, which are primarily included in Long-term liabilities, was $44.9. These environmental accruals represent the Company's estimate of costs reasonably expected to be incurred based on presently enacted laws and regulations, currently available facts, existing technology, and the Company's assessment of the likely remediation actions to be taken. The Company expects that these remediation actions will be taken over the next several years and estimates that annual expenditures to be charged to these environmental accruals will be approximately $3.0 to $11.0 for the years 2000 through 2004 and an aggregate of approximately $19.0 thereafter. As additional facts are developed and definitive remediation plans and necessary regulatory approvals for implementation of remediation are established or alternative technologies are developed, changes in these and other factors may result in actual costs exceeding the current environmental accruals. The Company believes that it is reasonably possible that costs associated with these environmental matters may exceed current accruals by amounts that could range, in the aggregate, up to an estimated $43.0. As the resolution of these matters is subject to further regulatory review and approval, no specific assurance can be given as to when the factors upon which a substantial portion of this estimate is based can be expected to be resolved. However, the Company is currently working to resolve certain of these matters. The Company believes that it has insurance coverage available to recover certain incurred and future environmental costs and is actively pursuing claims in this regard. No assurances can be given that the Company will be successful in attempts to recover incurred or future costs from insurers or that the amount of recoveries received will ultimately be adequate to cover costs incurred. While uncertainties are inherent in the final outcome of these environmental matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. ASBESTOS CONTINGENCIES The Company is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with the Company or exposure to products containing asbestos produced or sold by the Company. The lawsuits generally relate to products the Company has not sold for at least 20 years. At September 30, 2000, the number of such claims pending was approximately 114,700, as compared with 100,000 at December 31, 1999. During 1999, approximately 29,300 of such claims were received and 15,700 were settled or dismissed. During the quarter and nine-month periods ended September 30, 2000, approximately 6,100 and 20,800 of such claims were received and 1,400 and 6,100 of such claims were settled or dismissed. The foregoing claim and settlement figures as of and for the quarter and nine-month periods ended September 30, 2000, do not reflect the fact that as of September 30, 2000, the Company had reached agreements under which it expects to settle approximately 74,200 of the pending asbestos-related claims over an extended period. The Company maintains a liability for estimated asbestos- related costs for claims filed to date and an estimate of claims to be filed over a 10 year period (i.e., through 2010). The Company's estimate is based on the Company's view, at each balance sheet date, of the current and an anticipated number of asbestos-related claims, the timing and amounts of asbestos- related payments, the status of ongoing litigation and settlement initiatives, and the advice of Wharton Levin Ehrmantraut Klein & Nash, P.A., with respect to the current state of the law related to asbestos claims. However, there are inherent uncertainties involved in estimating asbestos-related costs and the Company's actual costs could exceed the Company's estimates due to changes in facts and circumstances after the date of each estimate. Further, while the Company does not presently believe there is a reasonable basis for estimating asbestos-related costs beyond 2010 and, accordingly, no accrual has been recorded for any costs which may be incurred beyond 2010, the Company expects that such costs may continue beyond 2010, and that such costs could be substantial. As of September 30, 2000, an estimated asbestos- related cost accrual of $538.6, before consideration of insurance recoveries, has been reflected in the accompanying interim consolidated financial statements primarily in Long-term liabilities. The Company estimates that annual future cash payments for asbestos-related costs will be approximately $60.0 in the fourth quarter of 2000 and will range from approximately $100.0 to $125.0 in the years 2001 and 2002, approximately $50.0 for each of the years 2003 and 2004, and an aggregate of approximately $160.0 thereafter. For the period from inception through September 30, 2000, before consideration of insurance recoveries, a total of approximately $168.6 of asbestos-related settlement and related legal costs have been paid, including approximately $47.7 in the nine-month period ended September 30, 2000. The Company believes it has insurance coverage available to recover a substantial portion of its asbestos-related costs. Although the Company has settled asbestos-related coverage matters with certain of its insurance carriers, other carriers have not yet agreed to settlements. For the period from inception through September 30, 2000, partial insurance reimbursements for asbestos-related matters totaling approximately $105.0 have been received, including $36.5 in the nine-month period ended September 30, 2000. The timing and amount of future recoveries from insurance carriers will depend on the pace of claims review and processing by such carriers and on the resolution of any disputes regarding coverage under such policies. The Company believes that substantial additional recoveries from the insurance carriers are probable. The Company reached this conclusion after considering its prior insurance- related recoveries in respect of asbestos-related claims, existing insurance policies, and the advice of Heller Ehrman White & McAuliffe LLP with respect to applicable insurance coverage law relating to the terms and conditions of those policies. Accordingly, an estimated aggregate insurance recovery of $428.0, determined on the same basis as the asbestos-related cost accrual, is recorded primarily in Other assets at September 30, 2000. However, no assurance can be given that the Company will be able to record similar recovery percentages for future asbestos-related claims or that the amounts related to future asbestos-related claims will not exceed the Company's aggregate insurance coverage. Management continues to monitor claims activity, the status of lawsuits (including settlement initiatives), legislative developments, and costs incurred in order to ascertain whether an adjustment to the existing accruals should be made to the extent that historical experience may differ significantly from the Company's underlying assumptions. In the third quarter of 2000, this process resulted in the Company reflecting a $43.0 charge (included in Other income (expense) - see Note 8), for asbestos- related claims, net of expected insurance recoveries, based on recent cost and other trends experienced by the Company and other companies. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and insurance recoveries that will be received, management currently believes that, based on the factors discussed in the preceding paragraphs, the resolution of asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on the Company's consolidated financial position or liquidity. However, as the Company's estimates are periodically re-evaluated, additional charges may be necessary and such charges could be material to the results of the period in which they are recorded. LABOR MATTERS In connection with the USWA strike and subsequent lock-out by the Company, which was settled in September 2000, certain allegations of unfair labor practices ("ULPs") were filed with the National Labor Relations Board ("NLRB") by the USWA. As previously disclosed, the Company responded to all such allegations and believes that they were without merit. In July 1999, the Oakland, California, regional office of the NLRB dismissed all material charges filed against the Company. In September 1999, the union filed an appeal of this ruling with the NLRB general counsel's office in Washington, D.C. In April 2000, the Company was notified by the general counsel of the NLRB of the dismissal of twenty-two of twenty-four allegations of ULPs previously brought against it by the USWA. In June 2000, the general counsel of the NLRB directed the Oakland Regional Office to issue a complaint on two allegations for trial before an administrative law judge. The Regional Office issued such a complaint in late June 2000. A trial date has been set for November 2000. Any outcome from the trial before the administrative law judge would be subject to an additional appeal by the general counsel of the NLRB, the USWA or the Company. This process could take months or years. If these proceedings eventually resulted in a definitive ruling against the Company, it could be obligated to provide back pay to USWA members at the five plants and such amount could be significant. The Company continues to believe that the charges are without merit. While uncertainties are inherent in matters such as this and it is presently impossible to determine the actual costs, if any, that may ultimately arise in connection with this matter, the Company does not believe that the ultimate outcome of this matter will have a material adverse impact on the Company's liquidity or financial position. However, amounts paid, if any, in satisfaction of this matter could be significant to the results of the period in which they are recorded. OTHER CONTINGENCIES The Company is involved in various other claims, lawsuits, and other proceedings relating to a wide variety of matters. While uncertainties are inherent in the final outcome of such matters, and it is presently impossible to determine the actual costs that ultimately may be incurred, management currently believes that the resolution of such uncertainties and the incurrence of such costs should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. See Note 11 of Notes to Consolidated Financial Statements for the year ended December 31, 1999. 5. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS At September 30, 2000, the net unrealized loss on the Company's position in aluminum forward sales and option contracts, (excluding the impact of those contracts discussed below which have been marked to market), energy forward purchase and option contracts, and forward foreign exchange and option contracts, was approximately $35.0 (based on applicable quarter- end published market prices). As the Company's hedging activities are generally designed to lock-in a specified price or range of prices, gains or losses on the derivative contracts utilized in these hedging activities will generally be offset by losses or gains, respectively, on the transactions being hedged. ALUMINA AND ALUMINUM The Company's earnings are sensitive to changes in the prices of alumina, primary aluminum and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold. Primary aluminum prices have historically been subject to significant cyclical price fluctuations. Alumina prices as well as fabricated aluminum product prices (which vary considerably among products) are significantly influenced by changes in the price of primary aluminum but generally lag behind primary aluminum price changes by up to three months. Since 1993, the Average Midwest United States transaction price for primary aluminum has ranged from approximately $.50 to $1.00 per pound. From time to time in the ordinary course of business, the Company enters into hedging transactions to provide price risk management in respect of the net exposure of earnings and cash flows resulting from (i) anticipated sales of alumina, primary aluminum and fabricated aluminum products, less (ii) expected purchases of certain items, such as aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with the price of primary aluminum. Forward sales contracts are used by the Company to effectively fix the price that the Company will receive for its shipments. The Company also uses option contracts (i) to establish a minimum price for its product shipments, (ii) to establish a "collar" or range of prices for the Company's anticipated sales, and/or (iii) to permit the Company to realize possible upside price movements. As of September 30, 2000, the Company had entered into option contracts that established a price range for 68,000, 362,000 and 183,000 tons* of primary aluminum with respect to 2000, 2001 and 2002, respectively. Additionally, as of September 30, 2000, the Company had also entered into a series of transactions with a counterparty that will provide the Company with a premium over the forward market prices at the date of the transaction for 2,000 tons of primary aluminum per month during the period October 2000 through June 2001. The Company also contracted with the counterparty to receive certain fixed prices (also above the forward market prices at the date of the transaction) on 4,000 tons of primary aluminum per month over a three year period commencing October 2001, unless market prices during certain periods decline below a stipulated "floor" price, in which case, the fixed price sales portion of the transactions terminate. The price at which the October 2001 and later transactions terminate is well below current market prices. While the Company believes that the October 2001 and later transactions are consistent with its stated hedging objectives, these positions do not qualify for treatment as a "hedge" under current accounting guidelines. --------------- * All references to tons in this report refer to metric tons of 2,204.6 pounds. Accordingly, these positions will be "marked-to-market" each period. See Note 8 for mark-to-market pre-tax gains (losses) associated with the transactions described in this paragraph for the quarter and nine-month periods ended September 30, 2000 and 1999. As of September 30, 2000, the Company had sold forward virtually all of the alumina available to it in excess of its projected internal smelting requirements for 2000, 2001 and 2002 at prices indexed to future prices of primary aluminum. ENERGY The Company is exposed to energy price risk from fluctuating prices for fuel oil, diesel oil and natural gas consumed in the production process. The Company from time to time in the ordinary course of business enters into hedging transactions with major suppliers of energy and energy-related financial instruments. As of September 30, 2000, the Company held option contracts for the purchase of approximately 20,000 MMBtu of natural gas per day for the period October 2000 through December 2000 and 30,000 MMBtu of natural gas per day for the period January 2001 through June 2001. As of September 30, 2000, the Company also held a combination of fixed price purchase and option contracts for an average of 232,000 barrels per month of fuel oil for the remainder of 2000. FOREIGN CURRENCY The Company enters into forward exchange contracts to hedge material cash commitments to foreign subsidiaries or affiliates. At September 30, 2000, the Company had net forward foreign exchange contracts for the purchase of 120.5 Australian dollars in respect of its Australian dollar dominated commitments from October 2000 through June 2001. In addition, the Company has entered into option contracts that establish a price range for the purchase of 24.0 Australian dollars for the period from October 2000 through June 2001 and option contracts that establish a ceiling on the purchase of 224.0 Australian dollars for the period from August 2001 through December 2005. See Note 12 of the Notes to Consolidated Financial Statements for the year ended December 31, 1999. 6. CHANDLER ACQUISITION In May 2000, the Company acquired the assets of a drawn tube aluminum fabricating operation in Chandler, Arizona. Total consideration for the acquisition was $16.1, consisting of cash payments of $15.1 and assumed current liabilities of $1.0. The purchase price was allocated to the assets acquired based on their estimated fair values, of which approximately $1.1 was allocated to property, plant and equipment and $2.8 was allocated to receivables, inventory and prepaid expenses. The excess of the purchase price over the fair value of the assets acquired (goodwill) was approximately $12.2 and is being amortized on a straight-line basis over 20 years. The acquisition is part of the Company's continued emphasis on its Engineered products business unit. Total revenues for the Chandler facility were approximately $13.8 for the year ended December 31, 1999 (unaudited). 7. WASHINGTON SMELTERS' POWER SALES AND OPERATING LEVEL As previously announced, during August 2000, the Company sold certain power that it had under contract for the third quarter of 2001. The power sold was in excess of the Company's current and expected future operating requirements and resulted in net proceeds and a net pre-tax gain of approximately $40.5 in the third quarter of 2000. This power sale had no impact on the Company's current level of operations. As previously reported, during June 2000, as a result of unprecedented high market prices for power in the Pacific Northwest, the Company temporarily curtailed approximately 128,000 tons of its 273,000 annual primary aluminum production capacity at the Tacoma and Mead, Washington smelters and sold 100 megawatts of power that it had under contract through June 30, 2001. As a result of the curtailment, the Company will avoid the need to purchase power on a variable market price basis. The sale of power is expected to substantially mitigate the cash impact of the potline curtailment over the contract period for which the power was sold. To implement the curtailment, the Company temporarily curtailed the two and one-half operating potlines at its Tacoma smelter and two and one-half out of a total of eight potlines at its Mead smelter. One-half of a potline at the Tacoma smelter was already curtailed. As a result of this sale of the power, the Company recorded a net pre-tax gain of approximately $15.8 in the second quarter of 2000, which amount was composed of gross proceeds of $31.3 offset by incremental excess power costs in the second quarter, employee termination expenses and other fixed commitments. Both net gains have been reflected (in their respective periods) in Other non-recurring operating items, net (see Note 8). During October 2000, the Company signed a new power contract with the Bonneville Power Administration ("BPA") under which the BPA will provide the Company's operations in the State of Washington with power during the period October 2001 through September 2006. The contract will provide the Company with sufficient power to fully operate the Company's Trentwood facility as well as approximately 40% of capacity at the Company's Mead and Tacoma aluminum smelting operations. Power costs under the new contract will exceed the cost of power under the Company's current BPA contract by approximately 20%. Additional provisions of the new BPA contract include a take-or- pay requirement, an additional cost recovery mechanism under which the Company's base power rate could be increased and a "good corporate citizen" clause, under which the Company's power allocation could be curtailed in certain instances. The Company has the right to terminate the contract until certain pricing and other provisions of the BPA contract are finalized, which is expected to be mid-2001. 8. OTHER NON-RECURRING ITEMS NON-RECURRING OPERATING ITEMS, NET (OTHER THAN LABOR SETTLEMENT) The income (loss) impact associated with non-recurring operating items, net, other than the labor settlement charge, for the quarter and nine-month periods ended September 30, 2000 and 1999, was as follows:
Quarter Ended Nine-Months Ended September 30, September 30, ------------------------------ ------------------------------ Business Segment 2000 1999 2000 1999 ----------------- -------------- -------------- -------------- -------------- Net gains on power sales (Note 7) Primary Aluminum $ 40.5 $ - $ 56.3 $ - Gramercy related items: Incremental maintenance spending (Note 2) Bauxite & Alumina (11.5) - (11.5) - Insurance deductibles, etc. Bauxite & Alumina - (4.0) - (4.0) (Note 2) Corporate - (1.0) - (1.0) Impairment charges associated with product line exits: LIFO inventory charge (Note 3)Flat-Rolled (7.5) - (7.5) - Products Other impairment charges Flat-Rolled (1.5) - (1.5) - Products (4.0) - (4.7) - Engineered Products Restructuring charges Primary Aluminum (3.1) - (3.1) - Corporate (2.0) - (5.5) - Micromill impairment Micromill - (19.1) - (19.1) ------------------------------ ------------------------------ $ 10.9 $ (24.1) $ 22.5 $ (24.1) ============================== ==============================
The $1.5 impairment charge reflected by the Company's Flat- Rolled products segment in the third quarter of 2000 reduces the carrying value of certain assets to their estimated net realizable value as a result of the segment's previously announced decision to exit the can body stock product line. The $4.0 impairment charge recorded by the Company's Engineered products segment in the third quarter of 2000 reduces the carrying value of certain machining facilities and assets, which are no longer required as a result of the segment's decision to exit a marginal product line, to their estimated net realizable value. During the second quarter of 2000, the Engineered products segment recorded an additional severance-related charge of $.7 related to this product line exit. The restructuring charges recorded by the Company's Primary aluminum segment in the third quarter of 2000 represent employee benefit and other costs for approximately 50 job eliminations reflecting a reduced emphasis on technology sales and reduced salaried employee requirements at the Company's Tacoma facility, given its current curtailment. The Corporate portion of the restructuring charges recorded in the quarter and nine-month periods ended September 30, 2000, represent employee benefit and other costs associated with the consolidation or elimination of certain corporate staff functions. The Corporate restructuring initiatives in 2000 involve a group of approximately 50 employees. See Note 4 of the Notes to Consolidated Financial Statements for the year ended December 31, 1999, for a discussion of the write-down of Micromill assets. OTHER INCOME (EXPENSE) Amounts included in other income (expenses), other than interest expense, for the quarter and nine-month periods ended September 30, 2000 and 1999, included the following pre-tax gains (losses):
Quarter Ended Nine Months Ended September 30, September 30, ------------------------------ ------------------------------ 2000 1999 2000 1999 -------------- -------------- -------------- -------------- Asbestos-related charges (Note 4) $ (43.0) $ (15.2) $ (43.0) $ (53.2) Gain on sale of Pleasanton complex 22.0 - 22.0 - Lease obligation adjustment 17.0 - 17.0 - Mark-to-market gains (losses) (Note 5) .9 (5.9) 9.6 (20.0) Gain on sale of interests in AKW L.P. - - - 50.5 All other, net (1.9) (.8) (7.0) 3.4 -------------- -------------- -------------- -------------- $ (5.0) $ (21.9) $ (1.4) $ (19.3) ============== ============== ============== ==============
During September 2000, the Company sold its Pleasanton, California, office complex because the administrative and research and development functions located there had been or are being relocated to other Kaiser locations and the complex had become surplus to the Company's needs. Net proceeds from the sale were approximately $51.6. The net lease obligation adjustment recorded in the third quarter of 2000 relates to a building in which the Company has not maintained offices for a number of years, but for which it is responsible for lease payments as master tenant through 2008 under a 1983 sale-and-leaseback agreement. The Company's recorded liability represents its long-term obligation under the master lease, net of estimated sublease income (included in Long-term liabilities). During the third quarter of 2000, the Company adjusted the net lease obligation to reflect new third-party sublease agreements in 2000 which resulted in occupancy and lease rates above those previously projected. During the quarter ended March 31, 2000, the Company, in the ordinary course of business, sold certain non-operating properties for total proceeds of approximately $12.0. The sale did not have a material impact on the Company's operating results for the nine-month period ended September 30, 2000 (included in All other, net above). See Note 3 of the Notes to Consolidated Financial Statements for the year ended December 31, 1999, for a discussion of the sale of interests in AKW L.P. 9. INTERIM OPERATING SEGMENT INFORMATION The Company uses a portion of its bauxite, alumina and primary aluminum production for additional processing at its downstream facilities. Transfers between business units are made at estimated market prices. The accounting policies of the segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements for the year ended December 31, 1999. Business unit results are evaluated internally by management before any allocation of corporate overhead and without any charge for income taxes or interest expense. See Note 13 of Notes to Consolidated Financial Statements for the year ended December 31, 1999. Financial information by operating segment for the quarter and nine-month periods ended September 30, 2000 and 1999 is as follows:
Quarter Ended Nine Months Ended September 30, September 30, ------------------------------ ------------------------------ 2000 1999 2000 1999 -------------------------------------------------------------------------------- ------------------------------ Net Sales: Bauxite and Alumina: (1) Net sales to unaffiliated customers $ 106.7 $ 108.3 $ 327.7 $ 308.8 Intersegment sales 29.0 33.7 115.3 86.3 -------------- -------------- -------------- -------------- 135.7 142.0 443.0 395.1 -------------- -------------- -------------- -------------- Primary Aluminum: Net sales to unaffiliated customers 153.6 113.5 411.3 303.1 Intersegment sales 56.5 65.7 196.1 177.9 -------------- -------------- -------------- -------------- 210.1 179.2 607.4 481.0 -------------- -------------- -------------- -------------- Flat-Rolled Products 115.4 140.8 390.5 444.4 Engineered Products 134.3 134.5 438.8 405.8 Minority interests 27.1 23.2 77.0 62.6 Eliminations (85.5) (99.4) (311.4) (264.2) -------------- -------------- -------------- -------------- $ 537.1 $ 520.3 $ 1,645.3 $ 1,524.7 ============== ============== ============== ============== Operating income (loss): (4) (5) Bauxite and Alumina (2) $ 6.3 $ 4.9 $ 36.2 $ (6.4) Primary Aluminum (3) 21.3 10.0 65.4 (10.5) Flat-Rolled Products 5.6 5.8 15.9 20.7 Engineered Products 7.3 12.2 33.2 29.8 Micromill - (3.2) (.6) (9.5) Eliminations 4.1 1.1 1.2 6.6 Corporate and Other (14.1) (18.7) (43.8) (50.7) Labor Settlement Charge (4) (38.5) - (38.5) - Other Non-Recurring Operating Items, Net (5) 10.9 (24.1) 22.5 (24.1) -------------- -------------- -------------- -------------- $ 2.9 $ (12.0) $ 91.5 $ (44.1) ============== ============== ============== ============== Depreciation and amortization: Bauxite and Alumina (6) $ 6.1 $ 6.0 $ 18.1 $ 23.8 Primary Aluminum 6.2 6.9 18.6 21.2 Flat-Rolled Products 4.1 4.0 12.3 12.2 Engineered Products 3.0 2.6 8.6 7.9 Micromill - .7 .2 2.1 Corporate and Other .4 .7 1.2 2.2 -------------- -------------- -------------- -------------- $ 19.8 $ 20.9 $ 59.0 $ 69.4 ============== ============== ============== ==============
(1) Net sales for the quarter and nine-month periods ended September 30, 2000, included approximately 50,000 tons and 195,000 tons, respectively, of alumina purchased from third parties and resold to certain unaffiliated customers of the Gramercy facility and 54,000 tons of alumina purchased from third parties for the nine-month period ended September 30, 2000, and transferred to the Company's Primary aluminum business unit. There were no purchases of alumina from third parties during the third quarter of 2000 for the Company's Primary aluminum business unit. Net sales for both the quarter and nine-month periods ended September 30, 1999, included approximately 190,000 tons of alumina purchased from third parties and resold to certain unaffiliated customers and 60,000 tons of alumina purchased from third parties and transferred to the Company's Primary aluminum business unit. (2) Operating income (loss) for the quarter and nine-month periods ended September 30, 2000, included estimated business interruption insurance recoveries totaling $23.8 and $89.6, respectively. Operating income (loss) for both the quarter and nine-month periods ended September 30, 1999, included estimated business interruption insurance recoveries totaling $22.0. (3) Operating income (loss) for the quarter and nine-month periods ended September 30, 1999, included potline restart costs of $1.9 and $11.5, respectively. (4) The allocation of the labor settlement charge to the Company's business units is as follows: Bauxite and Alumina - $2.1, Primary aluminum - $15.9, Flat-rolled products - $18.2 and Engineered products - $2.3. (5) See Note 8 of Notes to Interim Consolidated Financial Statements for a summary of the components of non-recurring operating items, net (other than the labor settlement charges) and the business segment to which the items relate. (6) Depreciation was suspended for the Gramercy facility for the last six months of 1999 and the first nine months of 2000, as a result of the July 5, 1999, incident. Depreciation expense for the Gramercy facility for the six months ended June 30, 1999, was approximately $6.0. See Note 2 of Notes to Interim Consolidated Financial Statements for additional information. Excluding the capital expenditures made during the first nine months of 2000 related to the rebuilding of the Gramercy facility, which affected the Bauxite and Alumina segment, and the purchase of the capital assets of a drawn tube aluminum fabricating operation, which affected the Engineering Products segment, there were no material changes in segment assets since December 31, 1999. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ------------------------------------ This section should be read in conjunction with the response to Item 1, Part I, of this Report. This section contains statements which constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this section (see, for example, "Recent Events and Developments," "Results of Operations," and "Liquidity and Capital Resources"). Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include the effectiveness of management's strategies and decisions, general economic and business conditions, developments in technology, new or modified statutory or regulatory requirements, and changing prices and market conditions. This section and Part I, Item 1. "Business - Factors Affecting Future Performance" in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, each identify other factors that could cause actual results to vary. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. RECENT EVENTS AND DEVELOPMENTS INCIDENT AT GRAMERCY FACILITY In July 1999, the Company's Gramercy, Louisiana alumina refinery was extensively damaged by an explosion in the digestion area of the plant. See Note 2 of Notes to Interim Consolidated Financial Statements for a full discussion regarding the incident at the Gramercy facility. Construction on the damaged part of the facility began during the first quarter of 2000. Initial production at the plant is currently expected to commence during the middle of the fourth quarter of 2000. Based on current estimates, full production is expected to be achieved during the first quarter of 2001. The Company has received the regulatory permits required to operate the plant once the facility is ready to resume production. In March 2000, the U.S. Mine Safety and Health Administration ("MSHA") proposed that the Company be assessed a penalty of $.5 million in connection with the citations issued from its investigation of the incident. The Company disagrees with the substance of the previously issued MSHA citations and has challenged them and the associated penalty. However, it is possible that other civil or criminal fines or penalties could be levied against the Company. From the date of the Gramercy incident through September 30, 2000, the Company had expended or incurred costs or losses associated with the Gramercy incident (that were not capital expenditures) totaling $155.6 million, consisting of clean-up, site preparation and business interruption costs. From the date of the Gramercy incident through September 30, 2000, $134.0 million of insurance recoveries related to these costs had been received. In addition, during the second and third quarters of 2000, the Company spent approximately $150.0 million on Gramercy- related construction activities and received $73.0 million of insurance recoveries for capital expenditures related to the rebuilding of the Gramercy facility. Gramercy-related capital spending prior to the second quarter of 2000 was not significant. LABOR DISPUTE, SETTLEMENT AND RELATED COSTS As previously reported, prior to the settlement of the labor dispute, the Company was operating five of its U.S. facilities with salaried employees and other employees as a result of the September 30, 1998, strike by the United Steelworkers of America ("USWA") and the subsequent "lockout" by the Company in January 1999. The labor dispute was settled in September 2000. A significant portion of the issues were settled through direct negotiations between the Company and the USWA and the remaining issues were settled pursuant to an agreed-upon arbitration process. Under the terms of the settlement, USWA members generally returned to the affected plants during October 2000. The new labor contact, which expires in September 2005, provides for a 2.6% average annual increase in the overall wage and benefit packages, results in the reduction of at least 540 hourly jobs at the five facilities (from approximately 2,800 on September 30, 1998), allows the Company greater flexibility in using outside contractors and provides for productivity gains by allowing the Company to utilize the knowledge obtained during the labor dispute without many of the work-rule restrictions that were part of the previous labor contract. The Company has recorded a one-time pre-tax labor settlement charge of $38.5 million in its results for the quarter ended September 30, 2000, to reflect the incremental, non-recurring impacts of the labor settlement, including severance and other contractual obligations for non-returning workers. See Note 1 of Notes to Interim Consolidated Financial Statements for additional discussions on the labor settlement. As more fully discussed in Note 4 of Notes to Interim Consolidated Financial Statements, in connection with the strike and subsequent lock-out, certain allegations of unfair labor practices ("ULPs") were filed with the National Labor Relations Board ("NLRB") by the USWA. Twenty-two of the twenty-four allegations brought by the USWA have been dismissed. A trial date has been set for November 2000 for the remaining two allegations. Any outcome from the trial before the administrative law judge would be subject to an additional appeal by the general counsel of the NLRB, the USWA or the Company. This process could take months or years. If these proceedings eventually resulted in a definitive ruling against the Company, it could be obligated to provide back pay to USWA members at the five plants and such amount could be significant. The Company continues to believe that the charges are without merit. While uncertainties are inherent in matters such as this and it is presently impossible to determine the actual costs, if any, that may ultimately arise in connection with this matter, the Company does not believe that the ultimate outcome of this matter will have a material adverse impact on the Company's liquidity or financial position. However, amounts paid, if any, in satisfaction of this matter could be significant to the results of the period in which they are recorded. WASHINGTON SMELTERS' POWER SALES AND OPERATING LEVEL During 2000, as a result of unprecedented high market prices for power in the Pacific Northwest, the Company temporarily curtailed approximately 128,000 tons of its annual primary aluminum production at the Tacoma and Mead, Washington, smelters and sold certain power that it had under contract through September 30, 2001. To implement the curtailment, the Company temporarily curtailed the two and one-half operating potlines at its Tacoma smelter and two and one-half out of a total of eight potlines at its Mead smelter. One-half of a potline at the Tacoma smelter was already curtailed. The Company is currently operating the Mead and Tacoma smelters at approximately 50% of their capacity. During October 2000, the Company signed a new power contract with the Bonneville Power Administration ("BPA") under which the BPA will provide the Company's operations in the State of Washington with power during the period October 2001 through September 2006. The contract will provide the Company with sufficient power to fully operate the Company's Trentwood facility as well as approximately 40% of capacity at the Company's Mead and Tacoma aluminum smelting operations. Power costs under the new contract will exceed the cost of power under the Company's current BPA contract by approximately 20%. Additional provisions of the new BPA contract include a take-or- pay requirement, an additional cost recovery mechanism under which the Company's base power rate could be increased and a "good corporate citizen" clause, under which the Company's power allocation could be curtailed in certain instances. The Company has the right to terminate the contract until certain pricing and other provisions of the BPA contract are finalized, which is expected to be mid-2001. See Note 7 of Notes to Interim Consolidated Financial Statements for additional information on the power sales and BPA contract. STRATEGIC INITIATIVES The Company's strategy is to improve its financial results by: increasing the competitiveness of its existing plants; continuing its cost reduction initiatives; adding assets to businesses it expects to grow; pursuing divestitures of its non- core businesses; and strengthening its financial position. In addition to working to improve the performance of the Company's existing assets, the Company has devoted significant efforts analyzing its existing asset portfolio with the intent of focusing its efforts and capital in sectors of the industry that are considered most attractive and in which the Company believes it is well positioned to capture value. This process has continued in 2000. During the first nine months of 2000, the Company sold certain non-operating properties, its Micromill assets and technology and its Pleasanton, California, office complex and purchased the assets of a drawn tube aluminum fabricating operation. The dispositions were part of the Company's initiative to monetize non-strategic or underperforming assets. The acquisition was part of the Company's continued focus on growing its Engineered products operations. Another area of emphasis has been a continuing focus on managing the Company's legacy liabilities. The Company believes that it has insurance coverage available to recover certain incurred and future environmental costs and a substantial portion of its asbestos-related costs and is actively pursuing recoveries in this regard. For the period from inception through September 30, 2000, the Company has paid approximately $168.6 million for asbestos-related settlements and associated defense costs and has received partial insurance reimbursements during this same period totaling $105.0 million. The timing and amount of future recoveries of asbestos-related claims from insurance carriers remain a major priority of the Company, but will depend on the pace of claims review and processing by such carriers and the resolution of any disputes regarding coverage under the insurance policies. Additional portfolio analysis and initiatives are continuing. RESULTS OF OPERATIONS As an integrated aluminum producer, the Company uses a portion of its bauxite, alumina, and primary aluminum production for additional processing at certain of its downstream facilities. Intersegment transfers are valued at estimated market prices. The following table provides selected operational and financial information on a consolidated basis with respect to the Company for the quarters and nine-month periods ended September 30, 2000 and 1999. The following data should be read in conjunction with the Company's interim consolidated financial statements and the notes thereto, contained elsewhere herein. See Note 13 of Notes to Consolidated Financial Statements for the year ended December 31, 1999, for further information regarding segments. Interim results are not necessarily indicative of those for a full year. Average realized prices for the Company's Flat- rolled products and Engineered products segments are not presented in the following table as such prices are subject to fluctuations due to changes in product mix. Average realized third party sales prices for alumina and aluminum in the following table includes the impact of hedging activities. SELECTED OPERATIONAL AND FINANCIAL INFORMATION (Unaudited) (In millions of dollars, except shipments and prices)
Quarter Ended Nine Months Ended September 30, September 30, ------------------------------ ------------------------------ 2000 1999 2000 1999 -------------------------------------------------------------------------------- ------------------------------ Shipments: (000 tons) Alumina (1) Third Party 484.0 572.4 1,460.4 1,670.8 Intersegment 149.8 191.4 584.1 531.0 -------------- -------------- -------------- -------------- Total Alumina 633.8 763.8 2,044.5 2,201.8 -------------- -------------- -------------- -------------- Primary Aluminum Third Party 96.3 75.4 261.8 207.3 Intersegment 34.0 44.6 119.4 130.4 -------------- -------------- -------------- -------------- Total Primary Aluminum 130.3 120.0 381.2 337.7 -------------- -------------- -------------- -------------- Flat-Rolled Products 34.9 54.3 125.7 165.8 -------------- -------------- -------------- -------------- Engineered Products 40.3 42.9 132.3 127.8 -------------- -------------- -------------- -------------- Average Realized Third Party Sales Price: Alumina (per ton) $ 204 $ 177 $ 204 $ 173 Primary Aluminum (per pound) $ .72 $ .68 $ .71 $ .66 Net Sales: Bauxite and Alumina (1) Third Party (includes net sales of bauxite) $ 106.7 $ 108.3 $ 327.7 $ 308.8 Intersegment 29.0 33.7 115.3 86.3 -------------- -------------- -------------- -------------- Total Bauxite & Alumina 135.7 142.0 443.0 395.1 -------------- -------------- -------------- -------------- Primary Aluminum Third Party 153.6 113.5 411.3 303.1 Intersegment 56.5 65.7 196.1 177.9 -------------- -------------- -------------- -------------- Total Primary Aluminum 210.1 179.2 607.4 481.0 -------------- -------------- -------------- ------------- Flat-Rolled Products 115.4 140.8 390.5 444.4 Engineered Products 134.3 134.5 438.8 405.8 Minority Interests 27.1 23.2 77.0 62.6 Eliminations (85.5) (99.4) (311.4) (264.2) -------------- -------------- ------------- -------------- Total Net Sales $ 537.1 $ 520.3 $ 1,645.3 $ 1,524.7 ============== ============== ============== ============== Operating Income (Loss): (4) (5) Bauxite & Alumina (2) $ 6.3 $ 4.9 $ 36.2 $ (6.4) Primary Aluminum (3) 21.3 10.0 65.4 (10.5) Flat-Rolled Products 5.6 5.8 15.9 20.7 Engineered Products 7.3 12.2 33.2 29.8 Micromill - (3.2) (.6) (9.5) Eliminations 4.1 1.1 1.2 6.6 Corporate (14.1) (18.7) (43.8) (50.7) Labor Settlement Charge (4) (38.5) - (38.5) - Other Non-Recurring Operating Items, Net (5) 10.9 (24.1) 22.5 (24.1) -------------- -------------- -------------- -------------- Total Operating Income (Loss) $ 2.9 $ (12.0) $ 91.5 $ (44.1) ============== ============== ============== ============== Net Income (Loss) $ (16.7) $ (38.8) $ 6.5 $ (91.8) ============== ============== ============== ============== Capital Expenditures $ 110.7 $ 10.0 $ 196.5 $ 40.3 ============== ============== ============== ==============
(1) Net sales for the quarter and nine-month periods ended September 30, 2000, included approximately 50,000 tons and 195,000 tons, respectively, of alumina purchased from third parties and resold to certain unaffiliated customers and 54,000 tons of alumina purchased from third parties for the nine-month period ended September 30, 2000, and transferred to the Company's Primary aluminum business unit. There were no purchases of alumina from third parties during the third quarter of 2000 for the Company's Primary aluminum business unit. Net sales for both the quarter and nine-month periods ended September 30, 1999, included approximately 190,000 tons of alumina purchased from third parties and resold to certain unaffiliated customers and 60,000 tons of alumina purchased from third parties and transferred to the Company's Primary aluminum business unit. (2) Operating income (loss) for the quarter and nine-month periods ended September 30, 2000, included estimated business interruption insurance recoveries totaling $23.8 and $89.6, respectively. Operating income (loss) for both the quarter and nine-month periods ended September 30, 1999, included estimated business interruption insurance recoveries totaling $22.0. Additionally, depreciation was suspended for the Gramercy facility, as a result of the July 5, 1999, incident. Depreciation expense for the Gramercy facility for the six months ended June 30, 1999, was approximately $6.0. See Note 2 of Notes to Interim Consolidated Financial Statements for additional information. (3) Operating income (loss) for the quarter and nine-month periods ended September 30, 1999, included potline restart costs of $1.9 and $11.5, respectively. (4) The allocation of the labor settlement charges to the Company's business units is as follows: Bauxite and Alumina - $2.1, Primary aluminum - $15.9, Flat-rolled products - $18.2 and Engineered products - $2.3. (5) See Note 8 of Notes to Interim Consolidated Financial Statements for a detail summary of the components of non- recurring operating items, net (other than the labor settlement charges) and the business segment to which the items are applicable. OVERVIEW The Company's operating results are sensitive to changes in prices of alumina, primary aluminum, and fabricated aluminum products, and also depend to a significant degree on the volume and mix of all products sold and on the Company's hedging strategies. Primary aluminum prices have historically been subject to significant cyclical price fluctuations. See Note 5 of Notes to Interim Consolidated Financial Statements for a discussion of the Company's hedging activities. Changes in global, regional, or country-specific economic conditions can have a significant impact on overall demand for aluminum-intensive fabricated products in the transportation, distribution, and packaging markets. Such changes in demand can directly affect the Company's earnings by impacting the overall volume and mix of such products sold. To the extent that these end-use markets weaken, demand can also diminish for what the Company sometimes refers to as the "upstream" products: alumina and primary aluminum. During 1999, the Average Midwest United States transaction price ("AMT price") per pound of primary aluminum declined from the low $.60 range at the beginning of the year to a low of approximately $.57 per pound in February and then began a steady increase ending 1999 at $.79 per pound. During both the quarter and nine-month periods ended September 30, 2000, the average AMT price was $.76 per pound. The average AMT price for primary aluminum for the week ended October 27, 2000, was approximately $.71 per pound. QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999 SUMMARY The Company reported a net loss of $16.7 million for the third quarter of 2000 compared to a net loss of $38.8 million for the same period of 1999. For the nine-month period ended September 30, 2000, the Company reported net income of $6.5 million compared to a net loss of $91.8 million for the nine- month period ended September 30, 1999. Results for the quarter and nine-month periods ended September 30, 2000 and 1999 included several special items. See Note 1 of Notes to Interim Consolidated Financial Statements for a discussion of the labor settlement charge and Note 8 of Notes to Interim Financial Statements for discussions of the other gains and losses. Net sales in the third quarter of 2000 totaled $537.1 million compared to $520.3 million in the third quarter of 1999. Net sales for the nine-month period ended September 30, 2000, totaled $1,645.3 million compared to $1,524.7 million for the nine-month period ended September 30, 1999. BAUXITE AND ALUMINA Third party net sales of alumina were slightly lower for the quarter ended September 30, 2000, as compared to the same period in 1999 as a 14% increase in third party average realized prices was more than offset by a 15% decrease in third party shipments. The increase in average realized prices was due to an increase in primary aluminum market prices because the sales price for alumina under the Company's third-party alumina sales contracts are linked to primary aluminum prices. This increase was partially offset by allocated net losses from the Company's hedging activities. The decrease in quarter-over-quarter shipments resulted primarily from differences in the timing of shipments and, to a lesser extent, the net effect of the Gramercy incident, after considering the 50,000 tons of alumina purchased by the Company in 2000 from third parties to fulfill third party sales contracts. Intersegment net sales of alumina for the quarter ended September 30, 2000, decreased 14% as compared to the same period in 1999. A 22% decrease in intersegment shipments was partially offset by a 9% increase in the intersegment average realized price. The decrease in shipments was primarily due to the potline curtailments at the Company's Washington smelters in mid- June 2000, as discussed above, and, to lessor extent, the timing of shipments. The increase in the intersegment average realized price is the result of increases in primary aluminum prices from period to period as intersegment transfers are made on the basis of primary aluminum market prices on a lagged basis of one month. No alumina was purchased from third parties in the third quarter of 2000 for the Primary aluminum business unit as the June 2000 potline curtailments alleviated the need for such purchases. For the nine-month period ended September 30, 2000, third party net sales of alumina were 6% higher than the comparable period in 1999 as an 18% increase in third party average realized prices was partially offset by a 13% decrease in third party shipments. The increase in average realized prices and decrease in third party shipments during the first nine months of 2000 as compared to 1999 was attributable to the same price and volume factors discussed above. Third party net sales included approximately 195,000 tons of alumina purchased by the Company from third parties to fulfill third party sales contracts. Intersegment net sales for the nine-month period ended September 30, 2000, increased 34% as compared to the same period in 1999. The increase was due to a 21% increase in the intersegment average realized price and a 10% increase in intersegment shipments. The increase in the intersegment average realized price is the result of increases in primary aluminum prices from period to period as intersegment transfers are made on the basis of primary aluminum market prices on a lagged basis of one month. The increase in shipments was due to the favorable impact of operating more potlines at the Company's smelters during the first half of 2000 as compared to the same period in 1999 offset, in part, by the unfavorable impact of the potline curtailments at the Company's Washington smelters in mid-June 2000 discussed above. Intersegment net sales for the year to date 2000 period included approximately 54,000 tons of alumina purchased during the first six months of 2000 from third-parties and transferred to the Primary aluminum business unit. Segment operating income (before non-recurring items) for the quarter ended September 30, 2000, was essentially flat as compared to the comparable period in 1999 as the increase in the average realized sales prices was offset by energy price increases as well as decreases in shipments. Segment operating income (before non-recurring items) for the nine-month period ended September 30, 2000, increased from the comparable period in 1999 primarily as the result of the increase in the average realized sales prices which was offset in part by the net decrease in shipments as discussed above. Segment operating income for the quarter and nine-month periods ended September 30, 2000, discussed above, excludes non- recurring labor settlement charges of $2.1 million and incremental maintenance spending of $11.5 million. Segment operating income for the quarter and nine-month periods ended September 30, 1999, excludes the segment's allocated share of the expense of insurance deductibles related to the Gramercy incident of $4.0 million. See Note 2 of Notes to Interim Consolidated Financial Statements for additional discussion of the effect of the Gramercy incident on the Bauxite and Alumina business unit's operations. PRIMARY ALUMINUM Third party net sales of primary aluminum were up 35% for the third quarter of 2000 as compared to the same period in 1999 as a result of a 28% increase in third party shipments and a 6% increase in third party averaged realized prices. The increase in shipments was primarily due to the timing of shipments and the favorable impact of the increased operating rate at the Company's 90%-owned Volta Aluminium Company Limited ("Valco") offset, only modestly, by the mid-June 2000 curtailment of the potlines at the Washington smelters discussed above as the business unit purchased primary aluminum from third-parties to meet its third- party and internal commitments (see additional discussion below.) The increase in the average realized prices reflects the 11% increase in primary aluminum market prices, partially offset by allocated net losses from the Company's hedging activities. Intersegment net sales were down approximately 14% between the third quarter of 2000 and the third quarter of 1999. This decrease was the result of a 24% decrease in intersegment shipments offset, in part, by a 12% increase in intersegment average realized prices. The decrease in shipments was primarily due to the potline curtailment at the Washington smelters. The increase in the intersegment average realized price was due to higher market prices for primary aluminum as intersegment transfers are made on the basis of primary aluminum market prices. For the nine-month period ended September 30, 2000, third party sales of primary aluminum increased approximately 36% from the comparable period in 1999, reflecting a 26% increase in third party shipments and an 8% increase in third party average realized prices. The increases in year-to-date 2000 shipments and prices compared to 1999 were attributable to the same factors described above. Intersegment net sales for the nine-month period ended September 30, 2000 were up 10% as compared to the same period in 1999. This increase primarily resulted from a 19% increase in intersegment average realized prices, reflecting higher market prices for primary aluminum offset, in part, by a 8% decrease in intersegment shipments, which was primarily due to the potline curtailments at the Washington smelters. Segment operating income (before non-recurring items) for the quarter and nine-month periods ended September 30, 2000, was up from the comparable periods in 1999. The primary reason for the increases was the improvements in average realized prices and net shipments discussed above. However, segment operating income for the quarter and nine-month periods ended September 30, 2000, have been adversely affected by increases in alumina and electric power costs. Even after excluding the excess power costs experienced by the Company in the Pacific Northwest, power costs have generally increased. As previously reported, new agreements entered into in both Ghana and Wales provide for increased power stability but at increased costs. Additionally, the quarter and nine-month periods ended September 30, 1999, also included costs of approximately $1.9 million and $11.5 million, respectively, associated with preparing and restarting potlines at Valco and the Washington smelters. Third party and intersegment shipments for the quarter and nine-month periods ended September 30, 2000, also include approximately 26,000 tons of primary aluminum purchased from third parties to meet the business unit's internal and third party shipment commitments because production was insufficient to meet such needs as a result of the aforementioned potline curtailments. Such volumes were sold by the business unit at cost. However this had an adverse impact on its operating income, as compared to having produced such primary aluminum in prior quarters. Segment operating income for the quarter and nine-month periods ended September 30, 2000, discussed above, excludes non- recurring net power sales gains of $40.5 million and $56.3 million, respectively. Segment operating income for the quarter and nine-month period ended September 30, 2000, also exclude the segment's share of the non-recurring labor settlement charge of $15.9 million and costs related to staff reduction initiatives of $3.1 million. FLAT-ROLLED PRODUCTS Net sales of flat-rolled products decreased by 18% during the third quarter 2000 as compared to 1999 as a 36% decrease in shipments was partially offset by a 27% increase in average realized prices. The decrease in shipments was primarily due to reduced shipments of can body stock as a part of the Company's planned exit from this product line. Offsetting the reduced can body stock shipments was a modest quarter over quarter improvement in shipments of heat-treat products. The increase in average realized prices primarily reflects the change in product mix (resulting from the can body stock exit) as well as the pass through to customers of increased market prices for primary aluminum. For the nine-month period ended September 30, 2000, net sales of flat-rolled products decreased by 12% as compared to the same period in 1999 as a 24% decrease in shipments was partially offset by a 16% increase in average realized prices. The decline in year-to-date 2000 shipments is primarily attributable to the aforementioned decline in can body stock offset, in part, by increased shipments of general engineering heat-treat products. The increase in the average realized price reflects the pass- through to customers of increased market prices for primary aluminum offset, in part, by a decline in prices for aerospace heat-treat products subsequent to the first quarter of 1999 due to reduced demand. Segment operating income (before non-recurring items) for the quarter ended September 30, 2000, was essentially flat when compared to the comparable period in 1999 as the increase in heat-treat products was offset by the can body stock exit. The decrease in segment operating income (before non-recurring items) in the nine-month period ended September 30, 2000, compared to the comparable period in 1999 was attributable to the same factors described above. Segment operating income for the quarter and nine-month periods ended September 30, 2000, discussed above, excludes the segment's share of the non-recurring labor settlement charge of $18.2 million. Segment operating income also excludes a $7.5 million LIFO inventory charge and $1.5 million of impairment charges associated with the Company's exit from the can body stock product line. Results for the fourth quarter of 2000 for the flat-rolled products segment may be modestly adversely affected by a routine maintenance outage of certain equipment, which could cause heat- treat product shipments to be less than they would be otherwise. ENGINEERED PRODUCTS Net sales of engineered products were essentially flat for the third quarter 2000 as compared to 1999, as a 6% increase in average realized prices was offset by a 6% decrease in product shipments. The increase in average realized prices reflects increased prices for soft alloy extrusions offset, in part, by a shift in product mix. The decrease in product shipments was the result of reduced ground transportation shipments due to softening market demand. For the nine-month period ended September 30, 2000, net sales of engineered products increased approximately 8% as compared to the same period in 1999 as the result of a 3% increase in product shipments and a 5% increase in average realized prices. The increase in product shipments in 2000 over 1999 reflects a strong first half of 2000 offset by a weakening ground transportation market in the third quarter of 2000. In addition to the factors described above, the changes in average realized prices for the nine-month period ended September 30, 2000, also reflect the pass through to customers of increased market prices for primary aluminum. The changes in segment operating income (before non- recurring items) for the quarter and nine-months periods ended September 30, 2000, as compared to the comparable periods in 1999 were attributable to the same factors described above. Segment operating income for the quarter ended September 30, 2000, discussed above, excludes a non-recurring impairment charge associated with product line exit of $4.0 million and labor settlement charges of $2.3 million. In addition to these items, segment operating results for the nine-month period ended September 30, 2000, excluded a $.7 severance-related charge (reflected in the second quarter of 2000) with respect to the same product line exit. Segment operating income for the nine months ended September 30, 1999, included equity in earnings of $2.5 million from the Company's 50% interest in AKW L.P., which was sold in April 1999. ELIMINATIONS Eliminations of intersegment profit vary from period to period depending on fluctuations in market prices as well as the amount and timing of the affected segments' production and sales. CORPORATE AND OTHER Corporate operating expenses (excluding non-recurring items) represent corporate general and administrative expenses which are not allocated to the Company's business segments. Corporate operating results for the quarter and nine-month periods ended September 30, 2000, exclude costs related to staff reduction and efficiency initiatives of $2.0 million and $5.5 million, respectively. Corporate operating results for the quarter and nine-month periods ended September 30, 1999, exclude the expense of insurance deductibles related to the Gramercy incident allocated to the Corporate segment of $1.0 million. Corporate operating results for the third quarter of 1999 also included an approximate $3.0 million non-cash re-allocation of certain employee benefit costs between the Corporate and other business units. LIQUIDITY AND CAPITAL RESOURCES See Note 5 of Notes to Consolidated Financial Statements for the year ended December 31, 1999, for a listing of the Company's indebtedness and information concerning certain restrictive debt covenants. OPERATING ACTIVITIES At September 30, 2000, the Company had working capital of $305.8 million, compared with working capital of $341.9 million at December 31, 1999. The decrease in working capital primarily resulted from decreases in inventories, prepaid expenses and other current assets and increases in accounts payable and accrued salaries, wages and related expenses offset by an increase in trade and other receivables. The decrease in inventories reflects a planned focus on inventory reduction and efficiency initiatives and the previously announced exit from production of can body stock at the Flat-rolled products business unit. The decrease in prepaid expenses and other current assets was driven by a reduction in margin deposits associated with the Company's hedging positions. The increase in accounts payable was primarily due to increased capital spending related to the Gramercy incident. The increase in accrued salaries, wages and related expenses were primarily due to the labor settlement with the USWA (see Note 1 of Notes to Interim Financial Statements). The increase in trade receivables reflects the increased market prices for primary aluminum. The increase in other receivables was primarily due to an increase in the estimated business interruption insurance recoveries related to the Gramercy facility incident (see Note 2 of Notes to Interim Consolidated Financial Statements). Changes in trade receivables and inventories also reflect the factors described in "Results of Operations." INVESTING ACTIVITIES Capital expenditures during the nine-month period ended September 30, 2000, were $196.5 million, consisting primarily of $159.0 million for the rebuilding of the Gramercy facility and $13.3 million for the purchase of the non-working capital assets of a drawn tube aluminum fabricating operation (see Note 6 of Notes to Interim Consolidated Financial Statements). The remainder of the 2000 capital expenditures were incurred to improve production efficiency and reduce operating costs at the Company's other facilities. Total consolidated capital expenditures, excluding the capital expenditures for the rebuilding of the Gramercy facility (see Note 2 of Notes to Interim Consolidated Financial Statements), are expected to be between $80.0 and $115.0 million per annum in each of 2000 through 2002 (of which approximately 10% is expected to be funded by the Company's minority partners in certain foreign joint ventures). See "- Financing Activities and Liquidity" below for a discussion of Gramercy-related capital spending. Management continues to evaluate numerous projects all of which would require substantial capital, both in the United States and overseas. The level of capital expenditures may be adjusted from time to time depending on the Company's price outlook for primary aluminum and other products, the Company's ability to assure future cash flows through hedging or other means, the Company's financial position and other factors. FINANCING ACTIVITIES AND LIQUIDITY SHORT-TERM: In addition to normal operating items, the Company's near- term liquidity will be, as more fully discussed below, affected by the Gramercy incident and the amount of net payments for asbestos liabilities. The Company will continue to incur substantial business interruption costs and capital spending until all construction activity at the Gramercy facility is completed and full production is restored. Business interruption costs are expected to be substantially offset by insurance recoveries. A minimum of an additional $27.0 million of capital spending is expected to be funded by insurance recoveries. The remainder of the Gramercy- related capital expenditures will be funded by the Company using existing cash resources, funds from operations and/or borrowings under the Company's Credit Agreement. The amount of capital expenditures to be funded by the Company will depend on, among other things, the ultimate cost, the elapsed time of the rebuild, and negotiations with the insurance carriers. The Company had previously estimated that the cost of the Gramercy rebuild would be approximately $200.0 million and that at least 50% would be funded by insurance recoveries. The Company now believes that the total cost of the rebuild will be somewhat higher than previously estimated. The Company continues to believe that at least 50% of the total cost will be funded by insurance recoveries. However, the Company has not yet reflected an increase in the minimum expected property damage recovery amount pending further discussions with the Company's insurers. The Company continues to work with the insurance carriers to maximize the amount of recoveries and to minimize, to the extent possible, the period of time between when the Company expends funds and when it is reimbursed. The Company will likely have to continue to fund an average of 30 - 60 days of property damage and business interruption activity, unless some other arrangement is agreed with the insurance carriers, and such amounts will be significant. The Company believes it has sufficient financial resources to fund the remaining construction and business interruption costs on an interim basis. However, no assurances can be given in this regard. During the first nine months of 2000, the Company paid $47.7 million of asbestos-related settlement and defense costs and received insurance reimbursements of $36.5 million for asbestos- related matters. The Company's future cash payments, prior to insurance recoveries, for asbestos-related costs is estimated to be approximately $60.0 million in the fourth quarter of 2000 and to be between $100.0 million and $125.0 million in each of the years 2001 and 2002. The Company believes that it will recover a substantial portion of asbestos payments from insurance. However, insurance reimbursements have historically lagged the Company's payments. Delays in receiving future insurance repayments would have an adverse impact on the Company's liquidity. While no assurance can be given that existing cash sources will be sufficient to meet the Company's short-term liquidity requirements, management believes that the Company's existing cash resources, together with cash flows from operations and borrowings under the credit agreement, as amended (the "Credit Agreement") - (which the Company intends to extend or replace prior to its August 2001 expiration date), will be sufficient to satisfy its working capital and capital expenditure requirements for the next year. LONG-TERM: As of September 30, 2000, the Company's total consolidated indebtedness was $959.3 million, compared with $972.8 million at December 31, 1999. At September 30, 2000, $235.6 million (of which $64.7 million could have been used for letters of credit) was available to the Company under the Credit Agreement and no borrowings were outstanding. As of October 31, 2000, $16.2 million of borrowings were outstanding under the Credit Agreement. During the first nine months of 2000, amounts outstanding at the end of a month have been as high as approximately $53.4 million, which occurred in August 2000 primarily as a result of costs incurred and capital spending related to the Gramercy rebuild, net of insurance reimbursements. The average amount of borrowings outstanding under the Credit Agreement during the nine-month period ended September 30, 2000, was approximately $28.0 million. The average per annum interest rate on loans outstanding under the Credit Agreement during the nine-month period ended September 30, 2000, was approximately 10.2%. The Credit Agreement significantly restricts the Company's ability to pay any dividends on its common stock. The Credit Agreement expires in August 2001. It is the Company's intent to extend or replace the Credit Agreement prior to its expiration. However, in order for the Credit Agreement to be extended beyond January 2002, it is likely that the $225.0 million of 9-7/8% Senior Notes, due February 2002, (the "9-7/8% Senior Notes"), will have to be retired or that both the 9-7/8% Senior Notes and the $400.0 million of 12-3/4% Senior Subordinated Notes, due February 2003, will have to be simultaneously retired and/or refinanced. The Company's ability to make payments on and to refinance its debt on a long-term basis depends on its ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond the Company's control. No assurance can be given that the Company will be able to refinance its debt on acceptable terms. However, with respect to long-term liquidity, management believes that operating cash flow, together with the ability to obtain both short and long-term financing, should provide sufficient funds to meet the Company's working capital, financing and capital expenditure requirements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET ----------------------------------------------------- RISK ---- The information included under Item 3. "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK" in the Company's Form 10-Q for the quarterly period ended March 31, 2000, is incorporated by reference. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ----------------- Gramercy Litigation On July 5, 1999, the Company's Gramercy, Louisiana, alumina refinery was extensively damaged by an explosion in the digestion area of the plant. The cause of the accident is under investigation by the Company and various governmental agencies. The U.S. Mine Safety and Health Administration issued 24 citations and proposed the Company be assessed a penalty of $.5 million in connection with its investigation of the Gramercy incident. The citations allege, among other things, that certain aspects of the plant's operations were unsafe and that such mode of operation contributed to the explosion. The Company has previously announced that it disagrees with the substance of the citations and has challenged them and the associated penalty. It is possible that other civil or criminal fines or penalties could be levied against the Company. A number of employees were injured in the incident, several of them severely. The Company may be liable for claims relating to the injured employees. The incident has resulted in more than ninety lawsuits, many of which were styled as class action suits, being filed against the Company and others since July 1999 on behalf of more than 16,000 claimants. Such lawsuits allege, among other things, property damage, business interruption loss by other businesses and personal injury. Such lawsuits generally are pending in the Fortieth Judicial District Court for the Parish of St. John the Baptist, State of Louisiana, and in the Twenty-Third Judicial District Court for the Parish of St. James or the Parish of Ascension, State of Louisiana, although a few of the lawsuits are pending in the United States District Court, Eastern District of Louisiana, or in the United States Court of Appeals for the Fifth Circuit. Discovery has begun in the cases. The aggregate amount of damages sought in the lawsuits cannot be determined at this time. In connection with the incident at Gramercy, the Company entered into a Consent Agreement and Final Order with the U.S. Environmental Protection Agency in July 2000 pursuant to which the Company agreed to pay a penalty of $200,000 and to implement an Operational Management System. See Part I, Item 3. "LEGAL PROCEEDINGS - Gramercy Litigation" in the Company's Form 10-K for the year ended December 31, 1999, and Part II, Item 1. "LEGAL PROCEEDINGS - Gramercy Litigation" in the Company's Form 10-Q for the quarter ended June 30, 2000. Asbestos-related Litigation The Company is a defendant in a number of lawsuits, some of which involve claims of multiple persons, in which the plaintiffs allege that certain of their injuries were caused by, among other things, exposure to asbestos during, and as a result of, their employment or association with the Company or exposure to products containing asbestos produced or sold by the Company. The portion of Note 4 of Notes to Interim Consolidated Financial Statements contained in this report under the heading "Asbestos Contingencies" is incorporated herein by reference. See Part I, Item 3. "LEGAL PROCEEDINGS - Asbestos-related Litigation" in the Company's Form 10-K for the year ended December 31, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits. Exhibit No. Exhibit ----------- ------- *4.1 Agreement dated August 18, 2000, among the Company, Kaiser Aluminum Corporation ("KAC"), the financial institutions party to the Credit Agreement dated as of February 15, 1994, as amended, and Bank of America, N.A., as agent, regarding the Sale of the Center for Technology. *10.1 Stock Option Grant Pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan to Jack A. Hockema. *10.2 Restricted Stock Agreement between Raymond J. Milchovich, the Company and KAC pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan. *10.3 Form of Enhanced Severance Agreement between the Company and key executive personnel. *10.4 Time-Based Stock Option Grant Pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan to Raymond J. Milchovich. *27 Financial Data Schedule. (b) Reports on Form 8-K. No Report on Form 8-K was filed by the Company during the quarter ended September 30, 2000. --------------- * Filed herewith SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, who have signed this report on behalf of the registrant as the principal financial officer and principal accounting officer of the registrant, respectively. KAISER ALUMINUM & CHEMICAL CORPORATION /s/ John T. La Duc By:____________________________ John T. La Duc Executive Vice President and Chief Financial Officer (Principal Financial Officer) KAISER ALUMINUM & CHEMICAL CORPORATION /s/ Daniel D. Maddox By:____________________________ Daniel D. Maddox Vice President and Controller (Principal Accounting Officer) Dated: November 9, 2000 EX-4 2 0002.txt EXH. 4.1 LIMITED WAIVER Exhibit 4.1 E X E C U T I O N C O P Y LIMITED WAIVER REGARDING SALE OF CENTER FOR TECHNOLOGY August 18, 2000 Kaiser Aluminum & Chemical Corporation Kaiser Aluminum Corporation 5847 San Felipe, Suite 2600 Houston, TX 77057 Attention: John T. LaDuc Karen A. Twitchell Ladies and Gentlemen: Reference is made to that certain Credit Agreement dated as of February 15, 1994, as amended by First Amendment to Credit Agreement dated as of July 21, 1994; Second Amendment to Credit Agreement dated as of March 10, 1995; Third Amendment to Credit Agreement and Acknowledgment dated as of July 20, 1995; Fourth Amendment to Credit Agreement dated as of October 17, 1995; Fifth Amendment to Credit Agreement dated as of December 11, 1995; Sixth Amendment to Credit Agreement dated as of October 1, 1996; Seventh Amendment to Credit Agreement dated as of December 17, 1996; Eighth Amendment to Credit Agreement dated as of February 24, 1997; Ninth Amendment to Credit Agreement and Acknowledgment dated as of April 21, 1997; Tenth Amendment to Credit Agreement and Assignment dated as of June 25, 1997; Eleventh Amendment to Credit Agreement and Limited Waivers dated as of October 20, 1997; Twelfth Amendment to Credit Agreement dated as of January 13, 1998; Thirteenth Amendment to Credit Agreement dated as of July 20, 1998; Fourteenth Amendment to Credit Agreement dated as of December 11, 1998; Fifteenth Amendment to Credit Agreement dated as of February 23, 1999; Sixteenth Amendment to Credit Agreement dated as of March 26, 1999; Seventeenth Amendment to Credit Agreement dated as of September 24, 1999; and Eighteenth Amendment to Credit Agreement dated as of February 11, 2000 (said Credit Agreement, as amended, being the CREDIT AGREEMENT , the terms defined therein being used herein as therein defined), among Kaiser Aluminum & Chemical Corporation, a Delaware corporation (the COMPANY ), Kaiser Aluminum Corporation, a Delaware corporation (the PARENT GUARANTOR ), the financial institutions listed on the signature pages hereof (the LENDERS ) and Bank of America, N.A., as Agent (the AGENT ). The Company has informed Agent that it has received an offer from PE Corporation (NY) to purchase the property owned by the Company in Pleasanton, California, known as the Center for Technology for net cash proceeds of approximately $50,000,000 and that it intends to use such proceeds for general corporate purposes, including the rebuilding of the alumina refinery owned by the Company in Gramercy, Louisiana. At the request of the Company, the undersigned Lenders, constituting all Lenders under the Credit Agreement, hereby waive compliance with the provisions of Section 9.2.11 of the Credit Agreement to the extent, and only to the extent, necessary to permit the sale of the Center for Technology as described above and hereby authorize the Agent to execute such documents and take such actions as may be necessary or desirable to release the Lien of the Agent, for the benefit of the Lenders, on such property. Without limiting the generality of the provisions of Section 12.1 of the Credit Agreement, the waiver set forth herein shall be limited precisely as written and relates solely to permitting the Company to sell the Center for Technology notwithstanding the provisions of Section 9.2.11 of the Credit Agreement in the manner and to the extent described above, and nothing in this Limited Waiver shall be deemed to (a) constitute a waiver of compliance by the Company with respect to Section 9.2.11 of the Credit Agreement in any other instance or any other term, provision or condition of the Credit Agreement or any other instrument or agreement referred to therein or (b) prejudice any right or remedy that the Agent or any Lender may now have or may have in the future under or in connection with the Credit Agreement or any other instrument or agreement referred to therein. Except as expressly set forth herein, the terms, provisions and conditions of the Credit Agreement and the other Loan Documents shall remain in full force and effect and in all other respects are hereby ratified and confirmed. This Limited Waiver may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. THIS LIMITED WAIVER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO SUCH LAWS RELATING TO CONFLICTS OF LAWS. IN WITNESS WHEREOF, the parties hereto have caused this Limited Waiver to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. KAISER ALUMINUM KAISER ALUMINUM & CHEMICAL CORPORATION CORPORATION By: /S/ Karen A. Twitchell By: /S/ Karen A. Twitchell Name: Karen A. Twitchell Name: Karen A. Twitchell Its: Vice President and Its: Vice President and Treasurer Treasurer BANK OF AMERICA, N.A. BANK OF AMERICA, N.A. (successor to BankAmerica (successor to BankAmerica Business Credit, Inc.), Business Credit, Inc.) as Agent By: /S/ Michael J. Jasaitis By: /S/ Michael J. Jasaitis Name: Michael J. Jasaitis Name: Michael J. Jasaitis Its: Vice President Its: Vice President BANK OF AMERICA, N.A. THE CIT GROUP/BUSINESS (formerly known as Bank of CREDIT, INC. America National Trust and Savings Association) By: /S/ Michael Balok By: /S/ Grant Weiss Name: Michael Balok Name: Grant Weiss Its: Managing Director Its:Assistant Vice President CONGRESS FINANCIAL HELLER FINANCIAL, INC. CORPORATION (WESTERN) By: /S/ Gary D. Cassianni By: /S/ Albert J. Forzano Name: Gary D. Cassianni Name: Albert J. Forzano Its: Vice President Its: Vice President LA SALLE BANK NATIONAL TRANSAMERICA BUSINESS ASSOCIATION (formerly La CREDIT CORPORATION Salle National Bank) By: /S/ Douglas C. Colletti By: /S/ Robert L. Heinz Name: Douglas C. Colletti Name: Robert L. Heinz Its: 1st VP Its: Senior Vice President ABN AMRO BANK N.V. By: /S/ L. David Wright Name: L. David Wright Its: Group Vice President By: /S/ Philip J. Leigh Name: Philip J. Leigh Its: Vice President ACKNOWLEDGED AND AGREED TO: AKRON HOLDING CORPORATION KAISER ALUMINUM & CHEMICAL INVESTMENT, INC. By: /S/ Karen A. Twitchell Name: Karen A. Twitchell By: /S/ Karen A. Twitchell Its: Vice President and Name: Karen A. Twitchell Treasurer Its: Vice President and Treasurer KAISER ALUMINUM PROPERTIES, KAISER ALUMINUM TECHNICAL INC. SERVICES, INC. By: /S/ Karen A. Twitchell Name: Karen A. Twitchell By: /S/ Karen A. Twitchell Its: Vice President and Name: Karen A. Twitchell Treasurer Its: Vice President and Treasurer OXNARD FORGE DIE COMPANY, KAISER ALUMINIUM INC. INTERNATIONAL, INC. By: /S/ Karen A. Twitchell By: /S/ Karen A. Twitchell Name: Karen A. Twitchell Name: Karen A. Twitchell Its: Vice President and Its: Vice President and Treasurer Treasurer KAISER ALUMINA AUSTRALIA KAISER FINANCE CORPORATION CORPORATION By: /S/ Karen A. Twitchell By: /S/ Karen A. Twitchell Name: Karen A. Twitchell Name: Karen A. Twitchell Its: Vice President and Its: Vice President and Treasurer Treasurer ALPART JAMAICA INC. KAISER JAMAICA CORPORATION By: /S/ Karen A. Twitchell By: /S/ Karen A. Twitchell Name: Karen A. Twitchell Name: Karen A. Twitchell Its: Vice President and Its: Vice President and Treasurer Treasurer KAISER BAUXITE COMPANY KAISER EXPORT COMPANY By: /S/ Karen A. Twitchell By: /S/ Karen A. Twitchell Name: Karen A. Twitchell Name: Karen A. Twitchell Its: Vice President and Its: Vice President and Treasurer Treasurer KAISER MICROMILL KAISER SIERRA HOLDINGS, LLC MICROMILLS, LLC By: /S/ Karen A. Twitchell By: /S/ Karen A. Twitchell Name: Karen A. Twitchell Name: Karen A. Twitchell Its: Vice President and Its: Vice President and Treasurer Treasurer KAISER TEXAS SIERRA KAISER TEXAS MICROMILL MICROMILLS, LLC HOLDINGS, LLC By: /S/ Karen A. Twitchell By: /S/ Karen A. Twitchell Name: Karen A. Twitchell Name: Karen A. Twitchell Its: Vice President and Its: Vice President and Treasurer Treasurer EX-10 3 0003.txt EXH. 10.1 STOCK OPTION GRANT Exhibit 10.1 STOCK OPTION GRANT PURSUANT TO THE KAISER 1997 OMNIBUS STOCK INCENTIVE PLAN 1) GRANT OF STOCK OPTION. Kaiser Aluminum Corporation --------------------- ("KAC") and Kaiser Aluminum & Chemical Corporation ("KACC"), both Delaware corporations (collectively, the Company ), hereby evidence that the Company has granted to Jack A. Hockema ("Optionee") the right, privilege and option as herein set forth (the "Stock Option") to purchase 28,184 shares of common stock, $.01 par value per share, of KAC (as more fully defined in Attachment I - Definitions Applicable to Certain Terms , which ------------ is incorporated herein and made a part hereof, the "Option Shares") in accordance with the terms of this document (this "Stock Option Grant"). The Stock Option is granted pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan (the "Plan") and is subject to the provisions of the Plan, a copy of which has been furnished to Optionee and which is hereby incorporated in and made a part of this Stock Option Grant, as well as to the provisions of this Stock Option Grant. By acceptance of the Stock Option, Optionee agrees to be bound by all of the terms, provisions, conditions and limitations of the Plan and this Stock Option Grant. All capitalized terms used herein shall have the meanings provided in the Plan document unless otherwise specifically provided in this Stock Option Grant, including Attachment I. The ------------ Stock Option is a Nonqualified Stock Option under the Plan and is not intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Code. All Option Shares, when issued to Optionee upon the exercise of this Stock Option, shall be fully paid and nonassessable. 2) OPTION TERM. Subject to earlier termination as ----------- provided herein, or in the Plan, the Stock Option shall expire on February 3, 2010 ("Expiration Date"). The period during which the Stock Option is in effect shall be referred to as the Option Period . 3) OPTION EXERCISE PRICE. The exercise price per Option ---------------------- Share (including any Attributable Securities, as defined in Attachment I) (the "Option Price") at which Optionee may purchase ------------- such Option Shares subject to the Stock Option shall be equal to the remainder of (i) $6.0938 per Option Share minus (ii) the amount per Option Share of Distributed Cash Value (as defined in Attachment I) determined as of the date of exercise. Such Option ------------- Price shall also be subject to adjustment as provided in the Plan and this Stock Option Grant. The Company shall notify Optionee within thirty (30) days of each change in the Option Price. 4) VESTING. The Stock Option may be exercised during the -------- Option Period only to the extent it has become a "Vested Option." Subject to the terms of this Paragraph 4 and Paragraphs 6 and 7 below, the Stock Option shall become a Vested Option as to one third of the Option Shares as of 12:01 a.m. Houston time on February 3, 2001, as to an additional one third of the Option Shares as of 12:01 a.m. Houston time on February 3, 2002, and as to an additional one third of the Option Shares as of 12:01 a.m. Houston time on February 3, 2003. However, if as of any such vesting date Shares (as defined in Attachment I) have not traded ------------- at $10 or more per Share (as reported on the consolidated tape of the New York Stock Exchange or other principal exchange on which such securities are traded) for a period of at least 20 consecutive Trading Days during the Option Period, such vesting date will instead be the date such condition has been met, or February 3, 2009, whichever occurs earlier. 5) METHOD OF EXERCISE. To exercise the Stock Option, ------------------ Optionee shall deliver written notice to the Company stating the number of Option Shares with respect to which the Stock Option is being exercised together with payment for such Option Shares. Payment shall be made (i) in cash or its equivalent, (ii) by tendering previously acquired Shares having an aggregate Fair Market Value (as defined in the Plan) at the time of exercise equal to the total Option Price (provided that the Shares which are tendered must have been held by Optionee for at least six months prior to their tender to satisfy the Option Price) or (iii) by a combination of (i) and (ii). 6) TERMINATION OF OPTIONEE'S EMPLOYMENT. Termination of ------------------------------------ Optionee s employment as a regular full-time salaried employee of KAC, a Subsidiary (as defined in Attachment I), or any branch, ------------ unit or division of KAC or any Subsidiary ("Employment") shall affect Optionee's rights under the Stock Option as follows: (1) Termination by the Company for Cause. If Optionee's Employment is terminated by the Company for Cause, then (i) the Option Period shall not terminate, and (ii) the Stock Option shall be exercisable from the date Employment is terminated through and including the end of the Option Period, only to the extent it has become a Vested Option as of the date Employment is terminated. Optionee shall be terminated for Cause if terminated as a result of Optionee's breach of Optionee's written employment or other engagement agreement (if any), or if the Board of Directors determines that Optionee is being terminated as a result of misconduct, dishonesty, disloyalty, disobedience or action that might reasonably be expected to injure KAC or any Subsidiary or their business interests or reputation. (2) If Optionee's Employment is terminated by the Company other than as a result of termination of Optionee's Employment for Cause, then (i) the Option Period shall not terminate and, (ii) the Stock Option shall be exercisable as to all Option Shares from the date Employment is terminated through and including the end of the Option Period. (3) Termination by Death. If Optionee's Employment is terminated as a result of death, then (i) the Option Period shall terminate upon the earlier of the Expiration Date or three years from the date of death, and (ii) the Stock Option shall be exercisable as to all Option Shares from date of death through and including the end of such Option Period. (4) Termination by Retirement. If Optionee's Employment is terminated as a result of Optionee's retirement under any of the early or normal retirement provisions of the Kaiser Aluminum Salaried Employees Retirement Plan, then (i) the Option Period shall not terminate, and (ii) the Stock Option shall be exercisable from the date Employment is terminated through and including the end of the Option Period, only to the extent it has become a Vested Option as of the date Employment is terminated. (5) Termination by Employee. If Optionee's Employment is terminated other than as a result of termination of Optionee's Employment by the Company, death or retirement, then (i) the Option Period shall not terminate, and (ii) the Stock Option shall be exercisable from the date Employment is terminated through and including the end of the Option Period, only to the extent it has become a Vested Option as of the date Employment is terminated. The Stock Option may be exercised by Optionee or, in the case of death, by the executor or administrator of Optionee's estate, or the person or persons to whom Optionee's rights under the Stock Option shall pass by will or by the applicable laws of descent and distribution, or in the case of Disability, by Optionee's personal representative. 7) CHANGE OF CONTROL. If KAC experiences a Change in ----------------- Control (as defined in Attachment I), then (i) the Option Period -------------- shall terminate upon the earlier of the Expiration Date or one year from the date of the Change in Control, and (ii) the Stock Option shall immediately become a Vested Option, exercisable as to all Option Shares through and including the end of such Option Period. 8) REORGANIZATIONS; REPURCHASE OF STOCK OPTION. -------------------------------------------- 1. Freedom to Reorganize the Company and Subsidiaries. The existence of the Stock Option shall not affect in any way the right or power of the Company and its Subsidiaries or the issuers of Attributable Securities or its or their stockholders to make or authorize any and all Distribution Events (as defined in Attachment I) and any and ------------- all other adjustments, recapitalizations, reorganizations or other changes in the capital structure or business of the Company or its Subsidiaries or the issuers of Attributable Securities, any and all issuances of bonds, debentures, common stock, preferred or prior preference stock, warrants, rights or other securities, whether or not affecting the Option Shares or the rights thereof, any dissolution or liquidation of the Company or any Subsidiary, any sale or other divestiture or transfer of all or any part of the assets or business of the Company or any Subsidiary or any issuer of Attributable Securities and any and all other corporate acts or proceedings, whether of a similar character or otherwise (collectively, including any Distribution Events, collectively, "Reorganizations"). 2. Spin-Offs. If the Board of Directors authorizes any Distribution Event or other Reorganization as a result of which holders of Shares become entitled, in their capacities as holders, to receive Marketable Securities (as defined in Attachment I), the Board of Directors shall, to ------------ the extent reasonably practicable, cause the Company to provide for or require: (i) that the issuer(s) of such Marketable Securities shall undertake to issue and deliver to Optionee, upon any subsequent exercise of the Stock Option, such Marketable Securities as Optionee would have received if Optionee had so exercised the Stock Option prior to such Distribution Event or other Reorganization and had participated therein (and in any and all subsequent Distribution Events or other Reorganizations) to the maximum extent allowed to holders of Shares (including any Attributable Securities) outstanding at the time of such Distribution Event or other Reorganization; (ii) that such Marketable Securities shall be so issued and delivered to Optionee pursuant to an effective registration statement under the Securities Act of 1933, as amended, or otherwise free of any restriction on resale thereof by Optionee, other than any restriction on resale arising from Optionee s being an Affiliate or Insider (as such terms are defined in the Plan) of such issuer; (iii) that such Marketable Securities shall be so issued and delivered without any agreement, condition, payment or other consideration being required of Optionee or the Company; (iv) that such issuer(s) shall at all times reserve for issuance a sufficient amount of such Marketable Securities to fulfill all obligations contemplated hereunder; and (v) that upon each such issuance, such Marketable Securities shall be duly authorized, validly issued, fully paid and nonassessable. The Company shall also provide for or require that: (x) in the event any such issuer shall fail or be unable to issue and deliver to Optionee any Marketable Securities as provided in the preceding sentence, such issuer shall be obligated, in lieu of issuing and delivering such Marketable Securities, to pay to Optionee in cash, immediately upon exercise of the Stock Option, the Market Value of such Marketable Securities determined as of the date of exercise of the Stock Option; and (y) in the event the Company is obligated to make a cash payment to Optionee pursuant to Paragraph 9(b), such issuer shall be obligated to reimburse the Company for a part of such payment proportionate to the Distributed Cash Value attributable to Attributable Securities of such issuer compared to the total amount of Distributed Cash Value. 3. Right to Repurchase Stock Option. Upon receipt of a notice of exercise, the Company shall have the right but not the obligation to repurchase, and thereby to satisfy all of the Company's obligations under, the Stock Option as to the number of Option Shares as to which the Stock Option is exercised by paying Optionee in cash an amount, net of any taxes required to be withheld, equal to the sum of (A) the product of (i) the number of Option Shares as to which the Stock Option is exercised multiplied by (ii) the amount, determined as of such date of exercise, equal to the remainder of (x) the Market Value of one Option Share minus (y) the Option Price plus (B) the amount of cash, if any, payable to Optionee pursuant to Paragraph 9(b). 9) ADJUSTMENTS. ------------ (a) In the event of any one or more Distribution Events or other Reorganizations affecting the Stock Option not already adjusted for under Paragraph 8, the Option Price and the number of Option Shares subject to the Stock Option shall be appropriately adjusted by the Board of Directors. In addition, the Board of Directors shall, as permitted by Section 3.2, Section 16.2 and other provisions of the Plan, construe and interpret the Plan and this Stock Option Grant and make all appropriate adjustments in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available to Optionee under this Stock Option Grant and the Plan. (b) Without limitation to the foregoing, in the event that the amount of Distributed Cash Value as of any date of exercise of the Stock Option is equal to or greater than $ 6.0938 per Option Share, the Option Price shall be deemed to be $.01 per Option Share and the Company, in addition to issuing Option Shares to Optionee, shall pay to Optionee in respect of each Option Share as to which the Stock Option is exercised an amount of cash equal to the remainder of (i) such amount of Distributed Cash Value per Option Share minus (ii) $6.0938. 10) NO RIGHTS IN OPTION SHARES. Optionee shall have no -------------------------- rights as a stockholder in respect of Option Shares until such Optionee becomes the holder of record of such Option Shares. 11) OPTION SHARES RESERVED. The Company shall at all times ---------------------- during the Option Period reserve and keep available such number of Shares as will be sufficient to satisfy the requirements of this Stock Option. 12) NONTRANSFERABILITY OF STOCK OPTION. The Stock Option ---------------------------------- granted pursuant to this Stock Option Grant is not transferable other than by will, the laws of descent and distribution or by qualified domestic relations order. The Stock Option will be exercisable during Optionee's lifetime only by Optionee or by Optionee s guardian or legal representative. No right or benefit hereunder shall in any manner be liable for or subject to any debts, contracts, liabilities, or torts of Optionee. 13) AMENDMENT AND TERMINATION. No amendment or termination ------------------------- of the Stock Option shall be made by the Board of Directors or the Committee (as defined in the Plan) at any time without the written consent of Optionee. No amendment of the Plan will adversely affect the rights, privileges and options of Optionee under the Stock Option without the written consent of Optionee. 14) NO GUARANTEE OF EMPLOYMENT. The Stock Option shall not -------------------------- confer upon Optionee any right with respect to continuance of Employment or other service with the Company or any Subsidiary or Affiliate, nor shall it interfere in any way with any right the Company or any Subsidiary or Affiliate would otherwise have to terminate such Optionee's Employment or other service at any time. 15) WITHHOLDING OF TAXES. The Company shall have the right -------------------- to deduct or withhold, or require Optionee to remit to the Company, an amount sufficient to satisfy all federal, state and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising under this Stock Option Grant or any exercise or other action or event hereunder. 16) NO GUARANTEE OF TAX CONSEQUENCES. Neither the Company -------------------------------- nor any Subsidiary or Affiliate, nor the Board of Directors or any Committee, makes any commitment or guarantee that any federal or state tax treatment will apply or be available to any person eligible for benefits under the Stock Option. 17) SEVERABILITY. In the event that any provision of the ------------ Stock Option shall be held illegal, invalid, or unenforceable for any reason, such provision shall be fully severable, but shall not affect the remaining provisions of the Stock Option, and the Stock Option shall be construed and enforced as if the illegal, invalid, or unenforceable provision had never been included herein. 18) GOVERNING LAW. The Stock Option shall be construed in ------------- accordance with the laws of the State of Texas to the extent federal law does not supersede and preempt Texas law. Executed effective as of the 3rd day of February 2000. "COMPANY" KAISER ALUMINUM CORPORATION By: /S/ Raymond J. Milchovich Printed Name: Raymond J. Milchovich Title: President and CEO KAISER ALUMINUM & CHEMICAL CORPORATION By: /S/ Raymond J. Milchovich Printed Name: Raymond J. Milchovich Title: President and CEO Accepted effective as of the 3rd day of February 2000. "OPTIONEE" /S/ Jack A. Hockema Jack A. Hockema Title: ATTACHMENT I TIME-BASED STOCK OPTION GRANT DEFINITIONS APPLICABLE TO CERTAIN TERMS "AFFILIATE" - see Section 2.1 of the Plan. "ATTRIBUTABLE SECURITIES" - see the definition of "Option Share". "CAUSE" - see Paragraph 6(1) of this Stock Option Grant. "CHANGE IN CONTROL" means (a) the sale, lease, conveyance, or other disposition of all or substantially all of KAC's assets as an entirety or substantially as an entirety to any person, entity, or group of persons acting in concert other than in the ordinary course of business; (b) any transaction or series of related transactions (as a result of a tender offer, merger, consolidation or otherwise) that results in any person (as defined in Section 13(h)(8)(E) under the Securities Exchange Act of 1934) becoming the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than 50% of the aggregate voting power of all classes of common equity of KAC, except if such Person is (i) a Subsidiary, (ii) an employee stock ownership plan for employees of KAC or (iii) a company formed to hold KAC's common equity securities and whose shareholders constituted, at the time such company became such holding company, substantially all the shareholders of KAC; or (c) a change in the composition of KAC's Board of Directors over a period of thirty-six (36) consecutive months or less such that a majority of the then current Board members ceases to be comprised of individuals who either (x) have been Board members continuously since the beginning of such period, or (y) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (x) who were still in office at the time such election or nomination was approved by the Board. "DISABILITY" - see Section 2.12 of the Plan. "DISTRIBUTED CASH VALUE" means, as of any determination date, the aggregate amount of cash (other than regular quarterly cash dividends, if any) plus the aggregate value, as determined by the Board of Directors as of the date of distribution, of all property (other than cash and Attributable Securities) distributed or set aside for distribution to the holder of one Original Share and all Attributable Securities, if any, during the period commencing February 3, 2000 and ending on the determination date. "DISTRIBUTION EVENTS" means any and all distributions, dividends, recapitalizations, forward or reverse splits, reorganizations, mergers, consolidations, spin-offs, combinations, repurchases, share exchanges, or other similar or substantially equivalent corporate transactions or events in which the holder of a security becomes, as such, entitled to receive cash, securities or other property in addition to or in exchange for or upon conversion of such security. "EMPLOYMENT" - see Paragraph 6 of this Stock Option Grant. "INSIDER" - see Section 2.19 of the Plan. "KAC" - see Paragraph 1 of this Stock Option Grant. "KACC" - see Paragraph 1 of this Stock Option Grant. "MARKET VALUE" means, as of any Trading Day, the average of the highest and lowest sales prices as reported by the consolidated tape (or, if such prices are not quoted, the average of the quoted closing bid and asked prices) on such Trading Day for one Option Share (including, as applicable, the Market Values of any Attributable Securities). In the event that sales prices or closing bid and asked prices are not quoted on a particular Trading Day, the Market Value for that Trading Day shall be deemed to be the Market Value for the immediately preceding Trading Day. In the event that any Attributable Security shall cease to be a Marketable Security, it shall thereupon be deemed to have no further Market Value and shall be deemed instead to have, as of the date it ceases to be a Marketable Security, such Distributed Cash Value as shall be determined by the Board of Directors. "MARKETABLE SECURITIES" means securities (a) of a class that is registered under the Securities Exchange Act of 1934, as amended, (b) for which sales prices or bid and asked prices are regularly quoted and (c) that, if issued and delivered to Optionee upon exercise of the Stock Option, would not be subject to any restriction on resale, other than any restriction arising from Optionee s being an Affiliate or Insider (as such terms are defined in the Plan) of the issuer of such Marketable Securities. "OPTION PERIOD" - see Paragraph 2 of this Stock Option Grant. "OPTION PRICE" - see Paragraph 3 of this Stock Option Grant. "OPTION SHARE" means (a) one Share as constituted on February 3, 2000 (an "Original Share") and (b) in the event of any one or more successive Distribution Events, all Marketable Securities ("Attributable Securities") into which or for which an Original Share or any Attributable Securities may be converted or exchanged or that a stockholder may have the right to receive in respect of such Original Share or Attributable Securities. "OPTIONEE" - see Paragraph 1 of this Stock Option Grant. "ORIGINAL SHARE" - see the definition of "Option Share". "PLAN" - see Paragraph 1 of this Stock Option Grant. "REORGANIZATION" - see Paragraph 8(1) of this Stock Option Grant. "SHARE" means one share of common stock, par value $.01 per share, of KAC. "STOCK OPTION" - see Paragraph 1 of this Stock Option Grant. "SUBSIDIARY" - see Section 2.32 of the Plan. For avoidance of doubt, KACC shall be considered a Subsidiary of KAC so long as KAC has a majority voting interest in KACC, and KAC shall be considered to have a majority voting interest whether it holds such interest directly or indirectly through one or more Subsidiaries. "TRADING DAY" means as to an Option Share (including any Attributable Securities) a day when the New York Stock Exchange (or other principal securities exchange, including NASDAQ, on which such securities are traded) is open. EX-10 4 0004.txt EXH. 10.2 RESTRICTED STOCK AGREEMENT Exhibit 10.2 KAISER 1997 OMNIBUS STOCK INCENTIVE PLAN RESTRICTED STOCK AGREEMENT RESTRICTED STOCK AGREEMENT (the "Agreement"), dated as of August 15, 2000, among Kaiser Aluminum Corporation, a Delaware corporation ("KAC"), its subsidiary Kaiser Aluminum & Chemical Corporation, a Delaware corporation ("KACC") (together, the "Company"), and Raymond J. Milchovich, the President and Chief Executive Officer of the Company (the "Grantee"). The Section 162(m) Compensation Committees of the Boards of Directors of the Company (the "Committee") have determined that the objectives of the Kaiser 1997 Omnibus Stock Incentive Plan (the "Plan") will be furthered by the grant to the Grantee of 26,116 shares of Common Stock of KAC ("Common Stock") subject to the restrictions set out in this Agreement (the "Restricted Shares"), effective on August 15, 2000 (the "Grant Date"). Notwithstanding any provision hereof, this Agreement shall become effective only as, when and if the Grantee shall have executed and delivered to the Company (i) this Agreement and (ii) the stock power referenced below. In connection with the grant of the Restricted Shares, the Grantee has delivered to the Company herewith a stock power duly endorsed in blank, which will be returned to the Grantee when all restrictions on the Restricted Shares covered thereby have expired as provided in Section 2. In consideration of the foregoing and of the mutual undertakings set forth in this Agreement, the Company and the Grantee agree as follows: SECTION 1. Issuance of Restricted Shares. As soon as -------- ----------------------------- practicable after receipt from the Grantee of this executed Agreement, the Company shall cause to be issued under the Plan in the name of the Grantee a Restricted Share stock certificate, representing 26,116 shares of Common Stock. Such certificate shall remain in the possession of the Company until the Restricted Shares represented thereby are free of the restrictions set forth in Section 2. Upon the issuance of such certificate, the Grantee shall have the rights of a stockholder with respect to the Restricted Shares, including the right to vote such shares, subject to the restrictions set forth in this Agreement and the Plan. SECTION 2. Restrictions. --------- ------------- 2.1 Restricted Shares may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of prior to the date provided for in Section 2.2 or Section 2.3. These restrictions shall apply as well to any shares of Common Stock or other securities of the Company which may be acquired by the Grantee in respect of the Restricted Shares as a result of any stock split, stock dividend, combination of shares or other change, or any exchange, reclassification or conversion of securities. 2.2 Unless sooner terminated pursuant to the terms hereof, the restrictions set forth in Section 2.1 shall expire, provided that the Grantee is then an employee of the Company, on March 28, 2002, or, if earlier, the date specified below for the designated portion of the award (the "Vesting Dates"): Vesting Date Number of Restricted Shares -------------- as to Which Restrictions Lapse ------------------------------- - the first date after the Grant Date on which a share of Common Stock trades for 20 consecutive 13,058 business days for a price equal to or greater than $9 - The later of (i) March 28, 2001, or (ii) the first date after the Grant Date on which a share of Common 13,058 Stock trades for a price equal to or greater than $9 for 20 consecutive business days As soon as practicable after each Vesting Date, the Company shall deliver to the Grantee, subject to the provisions of Section 4, a stock certificate representing the Restricted Shares which became free of restrictions on such Vesting Date. 2.3 Notwithstanding any other provisions of this Agreement, all restrictions on all of the Restricted Shares shall lapse on the earliest of (a) the date the Grantee dies while an employee of the Company or terminates employment on account of Disability, (b) the occurrence of a Change in Control while the Grantee is employed by the Company, as such term is defined in the employment agreement between the Grantee and KACC dated June 1, 1999 (the "Employment Agreement") or (c) the date the Grantee resigns for Good Reason or is terminated by the Company without Cause (as such terms are defined in the Employment Agreement), if either (a), (b) or (c) occurs earlier than the Vesting Dates specified in Section 2.2. 2.4 Dividends that become payable on Restricted Shares shall be held by the Company in escrow in accordance with the provisions of this Agreement. At each Vesting Date, the Company shall deliver out of escrow to the Grantee a lump sum cash amount equal to the dividends attributable to the Restricted Shares on which the restrictions lapse at such Vesting Date, without adjustment for earnings and losses. SECTION 3. Forfeiture. Except as provided in Section --------- ---------- 2, effective upon termination of the Grantee's employment with the Company for any reason, the Company shall cancel the stock certificate(s) representing any Restricted Shares on which the restrictions have not expired, and the Dividend Escrow Account shall thereupon be terminated, it being understood and agreed that Grantee shall not be entitled to any payment whatsoever under this Agreement or provisions of the Plan relating to this Agreement in connection with such cancellation and termination. SECTION 4. Withholding Taxes. --------- ------------------ 4.1 Whenever a stock certificate representing Restricted Shares that have vested in accordance with the terms hereof is to be delivered to the Grantee pursuant to Section 2, the Company shall be entitled to require as a condition of such delivery that the Grantee remit to the Company an amount sufficient in the opinion of the Company to satisfy all federal, state and other governmental tax withholding requirements related to the expiration of restrictions on the shares represented by such certificate. The Company shall, upon the request of the Grantee, withhold from delivery shares having a Fair Market Value on the Vesting Date equal to the amount of tax to be withheld. Fractional share amounts shall be settled in cash. 4.2 If the Grantee makes the election permitted under section 83(b) of the Internal Revenue Code (that is, an election to include in gross income in the year of transfer the amounts specified in section 83(b)), he shall notify the Company of such election within 10 days of filing notice of the election with the Internal Revenue Service and shall within the same 10-day period remit to the Company an amount sufficient in the opinion of the Company to satisfy all federal, state and other governmental tax withholding requirements related to such inclusion in Grantee's income. SECTION 5. Nature of Payments. --------- ------------------ The grant of the Restricted Shares hereunder constitutes a special incentive payment and the parties agree that it is not to be taken into account in computing the amount of salary or compensation of the Grantee for the purposes of determining (i) any pension, retirement, profit-sharing, bonus, life insurance or other benefits under any pension, retirement, profit-sharing, bonus, life insurance or other benefit plan of the Company, or (ii) any severance or other amounts payable under any other agreement between the Company and the Grantee. SECTION 6. Plan Provisions to Prevail. --------- --------------------------- This Agreement is subject to all of the terms and provisions of the Plan. Without limiting the generality of the foregoing, by entering into this Agreement the Grantee agrees that no member of the Committee or the Boards of Directors of the Company shall be liable for any action or determination made in good faith with respect to the Plan or any award thereunder or this Agreement. In the event that there is any inconsistency between the provisions of this Agreement and of the Plan, the provisions of the Plan shall govern. SECTION 7. Miscellaneous. --------- -------------- 7.1 Section Headings and Defined Terms. The Section ---------------------------------- headings contained herein are for purposes of convenience only and are not intended to define or limit the contents of the Sections. Unless otherwise indicated herein, terms with initial capital letters shall have the meanings given such terms in the Plan. 7.2 Notices. Any notice to be given to the Company ------- hereunder shall be in writing and shall be addressed to Chairman of the Board of the Company at its principal corporate address or at such other address as the Company may hereafter designate to the Grantee by notice as provided in this Section 7.2. Any notice to be given to the Grantee hereunder shall be addressed to the Grantee at the address set forth beneath his signature hereto, or at such other address as he may hereafter designate to the Company by notice as provided herein. A notice hereunder shall be deemed to have been duly given when personally delivered or mailed by registered or certified mail to the party entitled to receive it. 7.3 Successors and Assigns. This Agreement shall be ---------------------- binding upon and inure to the benefit of the parties hereto and the successors and assigns of the Company and, to the extent consistent with Sections 2 and 3 of this Agreement, the heirs and personal representatives of the Grantee. 7.4 Governing Law. This Agreement shall be ------------- interpreted, construed and administered in accordance with the laws of the State of Texas as they apply to contracts made, delivered and to be wholly performed in the State of Texas. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. KAISER ALUMINUM CORPORATION By: /S/ John Barneson Title: Vice President and Chief Administrative Officer KAISER ALUMINUM & CHEMICAL CORPORATION By: /S/ John Barneson Title: Vice President and Chief Administrative Officer /S/ Raymond J. Milchovich Raymond J. Milchovich, Grantee Address: 121 North Post Oak Lane, #1106 Houston, Texas 77024 Social Security Number: 173- 40-6128 EX-10 5 0005.txt EXH. 10.3 ENHANCED SEVERANCE AGRMT. Exhibit 10.3 ENHANCED SEVERANCE AGREEMENT ---------------------------- This Enhanced Severance Agreement (the "Agreement") is entered into by and between the Kaiser Aluminum & Chemical Corporation, a Delaware corporation (the "Corporation"), and _________________ ("Executive"), effective ___________, 2000 (the "Effective Date"). WHEREAS, Executive has made, and is expected to continue to make, major contributions to the short- and long-term profitability, growth and financial strength of the Corporation; WHEREAS, the Corporation continues to pursue strategies that will result in a stronger and more profitable Corporation going forward and may lead to acquisitions, divestitures or other forms of corporate restructuring; WHEREAS, the Corporation previously made available to key managers of the Corporation, including Executive, the Enhanced Severance Protection and Change in Control Benefits Program ("Severance Benefits Program"), in order to ensure that such managers have appropriate protection in the event of a "Change in Control" of the Corporation, and to permit them to maintain their focus on key goals related to the Corporation's initiatives; WHEREAS, the Corporation now desires to supercede and replace the Severance Benefits Program by entering into separate Enhanced Severance Agreements with certain key managers, including Executive, and Executive also desires to enter into this Agreement and to be bound by the terms thereof: NOW, THEREFORE, the Corporation and Executive agree as follows: 1. TERM OF AGREEMENT. This Agreement shall be ----------------- effective as of the Effective Date and shall terminate on December 31, 2003; provided, however, that if a Change in Control or Potential Change in Control occurs during the initial term of the Agreement, the Agreement shall not end (1)prior to the end of the [_____] month period beginning on the later of (a) the date of such Change in Control or (b) the date of a Change in Control which occurs within six (6) months after such Potential Change in Control. 2. DEFINED TERMS. In addition to terms defined ------------- elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Base Pay" means the Executive s annual base salary rate at a rate not less than his or her annual fixed or base compensation as in effect immediately prior to termination of employment or, if higher, prior to the occurrence of a Change in Control or Potential Change in Control, without reduction for contributions to any qualified or non-qualified employee benefit plan or fringe benefit plan. (b) "Cause" means (1) Executive's gross misconduct or fraud in the performance of his employment; (2) Executive's conviction or guilty plea with respect to any felony (except for motor vehicle violations); or (3) Executive's material breach of any written employment agreement between the Corporation and the Executive, or of the Kaiser Aluminum & Chemical Corporation Code of Business Conduct, or continued abandonment of his or her employment with the Corporation, which remains uncorrected, or which recurs, after written notice delivered to Executive of such breach or abandonment and a reasonable opportunity to correct such breach or abandonment. (c) "Change in Control" means: (1) The sale, lease, conveyance or other disposition of all or substantially all of the Corporation's assets as an entirety or substantially as an entirety to any person, entity or group of persons acting in concert other than in the ordinary course of business; (2) Any transaction or series of related transactions (as a result of a tender offer, merger, consolidation or otherwise) that results in any Person (as defined in Section 13(h)(8)(E) under the Securities Exchange Act of 1934) becoming the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than 50% of the aggregate voting power of all classes of common equity of the Corporation, except if such Person is (A) a subsidiary of the Corporation, (B) an employee stock ownership plan for employees of the Corporation or (C) a Corporation formed to hold the Corporation's common equity securities and whose shareholders constituted, at the time such Corporation became such holding Corporation, substantially all the shareholders of the Corporation; or (3) A change in the composition of the Corporation's Board of Directors over a period of thirty-six (36) consecutive months or less such that a majority of the then current Board members ceases to be comprised of individuals who either (a) have been Board members continuously since the beginning of such period, or (b) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (a) who were still in office at the time such election or nomination was approved by the Board. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time. All references to the Code shall be deemed also to refer to any successor provisions to such sections. (e) "Disability" means total and permanent disability as a result of bodily injury, disease or mental disorder which results in the Executive's entitlement to long term disability benefits under the Kaiser Aluminum Self-Insured Welfare Plan or the Kaiser Aluminum Salaried Employees Retirement Plan. (f) "Good Reason" means: (1) Demotion, reduction in title, substantial reduction of position responsibilities, or substantial change in reporting responsibilities or reporting level from the Executive's position immediately prior to a Change in Control or Potential Change in Control, or assignment of duties or responsibilities inconsistent with such position, which remains uncorrected for five (5) days after the Executive provides written notice to the Corporation of such event, or which recurs after previous correction; (2) Failure by the Corporation to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement; (3) Relocation of the Executive's primary office more than fifty (50) miles from the Executive's current office location, without the Executive's written consent; or (4) Reduction, without the Executive's written consent, in his or her level of base compensation (including base salary and fringe benefits) by more than ten percent (10%) or a reduction by more than ten percent (10%) in his or her Short Term Incentive target. (g) "Potential Change in Control" means: (1) The Corporation enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (2) The Corporation publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; or (3) The Board of Directors adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (h) "Incentive" means an annual or long term bonus, incentive or other payment of compensation, in addition to base pay, made or to be made to Executive in regard to services rendered in any year pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Corporation, or any successor thereto, but not including any stock option plan or program. (i) "Significant Restructuring" means the sale or other disposition of one or more business units to which the Executive provide services and therefore causes his or her job to be eliminated. 3. SEVERANCE UPON CHANGE IN CONTROL. If the Executive's -------------------------------- employment is terminated by the Corporation, or any successor to the Corporation, or the Executive terminates his or her employment due to Good Reason, within the period beginning ninety (90) days prior to a Change in Control and ending on the third anniversary of such Change in Control, the Executive will be entitled to receive the severance payments and benefits set forth in Section 6 and 7 below; provided, however, that no severance payments shall be made, or continuing benefits provided, under the Agreement, if any of the following apply: (a) The Executive voluntarily resigns or retires from employment other than for Good Reason; (b) The Executive is terminated for Cause; (c) The Executive s employment terminates as a result of death or Disability; or (d) The Executive declines to sign and return the Release Agreement set forth in Appendix A hereto or revokes such Release Agreement within the time provided therein. 2 4. SEVERANCE DUE TO SIGNIFICANT RESTRUCTURING. If the ------------------------------------------ Executive's employment is terminated by the Corporation due to Significant Restructuring, outside of the period beginning ninety (90) days prior to a Change in Control and ending on the third anniversary of such Change in Control, the Executive will be entitled to receive the severance payments and benefits set forth in Sections 6 and 7 below; provided, however, that no severance payments shall be made, or continuing benefits provided, under the Agreement, if any of the following apply: (a) An event described in Section 3(a), (b), (c) or (d) applies; or (b) The Corporation offers the Executive suitable employment in a substantially similar capacity as determined in accordance with Personnel Policy Committee Guidelines and at his or her current level of Base Pay and Short Term Incentive, regardless of whether the Executive accepts or rejects such employment. 3 5. OTHER SEVERANCE. If the Executive's employment is ---------------- terminated by the Corporation other than at a time, or for a reason, described in Section 3 or 4 above, the Executive will be entitled to receive the severance payments and benefits set forth in Sections 6 and 7 below; provided, however, that no severance payments shall be made, or continuing benefits provided, under the Agreement, if any of the following apply: (a) The Executive voluntarily resigns or retires from employment; (b) An event described in Section 3(b), (c) or (d) applies; or (c) The Corporation offers the Executive suitable employment as determined in accordance with Personnel Policy Committee Guidelines, and the Executive rejects such employment. 6. AMOUNT OF SEVERANCE PAYMENTS. If the Executive's ----------------------------- employment terminates as described in Section 3, 4 or 5 above, and he or she becomes entitled to severance benefits under this Agreement, the Corporation, or any successor to the Corporation, shall pay to the Executive the following amounts in a single sum cash payment: 4 (a) [_____] times the sum of the Executive's Base Pay and most recent Short Term Incentive target; and (b) Prorated short and long term Incentive programs in effect for the year in which the Executive's termination of employment occurs, determined by multiplying the Executive's short term Incentive target for the full current year by a fraction, the numerator of which is the number of days from January 1 until the Executive's termination of employment and the denominator of which is 365 and by multiplying the Executive's long term Incentive target for the current long term period by a fraction, the numerator of which is the number of days from the inception of the long term program until the Executive's termination of employment and the denominator of which is 1,095. Notwithstanding the foregoing, if the Executive is terminated on December 31 of any year, he or she will participate in the actual Incentive programs for the year, based on applicable performance measure(s), and no proration shall apply. 7. CONTINUATION OF BENEFITS. If the Executive's ------------------------ employment terminates as described in Section 3, 4 or 5 above, and he or she becomes entitled to severance benefits under this Agreement, the Corporation, or any successor to the Corporation, shall provide to the Executive continuation: (a) of his or her coverage under all medical, dental, life and accidental death and dismemberment benefits, as if the Executive had continued in employment with the Corporation uninterrupted for up to thirty six (36) months. The Executive must continue to pay monthly medical and life insurance contributions (if any) for this coverage to remain in effect. Notwithstanding the foregoing, coverage under any cafeteria plan, health care reimbursement account, dependent care spending account, long term disability plan or qualified retirement plan will cease. The Corporation may require the health benefit continuation period required under the Congressional Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") to run concurrently with the benefit continuation period hereunder. 5 (b) of all other existing perquisites, including, without limitation, the continuation of his or her company car benefit, for the period of thirty six (36) months, with the exception of gas reimbursement. The company reserves the right to offer a reasonable cash buy-out of the company car benefit. 8. GROSS-UP FOR TAX PAYMENTS. If any payment or ------------------------- distribution by the Corporation or any of its affiliates to or for the benefit of Executive, whether paid or payable or distributed or distributable under this Agreement or under any other agreement, policy, plan, program or arrangement, or the lapse or termination of any restriction under any agreement, policy, plan, program or arrangement (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code by reason of being considered contingent on a change in ownership or control of the Corporation, within the meaning of Section 280G of the Code, or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then Executive will be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"). The Gross-Up Payment will be in an amount such that, after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed on the Payment. Notwithstanding the foregoing, if no Excise Tax would apply if the aggregate Payments were reduced by five percent (5%), then the aggregate Payments shall be reduced by the amount necessary to avoid application of the Excise Tax, in such manner as the Executive shall direct, and no Gross-Up Payment will be made. The following provisions shall apply in determining whether a Gross-Up Payment shall apply: (a) Unless the Corporation and Executive otherwise agree in writing, any determination required under this Section 8 shall be made in writing by nationally recognized independent public accountants, whose determination shall be conclusive and binding upon Executive and the Corporation for all purposes. For purposes of making the calculations required by this Section 8, the Accounting Firm may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Corporation and Executive shall furnish to the Accounting Firm such information and documents as the Accounting Firm may reasonably request in order to make a determination hereunder. The Corporation shall bear all costs the Accounting Firm may reasonably incur in connection with any calculations contemplated hereunder. The Accounting Firm shall be required to provide its determination within sixty (60) days after the date of the Executive s termination, and the Corporation shall be responsible for any income tax, penalty or interest liability incurred as a result of delay by the Accounting Firm. (b) If the Accounting Firm determines that no Excise Tax is payable by Executive, it will, at the same time as it makes such determination, furnish the Corporation and Executive an opinion that Executive has substantial authority not to report any Excise Tax on his or her federal, state or local income or other tax return. If the Accounting Firm determines that an Excise Tax will (or would, but for reduction in the Payment) be payable by Executive, it will, at the same time as it makes such determination, furnish the Corporation and Executive the detailed basis for such opinion. The Corporation will make the Gross-Up payment within five (5) business days thereafter. (c) If the federal, state and local income or other tax returns filed by Executive are consistent with the determination of the Accounting Firm under paragraph (b) above, and the Internal Revenue Service or any other taxing authority asserts a claim or notice of deficiency (referred to in this Section 8 as a "claim") against the Executive that, if successful, would require the payment by the Corporation of a Gross-Up Payment, the following shall apply. Executive will not pay such claim prior to the earlier of (1) the expiration of the thirty (30) calendar day period following the date on which he or she gives such notice to the Corporation and (2) the date that any payment of amount with respect to such claim is due. If the Corporation notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive will: (i) Provide the Corporation with any written records or documents in his or her possession relating to such claim reasonably requested by the Corporation; (ii) Take such action in connection with contesting such claim as the Corporation shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Corporation; (iii) Cooperate with the Corporation in good faith in order effectively to contest such claim, which may include the payment of an amount advanced by the Corporation and assertion of a claim for refund; and (iv) Permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation will bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and will indemnify and hold harmless Executive, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such contest and any such payments. If the Corporation directs Executive to pay the tax claimed, or otherwise fails to contest the claim as described above, the Corporation will immediately pay to Executive the amount of the required deficiency payment, including any Excise Tax or income tax, and interest and penalties with respect thereto. 9. NONCOMPETITION; NONSOLICITATION. For the one year ------------------------------- period following the termination of employment with the Corporation, the Executive agrees that he will not, without the prior written consent of the Corporation, which shall not unreasonably be withheld, directly or indirectly, whether as a principal, agent, employee, consultant, contractor, advisor, representative, stockholder (other than as a holder of an interest of five percent (5%) or less in the equity of any corporation whose stock is traded on a public stock exchange), or in any other capacity: (a) except in the event where termination results from a change in control, provide services, advice or assistance to any business, person or entity which competes with the Corporation directly, as a primary focus of its business, in the United States or in any other location in which the Corporation operates, in the manufacture, sale or delivery of any materials, products or services which constitute more than twenty percent (20%) of the Corporation's revenues in the prior twelve month period; or (b) intentionally entice, induce or solicit, or attempt to entice, induce or solicit, any individual or entity having a business relationship with the Corporation, whether as an employee, consultant, customer or otherwise, to terminate or cease such relationship. By entering into this Agreement, the Executive acknowledges that these prohibitions are reasonable as to time, geographical area and scope of activity and do not impose a restriction greater than is necessary to protect the Corporation's good will, proprietary information and business interests. 10. CONFIDENTIALITY. The Executive shall keep secret --------------- and confidential and shall not disclose to any third party, in any fashion or for any purpose whatsoever, any information regarding the Corporation which is (a) not available to the general public, and/or (b) not generally known outside the Corporation, to which the Executive has or will have had access at any time during the course of his or her employment by the Corporation, including, without limitation, any information relating to: the Corporation's business or operations; its plans, strategies, prospects or objectives; its products, technology, Intellectual Property described in Section 15, processes or specifications; its research and development operations or plans; its customers and customer lists; its manufacturing, distribution, sales, service, support and marketing practices and operations; its financial condition and results of operations; its operational strengths and weaknesses; and, its personnel and compensation policies and procedures. However, this provision shall not preclude the Executive from providing truthful information to the extent required by subpoena, court order, search warrant or other legal process, provided that the Executive immediately notifies the Corporation of such request in order to provide the Corporation an opportunity to object to such request in the appropriate forum and to obtain a ruling on such objection. 11. COOPERATION. Upon termination of employment for any ----------- reason, Executive shall fully cooperate with the Corporation in all matters relating to the winding up of his or her pending work on behalf of the Corporation and the orderly transfer of any such pending work to other employees of the Corporation as may be designated by the Corporation. 12. ENFORCEMENT. Any claim arising out of or relating ----------- to this Agreement or the Executive's employment with the Corporation or the termination thereof, other than an action for injunctive relief as provided below, shall be resolved by confidential, final and binding arbitration conducted by Judicial Arbitration and Mediation Services ("JAMS") to be held in Houston, Texas, under the then-existing JAMS rules, rather than by litigation in court, trial by jury, administrative proceeding, or in any other forum. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The Corporation shall promptly pay all costs and expenses, including without limitation reasonable attorneys fees, incurred by the Executive or his beneficiaries in resolving any claim hereunder in which the Executive or his beneficiaries shall prevail. In all other cases the parties shall bear their own costs and expenses, except that the Executive shall pay all costs and expenses, including, without limitation, reasonable attorney's fees incurred by the Corporation in resolving such claim if the arbitrator(s) determine such claim to have been brought by the Executive (a) in bad faith or (b) without any reasonable basis. Notwithstanding the foregoing, the parties agree that any breach of Section 9 or 10 above is likely to cause irreparable injury to the Corporation and that damages for any breach of Section 9, 10 or 15 are difficult to calculate. Therefore, upon breach of Section 9, 10 or 15 hereof, the Corporation shall, at its election, be entitled to injunctive and other equitable relief from a court or such other relief or remedies, including damages, to which it may be entitled, and shall not be required to submit the matter to arbitration. 13. RETURN OF PROPERTY. Upon termination of your ------------------- employment for any reason, you will return to the Corporation all property belonging to it, including without limitation, computer equipment, computer programs, cellular telephones, beepers or other property belonging to the Corporation, and documents, property and data of any nature and in any form, including electronic or magnetic form, reflecting any confidential information described in Section 10 above. 14. DISPARAGEMENT. The Executive agrees not to make any -------------- derogatory, unfavorable, negative or disparaging statements concerning the Corporation and its affiliates, officers, directors, managers, employees or agents, or its and their business affairs or performance. This provision shall not be construed to limit the Executive's ability to give non-malicious and truthful testimony should you be subpoenaed to do so by competent authority having jurisdiction. 15. INTELLECTUAL PROPERTY. For purposes of this Section --------------------- 15, the term "Intellectual Property" means all inventions, creations, trade secrets, patents (utility or design) and other intellectual property relating to any programming, documentation, technology, material, product, service, idea, process, plan or strategy concerning the business or interests of the Corporation that the Executive conceives, develops or delivers to the Corporation, in whole or in part, at any time during his or her employment with the Corporation, including without limitation, all copyrights, inventions, discoveries and improvements, trademarks, designs and all other intellectual property rights. All such Intellectual Property shall be considered work made for hire by the Executive and owned by the Corporation. The Executive agrees to perform, upon the request of the Corporation, during or after his or her employment, such acts as may be necessary or desirable to transfer, perfect and defend the Corporation's ownership and any resulting registrations of the Intellectual Property. 16. MISCELLANEOUS. -------------- (a) Waiver. Neither party shall, by mere lapse of ------ time, without giving notice or taking other action hereunder be deemed to have waived any breach by the other party of any of the provisions of this Agreement. Further, the waiver by either party of a particular breach of this Agreement by the other shall neither be construed as, nor constitute, a continuing waiver of such breach or of other breaches by the same or any other provision of this Agreement. (b) Severability. If for any reason a court of ------------ competent jurisdiction or arbitrator finds any provision of this Agreement to be unenforceable, the provision shall be deemed amended as necessary to conform to applicable laws or regulations, or if it cannot be so amended without materially altering the intention of the parties, the remainder of the Agreement shall continue in full force and effect as if the offending provision were not contained herein. (c) No Mitigation. Executive shall have no duty to ------------- mitigate the Corporation's obligation with respect to the termination payments set forth herein by seeking other employment following termination of his or her employment, nor shall such termination payments be subject to offset or reductions by reason of any compensation received by Executive from such other employment. The Corporation's obligations to make any payments hereunder shall not terminate in the event Executive accepts other full time employment. (d) Notices. All notices and other communications ------- required or permitted to be given under this Agreement shall be in writing and shall be considered effective upon personal service or upon depositing such notice in the U.S. Mail, postage prepaid, return receipt requested and addressed to the Chairman of the Board of the Corporation at its principal corporate address, and to Executive at his most recent address shown on the Corporation's corporate records, or at any other address which he may specify in any appropriate notice to the Corporation. (e) Counterparts. This Agreement may be executed in ------------ any number of counterparts, each of which shall be deemed an original and all of which taken together constitutes one and the same instrument and in making proof hereof it shall not be necessary to produce or account for more than one such counterpart. (f) Entire Agreement. The parties hereto ---------------- acknowledge that each has read this Agreement, understands it, and agrees to be bound by its terms. The parties further agree that this Agreement constitutes the complete and exclusive statement of the agreement between the parties and supersedes all proposals (oral or written), understandings, representations, conditions, covenants, and all other communications between the parties relating to the subject matter hereof. (g) Governing Law. This Agreement shall be ------------- governed by the law of the State of Texas. (h) Assignment and Successors. This Agreement will ------------------------- be binding upon and inure to the benefit of the Corporation and any successor to the Corporation, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Corporation whether by purchase, merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed the "Corporation" for the purposes of this Agreement), but will not otherwise be assignable or delegable by the Corporation. The Corporation will require any such successor, by agreement in form and substance identical hereto, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Corporation would be required to perform if no such succession had taken place. This Agreement will inure to the benefit of and be enforceable by, if then applicable, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees, but shall not otherwise be assignable the Executive, whether by pledge, creation of a security interest or otherwise. (i) No Employment Rights. Nothing expressed or -------------------- implied in this Agreement will create any right or duty on the part of the Corporation or Executive to have Executive remain in the employment of the Corporation prior to or following a Change in Control. (j) Withholding. Any payments provided for ----------- hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. (k) Amendment. This Agreement may not be amended ---------- other than by written agreement of the Corporation and the Executive. 17. IMPACT ON OTHER AGREEMENTS. This Agreement -------------------------- supercedes and replaces the Severance Benefits Program. Severance payments under this Agreement shall be in lieu of any severance or other termination payments provided under any other agreement between the Executive and the Corporation; provided, however, that if any provision of this Agreement conflicts with a provision of a written employment agreement between the Executive and the Corporation, the provision more favorable to the Executive shall govern. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. Kaiser Aluminum & Chemical Corporation By: _____________________, Executive By: ANNEX A ------- FORM OF RELEASE --------------- WHEREAS, _________________ ("Executive") has previously entered into an Enhanced Severance Agreement (the "Agreement") by and between the Executive and the Kaiser Aluminum & Chemical Corporation, a Delaware corporation (the "Corporation'), effective October __, 2000 (the "Effective Date"); and WHEREAS, Executive's employment with the Corporation has terminated under circumstances in which enhanced severance benefits may be paid to the Executive provided that he execute and return this release of claims to the Corporation; and WHEREAS, Executive desires to sign and be bound by this Release in order to obtain certain benefits under the Agreement: NOW THEREFORE, Executive agrees as follows: 1. This Release is effective as of the date of termination of the Executive's employment with the Corporation and will continue in effect as provided herein. 2. In consideration of the payments to be made to Executive pursuant to the Agreement, which Executive acknowledges are in addition to payments to which Executive would be entitled to receive absent the Agreement, Executive, for himself or herself and his or her dependents, successors, assigns, heirs, executors and administrators (and his or her and their legal representatives of every kind), hereby releases and forever discharges the Corporation, its predecessors, parents, subsidiaries, divisions, related or affiliated companies, officers, directors, members, employees, heirs, successors, assigns, representatives, agents and counsel (collectively, "Kaiser") from any and all arbitrations, claims, including claims for attorney s fees and charges, demands, damages, suits, proceedings, actions and/or causes of action of any kind and every description, whether known or unknown, which Executive now has or may have had for, upon, or by reason of any of the following: (a) any and all claims of discrimination, including without limitation claims of discrimination on the basis of sex, race, age, national origin, marital status, religion or handicap, including, specifically, but without limiting the generality of the foregoing, any claims under the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, as amended, and the Americans with Disabilities Act; and (b) any and all claims of wrongful or unjust discharge or breach of any contract or promise, express or implied. The foregoing release does not apply to rights under the Agreement or any employee benefit plan of Kaiser. 3. Executive understands and acknowledges that Kaiser does not admit any violation of law, liability or contravention of any of his or her rights and that any such violation, laibility or contravention is expressly denied. The consideration provided for this Release is is made for the purpose of settling and extinguishing all claims and rights ( and every other similar or dissimilar matter) that Executive ever had or now may have against Kaiser to the extent provided in Paragraph 2 of this Release. Executive further agrees and acknowledges that no representations, promises or inducements have been made by Kaiser other than as appear in the Agreement. 4. Executive further agrees and acknowledges that: (a) The release provided for herein releases claims and rights to the extent provided in Paragraph 2 of the Release up to and including the date of this Release; (b) He or she has been advised by Kaiser to consult with legal counsel prior to executing this Release, has had an opportunity to consult with and to be advised by legal counsel of his or her choice, fully understands the terms of this Release and enters into this Release freely, voluntarily and intending to be bound; (c) He or she has had a period of not less than twenty-one (21) calendar days to review and consider the terms of this Release prior to its execution; and (d) He or she may, within seven (7) calendar days after execution, revoke this Release. Revocation will be made by delivering a written notice of revocation to the Chief Legal Officer of Kaiser. For such revocation to be effective, written notice must be actually received by Kaiser no later than the close of business on the seventh calendar day after Executive executes this Release. If Executive exercises his or her right to revoke this Release, all of the terms and conditions of the Release will be of no force and effect and Kaiser will not have any obligation to make payments or provide benefits to Executive as set forth in the Agreement. 5. Executive agrees that he or she will never file a lawsuit or other complaint asserting any claim that is released in Paragraph 2 of this Release. 6. Executive waives and releases any claim that he or she has or may have to reemployment. IN WITNESS WHEREOF, Executive has duly executed and delivered this Release on the date set forth below. Kaiser Aluminum & Chemical Corporation By: _____________________, Executive By: ---------- 1. For Executives who are named executive officers , as defined in Item 402(a)(3) of Regulation S-K under the Securities Exchange Act of 1934, and for certain other executive officers, the period is thirty-six (36) months. For other Executives who are not "named executive officers", the period is twenty-four (24) months or twelve (12) months. 2. Section 4 will be included in Agreements with Executives who are "named executive officers" and with certain other executive officers. 3. Section 5 will be included in Agreements with Executives who are "named executive officers" and with certain other executive officers. 4. For Executives who are "named executive officers" and for certain other executive officers, the multiplier is three (3). For other Executives who are not "named executive officers", the multiplier is two (2) or one (1). 5. Section 7(b) will be included in Agreements with Executives who are "named executive officers" and with certain other executive officers. EX-10 6 0006.txt EXH. 10.4 TIME-BASED STOCK OPTION GRANT Exhibit 10.4 TIME-BASED STOCK OPTION GRANT PURSUANT TO THE KAISER 1997 OMNIBUS STOCK INCENTIVE PLAN 1. GRANT OF STOCK OPTION. Kaiser Aluminum Corporation --------------------- ("KAC") and Kaiser Aluminum & Chemical Corporation ("KACC"), both Delaware corporations (collectively, the "Company"), hereby evidence that the Company has granted to RAYMOND J. MILCHOVICH ("Optionee") the right, privilege and option as herein set forth (the "Stock Option") to purchase 750,000 shares of common stock, $.01 par value per share, of KAC (as more fully described in Optionee's Employment Agreement (the "Employment Agreement") with KACC attached herewith as Attachment I, which is incorporated ------------ herein and made a part hereof, the "Option Shares") in accordance with the terms of this document (this "Stock Option Grant"). The Stock Option is granted pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan (the "Plan") and is subject to the provisions of the Plan, a copy of which has been furnished to Optionee and which is hereby incorporated in and made a part of this Stock Option Grant, as well as to the provisions of this Stock Option Grant. By acceptance of the Stock Option, Optionee agrees to be bound by all of the terms, provisions, conditions and limitations of the Plan and this Stock Option Grant. All capitalized terms used herein shall have the meanings provided in the Plan document unless otherwise specifically provided in this Stock Option Grant or the Employment Agreement, including Attachment II attached herewith, which is incorporated ------------- herein and made a part hereof. The Stock Option is a Nonqualified Stock Option under the Plan and is not intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Code. All Option Shares, when issued to Optionee upon the exercise of this Stock Option, shall be fully paid and nonassessable. 2. OPTION TERM. Subject to earlier termination as ----------- provided herein, or in the Plan, the Stock Option shall expire on June 1, 2009. The period during which the Stock Option is in effect shall be referred to as the "Option Period". 3. OPTION EXERCISE PRICE. The exercise price per Option --------------------- Share (including any Attributable Securities, as defined in Attachment II) (the "Option Price") at which Optionee may -------------- purchase Option Shares subject to the Stock Option shall be equal to the remainder of (i) the Base Exercise Price (as defined in Attachment II) minus (ii) the Distributed Cash Value (as defined ------------- in Attachment II) determined as of the date of exercise. The ------------- Option Price shall also be subject to adjustment as provided in the Plan and this Stock Option Grant. The Company shall notify Optionee within thirty (30) days of each change in the Option Price. 4. VESTING. The Stock Option may be exercised during the ------- Option Period only to the extent it has become a "Vested Option". Provided Optionee's Qualified Service Period (as defined in Attachment II) has not previously terminated, the Stock Option -------------- shall become a "Vested Option" as to 20% of the Option Shares at each Base Exercise Price as of 12:01 a.m. Houston time on January 1, 2001, and an additional 20% of the Option Shares at each Base Exercise Price as of 12:01 a.m. Houston time on January 1, 2002, 2 0 03, 2004, and 2005, respectively. Notwithstanding the preceding sentence, the Stock Option shall become a "Vested Option" to the extent that Sections 2, 3, 4 or 5 of the Employment Agreement provide that the Stock Option shall vest and become exercisable. 5. METHOD OF EXERCISE. To exercise the Stock Option, ------------------- Optionee shall deliver written notice to the Company stating the Base Exercise Price and number of Option Shares with respect to which the Stock Option is being exercised together with payment for such Option Shares. Payment shall be made (i) in cash or its equivalent, (ii) by tendering previously acquired Shares (as defined in Attachment II) having an aggregate Fair Market Value ------------- (as defined in the Plan) at the time of exercise equal to the total Option Price for such Option Shares (provided that the Shares which are tendered must have been held by Optionee for at least six months prior to their tender to satisfy the Option Price), or (iii) by a combination of (i) and (ii). 6. TERMINATION OF OPTIONEE'S EMPLOYMENT. Termination of ------------------------------------ Optionee's employment as a regular full-time salaried employee of KAC, a Subsidiary (as defined in Attachment II), or any branch, ------------- unit or division of KAC or any Subsidiary ("Employment") shall affect Optionee's rights under the Stock Option as follows: (a) T e rmination by the Company for Cause. If Optionee's Employment is terminated by the Company at any time for Cause (as defined in the Employment Agreement), then (i) the Option Period shall terminate and (ii) O p tionee's right to exercise the Stock Option shall terminate, in each case immediately upon Optionee's becoming subject to termination of Employment for Cause. (b) Termination by the Company Other than for Cause. If Optionee's Employment is terminated by the Company prior to January 2, 2005, other than as a result of termination of O p t ionee's Employment for Cause (as defined in the Employment Agreement), then (i) the Stock Option and the Option Period shall not terminate and (ii) the Stock Option shall thereafter be exercisable as to all Option Shares from and including the date of such termination through and including the end of the Option Period. (c) O t her Termination. If Optionee's Qualified Service Period terminates prior to January 2, 2005, other than as a result of termination of Optionee's Employment by the Company, then (i) the Stock Option and the Option Period shall not terminate but the Stock Option shall thereafter be exercisable in accordance with the provisions of Sections 2, 3, 4 or 5 of the Employment Agreement. The Stock Option may be exercised by Optionee or, in the case of death, by the executor or administrator of Optionee's estate, or the person or persons to whom Optionee's rights under the Stock Option shall pass by will or by the applicable laws of descent and distribution, or in the case of Disability (as defined in the Employment Agreement), by Optionee's personal representative consistent with the provisions of the Employment Agreement. 7. REORGANIZATIONS; REPURCHASE OF STOCK OPTION. -------------------------------------------- (a) F r e edom to Reorganize the Company and Subsidiaries. The existence of the Stock Option shall not affect in any way the right or power of the Company and its Subsidiaries or the issuers of Attributable Securities or its or their stockholders to make or authorize any and all Distribution Events (as defined in Attachment II) and any -------------- a n d all other adjustments, recapitalizations, reorganizations or other changes in the capital structure or business of the Company or its Subsidiaries or the issuers of Attributable Securities, any and all issuances of bonds, debentures, common stock, preferred or prior preference stock, warrants, rights or other securities, whether or not affecting the Option Shares or the rights thereof, any dissolution or liquidation of the Company or any Subsidiary, any sale or other divestiture or transfer of all or any part of the assets or business of the Company or any Subsidiary or any issuer of Attributable Securities and any and all other corporate acts or proceedings, whether of a similar c h a r acter or otherwise (collectively, including any Distribution Events, "Reorganizations"). (b) Spin-Offs. If the Board of Directors authorizes any Distribution Event or other Reorganization as a result of which holders of Shares (as defined in Attachment II) ------------- become entitled, in their capacities as holders, to receive Marketable Securities, the Board of Directors shall, to the extent reasonably practicable, cause the Company to provide for or require: (i) that the issuer(s) of such Marketable Securities shall undertake to issue and deliver to Optionee, upon any subsequent exercise of the Stock Option, such Marketable Securities as Optionee would have received if Optionee had so exercised the Stock Option prior to such D i s t ribution Event or other Reorganization and had p a rticipated therein (and in any and all subsequent Distribution Events or other Reorganizations) to the maximum e x t ent allowed to holders of Shares (including any Attributable Securities) outstanding at the time of such Distribution Event or other Reorganization; (ii) that such Marketable Securities shall be so issued and delivered to Optionee pursuant to an effective registration statement under the Securities Act of 1933, as amended, or otherwise free of any restriction on resale thereof by Optionee, other than any restriction on resale arising from Optionee's being an Affiliate or Insider (as such terms are defined in the Plan) of such issuer; (iii) that such Marketable Securities shall be so issued and delivered without any agreement, condition, payment or other consideration being required of Optionee or the Company; (iv) that such issuer(s) shall at all times reserve for issuance a sufficient amount of such M a rketable Securities to fulfill all obligations c o ntemplated hereunder; and (v) that upon each such i s s u ance, such Marketable Securities shall be duly authorized, validly issued, fully paid and nonassessable. The Company shall also provide for or require that: (x) in the event any such issuer shall fail or be unable to issue and deliver to Optionee any Marketable Securities as provided in the preceding sentence, such issuer shall be obligated, in lieu of issuing and delivering such Marketable Securities, to pay to Optionee in cash, immediately upon exercise of the Stock Option, the Market Value of such Marketable Securities determined as of the date of exercise of the Stock Option; and (y) in the event the Company is obligated to make a cash payment to Optionee pursuant to Paragraph 8(b), such issuer shall be obligated to reimburse the Company for a part of such payment proportionate to the D i s t ributed Cash Value attributable to Attributable Securities of such issuer compared to the total amount of Distributed Cash Value. (c) Right to Repurchase Stock Option. Upon receipt of a notice of exercise, the Company shall have the right but not the obligation to repurchase, and thereby to satisfy all of the Company's obligations under, the Stock Option as to the number of Option Shares as to which the Stock Option is exercised by paying Optionee in cash an amount, net of any taxes required to be withheld, equal to the sum of (A) the product of (i) the number of Option Shares as to which the Stock Option is exercised multiplied by (ii) the amount, determined as of such date of exercise, equal to the remainder of (x) the Market Value of one Option Share minus (y) the Option Price plus (B) the amount of cash, if any, payable to Optionee pursuant to Paragraph 8(b). If the Option Shares for which the Stock Option is being exercised a r e subject to different Option Prices, a separate calculation shall be made with respect to each Option Price and such totals aggregated. 8. ADJUSTMENTS. ------------ (a) In the event of any one or more Distribution Events or other Reorganizations affecting the Stock Option and not already adjusted for under Paragraph 7, the Option Price and the number of Option Shares subject to the Stock Option shall be appropriately adjusted by the Board of Directors. In addition, the Board of Directors shall, as permitted by Section 3.2, Section 16.2 and other provisions of the Plan, construe and interpret the Plan and this Stock Option Grant and make all appropriate adjustments in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available to Optionee under this Stock Option Grant and the Plan. (b) Without limitation to the foregoing, in the event that the amount of Distributed Cash Value as of any date of exercise of the Stock Option is equal to or greater than the Base Exercise Price for the Option Shares with respect to which this Stock Option is being exercised, the Option Price for each such Option Share shall be deemed to be $.01, and the Company, in addition to issuing such Option Shares to Optionee, shall pay to Optionee in respect of each such Option Share an amount of cash equal to the remainder of (i) the amount of the Distributed Cash Value minus (ii) such Base Exercise Price. 9. NO RIGHTS IN OPTION SHARES. Optionee shall have no -------------------------- rights as a stockholder in respect of Option Shares until such Optionee becomes the holder of record of such Option Shares. 10. OPTION SHARES RESERVED. The Company shall at all times ----------------------- during the Option Period reserve and keep available such number of Shares as will be sufficient to satisfy the requirements of this Stock Option. 11. NONTRANSFERABILITY OF STOCK OPTION. The Stock Option ----------------------------------- granted pursuant to this Stock Option Grant is not transferable other than by will, the laws of descent and distribution or by qualified domestic relations order. The Stock Option will be exercisable during Optionee's lifetime only by Optionee or by Optionee's guardian or legal representative. No right or benefit hereunder shall in any manner be liable for or subject to any debts, contracts, liabilities, or torts of Optionee. 12. AMENDMENT AND TERMINATION. No amendment or termination -------------------------- of the Stock Option shall be made by the Board of Directors or the Committee (as defined in the Plan) at any time without the written consent of Optionee. No amendment of the Plan will adversely affect the rights, privileges and options of Optionee under the Stock Option without the written consent of Optionee. 13. NO GUARANTEE OF EMPLOYMENT. The Stock Option shall not -------------------------- confer upon Optionee any right with respect to continuance of Employment or other service with the Company or any Subsidiary or Affiliate, nor shall it interfere in any way with any right the Company or any Subsidiary or Affiliate would otherwise have to terminate such Optionee's Employment or other service at any time. 14. WITHHOLDING OF TAXES. The Company shall have the right --------------------- to deduct or withhold, or require Optionee to remit to the Company, an amount sufficient to satisfy all federal, state and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising under this Stock Option Grant or any exercise or other action or event hereunder. 15. NO GUARANTEE OF TAX CONSEQUENCES. Neither the Company --------------------------------- nor any Subsidiary or Affiliate, nor the Board of Directors or any Committee, makes any commitment or guarantee that any federal or state tax treatment will apply or be available to any person eligible for benefits under the Stock Option. 16. SEVERABILITY. In the event that any provision of the ------------- Stock Option shall be held illegal, invalid, or unenforceable for any reason, such provision shall be fully severable, but shall not affect the remaining provisions of the Stock Option, and the Stock Option shall be construed and enforced as if the illegal, invalid, or unenforceable provision had never been included herein. 17. GOVERNING LAW. The Stock Option shall be construed in ------------- accordance with the laws of the State of Texas to the extent federal law does not supersede and preempt Texas law. Executed effective as of the 1st day of June, 1999. "COMPANY" KAISER ALUMINUM CORPORATION By: /S/ John Barneson Printed Name: John Barneson T i tle: Vice President and Chief Administrative Officer KAISER ALUMINUM & CHEMICAL CORPORATION By: /S/ John Barneson Printed Name: John Barneson T i tle: Vice President and Chief Administrative Officer Accepted effective as of the 1st day of June, 1999. "OPTIONEE" /S/ Raymond J. Milchovich Printed Name: Raymond J. Milchovich ATTACHMENT I Attachment I is the Employment Agreement, dated as of June 1, 1999, between KACC and Raymond J. Milchovich, which was filed as Exhibit 10.1 to the Report on Form 10-Q for the quarterly period ended June 30, 1999, filed by KAC, File No. 1-9477. ATTACHMENT II TIME-BASED STOCK OPTION GRANT DEFINITIONS APPLICABLE TO CERTAIN TERMS "AFFILIATE" -- see Section 2.1 of the Plan. "ATTRIBUTABLE SECURITIES" - see the definition of "Option Share". "BASE EXERCISE PRICE" means $9.50 per Option Share with respect to 150,000 Option Shares; $12.35 per Option Share with respect to 300,000 Option Shares; and $14.25 per Option Share with respect to 300,000 Option Shares. "DISTRIBUTED CASH VALUE" means, as of any determination date, the aggregate amount of cash (other than regular quarterly cash dividends, if any) plus the aggregate value, as determined by the Board of Directors as of the date of distribution, of all p r o p e rty (other than cash and Attributable Securities) distributed or set aside for distribution to the holder of one Original Share and all Attributable Securities, if any, during t h e period commencing June 1, 1999, and ending on the determination date. "DISTRIBUTION EVENTS" means any and all distributions, dividends, recapitalizations, forward or reverse splits, reorganizations, mergers, consolidations, spin-offs, combinations, repurchases, share exchanges, or other similar or substantially equivalent corporate transactions or events in which the holder of a security becomes, as such, entitled to receive cash, securities or other property in addition to or in exchange for or upon conversion of such security. "EMPLOYMENT" -- see Paragraph 6 of this Stock Option Grant. "INSIDER" -- see Section 2.19 of the Plan. "KAC" -- see Paragraph 1 of this Stock Option Grant. "KACC" -- see Paragraph 1 of this Stock Option Grant. "MARKET VALUE" means, as of any Trading Day, the average of the highest and lowest sales prices as reported by the consolidated tape (or, if such prices are not quoted, the average of the quoted closing bid and asked prices) on such Trading Day for one Option Share (including, as applicable, the Market Values of any Attributable Securities). In the event that sales prices or closing bid and asked prices are not quoted on a particular Trading Day, the Market Value for that Trading Day shall be deemed to be the Market Value for the immediately preceding Trading Day. In the event that any Attributable Security shall cease to be a Marketable Security, it shall thereupon be deemed to have no further Market Value and shall be deemed instead to have, as of the date it ceases to be a Marketable Security, such Distributed Cash Value as shall be determined by the Board of Directors. "MARKETABLE SECURITIES" means securities (a) of a class that is registered under the Securities Exchange Act of 1934, as amended, (b) for which sales prices or bid and asked prices are regularly quoted and (c) that, if issued and delivered to Optionee upon exercise of the Stock Option, would not be subject to any restriction on resale, other than any restriction arising from Optionee's being an Affiliate or Insider (as such terms are defined in the Plan) of the issuer of such Marketable Securities. "OPTION PERIOD" -- see Paragraph 2 of this Stock Option Grant. "OPTION PRICE" -- see Paragraph 3 of this Stock Option Grant. "OPTION SHARE" means (a) one Share as constituted on June 1, 1999, (an "Original Share") and (b) in the event of any one or more successive Distribution Events, all Marketable Securities ("Attributable Securities") into which or for which an Original Share or any Attributable Securities may be converted or exchanged or that a stockholder may have the right to receive in respect of such Original Share or Attributable Securities. "OPTIONEE" -- see Paragraph 1 of this Stock Option Grant. "ORIGINAL SHARE" -- see the definition of "Option Share". "PLAN" -- see Paragraph 1 of this Stock Option Grant. "QUALIFIED SERVICE PERIOD" means the period from and including January 1, 2000, through and including the earlier of (a) December 31, 2004, or (b) the date immediately preceding the date of termination of Optionee's Employment; provided , however, that -------- -------- if Optionee's Employment has not terminated prior to the date that a proposed transaction is announced by KAC or KACC that would cause KAC or KACC, respectively, to experience a Change in Control (as defined in the Employment Agreement with respect to KACC) and such transaction is subsequently consummated so that KAC or KACC experiences a Change in Control, then Optionee's Qualified Service Period shall be deemed to continue through the date of consummation of such transaction and Change in Control unless Optionee's Employment is terminated by the Company for Cause or by Optionee. "REORGANIZATION" -- see Paragraph 7(a) of this Stock Option Grant. "SHARE" means one share of common stock, par value $.01 per share, of KAC. "STOCK OPTION" -- see Paragraph 1 of this Stock Option Grant. "SUBSIDIARY" -- see Section 2.32 of the Plan. For avoidance of doubt, KACC shall be considered a Subsidiary of KAC so long as KAC has a majority voting interest in KACC, and KAC shall be considered to have a majority voting interest whether it holds such interest directly or indirectly through one or more Subsidiaries. "TRADING DAY" means as to an Option Share (including any Attributable Securities) a day when the New York Stock Exchange (or other principal securities exchange, including Nasdaq, on which such securities are traded) is open. EX-27 7 0007.txt
5 This schedule contains summary financial information extracted from the consolidated financial statements of the Company for the nine months ended September 30, 2000, and is qualified in its entirety by reference to such financial statements. 0000054291 KAISER ALUMINUM & CHEMICAL CORPORATION 1,000,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 47 00 383 6 434 969 2,097 969 3,313 663 958 18 1 15 61 3,313 1,645 1,645 1,357 1,357 116 00 84 7 3 7 00 00 00 7 00 00
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