-----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, ASIAS+sppBMrmjqnrejxOT2FmMJs/M8J0/shGMm8Q0qA225rJCN6LzXXn/1EuaAZ zW74DBviem7zAnwi+9qjYA== 0000811596-98-000022.txt : 19981118 0000811596-98-000022.hdr.sgml : 19981118 ACCESSION NUMBER: 0000811596-98-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KAISER ALUMINUM CORP CENTRAL INDEX KEY: 0000811596 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY PRODUCTION OF ALUMINUM [3334] IRS NUMBER: 943030279 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09447 FILM NUMBER: 98750493 BUSINESS ADDRESS: STREET 1: 5847 SAN FELIPE STE 2600 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7132673777 MAIL ADDRESS: STREET 1: 5847 SAN FELIPE STE 2600 STREET 2: PO 572887 CITY: HOUSTON STATE: TX ZIP: 77057 FORMER COMPANY: FORMER CONFORMED NAME: KAISERTECH LTD DATE OF NAME CHANGE: 19901122 10-Q 1 KAC 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, 1998 Commission file number 1-9447 KAISER ALUMINUM CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-3030279 (State of incorporation) (I.R.S. Employer Identification No.) 5847 SAN FELIPE, SUITE 2600, HOUSTON, TEXAS 77057-3010 (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 November 2, 1998, the registrant had 79,153,543 shares of Common Stock outstanding. - --------------------------------------------------------------------------- KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS -------------------- CONSOLIDATED BALANCE SHEETS (In millions of dollars)
September 30, December 31, 1998 1997 ------------------------------ ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 97.4 $ 15.8 Receivables 298.1 340.2 Inventories 519.7 568.3 Prepaid expenses and other current assets 119.2 121.3 ------------------------------ Total current assets 1,034.4 1,045.6 Investments in and advances to unconsolidated affiliates 130.3 148.6 Property, plant, and equipment - net 1,156.1 1,171.8 Deferred income taxes 332.8 330.6 Other assets 330.2 317.3 ------------------------------ Total $ 2,983.8 $ 3,013.9 ============================== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 171.9 $ 176.2 Accrued interest 24.6 37.6 Accrued salaries, wages, and related expenses 76.3 97.9 Accrued postretirement medical benefit obligation - current portion 45.3 45.3 Other accrued liabilities 146.5 145.6 Payable to affiliates 80.2 82.7 Long-term debt - current portion 2.0 8.8 ------------------------------ Total current liabilities 546.8 594.1 Long-term liabilities 490.9 491.9 Accrued postretirement medical benefit obligation 704.0 720.3 Long-term debt 962.5 962.9 Minority interests 121.5 127.7 Commitments and contingencies Stockholders' equity: Common stock .8 .8 Additional capital 535.4 533.8 Accumulated deficit (378.1) (417.6) ------------------------------ Total stockholders' equity 158.1 117.0 ------------------------------ Total $ 2,983.8 $ 3,013.9 ==============================
The accompanying notes to interim consolidated financial statements are an integral part of these statements. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED INCOME (Unaudited) (In millions of dollars, except share amounts)
Quarter Ended Nine Months Ended September 30, September 30, ------------------------------ ------------------------------ 1998 1997 1998 1997 ------------------------------ ------------------------------ Net sales $ 541.6 $ 634.1 $ 1,753.4 $ 1,778.6 ------------------------------ ------------------------------ Costs and expenses: Cost of products sold 460.6 523.7 1,466.3 1,473.7 Depreciation 22.1 22.9 67.3 68.8 Selling, administrative, research and development, and general 28.1 33.0 88.9 95.3 Restructuring of operations - - - 19.7 ------------------------------ ------------------------------ Total costs and expenses 510.8 579.6 1,622.5 1,657.5 ------------------------------ ------------------------------ Operating income 30.8 54.5 130.9 121.1 Other income (expense): Interest expense (27.7) (27.5) (82.6) (83.3) Other - net 1.3 2.1 (.6) 1.7 ------------------------------ ------------------------------ Income before income taxes and minority interests 4.4 29.1 47.7 39.5 Benefit (provision) for income taxes 6.7 (11.0) (8.5) (2.4) Minority interests (.3) (.6) .3 (3.3) ------------------------------ ------------------------------ Net income 10.8 17.5 39.5 33.8 Dividends on preferred stock - (1.3) - (5.5) ------------------------------ ------------------------------ Net income available to common shareholders $ 10.8 $ 16.2 $ 39.5 $ 28.3 ============================== ============================== Earnings per share: Basic $ .14 $ .22 $ .50 $ .39 Diluted $ .14 $ .22 $ .50 $ .39 Weighted average shares outstanding (000): Basic 79,150 74,453 79,102 72,617 Diluted 79,169 74,663 79,166 72,775
The accompanying notes to interim consolidated financial statements are an integral part of these statements. KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS (Unaudited) (In millions of dollars)
Nine Months Ended September 30, ------------------------------ 1998 1997 ------------------------------ Cash flows from operating activities: Net income $ 39.5 $ 33.8 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation 67.3 68.8 Restructuring of operations - 19.7 Non-cash benefit for income taxes (8.3) (12.5) Amortization of excess investment over equity in unconsolidated affiliates 7.5 8.7 Amortization of deferred financing costs and net discount on long-term debt 3.0 4.5 Equity in (income) loss of unconsolidated affiliates, net of distributions .9 16.7 Minority interests (.2) 3.3 Decrease (increase) in receivables 27.3 (59.5) Decrease in inventories 48.6 5.7 Decrease in prepaid expenses and other assets 32.8 1.1 Decrease in accounts payable (4.3) (28.6) Decrease in accrued interest (12.9) (10.8) Decrease in payable to affiliates and accrued liabilities (64.7) (29.8) Increase (decrease) in accrued and deferred incometaxes 3.1 (2.1) Other 7.0 3.6 ------------------------------ Net cash provided by operating activities 146.6 22.6 ------------------------------ Cash flows from investing activities: Capital expenditures (52.3) (94.7) Net proceeds from disposition of property and investments 3.6 22.2 Other (3.4) (2.6) ------------------------------ Net cash used by investing activities (52.1) (75.1) ------------------------------ Cash flows from financing activities: Borrowings under revolving credit facility, net - - Borrowings of long-term debt - 19.0 Repayments of long-term debt (7.1) (8.6) Decrease (increase) in restricted cash, net 3.3 (6.5) Redemption of minority interests' preference stock (8.6) (2.0) Dividends paid - (4.2) Incurrence of financing costs (.6) (.6) Capital stock issued .1 .4 ------------------------------ Net cash used by financing activities (12.9) (2.5) ------------------------------ Net increase (decrease) in cash and cash equivalents during the period 81.6 (55.0) Cash and cash equivalents at beginning of period 15.8 81.3 ------------------------------ Cash and cash equivalents at end of period $ 97.4 $ 26.3 ============================== Supplemental disclosure of cash flow information: Interest paid, net of capitalized interest $ 92.6 $ 89.5 Income taxes paid 12.5 14.8
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 share amounts) 1. GENERAL Kaiser Aluminum Corporation (the "Company") is a subsidiary of MAXXAM Inc. ("MAXXAM"). MAXXAM and one of its wholly owned subsidiaries together own approximately 63% of the Company's Common Stock with the remaining approximately 37% publicly held. The Company operates through its subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). The foregoing unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by 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, 1997. 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 period ended September 30, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. See Note 6 regarding recent accounting pronouncements. 2. INVENTORIES The classification of inventories is as follows:
September 30, December 31, 1998 1997 ------------------------------ Finished fabricated aluminum products $ 109.9 $ 103.9 Primary aluminum and work in process 187.3 226.6 Bauxite and alumina 101.0 108.4 Operating supplies and repair and maintenance parts 121.5 129.4 ------------------------------ Total $ 519.7 $ 568.3 ==============================
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. 3. EARNINGS PER SHARE Basic - Basic earnings per share is computed by deducting preferred stock dividends, if any, from net income in order to determine net income available to common shareholders. This amount is then divided by the weighted average number of shares of Common Stock outstanding during the period including the weighted average impact of the shares of Common Stock issued during the year from the date(s) of issuance. Diluted - Diluted earnings per share include the dilutive effect of outstanding stock options (19,000 and 213,000 shares for the quarters ended September 30, 1998, and 1997, and 64,000 and 168,000 shares for the nine- month periods ended September 30, 1998 and 1997, respectively). The Company's 8.255% PRIDES, Convertible Preferred Stock ("PRIDES") have not been treated "as if" converted for purposes of the Diluted computation in the quarter and nine months ended September 30, 1997, as such treatment would have been antidilutive. 4. CONTINGENCIES ENVIRONMENTAL CONTINGENCIES The Company and KACC are 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. KACC currently is subject to a number of lawsuits under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along with certain other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA. 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, 1998, the balance of such accruals, which are primarily included in Long-term liabilities, was $28.3. 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 $2.0 to $9.0 for the years 1998 through 2002 and an aggregate of approximately $7.0 thereafter. 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. Through September 30, 1998, no accruals have been made for any such insurance recoveries. However, subsequent to September 30, 1998, KACC determined that recoveries totalling up to approximately $34.0 are likely to be received during the fourth quarter of 1998 related to current and future claims against certain of its insurers. It is currently estimated that approximately one-fourth to one-third of the recoveries are allocable to previously accrued (expensed) items. The amount ultimately allocated to previously expensed items will be reflected in earnings during the fourth quarter of 1998. No assurances can be given that the Company will be successful in other attempts to recover incurred or future costs from other insurers or that the amount of any recoveries received will ultimately be adequate to cover costs incurred. 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 $18.0. 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. 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 KACC 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 KACC or exposure to products containing asbestos produced or sold by KACC. The lawsuits generally relate to products KACC has not manufactured for at least 20 years. At September 30, 1998, the number of such claims pending was approximately 86,400, as compared with 77,400 at December 31, 1997. During the quarter and nine months ended September 30, 1998, approximately 5,500 and 16,000 of such claims were received and 3,000 and 7,000 of such claims were settled or dismissed, respectively. In addition, the foregoing pending claims and settlement figures as of September 30, 1998, do not reflect the fact that KACC has reached agreements under which it will settle approximately 20,000 of the pending asbestos-related claims over an extended period. Based on past experience and reasonably anticipated future activity, the Company has established an accrual for estimated asbestos-related costs for claims filed and estimated to be filed through 2008. There are inherent uncertainties involved in estimating asbestos-related costs, and the Company's actual costs could exceed or be less than these estimates. The Company's accrual was calculated based on the current and anticipated number of asbestos-related claims, the prior timing and amounts of asbestos-related payments, and the advice of Wharton Levin Ehrmantraut Klein & Nash, P.A. with respect to the current state of the law related to asbestos claims. Accordingly, an estimated asbestos-related cost accrual of $164.9, before consideration of insurance recoveries, is included primarily in Long-term liabilities at September 30, 1998. While the Company does not presently believe there is a reasonable basis for estimating such costs beyond 2008 and, accordingly, no accrual has been recorded for such costs which may be incurred beyond 2008, there is a reasonable possibility that such costs may continue beyond 2008, and such costs may be substantial. The Company estimates that annual future cash payments in connection with such litigation will be approximately $15.0 to $26.0 for each of the years 1998 through 2002, and an aggregate of approximately $64.0 thereafter. The Company believes that KACC has insurance coverage available to recover a substantial portion of its asbestos-related costs. The timing and amount of future recoveries from the insurance carriers will depend on the pace of claims review and processing by such carriers, and on the resolution of any disputes which may arise in the course of discussions regarding coverage under their policies. The Company believes, based on prior insurance-related recoveries in respect of asbestos-related claims, existing insurance policies, and the advice of Thelen Reid & Priest LLP (formerly Thelen, Marrin, Johnson & Bridges LLP) with respect to applicable insurance coverage law relating to the terms and conditions of those policies, that substantial recoveries from the insurance carriers are probable. Accordingly, an estimated aggregate insurance recovery of $131.9, determined on the same basis as the asbestos-related cost accrual, is recorded primarily in Other assets at September 30, 1998. Management continues to monitor claims activity, the status of lawsuits (including settlement initiatives), legislative progress, 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. While uncertainties are inherent in the final outcome of these asbestos matters and it is presently impossible to determine the actual costs that ultimately may be incurred and insurance recoveries that will be received, management currently believes that, based on the factors discussed in the preceding paragraphs, the resolution of asbestos-related uncertainties and the incurrence of asbestos-related costs net of related insurance recoveries should not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. OTHER CONTINGENCIES The Company and KACC are 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 9 of the Notes to Consolidated Financial Statements for the year ended December 31, 1997. 5. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS At September 30, 1998, the net unrealized gain on KACC's position in aluminum forward sales and option contracts, based on an average contract price of $.74 per pound of primary aluminum, natural gas, fuel oil and diesel fuel forward purchase and option contracts, and forward foreign exchange contracts, was approximately $17.6. Any gains or losses on the derivative contracts utilized in KACC's hedging activities are offset by losses or gains, respectively, on the transactions being hedged. However, see Note 6 regarding a recent accounting pronouncement. 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 fluctuations. Since 1993, the Average Midwest transaction price for primary aluminum has ranged from approximately $.50 to $1.00 per pound. 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. From time to time in the ordinary course of business, KACC enters into hedging transactions to provide price risk management in respect of the net exposure of earnings 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 KACC to effectively fix the price that KACC will receive for its shipments. KACC also uses option contracts (i) to establish a minimum price for its product shipments, (ii) to establish a "collar" or range of prices for KACC's anticipated sales, and/or (iii) to permit KACC to realize possible upside price movements. As of September 30, 1998, KACC had sold forward, at fixed prices, approximately 23,400 and 24,000 tons* of primary aluminum with respect to 1998 and 1999, respectively. As of September 30, 1998, KACC had also purchased put options to establish a minimum price for approximately 11,250 tons of primary aluminum with respect to 1998 and had entered into option contracts that established a price range for an additional 57,900 and 124,500 tons for 1998 and 1999, respectively. Additionally, at September 30, 1998, KACC also held fixed price purchase contracts for 16,100 tons of primary aluminum with respect to 1998. As of September 30, 1998, KACC had sold forward virtually all of the alumina available to it in excess of its projected internal smelting requirements for 1998, 1999 and 2000 at prices indexed to future prices of primary aluminum. ENERGY KACC is exposed to energy price risk from fluctuating prices for fuel oil, diesel fuel, and natural gas consumed in the production process. Accordingly, KACC 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, 1998, KACC had a combination of fixed price purchase and option contracts for the purchase of approximately 45,000 MMBtu of natural gas per day during the remainder of 1998. As of September 30, 1998, KACC also held a combination of fixed price purchase and option contracts for an average of 232,000 and 245,000 barrels per month of fuel oil and diesel fuel for 1998 and 1999, respectively. FOREIGN CURRENCY KACC enters into forward exchange contracts to hedge material cash commitments to foreign subsidiaries or affiliates. At September 30, 1998, - ------------- * All references to tons in this report refer tometric tons of 2,204.6 pounds. KACC had net forward foreign exchange contracts totaling approximately $168.8 for the purchase of 246.6 Australian dollars from October 1998 through December 2000, in respect of its commitments for 1998 through 2000 expenditures denominated in Australian dollars. See Note 10 of the Notes to Consolidated Financial Statements for the year ended December 31, 1997. 6. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130") was issued in June 1997 and was adopted by the Company as of January 1, 1998. SFAS No. 130 requires the presentation of an additional income measure (termed "comprehensive income"), which adjusts traditional net income for certain items that previously were only reflected as direct charges to equity (such as minimum pension liabilities). Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133") was issued in June 1998 and requires companies to recognize all derivative instruments as assets or liabilities in the balance sheet and to measure those instruments at fair value. SFAS No. 133 must be adopted by the Company no later than January 1, 2000, although earlier application is permitted. The Company is currently evaluating how and when to implement SFAS No. 133. Currently, the dollar amount of the Company's comprehensive income adjustments is not significant so there is not a significant difference between "traditional" net income and comprehensive income for the quarter and nine-month periods ended September 30, 1998 and 1997. However, differences between comprehensive income and traditional net income may become significant in future periods as a result of SFAS No. 133. As discussed more fully in Note 5, the intent of the Company's hedging program 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. Under SFAS No. 133, the Company will be required to "mark-to-market" its hedging positions at each period end in advance of reflecting the physical transaction to which the hedge relates. Pursuant to SFAS No. 130, the Company will reflect changes in the fair value of its open hedging positions as an increase or reduction in stockholders' equity through comprehensive income. Under SFAS No. 130, the impact of the changes in fair value of financial instruments will reverse out of comprehensive income (net of any fluctuations in other "open" positions) and will be reflected in traditional net income when the subsequent physical transaction occurs. The combined result of SFAS No's. 130 and 133 will be that there will be fluctuations in comprehensive 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. The amount of such fluctuations could be significant. 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 the Company's Annual Report on Form 10-K for the year ended December 31, 1997, each identify other factors that could cause such differences. 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 Substantially all of KACC's hourly workforce at the Gramercy, Louisiana, alumina refinery, Mead and Tacoma, Washington, aluminum smelters, Trentwood, Washington, rolling mill, and Newark, Ohio, extrusion facility were covered by a master labor agreement with the United Steelworkers of America (the "USWA") which expired on September 30, 1998. The Company has previously reported that it did not reach a settlement with the USWA prior to the expiration of the master agreement and the USWA chose to strike. Until the strike ends, the Company plans to run the facilities using a combination of temporary workers, salaried employees, retirees and others. Based on operating results to date, the Company believes that a significant business interruption will not occur. The Company will initially experience an adverse impact on its profitability until plant operations and temporary workforce levels are stabilized at the five facilities. The Company currently expects operations at those facilities to be stabilized and able to run at, or near, full capacity, if it is deemed appropriate to do so, at a level of profitability approximating pre- strike levels (subject to market conditions) by the end of the fourth quarter of 1998 or during the first quarter of 1999. However, no assurances can be given that the Company's efforts to run the plants on a sustained basis, without a business interruption or material negative impact on the Company's operating results will be successful. The Company and the USWA are communicating and several meetings have been held. However, no formal schedule for bargaining sessions has been developed at this time. The objective of the Company has been and continues to be to negotiate a fair labor contract that is consistent with its business strategy and the commercial realities of the marketplace. The Company has previously announced that it temporarily curtailed three out of a total of eleven potlines at its Mead and Tacoma, Washington, aluminum smelters at September 30, 1998, as a result of the USWA strike. The curtailed potlines represent approximately 70,000 tons of annual production out of a total production capacity of 273,000 tons per year at the facilities. The Company has also announced that it has begun preparations to restart all three curtailed lines. However, neither the number of potlines nor the actual timing of any such restart has yet to be determined and will be dependent upon market conditions and other factors. During 1998, the Company's 90%-owned Volta Aluminium Company Limited ("Valco") smelter in Ghana reached an agreement with the Volta River Authority ("VRA") to receive compensation in lieu of the power necessary to run two potlines that were curtailed during February 1998 and April 1998. The compensation is substantially mitigating the financial impact of the curtailment. Valco had previously curtailed one additional potline in January 1998, for which it received no compensation. Valco is now operating only one of its five potlines, as compared to 1997, when Valco operated four potlines. Each of Valco's potlines produces, on average, approximately 40,000 tons of primary aluminum per year. As previously announced, the Company has notified the VRA that it believes it had the contractual rights at the beginning of 1998 to sufficient energy to run four and one-half potlines for the balance of the year. Valco continues to seek compensation from the VRA with respect to the January 1998 reduction of its power allocation. Valco and the VRA also are in continuing discussions concerning other matters, including steps that might be taken to reduce the likelihood of power curtailments beyond 1998. No assurances can be given as to the success of these discussions. In November 1998 Valco received notification from the VRA as to the facility's proposed 1999 power allocation. Valco anticipates making a formal response to the VRA's proposal no later than early to mid-December. While the proposed allocation would enable Valco to operate up to approximately three potlines, any decisions by Valco to restart any of the currently curtailed potlines will be made only after further discussions with the VRA and after consideration of market and other economic factors. 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. Through September 30, 1998, no accruals have been made for any such insurance recoveries. However, subsequent to September 30, 1998, KACC determined that recoveries totalling up to approximately $34.0 million are likely to be received during the fourth quarter of 1998 related to current and future claims against certain of its insurers. It is currently estimated that approximately one-fourth to one-third of the recoveries are allocable to previously accrued (expensed) items. The amount ultimately allocated to previously expensed items will be reflected in earnings during the fourth quarter of 1998. No assurances can be given that the Company will be successful in other attempts to recover incurred or future costs from other insurers or that the amount of any recoveries received will ultimately be adequate to cover costs incurred. The Company has previously disclosed that it set a goal of achieving $120.0 million of pre-tax cost reductions and other profit improvements, independent of metal price changes, with the full effect planned to be realized in 1998 and beyond, measured against 1996 results. The Company believes that its operations had achieved the run rate necessary to meet this objective prior to the end of the third quarter, when the impact of such items as the operating level at Valco, the USWA strike and foreign currency changes are excluded from the analysis, and that it has implemented the steps that will allow it to sustain the stated goal over the long term. The Company remains committed to sustaining the full $120.0 million improvement and to generating additional profit improvements in future years, however, no assurances can be given that the Company will be successful in this regard. In addition to working to improve the performance of the Company's existing assets, the Company has expended significant efforts on analyzing its existing asset portfolio with the intent of focusing its efforts and capital in sectors of the industry that are considered most attractive. Additional portfolio analysis and initiatives are ongoing. RESULTS OF OPERATIONS The table on the following page provides selected operational and financial information on a consolidated basis with respect to the Company for the quarter and nine-month periods ended September 30, 1998, and 1997. As an integrated aluminum producer, the Company uses a portion of its bauxite, alumina and primary aluminum production for additional processing at certain of its other facilities. Intracompany shipments and sales are excluded from the information set forth on the following page. Interim results are not necessarily indicative of those for a full year. SELECTED OPERATIONAL AND FINANCIAL INFORMATION (Unaudited) (In millions of dollars, except shipments and prices)
Quarter Ended Nine Months Ended September 30, September 30, ------------------------------ ------------------------------ 1998 1997 1998 1997 ------------------------------ ------------------------------ Shipments: (1) Alumina 644.6 579.2 1,721.7 1,457.0 Aluminum products: Primary aluminum 61.5 86.4 210.3 246.9 Fabricated aluminum products 97.7 105.2 311.0 299.5 ------------------------------ ------------------------------ Total aluminum products 159.2 191.6 521.3 546.4 ============================== ============================== Average realized sales price: Alumina (per ton) $ 190 $ 200 $ 195 $ 196 Primary aluminum (per pound) .70 .76 .70 .75 Net sales: Bauxite and alumina: Alumina $ 122.6 $ 115.9 $ 336.4 $ 285.6 Other (2) (3) 24.7 27.1 77.2 80.2 ------------------------------ ------------------------------ Total bauxite and alumina 147.3 143.0 413.6 365.8 ------------------------------ ------------------------------ Aluminum processing: Primary aluminum 94.6 145.0 326.6 409.5 Fabricated aluminum products 298.8 341.7 1,008.7 990.6 Other (3) .9 4.4 4.5 12.7 ------------------------------ ------------------------------ Total aluminum processing 394.3 491.1 1,339.8 1,412.8 ------------------------------ ------------------------------ Total net sales $ 541.6 $ 634.1 $ 1,753.4 $ 1,778.6 ============================== ============================== Operating income (loss): Bauxite and alumina (4) $ 9.2 $ 8.8 $ 30.4 $ 14.8 Aluminum processing (4) (5) 38.8 64.1 152.7 161.6 Corporate (6) (17.2) (18.4) (52.2) (55.3) ------------------------------ ------------------------------ Total operating income $ 30.8 $ 54.5 $ 130.9 $ 121.1 ============================== ============================== Net income $ 10.8 $ 17.5 $ 39.5 $ 33.8 ============================== ============================== Capital expenditures $ 15.6 $ 25.9 $ 52.3 $ 94.7 ============================== ==============================
- --------------- (1) In thousands of metric tons. (2) Includes net sales of bauxite. (3) Includes the portion of net sales attributable to minority interests in consolidated subsidiaries. (4) Operating income for the quarter and nine-month period ended September 30, 1998, reflects a reduced level of profitability and increased costs related to preparation for the work stoppage at five locations (see Recent Events). The third quarter profitability impact for the Bauxite and alumina segment was nominal. (5) Includes a pre-tax charge of $15.1 related to restructuring of operations recorded in the quarter ended June 30, 1997. (6) Includes a pre-tax charge of $4.6 related to restructuring of operations recorded in the quarter ended June 30, 1997. 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 KACC's hedging strategies. Primary aluminum prices have historically been subject to significant cyclical 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. During 1997, the Average Midwest Transaction Price ("AMT Price") for primary aluminum remained fairly stable generally in the $.75 - $.80 range through November and then declined during December to the $.70 - $.75 range. After beginning 1998 at approximately $.73, the AMT Price for primary aluminum has declined throughout 1998 to approximately $.63 at the end of September 1998. The AMT Price for primary aluminum for the week ended October 30, 1998, was approximately $.62 per pound. See Note 5 of the Notes to Interim Consolidated Financial Statements for a discussion of KACC's hedging activities. QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997 SUMMARY The Company reported net income of $10.8 million, or basic earnings per share of $.14, for the third quarter of 1998, compared to a net income of $17.5 million, or basic earnings per share of $.22, for the same period of 1997. Net sales in the third quarter of 1998 totaled $541.6 million compared to $634.1 million in the third quarter of 1997. For the nine-month period ended September 30, 1998, net income was $39.5 million, or basic earnings per share of $.50, compared to net income of $33.8 million, or basic earnings per share of $.39, for the nine-month period ended September 30, 1997. Net sales for the nine-month period ended September 30, 1998, were $1,753.4 million compared to $1,778.6 million for the first nine months of 1997. Results for the quarter and nine-month period ended September 30, 1998, included two essentially offsetting non-recurring items, a favorable $8.3 million non-cash tax provision benefit resulting from the resolution of certain matters and the unfavorable gross profit impact of preparing for a strike by employees represented by the USWA at five locations. Results for the nine-month period ended September 30, 1997, included the effect of certain nonrecurring items including a $19.7 million restructuring charge and an offsetting $12.5 million non-cash tax benefit related to settlement of certain matters. Additionally, results for the nine-month periods ended September 30, 1998, and 1997, included charges related to additional litigation reserves of $3.9 million and $5.8 million, respectively. BAUXITE AND ALUMINA Net sales of alumina increased by 6% for the quarter ended September 30, 1998, from the comparable prior year period, as a result of an 11% increase in alumina shipments, offset by a 5% decrease in average realized price. For the nine-month period ended September 30, 1998, net sales of alumina increased by 18%, from the comparable period in the prior year due to a 18% increase in alumina shipments. Increased shipments of alumina in the quarter and nine-month period ended September 30, 1998, were due, in part, to reduced intracompany usage of alumina at Valco. On a comparative basis, operating income for the segment was flat for the quarter, and up for nine-month period ended September 30, 1998, primarily due to the price and volume factors discussed above. ALUMINUM PROCESSING Net sales of primary aluminum for the quarter ended September 30, 1998 decreased by 35% from the comparable prior year period as a result of a 28% decrease in shipments, primarily due to the aforementioned Valco potline curtailments, as well as a 7% decrease in average realized prices. Net sales of fabricated aluminum products for the quarter ended September 30, 1998, were down 13% as compared to the prior year period as a result of a 7% decrease in shipments and a 6% decrease in average realized prices. The decrease in fabricated aluminum product shipments from the third quarter of 1997 was the result of a reduced demand for engineered products resulting from strikes at two major end users of such products and an inventory destocking among customers of heat-treat general engineering products. For the nine-month period ended September 30, 1998, net sales for the aluminum processing segment decreased by approximately 5% compared to the nine-month period ended September 30, 1997. Net sales of primary aluminum for the 1998 period declined by 20% from the comparable prior year period as a result of the price and volume factors discussed above. This decline was partially offset on a year-to-date basis by a 2% increase in net sales of fabricated aluminum products. The increase in net sales of fabricated aluminum products on a year-to-date basis was the result of a 4% increase in shipments offset by a 2% decrease in average realized prices. Increased year-over-year shipments reflect increased demand in the first half of the year, particularly for heat treat products. Operating income for the aluminum processing segment declined in the quarter and nine-month period ended September 30, 1998, from the comparable prior year periods primarily due to the increased costs and reduced profitability caused by preparations for a work stoppage at the Company's five USWA locations (as further discussed above) and due to a decline in the average realized price for primary aluminum. Reduced shipments of primary aluminum in the third quarter of 1998, as well as on a year-to-date basis, were substantially offset by compensation recorded by the Company (which will be received over a 18-month period which began in July 1998) for two of the three Valco potlines curtailed during 1998. Segment operating income for the quarter and year-to-date periods ended September 30, 1998, was also impacted by the price and volume factors affecting fabricated aluminum products discussed above. Operating income for the quarter and nine-month period ended September 30, 1997, included approximately $2.7 million and $7.5 million, respectively, from the settlement of certain issues related to energy service contracts. Operating income for the nine-month period ended September 30, 1997, also included a $15.1 million charge resulting from the previously discussed restructuring of operations. CORPORATE Corporate operating expenses represent corporate general and administrative expenses which are not allocated to the Company's business segments. Operating results for the nine-month period ended September 30, 1997, include a pre-tax charge of approximately $4.6 million associated with the Company's restructuring of operations. LIQUIDITY AND CAPITAL RESOURCES CAPITAL STRUCTURE MAXXAM Inc. ("MAXXAM") and one of its wholly owned subsidiaries collectively own approximately 63% of the Company's Common Stock, with the remaining approximately 37% of the Company's Common Stock being publicly held. Certain of the shares of the Company's Common Stock beneficially owned by MAXXAM are subject to certain pledge agreements by MAXXAM and its subsidiary. During August 1997, the remaining 8,673,850 shares of outstanding PRIDES were converted into 7,227,848 shares of the Company's Common Stock pursuant to the PRIDES Certificate of Designations. The Company has an effective "shelf" registration statement covering the offering from time to time of up to $150.0 million of equity securities. Any such offering will only be made by means of a prospectus. The Company also has an effective "shelf" registration statement covering the offering of up to 10,000,000 shares of the Company's Common Stock that are owned by MAXXAM. The Company will not receive any of the net proceeds from any transaction initiated by MAXXAM pursuant to this registration statement. OPERATING ACTIVITIES At September 30, 1998, the Company had working capital of $487.6 million, compared with working capital of $451.5 million at December 31, 1997. The increase in working capital primarily results from increases in Cash and cash equivalents and decreases in accrued interest and accrued salaries, wages and related expenses offset, in part, by decreases in Receivables and Inventories. INVESTING ACTIVITIES Capital expenditures during the nine months ended September 30, 1998, were $52.3 million and were used primarily to improve production efficiency, reduce operating costs, expand capacity at existing facilities, and construct new facilities. Total consolidated capital expenditures (of which approximately 8% is expected to be funded by the Company's minority partners in certain foreign joint ventures) are expected to be between $75.0 and $125.0 million per annum in each of 1998 through 2000. During 1998, the Micromill(TM) facility commenced shipments of commercial products to customers, but the amount of such shipments has been minimal. Additional product trials for international and domestic customers were conducted in the third quarter. However, the Micromill(TM) technology has not yet been fully implemented or commercialized, and there can be no assurances that full implementation or commercialization will be successful. In October 1998, the Company temporarily suspended substantially all of its Micromill(TM) commercialization efforts and temporarily transferred the employees of the Micromill(TM) facility to KACC's strike affected plants in the State of Washington in order to supplement the workforce at those locations. Re-commencement of the commercialization efforts on the Micromill(TM) technology will depend on when the strike ends, when the employees from the Micromill(TM) facility are no longer needed at the strike affected plants and other economic considerations. Management continues to evaluate numerous projects, including the Micromill(TM) technology, all of which would require substantial capital, both in the United States and overseas. FINANCING ACTIVITIES AND LIQUIDITY At September 30, 1998, the Company had long-term debt of $964.5 million, compared with $971.7 million at December 31, 1997. At September 30, 1998, $274.1 million (of which $74.1 million could have been used for letters of credit) was available to KACC under the Credit Agreement and no amounts were outstanding under the revolving credit facility. Loans under the Credit Agreement bear interest at a spread (which varies based on the results of a financial test) over either a base rate or LIBOR at the Company's option. During the nine-month period ended September 30, 1998, the average per annum interest rates on loans outstanding under the Credit Agreement was approximately 9%. The Credit Agreement does not permit the Company or KACC to pay any dividends on their common stock. Management believes that the Company's existing cash resources, together with cash flows from operations and borrowings under the Credit Agreement, will be sufficient to meet its working capital and capital expenditure requirements for the next year. Additionally, with respect to long-term liquidity, management believes that operating cash flow, together with the expected ability to obtain both short and long-term financing, should provide sufficient funds to meet the Company's working capital and capital expenditure requirements. OTHER MATTERS YEAR 2000 The Company utilizes software and related technologies throughout its business that will be affected by the date change to the year 2000. There may also be technology embedded in certain of the equipment owned or used by the Company that is susceptible to the year 2000 date change as well. The Company has implemented a company-wide program to coordinate the year 2000 efforts of its individual business units and to track their progress. The intent of the program is to make sure that critical items are identified on a sufficiently timely basis to assure that the necessary resources can be committed to address any material risk areas that could prevent the Company's systems and assets from being able to meet the Company's business needs and objectives. Year 2000 progress and readiness has also been the subject of the Company's normal, recurring internal audit function. Each of the Company's business units has developed, or is completing, year 2000 plans specifically tailored to their individual situations. A wide range of solutions is being implemented, including modifying existing systems and, in limited cases where it is cost effective, purchasing new systems. Spending related to these projects, which began in 1997 and is expected to continue through 1999, is currently estimated to be in the $10- 15 million range. System modification costs are being expensed as incurred. Costs associated with new systems are being capitalized and will be amortized over the life of the product. The Company has established an internal goal of having all necessary system changes in place and tested by mid-year 1999. The Company plans to commit the necessary resources to meet this deadline. In addition to addressing the Company's internal systems, the company- wide program involves identification of key suppliers, customers, and other third-party relationships that could be impacted by year 2000 issues. A general survey has been conducted of the Company's supplier base. Direct contact has been made, or is in progress, with parties which are deemed to be particularly critical including financial institutions, power suppliers, and customers, with which the Company has a material relationship. Each business unit, including the corporate group, is developing a contingency plan covering the steps that would be taken if a year 2000 problem were to occur despite the Company's best efforts to identify and remediate all critical at-risk items. Each contingency plan will address, among other things, matters such as alternative suppliers for critical inputs, incremental standby labor requirements at the millennium to address any problems as they occur, and backup processing capabilities for critical equipment or processes. The goal of the contingency plans will be to minimize any business interruptions and the associated financial implications. While the Company believes that its program is sufficient to identify the critical issues and associated costs necessary to address possible year 2000 problems in a timely manner, there can be no assurances that the program, or underlying steps implemented, will be successful in resolving all such issues by the Company's mid-1999 goal or prior to the year 2000. If the steps taken by the Company (or critical third parties) are not made in a timely manner, or are not successful in identifying and remediating all significant year 2000 issues, business interruptions or delays could occur and could have a material adverse impact on the Company's results and financial condition. However, based on the information the Company has gathered to date and the Company's expectations of its ability to remediate problems encountered, the Company currently believes that significant business interruptions that would have a material impact on the Company's results or financial condition will not be encountered. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ----------------- Asbestos-related Litigation KACC 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 KACC or exposure to products containing asbestos produced or sold by KACC. The portion of Note 4 of the 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, 1997. United States of America v. Kaiser Aluminum & Chemical Corporation On August 28, 1998, a Certificate of Completion was filed with the United States District Court for the Eastern District of Washington, evidencing completion of a program of plant improvements and operational changes at KACC's Trentwood, Washington, facility, and the attainment and maintenance of furnace compliance with the capacity standard in the Washington State Implementation Plan. Thirty days thereafter, the Consent Decree between KACC and the United States Environmental Protection Agency was terminated. Hammons v. Alcan Aluminum Corp. et al On May 4, 1998, the United States Court of Appeals for the Ninth Circuit denied the plaintiff's petition for a rehearing en banc. On August 12, 1998, the plaintiff filed a petition with the Supreme Court of the United States for a writ of certiorari, which petition was denied on October 19, 1998. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits. Exhibit No. Exhibit ----------- ------- 3.1 Restated Certificate of Incorporation of Kaiser Aluminum Corporation (the "Company" or "KAC"), dated February 21, 1991 (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Registration Statement on Form S-1, dated June 11, 1991, filed by KAC, Registration No. 33-37895). 3.2 Certificate of Retirement of KAC, dated October 24, 1995 (incorporated by reference to Exhibit 3.2 to the Report on Form 10-K for the period ended December 31, 1995, filed by KAC, File No. 1-9447). 3.3 Certificate of Retirement of KAC, dated February 12, 1998 (incorporated by reference to Exhibit 3.3 to the Report on Form 10-K for the period ended December 31, 1997, filed by KAC, File No. 1-9447). 3.4 Amended and Restated Bylaws of KAC, dated October 1, 1997 (incorporated by reference to Exhibit 3.3 to the Report on Form 10-Q for the quarterly period ended September 30, 1997, filed by KAC, File No. 1-9447). *10.1 Letter Agreement, dated July 21, 1998, between Kaiser Aluminum & Chemical Corporation ("KACC") and Lawrence L. Watts concerning employment and severance matters. *10.2 Agreement, effective January 1, 1999, between KACC and Lawrence L. Watts concerning certain consulting services to be provided to KACC. *10.3 Employment agreement between KACC and Raymond J. Milchovich made effective for the period from January 1, 1998, to December 31, 2002. *10.4 Time-Based Stock Option Grant Pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan to Raymond J. Milchovich effective July 2, 1998. *10.5 Employment agreement between KACC and John T. La Duc made effective for the period from January 1, 1998 to December 31, 2002. *10.6 Time-Based Stock Option Grant Pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan to John T. La Duc effective July 10, 1998. *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, 1998. - --------------- * 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 CORPORATION /s/ John T. La Duc By: ---------------------------- John T. La Duc Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Daniel D. Maddox By: ---------------------------- Daniel D. Maddox Vice President and Controller (Principal Accounting Officer) Dated: November 16, 1998 EX-1 2 July 21, 1998 Mr. Lawrence L. Watts Kaiser Aluminum & Chemical Corporation 5847 San Felipe, Suite 2600 Houston, Texas 77057 Dear Larry: This letter reflects our agreement that the supplemental non-recurring 1998 annual incentive payment to be paid to you under our existing agreement will be in the amount of $335,000. This amount will be paid promptly following the execution of this letter and your consulting agreement. Please acknowledge your acceptance of the foregoing and its terms in the space provided below. Very truly yours, /s/ George T. Haymaker, Jr. George T. Haymaker, Jr. Chairman and Chief Executive Officer Agreed and accepted: /s/ Lawrence L. Watts Lawrence L. Watts July 21, 1998 EX-2 3 AGREEMENT This Agreement is made and entered into to be effective as of this January 1, 1999, by and between KAISER ALUMINUM & CHEMICAL CORPORATION, a Delaware corporation with corporate offices at 5847 San Felipe, Suite 2600, Houston, Texas 77257, hereinafter referred to as "Kaiser", and Lawrence L. Watts, whose address is 2372 Bering Drive, Apt B, Houston, TX 77057, hereinafter referred to as "Consultant". In consideration of the mutual promises made herein, the parties agree as follows: 1. Consulting Services. ------------------- A. The Company hereby retains Consultant's services as a consultant. Consultant agrees to consult with and advise the Company regarding (i) the management, administration, organization, structure, policies and operations of Kaiser, its business units, subsidiaries and their respective successors, if any, (collectively, the "Kaiser Entities"), (ii) developing, analyzing and implementing strategic plans and transactions involving one or more of the Kaiser Entities including, but not limited to, the alumina business unit, (iii) information technology and systems development, and (iv) such other similar matters reasonably requested by Kaiser. B. Consulting services may be requested by Kaiser from time to time during the term of the Agreement. While Kaiser may not utilize Consultant's services fully throughout the term of this Agreement, Consultant agrees to make his himself generally available upon Kaiser's reasonable request during normal business hours and, if requested by Kaiser, to devote his entire time, energy and skill during normal business hours to the business and affairs of Kaiser and the Kaiser Entities and to the promotion of their interests. Consultant further agrees and acknowledges that his engagement hereunder may require him to undertake reasonable travel on behalf of Kaiser. C. In connection with the services contemplated by this Agreement, Consultant agrees to consult with and keep the appropriate members of Kaiser's senior leadership and the Board of Directors, officers, consultants and representatives of the Kaiser Entities fully informed of Consultant's efforts under this Agreement. 2. Term. This Agreement shall be for a term of one year ---- commencing on the effective date and terminating on December 31, 1999, unless otherwise terminated in accordance with the terms and conditions of this Agreement. 3. Retainer, Payment and Automobile. --------------------------------- A. As consideration for Consultant's willingness to hold himself available to Kaiser and the Kaiser Entities throughout the term of this Agreement and for providing the consulting services contemplated by this Agreement, Kaiser agrees to pay Consultant a retainer at a monthly rate equal to Consultant's base pay prior to Consultant's termination of employment with Kaiser. The retainer shall be payable by Kaiser to Consultant in equal semimonthly installments of Twelve Thousand Eighty Four Dollars ($12,084.00) to be paid on the fifteenth (15th) and last day of each month during which such compensation is due hereunder. B. During the term of this Agreement, Kaiser agrees that Consultant may retain the use of the automobile provided by Kaiser at the time of Consultant's termination of employment upon substantially the same terms and conditions except as required under Kaiser's corporate policies and procedures as a result of Consultant no longer being employed by Kaiser. 4. Reimbursement for Expenses. Kaiser shall -------------------------- reimburse Consultant upon the presentation of substantiating invoices, for the following described expenses incurred by Consultant in connection with, and as a necessity of, the performance of his services hereunder: A. All reasonable, normal, and necessary travel expenses, including airline tickets, meals, lodging, rental cars, and related expenses, incurred by Consultant while away from his office, consistent with Kaiser's existing policies. B. Cost of telephone and facsimile when used on behalf of Kaiser. C. All other reasonable expenses incurred by Consultant as the direct and necessary result of providing the consulting services contemplated by this Agreement. 5. Independent Contractor. ---------------------- A. It is understood and agreed that Consultant is acting as an independent contractor and not as an agent or employee of Kaiser in the execution and performance of this Agreement and that Consultant has no authority to act for, legally represent, or otherwise bind or legally commit Kaiser in any way. B. It is further understood and agreed that Consultant is not and will not be eligible to participate in, or accrue benefits under any employee benefit plans of Kaiser, including but not limited to pensions, insurance, disability and/or vacation plans, for services performed under this Agreement. This provision will not affect Consultant's eligibility for such benefits based on services previously performed by Consultant as an employee of Kaiser. C. Finally, it is understood and agreed that Consultant shall be solely responsible for paying, and agrees to pay, any and all applicable federal, state, and local taxes and fees in connection with his activities in connection with this Agreement, and he will abide by all applicable federal, state, and local laws in connection therewith. Consultant acknowledges that Kaiser shall not deduct or be responsible for the withholding of taxes of any kind. 6. Protection of Proprietary or Confidential Information. ----------------------------------------------------- A. Any and all communications between any of the Kaiser Entities and Consultant shall be privileged and confidential, subject to waiver only by the appropriate Kaiser Entity, and may not be divulged by Consultant to any third party without the prior written authorization of the appropriate Kaiser Entity except to the extent necessary to perform the services contemplated by this Agreement. Consultant acknowledges that by reason of his experience with Kaiser as an officer and employee prior to the effective date of this Agreement he has had access to proprietary and confidential information with respect to the Kaiser, its business units, subsidiaries and affiliates and their respective financial and business affairs and strategic plans ("Confidential Information") and that he will continue to be exposed to such information during his engagement under this Agreement. In recognition of the foregoing, Consultant agrees not to disclose, use, transfer or sell, except in the course of Consultant's engagement hereunder, any Confidential Information so long as such information has not otherwise been disclosed or is not otherwise in the public domain, except as required by law or pursuant to legal process. Upon the request of Kaiser, Consultant shall surrender to Kaiser any and all personal property, software, disks, work papers, reports, manuals, documents and the like (including all originals and copies thereof) in his possession or control which contain any Confidential Information. B. Consultant further acknowledges (i) that the Confidential Information constitutes valuable and unique property, that irreparable damage would result to Kaiser if any of the Confidential Information were disclosed to a third party except as expressly provided in this Agreement, (ii) that the appropriate amount of any money damages would be difficult to ascertain, and (iii) that, as a result, money damages would not be a sufficient remedy for a breach or anticipated breach by Consultant of the foregoing paragraph. Therefore, Consultant acknowledges that Kaiser shall be entitled, in addition to any other rights and remedies which may be available to Kaiser, to specific performance and/or injunctive or other equitable relief as a remedy for any such breach or anticipated breach of the foregoing paragraph. If a court exercising applicable jurisdiction determines that Kaiser is entitled to injunctive and/or other equitable relief, Consultant agrees to, and hereby does, waive any requirement for the securing or posting of any bond in connection with any such remedy. No failure or delay by Kaiser in exercising any right, power, or privilege hereunder, at law or in equity, shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude or limit any other or further exercise thereof. 7. Non-Competition and Non-Disparagement. ------------------------------------- A. Without the consent in writing of Kaiser, Consultant will not for a period of eighteen (18) months beginning on the effective date of this Agreement and ending on June 30, 2000, acting alone or in conjunction with others, directly or indirectly (i) engage (either as owner, partner, stockholder, employer or employee) in any business in which he has been directly engaged, or has supervised or advised in any manner, as an employee of Kaiser or an officer of any of the Kaiser Entities and which is directly in competition with a business conducted by any of the Kaiser Entities; (ii) induce any customers of the Kaiser Entities with whom Consultant has had or will have contacts or relationships, directly or indirectly, during and within the scope of his employment with Kaiser or during the term of this Agreement to curtail or cancel their business with any of the Kaiser Entities; (iii) solicit or canvas business from any person who was a customer of any of the Kaiser Entities at or during the two-year period immediately preceding termination of Consultant's employment with Kaiser or at any time during the term hereof; or (iv) induce, or attempt to influence, any employee of any of the Kaiser Entities to terminate his or her employment. The provisions of clauses (i), (ii), (iii) and (iv) above are separate and distinct commitments independent of each of the other subparagraphs. It is agreed that the ownership of not more than of 5% of the equity securities of any company having securities listed on an exchange or regularly traded in the over-the-counter market shall not, of itself, be deemed inconsistent with clause (i) above. B. The foregoing covenants on the part of Consultant shall be construed as agreements independent of any other provision of this Agreement, and the existence of any claim or cause of action by Consultant against Kaiser, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Kaiser of any of those covenants. C. Consultant shall not, at any time, make any statement which might be reasonably regarded as disparaging to any of the Kaiser Entities, their respective Boards of Directors, Directors, officers, employees, operations, businesses, business practices, strategic and business plans or which may be reasonably expected to reflect unfavorably on any Kaiser Entity, except as may be required by law. 8. Cooperation. Consultant agrees to cooperate with ----------- Kaiser and each of the Kaiser Entities by making himself available to testify on behalf of any of them in any action, suit or proceeding, whether civil, criminal, administrative or investigative, and to assist any of the Kaiser Entities in any such action, suit or proceeding, by providing information and meeting and consulting with the representatives or counsel of any of the Kaiser Entities. Kaiser agrees to reimburse Consultant for all reasonable expenses actually incurred in connection with his provision of testimony or assistance. 9. Termination of Engagement. -------------------------- A. Consultant may terminate this Agreement by giving thirty (30) days' prior written notice of termination to Kaiser. B. Kaiser may terminate this Agreement upon the earlier to occur of (i) the death or permanent disability of Consultant such that Consultant is no longer capable in the reasonable opinion of Kaiser to perform the services contemplated by this Agreement, (ii) the conviction of Consultant for the commission of any felony in any state or federal court in the United States of America, or in any jurisdiction where he is engaged, and (iii) Consultant's breach of this agreement, which breach continues beyond the thirty (30) day period beginning on the date Consultant receives written notice of such breach from Kaiser. C. Termination of Consultant's services hereunder by Kaiser shall not be construed to be a breach of this Agreement by Kaiser, and shall terminate all compensation and benefits to which Consultant is entitled under this Agreement. Further, in the event of such termination, Kaiser shall have no further liability to Consultant under this Agreement and all rights and obligations hereunder shall cease, except for (i) the rights and obligations under Sections 3 and 4 to the extent that Consultant has not been paid his retainer for any period in which this Agreement remained in effect and has not been reimbursed for his expenses in accordance with the terms of this Agreement, (ii) the rights and obligations under Section 6 regarding protection of confidential information, (iii) the obligations under Section 7 regarding, among other things, Consultant's agreement not to compete or otherwise interfere with the business or customers of any of the Kaiser Entities, and (iv) all procedural and remedial provisions of this Agreement. 10. Assignment. Consultant shall neither, without the ---------- prior written consent of Kaiser, assign this Agreement or any of the rights hereunder, in whole or in part, nor delegate any of the duties hereunder, in whole or in part. 11. Applicable Law. This Agreement is made in the State of -------------- Texas and shall in all respects be governed by and construed in accordance with the internal laws of Texas, without regard to the rules of the conflict of laws of such state. Except as otherwise permitted by Section 6 in connection with seeking specific performance and/or injunctive or other equitable relief as a remedy for any such breach or anticipated breach of Section 6 of this Agreement, any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Houston, Texas by three arbitrators in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect at the time of submission to arbitration. Judgment may be entered on the arbitrators' award in any court having jurisdiction. 12. Notices. Where a notice is called for by this ------- Agreement, it shall mean a notice in writing signed by the party giving the notice and delivered to: For Consultant: Lawrence L. Watts For Kaiser: Kaiser Aluminum & Chemical Corporation 5847 San Felipe, Suite 2600 Houston, Texas 77257-2887 Attention: Chairman Any notice so delivered to the party to whom it is addressed shall be deemed to have been given and received (i) if by personal delivery, on the day of such delivery, (ii) if by certified or registered mail, on the seventh day after mailing thereof, (iii) if by facsimile, the day on which such facsimile was sent and a confirmation of successful transmission is received or (iv) if by next-day or overnight mail delivery, on the day delivered, provided that if any such day is not a -------- business day then the notice shall be deemed to have been given and received on the business day next following such day. 13. Entire Agreement. This Agreement and the termination ---------------- letter entered into by Consultant and the Company, as amended or supplemented, contain the entire understanding and agreement between the parties hereto as to the subject matter hereof, and supersede all prior or contemporaneous communication, agreements and understandings between the parties, whether written or oral with respect to the subject matter hereof and thereof. 14. Amendment. This Agreement can be amended, --------- supplemented, or superseded only by an instrument in writing signed by both of the parties hereto. 15. Severability. If any provision of this Agreement is ------------ held to be illegal, invalid, or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement and each separate provision hereof shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. In addition, in lieu of such illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable. 16. Headings. The headings contained in this Agreement are -------- for reference purposes only and shall not affect in any way the meaning, interpretation, or scope of this Agreement. 17. Successors and Assigns. This Agreement shall inure to ---------------------- the benefit of and be binding upon the respective parties hereto, their permitted respective successors and assigns. 18. Waiver of Default. Any waiver by either party of a ----------------- breach of any provision of this Agreement shall not operate or be construed as a waiver by such party of any subsequent breach of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. /s/ Lawrence L. Watts - ---------------------------- LAWRENCE L. WATTS KAISER ALUMINUM & CHEMICAL CORPORATION by:/s/ George T. Haymaker,Jr. -------------------------- George T. Haymaker, Jr. Chairman and Chief Executive Officer EX-3 4 EMPLOYMENT AGREEMENT This Agreement (the "Agreement") is made effective for the period from January 1, 1998 to December 31, 2002, (such term being hereinafter referred to as the "Employment Period") between Kaiser Aluminum & Chemical Corporation, a Delaware corporation ("Company"), and Raymond J. Milchovich ("Executive"). WHEREAS, Executive is currently employed by the Company as a senior executive; and WHEREAS, the Company desires to secure the services of Executive as President and Chief Operating Officer, and Executive desires to perform such services for the Company, on the terms and conditions as set forth herein; NOW, THEREFORE, in consideration of the premises and of the covenants and agreements set forth below, it is mutually agreed as follows: 1. Effective Date, Term and Duties. The term of -------------------------------- employment of Executive by the Company hereunder shall be deemed to have commenced on January 1, 1998 and end on December 31, 2002, (the "Employment Period") unless earlier terminated pursuant to Section 4. Executive shall have such duties as the Company may from time to time prescribe consistent with his position as President and Chief Operating Officer of the Company (the "Services"). Executive shall report directly to the Chief Executive Officer and Chairman of the Company. Executive shall devote his full time, attention, energies and best efforts to the business of the Company. The Company shall maintain an office for Executive in Pleasanton, California. 2. Compensation. The Company shall pay and Executive ------------ shall accept as full consideration for the Services compensation consisting of the following: 2.1 Base Salary. Effective June 1, 1998, $475,000 per ----------- year base salary, payable in installments in accordance with the Company's normal payroll practices, less such deductions or withholdings required by law. Base Salary shall be reviewed annually by the Compensation Committee of the Company to evaluate the performance of Executive and his duties hereunder, and in any event will be adjusted for inflation consistent with the general program of increases for other executives and management employees. 2.2 Annual Bonus. A target bonus of $270,000 ------------ (adjusted for inflation as determined by the Company's Compensation Committee) per year ("Target Annual Bonus") shall be payable based on the attainment by the Company of the Short-Term Bonus Plan Objectives under the Company's Executive Bonus Plan for each such year, which such Short-Term Bonus Plan Objectives shall be agreed upon by the Executive and the Company annually and shall be consistent with the Company's business plan for the relevant year. 2.3 Long-Term Compensation. During June 1998 ---------------------- Executive shall receive a stock option grant of 635,000 shares under the Company's Stock Option Plan, which is a grant equivalent to a value of five times Executive's annual long term incentive target of $630,000, determined using Black Scholes methodology and assumptions as described in Schedule A and with an exercise price of $9.4063. The options will have an exercise period of five years from date of grant. Such options shall be in lieu of any payment of long-term incentive compensation under the Company's Executive Bonus Plan ("Plan") for the five year period beginning January 1, 1998, although Executive shall be eligible for additional option grants at the discretion of the Company's Compensation Committee. The options shall vest at the rate of 20% per year, beginning on December 31, 1998, unless: (i) Executive becomes employed by an affiliate or "spin-out" of Kaiser Aluminum, in which case a pro rata amount of the options will vest equal to the percentage of days during the Employment Period which the Executive has been employed; or (ii) Executive's service is terminated by the Company for any reason other than for "Cause, or Executive's employment terminates by the expiration of the Employment Period without an offer for continued employment by the Company for a position of responsibility comparable to that held by Executive at the beginning of the Employment Period and on substantially the same or improved terms and conditions, or Executive terminates his employment for "Good Reason" or in event of a Change in Control, in which cases vesting of all outstanding options is accelerated as provided in Section 4. Such option grant shall provide that upon exercise of any option, Executive will be entitled to receive shares pursuant to the Company's Stock Option Plan but also any securities that have been distributed in respect to such shares. For example, if the Company were to spin off part of its business as a new company and distribute to its stockholders one share of stock of the new company for each one share of stock under the Company's Stock Option Plan, then, upon a subsequent exercise by Executive of the stock options under the Company's Stock Option Plan, Executive would also receive one new company share along with one share under the Company's Stock Option Plan. All such grants shall be governed by the Company's Stock Option Plan and by the agreement executed by the Company and Executive at the time of the option grant. 2.4 Indemnification. In the event Executive is --------------- made, or threatened to be made, a party to any legal action or proceeding, whether civil or criminal, by reason of the fact that Executive is or was a director or officer of the Company or serves or served any other corporation fifty percent (50%) or more owned or controlled by the Company in any capacity at the Company's request, Executive shall be indemnified by the Company, and the Company shall pay Executive's related expenses when and as incurred, all to the fullest extent permitted by law, provided, however, that the Company shall have the right of defense to any action or proceeding. 3. Benefits during Employment Period. Employee will be --------------------------------- eligible to participate in the Company's employee benefit plans of general application, including, without limitation, those plans covering medical, disability and life insurance in accordance with the rules established for individual participation in any such plan and under applicable law. Employee will be eligible for vacation and sick leave in accordance with the policies in effect during the term of this Agreement and will receive such other benefits as the Company generally provides to its other employees of comparable position and experience. 4. Benefits Upon Termination. Notwithstanding anything in ------------------------- the Agreement to the contrary, if (i) Executive's employment is terminated during the Employment Period for any reason other than (a) termination by the Company for "Cause" (as defined in Subsection 4.1), (b) acceptance by Executive of an offer of employment with an affiliate of the Company, or (c) a voluntary termination by Executive for other than "Good Reason"; or (ii) Executive's employment terminates by the expiration of the Employment Period without an offer for continued employment by the Company for a position of responsibility comparable to that held by Executive at the beginning of the Employment Period and on substantially the same or improved terms and conditions, then Executive will be entitled to receive the following benefits: (A) An Early Retirement Lump Sum Payment by the Company as described below: The Early Retirement Lump Sum Payment by the Company shall be equal to the excess, if any, of the sum of (i) plus (ii) less the amount computed in accordance with (iii). (i) The lump sum benefit from the Kaiser Aluminum Salaried Employees Retirement Plan (KRP) that the Executive would have been entitled to as of the date of his actual termination calculated, for this purpose, as if the terms of KRP in effect on such date were identical to the terms of KRP in effect on the effective date of this Agreement (except for such changes required to maintain the qualified status of KRP), and as if the Executive qualified for a KRP Full Early Retirement Pension; provided, however, in calculating such amount, his actual age, credited service, social security benefits and final average monthly compensation in effect on the date of his actual termination shall be used as well as the daily yields on longer term treasury issues and the PBGC applicable interest rates in effect on such date. (ii) The lump sum benefit from the Kaiser Aluminum Supplemental Benefits Plan (KASBP) based on KRP limitations, that the Executive would have been entitled to as of the date of his actual termination calculated, for this purpose, as if (i) the terms of KASBP in effect on such date were identical to the terms of KASBP in effect on the effective date of this Agreement, (ii) the Executive qualified for a KRP Full Early Retirement Pension, and (iii) the other assumptions set forth in "(i)" above including interest rates were in effect in calculating the benefits under Section C-2(a) and (b) of KASBP. (iii) An amount equal to the lump sum actuarial equivalent of (a) the Executive's actual benefit payable from KRP on account of his actual termination, plus (b) the Executive's actual benefit payable from KASBP based on KRP limitations on account of his actual termination. (B) Full health benefits as if the Executive had qualified for an Early Retirement Pension. (C) A lump sum amount equal to Executive's base salary as of the date of Executive's termination for a period equal to the greater of (i) the number of months remaining in the Employment Period or (ii) two years. In addition, Executive shall be entitled to receive Executive's Target Annual Bonus for the year of termination (but no less than $270,000) in one lump sum payment. Such salary and Target Annual Bonus payments shall be referred to as "Termination Pay". Such Termination Pay shall be in lieu of any claims Executive may have had with respect to termination benefits. (D) All of the unvested stock options held by Executive on the date of such termination that would have vested during the Employment Period shall immediately vest and become exercisable in full for the remaining portion of the period of five years from date of grant. 4.1 Circumstances Under Which Termination Benefits ----------------------------------------------- Would Not Be Paid. The Company shall not be obligated to pay - ----------------- Executive the termination benefits pursuant to Section 4 if the Executive's employment is terminated for Cause. For purposes of this Agreement, "Cause" shall be limited to (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 this Agreement after written notice delivered to Executive of such breach and a reasonable opportunity to cure such breach. 4.2 Constructive Termination. Notwithstanding ------------------------ anything in this Section 4 or Section 5 to the contrary, the Employment Period will be deemed to have been terminated (a "Constructive Termination") and Executive will be deemed to have Good Reason for voluntary termination of the Employment Period ("Good Reason"), if there should occur: (A) a material adverse change in Executive's position causing it to be of materially less stature or responsibility without Executive's written consent, and such a materially adverse change shall in all events be deemed to occur if Executive no longer serves as President and Chief Operating Officer reporting to the Chief Executive Officer, unless Executive consents in writing to such change; (B) a reduction, without Executive's written consent, in his 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 Target Annual Bonus under the CEO Bonus Plan; or (C) a relocation of his principal place of employment by more than 50 miles without Executive's consent. 4.3 Termination by Reason of Death or Disability. In -------------------------------------------- the event of Employee's death during the Employment Period, the Company shall pay to Employee or Employee's estate Employee's Target Annual Bonus for the Company's fiscal year in which death occurred or, if no such Target Annual Bonus has been scheduled, an amount equal to the Target Annual Bonus paid to Employee for the Company's fiscal year immediately preceding the year in which death occurred. In addition, Employee's estate will receive payment for all salary, bonuses and unpaid vacation accrued as of the date of Employee's death and any other benefits payable under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of death and in accordance with applicable law. In the event that, during the term of this Agreement, Employee is unable to perform his job due to disability (as determined under the Company's long-term disability insurance program) for six (6) months in any twelve (12) month period, the Company may, at its election, terminate Employee's employment with the Company and such termination shall be deemed to be a termination by the Company other than for Cause and Employee shall be entitled to receive the benefits set forth in Section 4 hereof. 5. Change in Control ----------------- Should there occur a Change in Control (as defined below), then the following provisions shall become applicable: (A) During the period (if any) following a Change in Control that Executive shall continue to provide the Services, then the terms and provisions of this Agreement shall continue in full force and effect, and Executive shall continue to vest in all of his unvested stock options; or (B) In the event of (x) a termination of the employment by the Company other than for Cause or (y) a termination of employment by Executive for any reason within twelve (12) months following such Change in Control, the benefits listed in Section 4 shall become due and payable: For purposes of this Section 5, a Change of Control shall be deemed to occur upon: (I) the sale, lease, conveyance or other disposition of all or substantially all of the Company'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; (II) 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 Company, except if such Person is (A) a subsidiary of the Company, (B) an employee stock ownership plan for employees of the Company or (C) a company formed to hold the Company's common equity securities and whose shareholders constituted, at the time such company became such holding company, substantially all the shareholders of the Company; or (III) a change in the composition of the Company'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. In the event that the severance and other benefits provided to Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 5, such severance and benefits would be subject to the excise tax imposed by Section 4999 of the Code, then Executive's severance benefits under this Section 5 shall be payable either: (a) in full, (b) as to such lesser amount which would result in no portion of such severance and other benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits under Section 5. Unless the Company and Executive otherwise agree in writing, any determination required under this Section 5 shall be made in writing by independent public accountants agreed to by the Company and Executive (the "Accountants"), whose determination shall be conclusive and binding upon Executive and the Company for all purposes. For purposes of making the calculations required by this Section 5, the Accountants 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 Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 5. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5. 6. Dispute Resolution. The Company and Executive agree ------------------ that any dispute regarding the interpretation or enforcement of this Agreement shall be decided by confidential, final and binding arbitration conducted by Judicial Arbitration and Mediation Services ("JAMS") under the then-existing JAMS rules, rather than by litigation in court, trial by jury, administrative proceeding, or in any other forum. 7. Cooperation with the Company After Termination of the ----------------------------------------------------- Employment Period. Following termination of the Employment - ------------------ Period by Executive, Executive shall fully cooperate with the Company in all matters relating to the winding up of his pending work on behalf of the Company and the orderly transfer of any such pending work to other employees of the Company as may be designated by the Company. 8. Confidentiality; Return of Property. Executive ----------------------------------- acknowledges that the Employee Invention and Confidential Information Agreement executed by Executive on October 28, 1996 shall continue in effect. 9. General. ------- 9.1 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. 9.2 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. 9.3 No Mitigation. Executive shall have no duty to ------------- mitigate the Company's obligation with respect to the termination payments set forth in Sections 4 or 5 by seeking other employment following termination of his 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 Company's obligations to make payments under Sections 4 or 5 shall not terminate in the event executive accepts other full time employment. 9.4 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 Company as its principal corporate address, and to Executive at his most recent address shown on the Company's corporate records, or at any other address which he may specify in any appropriate notice to the Company. 9.5 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. 9.6 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 and the referenced stock option agreement constitute 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. The parties further agree that this Agreement supersedes the employment agreement between the Company and Executive dated October 28, 1996. Notwithstanding anything to the contrary, Sections 4 and 5 of this Agreement shall govern all options issued to Executive by the Company prior to and after the effective date of this Agreement. 9.7 Governing Law. This Agreement shall be governed ------------- by the law of the State of California. 9.8 Assignment and Successors. The Company shall have -------------------------- the right to assign its rights and obligations under this Agreement to an entity which acquires substantially all of the assets of the Company. The rights and obligation of the Company under this Agreement shall inure to the benefit and shall be binding upon the successors and assigns of the Company. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. KAISER ALUMINUM & CHEMICAL CORPORATION By:/s/ George T. Haymaker, Jr. -------------------------- Name: George T. Haymaker, Jr. ----------------------- Title: Chief Executive Officer ----------------------- EXECUTIVE /s/ Raymond J. Milchovich - ------------------------------ Raymond J. Milchovich Schedule A Assumptions in Calculation of Options Option Value: $4.96 Stock Price: $9.4063 Risk Free Rate: 5.80% (The risk-free interest rate based on estimated 5-year T-Bond rate.) Term of Option: 5 years from Grant Date (1825 days) Volatility Rate: 42.86% (Stock volatility derived from 3 years of monthly data: 2/95-2/98) Annual Dividend: $0.00 As a result, to grant $3,150,000 of value, the number of options necessary will be 635,000. EX-4 5 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 Aluminium & 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 635,000 shares of common stock, $.01 par value per share, of KAC (as more fully described in Optionee's Employment Agreement (the "Employment Agreement) with the Company 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 July 2, 2003. 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 such Option Shares subject to the Stock Option shall be equal to the remainder of (i) $9.4063 per Option Share minus (ii) the amount per Option Share of Distributed Cash Value (as defined in Attachment II) 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". 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 as of 12:01 a.m. Houston time on December 31, 1998, and an additional 20% of the Option Shares as of 12:01 a.m. Houston time on December 31, 1999, 2000, 2001, and 2002 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 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 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) Termination 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) Optionee'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 1, 2003 other than as a result of termination of Optionee'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) Other Termination. If Optionee's Qualified Service Period terminates prior to January 1, 2003 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) 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 II) 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"). (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 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 8(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. (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). 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 $9.4063 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) $9.4063. 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 2nd day of July, 1998. "COMPANY" KAISER ALUMINUM CORPORATION By: /s/ George T. Haymaker, Jr. Printed Name: George T. Haymaker,Jr. ----------------------- Title: Chairman and CEO ----------------- KAISER ALUMINUM & CHEMICAL CORPORATION By: /s/ George T. Haymaker, Jr. Printed Name: George T. Haymaker,Jr. ----------------------- Title: Chairman and CEO ----------------- Accepted effective as of the 10th day of July, 1998. "OPTIONEE" /s/ Raymond J. Milchovich Printed Name: Raymond J. Milchovich Title: President 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". "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 January 1, 1998 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 January 1, 1998 (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, 1998 through and including the earlier of (a) December 31, 2002 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 that would cause KAC to experience a change in control and such transaction is subsequently consummated so that KAC 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 Section 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-5 6 EMPLOYMENT AGREEMENT This Agreement (the "Agreement") is made effective for the period from January 1, 1998 to December 31, 2002, (such term being hereinafter referred to as the "Employment Period") between Kaiser Aluminum & Chemical Corporation, a Delaware corporation ("Company"), and John T. La Duc ("Executive"). WHEREAS, Executive is currently employed by the Company as a senior executive; and WHEREAS, the Company desires to secure the services of Executive as Executive Vice President and Chief Financial Officer, and Executive desires to perform such services for the Company, on the terms and conditions as set forth herein; NOW, THEREFORE, in consideration of the premises and of the covenants and agreements set forth below, it is mutually agreed as follows: 1. Effective Date, Term and Duties. The term of ------------------------------- employment of Executive by the Company hereunder shall be deemed to have commenced on January 1, 1998 and end on December 31, 2002, (the "Employment Period") unless earlier terminated pursuant to Section 4. Executive shall have such duties as the Company may from time to time prescribe consistent with his position as Executive Vice President and Chief Financial Officer of the Company (the "Services"). Executive shall report directly to the Chief Executive Officer of the Company. Executive shall devote his full time, attention, energies and best efforts to the business of the Company. The Company shall maintain an office for Executive in Houston, Texas. 2. Compensation. The Company shall pay and Executive ------------ shall accept as full consideration for the Services compensation consisting of the following: 2.1 Base Salary. Effective June 1, 1998, $350,000 per ----------- year base salary, payable in installments in accordance with the Company's normal payroll practices, less such deductions or withholdings required by law. Base Salary shall be reviewed annually by the Compensation Committee of the Company to evaluate the performance of Executive and his duties hereunder, and in any event will be adjusted for inflation consistent with the general program of increases for other executives and management employees. 2.2 Annual Bonus. A target bonus of $200,000 ------------ (adjusted for inflation as determined by the Company's Compensation Committee) per year ("Target Annual Bonus") shall be payable based on the attainment by the Company of the Short-Term Bonus Plan Objectives under the Company's Executive Bonus Plan for each such year, which such Short-Term Bonus Plan Objectives shall be agreed upon by the Executive and the Company annually and shall be consistent with the Company's business plan for the relevant year. 2.3 Long-Term Compensation. During June 1998 Executive ---------------------- shall receive a stock option grant of 468,750 shares under the Company's Stock Option Plan, which is a grant equivalent to a value of five times Executive's annual long term incentive target of $465,000, determined using Black Scholes methodology and assumptions as described in Schedule A and with an exercise price of $9.3125. The options will have an exercise period of five years from date of grant. Such options shall be in lieu of any payment of long-term incentive compensation under the Company's Executive Bonus Plan ("Plan") for the five year period beginning January 1, 1998, although Executive shall be eligible for additional option grants at the discretion of the Company's Compensation Committee. The options shall vest at the rate of 20% per year, beginning on December 31, 1998, unless Executive's service is terminated by the Company for any reason other than for "Cause, or Executive terminates his employment for "Good Reason" or in event of a Change in Control, in which cases vesting of all outstanding options is accelerated as provided in Section 4. Such option grant shall provide that upon exercise of any option, Executive will be entitled to receive shares pursuant to the Company's Stock Option Plan but also any securities that have been distributed in respect to such shares. For example, if the Company were to spin off part of its business as a new company and distribute to its stockholders one share of stock of the new company for each one share of stock under the Company's Stock Option Plan, then, upon a subsequent exercise by Executive of the stock options under the Company's Stock Option Plan, Executive would also receive one new company share along with one share under the Company's Stock Option Plan. All such grants shall be governed by the Company's Stock Option Plan and by the agreement executed by the Company and Executive at the time of the option grant. 2.4 Indemnification. In the event Executive is made, ---------------- or threatened to be made, a party to any legal action or proceeding, whether civil or criminal, by reason of the fact that Executive is or was a director or officer of the Company or serves or served any other corporation fifty percent (50%) or more owned or controlled by the Company in any capacity at the Company's request, Executive shall be indemnified by the Company, and the Company shall pay Executive's related expenses when and as incurred, all to the fullest extent permitted by law, provided, however, that the Company shall have the right of defense to any action or proceeding. 3. Benefits during Employment Period. Employee will be --------------------------------- eligible to participate in the Company's employee benefit plans of general application, including, without limitation, those plans covering medical, disability and life insurance in accordance with the rules established for individual participation in any such plan and under applicable law. Employee will be eligible for vacation and sick leave in accordance with the policies in effect during the term of this Agreement and will receive such other benefits as the Company generally provides to its other employees of comparable position and experience. 4. Benefits Upon Termination. Notwithstanding anything in ------------------------- the Agreement to the contrary, if (i) Executive's employment is terminated during the Employment Period for any reason other than (a) termination by the Company for "Cause" (as defined in Subsection 4.1), (b) acceptance by Executive of an offer of employment with an affiliate of the Company, or (c) a voluntary termination by Executive for other than "Good Reason"; or (ii) Executive's employment terminates by the expiration of the Employment Period without an offer for continued employment by the Company for a position of responsibility comparable to that held by Executive at the beginning of the Employment Period and on substantially the same or improved terms and conditions, then Executive will be entitled to receive the following benefits: (A) An Early Retirement Lump Sum Payment by the Company as described below: The Early Retirement Lump Sum Payment by the Company shall be equal to excess, if any, of the sum of (i) plus (ii) less the amount computed in accordance with (iii). (i) The lump sum benefit from the Kaiser Aluminum Salaried Employees Retirement Plan (KRP) that the Executive would have been entitled to as of the date of his actual termination calculated, for this purpose, as if the terms of KRP in effect on such date were identical to the terms of KRP in effect on the effective date of this Agreement (except for such changes required to maintain the qualified status of KRP), and as if: the Executive qualified for a KRP Full Early Retirement Pension, provided, however, in calculating such amount, his actual age, credited service, social security benefits and final average monthly compensation in effect on the date of his actual termination shall be used as well as the daily yields on longer term treasury issues and the PBGC applicable interest rates in effect on such date. (ii)The lump sum benefit from the Kaiser Aluminum Supplemental Benefits Plan (KASBP) based on KRP limitations, that the Executive would have been entitled to as of the date of his actual termination calculated, for this purpose, as if: (i) the terms of KASBP in effect on such date were identical to the terms of KASBP in effect on the effective date of this Agreement, (ii) the Executive qualified for a KRP Full Early Retirement Pension and (iii) the other assumptions set forth in "(i)" above including interest rates were in effect in calculating the benefits under Section C-2(a) and (b) of KASBP. (iii) An amount equal to the lump sum actuarial equivalent of (a) the Executive's actual benefit payable from KRP on account of his actual termination, plus (b) the Executive's actual benefit payable from KASBP based on KRP limitations on account of his actual termination. (B) Full health benefits as if the Executive had qualified for an Early Retirement Pension. (C) A lump sum amount equal to Executive's base salary as of the date of Executive's termination for a period equal to the greater of (i) the number of months remaining in the Employment Period or (ii) two years. In addition, Executive shall be entitled to receive Executive's Target Annual Bonus for the year of termination (but no less than $200,000) in one lump sum payment. Such salary and Target Annual Bonus payments shall be referred to as "Termination Pay". Such Termination Pay shall be in lieu of any claims Executive may have had with respect to termination benefits. (D) All of the unvested stock options held by Executive on the date of such termination that would have vested during the Employment Period shall immediately vest and become exercisable in full for the remaining portion of the period of five years from date of grant. 4.1 Circumstances Under Which Termination Benefits ---------------------------------------------- Would Not Be Paid. The Company shall not be obligated to pay - ----------------- Executive the termination benefits pursuant to Section 4 if the Executive's employment is terminated for Cause. For purposes of this Agreement, "Cause" shall be limited to (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 this Agreement after written notice delivered to Executive of such breach and a reasonable opportunity to cure such breach. 4.2 Constructive Termination. Notwithstanding ------------------------ anything in this Section 4 or Section 5 to the contrary, the Employment Period will be deemed to have been terminated (a "Constructive Termination") and Executive will be deemed to have Good Reason for voluntary termination of the Employment Period ("Good Reason"), if there should occur: (A) a material adverse change in Executive's position causing it to be of materially less stature or responsibility without Executive's written consent, and such a materially adverse change shall in all events be deemed to occur if Executive no longer serves as Executive Vice President and Chief Financial Officer reporting to the Chief Executive Officer, unless Executive consents in writing to such change; (B) a reduction, without Executive's written consent, in his 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 Target Annual Bonus under the Short-Term Incentive Plan; or (C) a relocation of his principal place of employment by more than 50 miles without Executive's consent. 4.3 Termination by Reason of Death or Disability. In --------------------------------------------- the event of Employee's death during the Employment Period, the Company shall pay to Employee or Employee's estate Employee's Target Annual Bonus for the Company's fiscal year in which death occurred or, if no such Target Annual Bonus has been scheduled, an amount equal to the Target Annual Bonus paid to Employee for the Company's fiscal year immediately preceding the year in which death occurred. In addition, Employee's estate will receive payment for all salary, bonuses and unpaid vacation accrued as of the date of Employee's death and any other benefits payable under the Company's then existing benefit plans and policies in accordance with such plans and policies in effect on the date of death and in accordance with applicable law. In the event that, during the term of this Agreement, Employee is unable to perform his job due to disability (as determined under the Company's long-term disability insurance program) for six (6) months in any twelve (12) month period, the Company may, at its election, terminate Employee's employment with the Company and such termination shall be deemed to be a termination by the Company other than for Cause and Employee shall be entitled to receive the benefits set forth in Section 4 hereof. 5. Change in Control ----------------- Should there occur a Change in Control (as defined below), then the following provisions shall become applicable: (A) During the period (if any) following a Change in Control that Executive shall continue to provide the Services, then the terms and provisions of this Agreement shall continue in full force and effect, and Executive shall continue to vest in all of his unvested stock options; or (B) In the event of (x) a termination of the employment by the Company other than for Cause or (y) a termination of employment by Executive for any reason within twelve (12) months following such Change in Control, the benefits listed in Section 4 shall become due and payable. For purposes of this Section 5, a Change of Control shall be deemed to occur upon: (I) the sale, lease, conveyance or other disposition of all or substantially all of the Company'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; (II) 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 Company, except if such Person is (A) a subsidiary of the Company, (B) an employee stock ownership plan for employees of the Company or (C) a company formed to hold the Company's common equity securities and whose shareholders constituted, at the time such company became such holding company, substantially all the shareholders of the Company; or (III) a change in the composition of the Company'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. In the event that the severance and other benefits provided to Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this Section 5, such severance and benefits would be subject to the excise tax imposed by Section 4999 of the Code, then Executive's severance benefits under this Section 5 shall be payable either: (a) in full, (b) as to such lesser amount which would result in no portion of such severance and other benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits under Section 5. Unless the Company and Executive otherwise agree in writing, any determination required under this Section 5 shall be made in writing by independent public accountants agreed to by the Company and Executive (the "Accountants"), whose determination shall be conclusive and binding upon Executive and the Company for all purposes. For purposes of making the calculations required by this Section 5, the Accountants 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 Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 5. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 5. 6. Dispute Resolution. The Company and Executive agree ------------------ that any dispute regarding the interpretation or enforcement of this Agreement shall be decided by confidential, final and binding arbitration conducted by Judicial Arbitration and Mediation Services ("JAMS") under the then-existing JAMS rules, rather than by litigation in court, trial by jury, administrative proceeding, or in any other forum. 7. Cooperation with the Company After Termination of the ----------------------------------------------------- Employment Period. Following termination of the Employment - ------------------ Period by Executive, Executive shall fully cooperate with the Company in all matters relating to the winding up of his pending work on behalf of the Company and the orderly transfer of any such pending work to other employees of the Company as may be designated by the Company. 8. Confidentiality; Return of Property. Executive ----------------------------------- acknowledges that the Employee Invention and Confidential Information Agreement executed by Executive shall continue in effect. 9. General. ------- 9.1 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. 9.2 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. 9.3 No Mitigation. Executive shall have no duty to mitigate the Company's obligation with respect to the termination payments set forth in Sections 4 or 5 by seeking other employment following termination of his 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 Company's obligations to make payments under Sections 4 or 5 shall not terminate in the event executive accepts other full time employment. 9.4 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 Company as its principal corporate address, and to Executive at his most recent address shown on the Company's corporate records, or at any other address which he may specify in any appropriate notice to the Company. 9.5 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. 9.6 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 and the referenced stock option agreement constitute 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. The parties further agree that this Agreement supersedes the employment agreement between the Company and Executive dated October 28, 1996. Notwithstanding anything to the contrary, Sections 4 and 5 of this Agreement shall govern all options issued to Executive by the Company prior to and after the effective date of this Agreement. 9.7 Governing Law. This Agreement shall be governed ------------- by the law of the State of Texas. 9.8 Assignment and Successors. The Company shall have ------------------------- the right to assign its rights and obligations under this Agreement to an entity which acquires substantially all of the assets of the Company. The rights and obligation of the Company under this Agreement shall inure to the benefit and shall be binding upon the successors and assigns of the Company. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. KAISER ALUMINUM & CHEMICAL CORPORATION By: /s/ George T. Haymaker, Jr. --------------------------- Name: George T. Haymaker, Jr. ------------------------ Title: Chief Executive Officer ------------------------ EXECUTIVE /s/ John T. La Duc - ------------------------------ John T. La Duc Schedule A Assumptions in Calculation of Options Option Value: $4.96 Stock Price: $9.3125 Risk Free Rate: 5.80% (The risk-free interest rate based on estimated 5-year T-Bond rate Term of Option: 5 years from Grant Date (1825 days) Volatility Rate: 42.86% (Stock volatility derived from 3 years of monthly data: 2/95 - 2/98 Annual Dividend: $0.00 As a result, to grant $2,325,000 of value, the number of options necessary will be 468,750. EX-6 7 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 Aluminium & Chemical Corporation ("KACC"), both Delaware corporations (collectively, the "Company"), hereby evidence that the Company has granted to JOHN T. LA DUC ("Optionee") the right, privilege and option as herein set forth (the "Stock Option") to purchase 468,750 shares of common stock, $.01 par value per share, of KAC (as more fully described in Optionee's Employment Agreement (the "Employment Agreement) with the Company 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 July 10, 2003. 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 such Option Shares subject to the Stock Option shall be equal to the remainder of (i) $9.3125 per Option Share minus (ii) the amount per Option Share of Distributed Cash Value (as defined in Attachment II) 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". 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 as of 12:01 a.m. Houston time on December 31, 1998, and an additional 20% of the Option Shares as of 12:01 a.m. Houston time on December 31, 1999, 2000, 2001, and 2002 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 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 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) Termination 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) Optionee'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 1, 2003 other than as a result of termination of Optionee'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) Other Termination. If Optionee's Qualified Service Period terminates prior to January 1, 2003 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) 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 II) 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"). (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 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 8(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. (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). 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 $9.3125 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) $9.3125. 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 10th day of July, 1998. "COMPANY" KAISER ALUMINUM CORPORATION By: /s/ George T. Haymaker, Jr. Printed Name: George T. Haymaker,Jr. ---------------------- Title: Chairman and CEO ---------------- KAISER ALUMINUM & CHEMICAL CORPORATION By: /s/ George T. Haymaker, Jr. Printed Name: George T. Haymaker, Jr. ----------------------- Title: Chairman and CEO ---------------- Accepted effective as of the 10th day of July, 1998. "OPTIONEE" /s/ John T. La Duc Printed Name: John T. La Duc --------------- Title: Executive Vice President and Chief Financial Officer ----------------------------- 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". "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 January 1, 1998 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 January 1, 1998 (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, 1998 through and including the earlier of (a) December 31, 2002 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 that would cause KAC to experience a change in control and such transaction is subsequently consummated so that KAC 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 Section 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 8
5 This schedule contains summary financial information extracted from the consolidated financial statements of the Company for the nine months ended September 30, 1998, and is qualified in its entirety by reference to such financial statements. 0000811596 KAISER ALUMINUM CORPORATION 1,000,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 97 0 298 6 520 1,034 1,156 67 2,984 547 963 0 0 1 157 2,984 1,753 1,753 1,466 1,466 156 0 83 48 9 40 0 0 0 40 .50 .50
-----END PRIVACY-ENHANCED MESSAGE-----