sv1za
As filed with the Securities and Exchange Commission on
November 21, 2006
Registration
No. 333-137623
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-Effective Amendment No. 1
to
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
KAISER ALUMINUM CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Delaware |
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3334 |
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94-3030279 |
(State or Other Jurisdiction of
Incorporation or Organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(I.R.S. Employer
Identification Number) |
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27422 Portola Parkway, Suite 350
Foothill Ranch, California 92610-2831
(949) 614-1740
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrants Principal Executive
Offices) |
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John M. Donnan
Vice President, General Counsel and Secretary
Kaiser Aluminum Corporation
27422 Portola Parkway, Suite 350
Foothill Ranch, California 92610-2831
(949) 614-1740
(Name, Address, Including Zip Code, and Telephone
Number,
Including Area Code, of Agent for Service) |
With a copy to:
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Troy B. Lewis
Mark T. Goglia
Jones Day
2727 North Harwood Street
Dallas, Texas 75201-1515
Telephone: (214) 220-3939
Facsimile: (214) 969-5100 |
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Joseph A. Hall
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telephone: (212) 450-4000
Facsimile: (212) 450-4800 |
Approximate date of commencement of proposed sale to the
public: As soon as practicable on or after the effective
date of this Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 (the
Securities Act), check the following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until this Registration Statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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PRELIMINARY PROSPECTUS |
Subject to Completion |
November 21, 2006 |
2,517,955 Shares
Common Stock
This is an offering of common stock of Kaiser Aluminum
Corporation. All of the shares of common stock are being sold by
the selling stockholder named in this prospectus. We will not
receive any proceeds from the sale of the shares by the selling
stockholder.
Our common stock is traded on the Nasdaq Global Market under the
symbol KALU. On November 20, 2006, the last
reported sales price of our common stock on the Nasdaq Global
Market was $49.60 per share. Our common stock is subject to
certain transfer restrictions that potentially prohibit or void
transfers by any person or group that is, or as a result of such
a transfer would become, a 5% stockholder.
Investing in our common stock involves risks. Before buying
any shares you should carefully read the discussion of material
risks of investing in our common stock contained in Risk
Factors beginning on page 10 of this prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Per share | |
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Public offering price
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Underwriting discounts and commissions
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Proceeds, before expenses, to the selling stockholder
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The underwriters may also purchase up to an additional
377,693 shares of common stock from the selling stockholder
at the public offering price, less underwriting discounts and
commissions, within 30 days from the date of this
prospectus to cover over-allotments, if any. If the underwriters
exercise this option in full, the total underwriting discounts
and commissions will be
$ and
total proceeds, before expenses, to the selling stockholder will
be
$ .
Delivery of the shares of common stock will be made on or
about ,
2006.
The underwriters are offering the common stock as set forth
under Underwriting.
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UBS Investment Bank |
Bear, Stearns & Co. Inc. |
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Lehman Brothers |
Lazard Capital Markets |
The date of this prospectus
is ,
2006
You should rely only on the information contained in this
prospectus or to which we have referred you. We have not
authorized anyone to provide you with information that is
different. This document may be used only where it is legal to
sell our common stock. The information contained in this
prospectus is current only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or any
sale of our common stock.
TABLE OF CONTENTS
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F-1 |
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Kaiser Aluminum, Kaiser
Selecttm,
Kaiser Precision
Selecttm,
Kaiser Precision
Rodtm,
our logo and certain other names of our products are our
trademarks, trade names or service marks. Each trademark, trade
name or service mark of any other company appearing in this
prospectus belongs to its holder.
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Prospectus summary
This summary highlights information contained elsewhere in
this prospectus. This summary does not contain all of the
information that may be important to you. You should read this
entire prospectus carefully, including the risks discussed under
Risk factors and the financial statements and notes
thereto included elsewhere in this prospectus. In this
prospectus, all references to (1) Kaiser,
we, us, the company and
our refer to Kaiser Aluminum Corporation and its
subsidiaries unless the context otherwise requires or where
otherwise indicated; (2) the Union VEBA Trust
refers to the voluntary employees beneficiary association
trust, or VEBA, that provides benefits for certain eligible
retirees represented by certain unions and their spouses and
eligible dependents; and (3) the Salaried Retiree
VEBA Trust refers to the VEBA that provides benefits for
certain other eligible retirees and their surviving spouses and
eligible dependents.
OUR COMPANY
We are a leading independent fabricated aluminum products
manufacturing company with 2005 net sales of approximately
$1.1 billion. We were founded in 1946 and operate 11
production facilities in the United States and Canada. We
manufacture rolled, extruded, drawn and forged aluminum products
within three product categories consisting of aerospace and high
strength products (which we refer to as Aero/ HS products),
general engineering products and custom automotive and
industrial products.
We produced and shipped approximately 482 million pounds of
fabricated aluminum products in 2005, which comprised 86% of our
total net sales. Of our total fabricated product shipments in
2005, approximately 29% were Aero/ HS products, approximately
44% were general engineering products and the remaining
approximately 27% consisted of custom automotive and industrial
products. Of our total fabricated products net sales in 2005,
approximately 38% were Aero/ HS products, approximately 38% were
general engineering products and the remaining approximately 24%
consisted of custom automotive and industrial products.
In order to capitalize on the significant growth in demand for
high quality heat treat aluminum plate products in the market
for Aero/ HS products, we have begun a major expansion at our
Trentwood facility in Spokane, Washington. We anticipate that
the Trentwood expansion will significantly increase our aluminum
plate production capacity and enable us to produce thicker gauge
aluminum plate. The $105 million expansion will be
completed in phases, with one new heat treat furnace currently
operational and expected to reach full production in the fourth
quarter of 2006, a second such furnace currently operational and
expected to reach full production no later than early 2007 and a
third such furnace becoming operational in early 2008. A new
heavy gauge stretcher, which will enable us to produce thicker
gauge aluminum plate, will also become operational in early 2008.
We have long-standing relationships with our customers, which
include leading aerospace companies, automotive suppliers and
metal distributors. We strive to tightly integrate the
management of our fabricated products operations across multiple
production facilities, product lines and target markets in order
to maximize the efficiency of product flow to our customers. In
our served markets, we seek to be the supplier of choice by
pursuing
best-in-class
customer satisfaction and offering a product portfolio that is
unmatched in breadth and depth by our competitors.
The price we pay for primary aluminum, the principal raw
material for our fabricated aluminum products business, consists
of two components: the price quoted for primary aluminum ingot
on the London Metals Exchange, or the LME, and the
Midwest Transaction Premium, a premium to LME reflecting
domestic market dynamics as well as the cost of shipping and
warehousing. Because aluminum prices are volatile, we manage the
risk of fluctuations in the price of primary aluminum
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through a combination of pricing policies, internal hedging and
financial derivatives. Our three principal pricing mechanisms
are as follows:
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Spot
price. Some of our
customers pay a product price that incorporates the spot price
of primary aluminum in effect at the time of shipment to a
customer. This pricing mechanism typically allows us to pass
commodity price risk to the customer.
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Index-based
price. Some of our
customers pay a product price that incorporates an index-based
price for primary aluminum such as Platts Midwest price
for primary aluminum. This pricing mechanism also typically
allows us to pass commodity price risk to the customer.
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Fixed
price. Some of our
customers pay a fixed price. During 2003, 2004, 2005 and the
nine months ended September 30, 2006, approximately
97.6 million pounds (or approximately 26%),
119.0 million pounds (or approximately 26%),
155.0 million pounds (or approximately 32%) and
153.0 million pounds (or approximately 38%), respectively,
of our fabricated products were sold at a fixed price. We bear
commodity price risk on fixed-price contracts, which we normally
hedge though a combination of financial derivatives and
production from Anglesey Aluminium Limited, described below.
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In addition to our core fabricated products operations, we have
a 49% ownership interest in Anglesey Aluminium Limited, an
aluminum smelter based in Holyhead, Wales. Anglesey has produced
in excess of 140,000 metric tons for each of the last three
fiscal years, of which 49% is available to us. We sell our
portion of Angleseys primary aluminum output to a single
third party at market prices. During 2005, sales of our portion
of Angleseys output represented 14% of our total net
sales. Because we also purchase primary aluminum for our
fabricated products at market prices, Angleseys production
acts as a natural hedge for our fabricated products operations.
Please see Risk factors The expiration of the power
agreement for Anglesey may adversely impact our cash flows and
impact our hedging programs for a discussion regarding the
potential closure of Anglesey, which could occur as soon as 2009.
OUR COMPETITIVE STRENGTHS
We believe that the following competitive strengths will enable
us to enhance our position as one of the leaders in the
fabricated aluminum products industry:
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Leading market positions in
value-added niche markets for fabricated
products. We have
repositioned our business to concentrate on products in which we
believe we have strong production capability, well- developed
technical expertise and high product quality. We believe that we
hold a leading market share position in niche markets that
represented approximately 85% of our 2005 net sales from
fabricated aluminum products. Our leading market position
extends throughout our broad product offering, including plate,
sheet, seamless extruded and drawn tube, rod, bar, extrusions
and forgings for use in a variety of value-added aerospace,
general engineering and custom automotive and industrial
applications.
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Well-positioned growth
platform. We have
substantial organic growth opportunities in the production of
aluminum plate, extrusions and forgings. We are in the midst of
a $105 million expansion of our Trentwood facility that
will allow us to significantly increase production capacity and
enable us to produce thicker gauge aluminum plate. We also have
the ability to add presses and other manufacturing equipment at
several of our current facilities in order to increase extrusion
and forging capacity. Additionally, we believe our platform
provides us with flexibility to create additional stockholder
value through selective acquisitions.
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Supplier of
choice. We pursue
best-in-class
customer satisfaction through the consistent, on-time delivery
of high quality products on short lead times. We offer our
customers a portfolio of both highly engineered and industry
standard products that is unmatched in breadth and depth by most
of our competitors. Our continuous improvement culture is
grounded in our production system, the Kaiser Production System,
which involves an integrated utilization of application and
advanced process engineering and business improvement
methodologies such as lean enterprise, total |
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productive maintenance and six sigma. We believe that our broad
product portfolio of highly engineered products and the Kaiser
Production System, together with our established record of
product innovation, will allow us to remain the supplier of
choice for our customers and further enhance our competitive
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Blue-chip customer base and diverse end markets. Our
fabricated products customers include leading aerospace
companies, automotive suppliers and metal distributors, such as
A.M. Castle-Raytheon, Airbus Industrie, Boeing, Bombardier,
Eclipse Aviation, Reliance Steel & Aluminum and
Transtar-Lockheed Martin. We have long-term relationships with
our top customers, many of which we have served for decades. Our
customer base spans a variety of end markets, including
aerospace and defense, automotive, consumer durables, machinery
and equipment, and electrical. |
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Financial strength. We have little debt and significant
liquidity as a result of our recent reorganization. We also have
net operating loss carry-forwards and other significant tax
attributes that we believe could together offset in the range of
$550 to $900 million of otherwise taxable income and
accordingly may reduce our future cash payments of
U.S. income tax. |
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Strong and experienced management. The members of our
senior management team have, on average, 20 years of
industry work experience, particularly within the areas of
operations, technology, marketing and finance. Our management
team has repositioned our fabricated products business and led
us through our recent reorganization, creating a focused
business with financial and competitive strength. |
OUR STRATEGY
Our principal strategies to increase stockholder value are to:
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Pursue organic
growth. We will
continue to utilize our manufacturing platform to increase
growth in areas where we are well-positioned such as aluminum
plate, forgings and extrusions. For instance, we anticipate that
the expansion of our Trentwood facility will enable us to
significantly increase our production capacity and enable us to
produce thicker gauge aluminum plate, allowing us to capitalize
on the significant growth in demand for high quality heat treat
aluminum plate products in the market for Aero/ HS products.
Further, our well-equipped extrusion and forging facilities
provide a platform to expand production as we take advantage of
opportunities and our strong customer relationships in the
aerospace and industrial end markets.
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Continue to differentiate our
products and provide superior customer
support. As part of
our ongoing supplier of choice efforts, we will continue to
strive to achieve
best-in-class
customer satisfaction. We will also continue to offer a broad
portfolio of differentiated, superior-quality products with high
engineering content, tailored to the needs of our customers. For
instance, our unique
T-Form®
sheet provides aerospace customers with high formability as well
as requisite strength characteristics, enabling these customers
to substantially lower their production costs. Additionally, we
believe our Kaiser
Select®
Rod established a new industry benchmark for quality and
performance in automatic screw applications. By continually
striving for
best-in-class
customer satisfaction and offering a broad portfolio of
differentiated products, we believe we will be able to maintain
our premium product pricing, increase our sales to current
customers and gain new customers, thereby increasing our market
share. |
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Continue to enhance our
operating
efficiencies. During
the last five years, we have significantly reduced our costs by
narrowing our product focus, strategically investing in our
production facilities and implementing the Kaiser Production
System. We will continue to implement additional measures to
enhance our operating efficiency and productivity, which we
believe will further decrease our production costs.
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Maintain financial
strength. We intend
to employ debt judiciously in order to remain financially strong
throughout the business cycle and to maintain our flexibility to
capitalize on growth opportunities.
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Enhance our product portfolio
and customer base through selective
acquisitions. We may
seek to grow through acquisitions and strategic partnerships. We
will selectively consider acquisition opportunities that we
believe will complement our product portfolio and add long-term
stockholder value.
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REORGANIZATION
Between the first quarter of 2002 and the first quarter of 2003,
Kaiser and 25 of our then-existing subsidiaries filed voluntary
petitions for relief under chapter 11 of the United States
Bankruptcy Code. Pursuant to our plan of reorganization, we
emerged from chapter 11 bankruptcy on July 6, 2006.
Our plan of reorganization allowed us to shed significant legacy
liabilities, including long-term indebtedness, pension
obligations, retiree medical obligations and liabilities
relating to asbestos and other personal injury claims. In
addition, prior to our emergence from chapter 11
bankruptcy, we sold all of our interests in bauxite mining
operations, alumina refineries and aluminum smelters, other than
our interest in Anglesey, in order to focus on our fabricated
aluminum products business, which we believe maintains a
stronger competitive position and presents greater opportunities
for growth.
INDUSTRY OVERVIEW
The aluminum fabricated products market is broadly defined as
the markets for flat-rolled, extruded, drawn, forged and cast
aluminum products, which are used in a variety of end-use
applications. We participate in certain portions of the markets
for flat-rolled, extruded/drawn and forged products focusing on
highly engineered products for aerospace and high strength,
general engineering and custom automotive and industrial
applications. The portions of markets in which we participate
accounted for an estimated 20% of total North American shipments
of aluminum fabricated products in 2005.
We have chosen to focus on the manufacture of aluminum
fabricated products primarily for aerospace and high strength,
general engineering and custom automotive and industrial
applications.
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Products sold for aerospace and
high strength applications represented 29% of our 2005
fabricated products shipments. We offer various aluminum
fabricated products to service aerospace and high strength
customers, including heat treat plate and sheet products, as
well as cold finish bars and seamless drawn tubes. Heat treated
products are distinguished from common alloy products by higher
strength, fracture toughness and other desired product
attributes.
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Products sold for general
engineering applications represented 44% of our 2005 fabricated
products shipments. This market consists primarily of
transportation and industrial end customers who purchase a
variety of extruded, drawn and forged fabricated products
through large North American distributors.
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Products sold for custom
automotive and industrial applications represented 27% of 2005
fabricated products shipments. These products include custom
extruded, drawn and forged aluminum products for a variety of
applications. While we are capable of producing forged products
for most end use applications, we concentrate our efforts on
meeting demand for forged products, other than wheels, in the
automotive industry.
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We have elected not to participate in certain end markets for
fabricated aluminum products, including beverage and food cans,
building and construction materials, and foil used for
packaging, which represented approximately 95% of the North
American flat-rolled products market and approximately 45% of
the North American extrusion market in 2005. We believe our
chosen end markets present better opportunities for sales growth
and premium pricing of differentiated products.
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Aerospace and defense applications
We are a leading supplier of high quality sheet, plate, drawn
tube and bar products to the global aerospace and defense
industry. Our products for these end-use applications are heat
treat plate and sheet, as well as cold finish bar and seamless
drawn tube that are manufactured to demanding specifications.
The aerospace and defense markets consumption of
fabricated aluminum products is driven by overall levels of
industrial production, cyclical airframe build rates and defense
spending, as well as the potential availability of competing
materials such as composites. According to Airline Monitor, the
global build rate of commercial aircraft over 50 seats is
expected to rise at a 4.6% compound annual growth rate through
2025. Additionally, demand growth is expected to increase for
thick plate with growth in monolithic construction
of commercial and other aircraft. In monolithic construction,
aluminum plate is heavily machined to form the desired part from
a single piece of metal (as opposed to creating parts using
aluminum sheet, extrusions or forgings that are affixed to one
another using rivets, bolts or welds). In addition to commercial
aviation demand, military applications for heat treat plate and
sheet include aircraft frames and skins and armor plating to
protect ground vehicles from explosive devices.
General engineering applications
General engineering products consist primarily of standard
catalog items sold to large metal distributors. These products
have a wide range of uses, many of which involve further
fabrication for numerous transportation and industrial end-use
applications where machining of plate, rod and bar is intensive.
Demand growth and cyclicality for general engineering products
tend to mirror broad economic patterns and industrial activity
in North America. Demand is also impacted by the destocking and
restocking of inventory in the full supply chain.
Custom automotive and industrial applications
We manufacture custom extruded/drawn and forged aluminum
products for many automotive and industrial end uses, including
consumer durables, electrical, machinery and equipment,
automobile, light truck, heavy truck and truck trailer
applications. Examples of the wide variety of custom products
that we supply to the automotive industry are extruded products
for anti-lock braking systems, drawn tube for drive shafts and
forgings for suspension control arms and drive train yokes.
Demand growth and cyclicality tend to mirror broad economic
patterns and industrial activity in North America, with specific
individual market segments such as automotive, heavy truck and
truck trailer applications tracking their respective build rates.
RISK FACTORS
Investing in our common stock involves risk. Before you invest
in our common stock, you should carefully consider the matters
discussed under the headings Risk factors and
Special note regarding forward-looking statements
and all other information contained in this prospectus.
OUR CORPORATE INFORMATION
We were incorporated in February 1987 under Delaware law. Our
principal executive offices are located at 27422 Portola
Parkway, Suite 350, Foothill Ranch, California 92610-2831,
and our telephone number at this address is (949) 614-1740.
Our website is www.kaiseraluminum.com. Information on, or
accessible through, our website is not a part of, and is not
incorporated into, this prospectus.
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The offering
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Common stock offered by the selling stockholder |
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2,517,955 shares |
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Common stock outstanding before and after the offering |
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20,525,660 shares |
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Over-allotment option |
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The selling stockholder has granted the underwriters a
30-day option to
purchase up to 377,693 additional shares of our common stock to
cover over-allotments. |
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Nasdaq Global Market symbol |
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KALU |
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Use of proceeds |
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We will receive no proceeds from the sale of common stock by the
selling stockholder. |
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Transfer restrictions |
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Our common stock is subject to certain transfer restrictions
that potentially prohibit or void transfers by any person or
group that is, or as a result of such transfer would become, a
5% stockholder. See Description of capital
stock Restrictions on Transfer of Common Stock. |
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Risk factors |
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You should carefully read and consider the information set forth
under Risk factors, together with all of the other
information set forth in this prospectus, before deciding to
invest in shares of our common stock. |
Unless we indicate otherwise, the number of shares of common
stock shown to be outstanding before and after the offering is
based on shares outstanding on October 31, 2006 and
excludes 1,696,562 shares of common stock reserved and
available for issuance under our equity incentive plan.
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Summary consolidated financial and operating data
The following tables set forth our summary consolidated
financial and operating data as of the dates and for the periods
indicated below. The summary consolidated statement of income
data for the three years ended December 31, 2003, 2004 and
2005 are derived from our audited consolidated financial
statements included elsewhere in this prospectus.
As a result of the effectiveness of our plan of reorganization
on July 6, 2006, we adopted fresh start accounting in
accordance with American Institute of Certified Professional
Accountants Statement of
Position 90-7,
Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code, or
SOP 90-7, as of
July 1, 2006. Because
SOP 90-7 requires
us to restate our stockholders equity to our
reorganization value and to allocate such value to our assets
and liabilities based on their fair values, our financial
condition and results of operations after June 30, 2006
will not be comparable in some material respects to the
financial condition or results of operations reflected in our
historical financial statements at dates or for periods prior to
July 1, 2006. This makes it difficult to assess our future
prospects based on historical performance.
Our emergence from chapter 11 bankruptcy and adoption of
fresh start accounting resulted in a new reporting entity for
accounting purposes. Although we emerged from chapter 11
bankruptcy on July 6, 2006, we adopted fresh start
accounting under the provisions of
SOP 90-7 effective
as of the beginning of business on July 1, 2006. As such,
it was assumed that the emergence was completed instantaneously
at the beginning of business on July 1, 2006 such that all
operating activities during the three months ended
September 30, 2006 are reported as applying to the new
reporting entity. We believe that this is a reasonable
presentation as there were no material transactions between
July 1, 2006 and July 6, 2006 other than plan of
reorganization-related transactions.
The accompanying financial statements include our financial
statements for both before and after emergence. Financial
information related to the newly emerged entity is generally
referred to throughout this prospectus as successor
information and financial information related to the
pre-emergence entity is generally referred to as
predecessor information. The financial information
of the successor entity is not comparable to that of the
predecessor given the effect of the plan of reorganization,
implementation of fresh start reporting and other factors.
With respect to the nine months ended September 30, 2006,
the successors operating data for the period from
July 1, 2006 through September 30, 2006 have been
combined with the predecessors results for the period from
January 1, 2006 to July 1, 2006 and are compared to
the predecessors operating data for the nine months ended
September 30, 2005. Differences between periods due to
fresh start accounting are explained when material.
The summary consolidated financial data as of and for the nine
months ended September 30, 2005 and 2006 are derived from
our unaudited consolidated financial statements included
elsewhere in this prospectus. We have prepared our unaudited
consolidated financial statements on the same basis as our
audited consolidated financial statements (except as set forth
in Note 2 of our interim consolidated financial statements)
and have included all adjustments, consisting of normal and
recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for
the unaudited period. The summary consolidated financial and
operating data as of and for the nine months ended
September 30, 2006 are not necessarily indicative of the
results that may be obtained for a full year.
The information presented in the following tables should be read
in conjunction with Capitalization, Selected
historical consolidated financial data,
Managements discussion and analysis of financial
condition and results of operations and the consolidated
financial statements and the notes thereto included elsewhere in
this prospectus.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
|
|
|
|
|
|
|
|
|
2006 | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
|
|
|
|
|
Predecessor | |
|
period | |
|
|
Period from | |
|
|
Predecessor | |
|
nine months | |
|
from | |
|
|
July 1, 2006 | |
|
|
year ended December 31, | |
|
ended | |
|
January 1, | |
|
|
through | |
|
|
| |
|
September 30, | |
|
2006 to | |
|
|
September 30, | |
Statements of income data: |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
July 1, 2006 | |
|
|
2006 | |
| |
(dollars in millions) |
|
|
|
(unaudited) | |
|
|
|
|
|
|
(restated)(1) | |
|
(unaudited) | |
|
|
(unaudited) | |
Net sales
|
|
$ |
710.2 |
|
|
$ |
942.4 |
|
|
$ |
1,089.7 |
|
|
$ |
815.9 |
|
|
$ |
689.8 |
|
|
|
$ |
331.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
681.2 |
|
|
|
852.2 |
|
|
|
951.1 |
|
|
|
710.9 |
|
|
|
596.4 |
|
|
|
|
291.8 |
|
|
Depreciation and amortization
|
|
|
25.7 |
|
|
|
22.3 |
|
|
|
19.9 |
|
|
|
15.0 |
|
|
|
9.8 |
|
|
|
|
2.8 |
|
|
Selling, administrative, research and development, and general
|
|
|
92.5 |
|
|
|
92.3 |
|
|
|
50.9 |
|
|
|
38.0 |
|
|
|
30.3 |
|
|
|
|
18.0 |
|
|
Other operating charges (credits), net
(2)
|
|
|
141.6 |
|
|
|
793.2 |
|
|
|
8.0 |
|
|
|
6.5 |
|
|
|
0.9 |
|
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
941.0 |
|
|
|
1,760.0 |
|
|
|
1,029.9 |
|
|
|
770.4 |
|
|
|
637.4 |
|
|
|
|
309.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(230.8 |
) |
|
|
(817.6 |
) |
|
|
59.8 |
|
|
|
45.5 |
|
|
|
52.4 |
|
|
|
|
21.7 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense(3)
|
|
|
(9.1 |
) |
|
|
(9.5 |
) |
|
|
(5.2 |
) |
|
|
(4.2 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
Reorganization
items(4)
|
|
|
(27.0 |
) |
|
|
(39.0 |
) |
|
|
(1,162.1 |
) |
|
|
(25.3 |
) |
|
|
3,093.1 |
|
|
|
|
|
|
|
Other, net
|
|
|
(5.2 |
) |
|
|
4.2 |
|
|
|
(2.4 |
) |
|
|
(1.5 |
) |
|
|
1.2 |
|
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and discontinued operations
|
|
|
(272.1 |
) |
|
|
(861.9 |
) |
|
|
(1,109.9 |
) |
|
|
14.5 |
|
|
|
3,145.9 |
|
|
|
|
22.6 |
|
Provision for income taxes
|
|
|
(1.5 |
) |
|
|
(6.2 |
) |
|
|
(2.8 |
) |
|
|
(6.0 |
) |
|
|
(6.2 |
) |
|
|
|
(8.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(273.6 |
) |
|
|
(868.1 |
) |
|
|
(1,112.7 |
) |
|
|
8.5 |
|
|
|
3,139.7 |
|
|
|
|
14.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of income taxes,
including minority interests
|
|
|
(514.7 |
) |
|
|
(5.3 |
) |
|
|
(2.5 |
) |
|
|
21.3 |
|
|
|
4.3 |
|
|
|
|
|
|
|
Gain from sale of commodity interests
|
|
|
|
|
|
|
126.6 |
|
|
|
366.2 |
|
|
|
365.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
(5)
|
|
|
(514.7 |
) |
|
|
121.3 |
|
|
|
363.7 |
|
|
|
386.9 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect on years prior to 2005 of adopting accounting
for conditional asset retirement obligations
|
|
|
|
|
|
|
|
|
|
|
(4.7 |
) |
|
|
(4.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(788.3 |
) |
|
$ |
(746.8 |
) |
|
$ |
(753.7 |
) |
|
$ |
390.7 |
|
|
$ |
3,144.0 |
|
|
|
$ |
14.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months | |
|
|
|
|
ended | |
|
|
Year ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
Operating data (unaudited): |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
| |
Shipments (millions of pounds):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated products
|
|
|
372.3 |
|
|
|
458.6 |
|
|
|
481.9 |
|
|
|
365.2 |
|
|
|
399.7 |
|
|
Primary aluminum
|
|
|
158.7 |
|
|
|
156.6 |
|
|
|
155.6 |
|
|
|
115.7 |
|
|
|
117.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
531.0 |
|
|
|
615.2 |
|
|
|
637.5 |
|
|
|
480.9 |
|
|
|
516.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average realized third-party sales price (per pound):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated
products(6)
|
|
$ |
1.61 |
|
|
$ |
1.76 |
|
|
$ |
1.95 |
|
|
$ |
1.94 |
|
|
$ |
2.18 |
|
|
Primary
aluminum(7)
|
|
$ |
0.71 |
|
|
$ |
0.85 |
|
|
$ |
0.95 |
|
|
$ |
0.93 |
|
|
$ |
1.27 |
|
Capital expenditures, net of accounts payable (excluding
discontinued operations) (in millions)
|
|
$ |
8.9 |
|
|
$ |
7.6 |
|
|
$ |
31.0 |
|
|
$ |
20.4 |
|
|
$ |
39.7 |
|
(footnotes on following page)
8
|
|
|
|
|
|
|
As of | |
|
|
September 30, | |
Balance sheet data: |
|
2006 | |
| |
(dollars in millions) |
|
(unaudited) | |
Cash and cash equivalents
|
|
$ |
52.7 |
|
Working
capital(8)
|
|
|
212.1 |
|
Total assets
|
|
|
621.1 |
|
Long-term debt
|
|
|
50.0 |
|
Stockholders equity (deficit)
|
|
|
345.9 |
|
|
|
|
(1) |
We restated our operating results for the nine months ended
September 30, 2005. See Note 15 to our interim
consolidated financial statements for information regarding the
restatement. |
|
|
|
(2) |
Other operating charges (credits), net in 2003 and 2004
include certain significant charges associated with the
termination of certain pension and post-retirement medical
plans, a settlement in respect of a past labor matter and other
items. These items are detailed in Note 6 to our audited
consolidated financial statements and Note 10 to our
interim consolidated financial statements. |
|
|
|
(3) |
Excludes unrecorded contractual interest expense of
$95.0 million in each of 2003, 2004 and 2005,
$71.2 million for the nine months ended September 30,
2005 and $47.4 million for the period from January 1,
2006 to July 1, 2006. |
|
|
|
(4) |
Reorganization items for 2005 includes an approximate
$1.1 billion charge as a result of the value of an
intercompany note treated as being for the benefit of certain
creditors. See Note 1 to our audited consolidated financial
statements. Reorganization items for the period from
January 1, 2006 to July 1, 2006 includes a gain of
approximately $3.1 billion in connection with the
implementation of our plan of reorganization and fresh start
accounting. See Note 13 to our interim consolidated
financial statements. |
|
|
(5) |
Income (loss) from discontinued operations includes a
substantial impairment charge in 2003 and gains in 2004 and 2005
in connection with the sale of certain of our commodity-related
interests. See Note 3 to our audited consolidated financial
statements. |
|
|
(6) |
Average realized prices for our fabricated products business
unit are subject to fluctuations due to changes in product mix
as well as underlying primary aluminum prices and are not
necessarily indicative of changes in underlying
profitability. |
|
|
|
(7) |
Average realized prices for our primary aluminum business
unit exclude hedging revenues. |
|
|
|
(8) |
Working capital represents total current assets, including
cash, minus total current liabilities. |
|
9
Risk factors
An investment in our common stock involves various risks.
Before making an investment in our common stock, you should
carefully consider the following risks, as well as the other
information contained in this prospectus, including our
consolidated financial statements and the notes thereto and
Managements discussion and analysis of financial
condition and results of operations. The risks described
below are those which we believe are the material risks we face.
The occurrence of any of the events discussed below could
significantly and adversely affect our business, prospects,
financial condition, results of operations and cash flows. As a
result, the trading price of our common stock could decline and
you may lose a part or all of your investment.
RISKS RELATING TO OUR BUSINESS AND OUR INDUSTRY
We recently emerged from chapter 11 bankruptcy, have
sustained losses in the past and may not be able to maintain
profitability.
Because we recently emerged from chapter 11 bankruptcy and
have in the past sustained losses, we cannot assure you that we
will be able to maintain profitability in the future. We sought
protection under chapter 11 of the Bankruptcy Code in
February 2002. We emerged from bankruptcy as a reorganized
entity on July 6, 2006. Prior to and during this
reorganization, we incurred substantial net losses, including
net losses of $788.3 million, $746.8 million and
$753.7 million in the fiscal years ended December 31,
2003, 2004 and 2005, respectively. If we cannot maintain
profitability, the value of your investment in Kaiser may
decline.
You may not be able to compare our historical financial
information to our future financial information, which will make
it more difficult to evaluate an investment in our company.
As a result of the effectiveness of our plan of reorganization
on July 6, 2006, we are operating our business under a new
capital structure. In addition, we adopted fresh start
accounting in accordance with
SOP 90-7 as of
July 1, 2006. Because
SOP 90-7 requires
us to account for our assets and liabilities at their fair
values as of the effectiveness of our plan of reorganization,
our financial condition and results of operations from and after
July 1, 2006 will not be comparable in some material
respects to the financial condition or results of operations
reflected in our historical financial statements at dates or for
periods prior to July 1, 2006. This may make it difficult
to assess our future prospects based on historical performance.
We operate in a highly competitive industry which could
adversely affect our profitability.
The fabricated products segment of the aluminum industry is
highly competitive. Competition in the sale of fabricated
aluminum products is based upon quality, availability, price and
service, including delivery performance. Many of our competitors
are substantially larger than we are and have greater financial
resources than we do, and may have other strategic advantages,
including more efficient technologies or lower raw material and
energy costs. Our facilities are primarily located in North
America. To the extent that our competitors have production
facilities located outside North America, they may be able to
produce similar products at a lower cost. We may not be able to
adequately reduce costs to compete with these products.
Increased competition could cause a reduction in our shipment
volumes and profitability or increase our expenditures, any one
of which could have a material adverse effect on our financial
position, results of operations and cash flows.
We depend on a core group of significant customers.
In 2005 and for the nine months ended September 30, 2006,
our largest fabricated products customer, Reliance
Steel & Aluminum, accounted for approximately 11% and
19%, respectively, of our fabricated products net sales, and our
five largest customers accounted for approximately 33% and 42%,
respectively, of our fabricated products net sales. The increase
in the percentage of our net sales
10
Risk factors
to our largest fabricated products customer is the result of
Reliance acquiring one of our other top five customers in the
second quarter of 2006. Sales to Reliance and the other customer
(on a combined basis) accounted for approximately 19% of our net
sales in 2005 and for the nine months ended September 30,
2006. If our existing relationships with significant customers
materially deteriorate or are terminated and we are not
successful in replacing lost business, our financial position,
results of operations and cash flows could be materially and
adversely affected. The loss of Reliance as a customer could
have a material adverse effect on our financial position,
results of operations and cash flows. In addition, a significant
downturn in the business or financial condition of any of our
significant customers could materially and adversely affect our
financial position, results of operations and cash flows.
Some of our current and former international customers,
particularly automobile manufacturers in Europe and Japan, were
reluctant to do business with us while we underwent
chapter 11 bankruptcy reorganization, presumably because of
their unfamiliarity with U.S. bankruptcy laws and the
uncertainty about the strength of our business. Although we
believe our emergence from chapter 11 bankruptcy should
mitigate such reluctance, we cannot assure you that this will be
the case.
Our industry is very sensitive to foreign economic,
regulatory and political factors that may adversely affect our
business.
We import primary aluminum from, and manufacture fabricated
products used in, foreign countries. We also own 49% of
Anglesey, which owns and operates an aluminum smelter in the
United Kingdom. We purchase alumina to supply to Anglesey and we
purchase aluminum from Anglesey for sale to a third party in the
United Kingdom. Factors in the politically and economically
diverse countries in which we operate or have customers or
suppliers, including inflation, fluctuations in currency and
interest rates, competitive factors, civil unrest and labor
problems, could affect our financial position, results of
operations and cash flows. Our financial position, results of
operations and cash flows could also be adversely affected by:
|
|
|
acts of war or terrorism or the
threat of war or terrorism;
|
|
|
government regulation in the
countries in which we operate, service customers or purchase raw
materials;
|
|
|
the implementation of controls
on imports, exports or prices;
|
|
|
the adoption of new forms of
taxation;
|
|
|
the imposition of currency
restrictions;
|
|
|
the nationalization or
appropriation of rights or other assets; and
|
|
|
trade disputes involving
countries in which we operate, service customers or purchase raw
materials.
|
The aerospace industry is cyclical and downturns in the
aerospace industry, including downturns resulting from acts of
terrorism, could adversely affect our revenues and
profitability.
We derive a significant portion of our revenue from products
sold to the aerospace industry, which is highly cyclical and
tends to decline in response to overall declines in industrial
production. As a result, our business is affected by overall
levels of industrial production and fluctuations in the
aerospace industry. The commercial aerospace industry is
historically driven by the demand from commercial airlines for
new aircraft. Demand for commercial aircraft is influenced by
airline industry profitability, trends in airline passenger
traffic, by the state of U.S. and world economies and numerous
other factors, including the effects of terrorism. The military
aerospace cycle is highly dependent on U.S. and foreign
government funding; however, it is also driven by the effects of
terrorism, a changing global political environment,
U.S. foreign policy, regulatory changes, the retirement of
older aircraft and
11
Risk factors
technological improvements to new aircraft engines that increase
reliability. The timing, duration and severity of cyclical
upturns and downturns cannot be predicted with certainty. A
future downturn or reduction in demand could have a material
adverse effect on our financial position, results of operations
and cash flows.
In addition, because we and other suppliers are expanding
production capacity to alleviate the current supply shortage for
heat treat aluminum plate, heat treat plate prices may
eventually begin to decrease as production capacity increases.
Although we have implemented cost reduction and sales growth
initiatives to minimize the impact on our results of operations
as heat treat plate prices return to more typical historical
levels, these initiatives may not be adequate and our financial
position, results of operations and cash flows may be adversely
affected.
A number of major airlines have also recently undergone or are
undergoing chapter 11 bankruptcy and continue to experience
financial strain from high fuel prices. Continued financial
instability in the industry may lead to reduced demand for new
aircraft that utilize our products, which could adversely affect
our financial position, results of operations and cash flows.
The aerospace industry suffered significantly in the wake of the
events of September 11, 2001, resulting in a sharp decrease
globally in new commercial aircraft deliveries and order
cancellations or deferrals by the major airlines. This decrease
reduced the demand for our Aero/ HS products. While there has
been a recovery since 2001, the threat of terrorism and fears of
future terrorist acts could negatively affect the aerospace
industry and our financial position, results of operations and
cash flows.
Our customers may reduce their demand for aluminum products
in favor of alternative materials.
Our fabricated aluminum products compete with products made from
other materials, such as steel and composites, for various
applications. For instance, the commercial aerospace industry
has used and continues to evaluate the further use of
alternative materials to aluminum, such as composites, in order
to reduce the weight and increase the fuel efficiency of
aircraft. The willingness of customers to accept substitutions
for aluminum or the ability of large customers to exert leverage
in the marketplace to reduce the pricing for fabricated aluminum
products could adversely affect the demand for our products,
particularly our Aero/ HS products, and thus adversely affect
our financial position, results of operations and cash flows.
Downturns in the automotive industry could adversely affect
our net sales and profitability.
The demand for many of our general engineering and custom
products is dependent on the production of automobiles, light
trucks and heavy duty vehicles in North America. The automotive
industry is highly cyclical, as new vehicle demand is dependent
on consumer spending and is tied closely to the overall strength
of the North American economy. The North American automotive
industry is facing costly inventory corrections which could
adversely affect our net sales and profitability. Recent
production cuts announced by General Motors Corporation, Ford
Motor Company and DaimlerChrysler AG, as well as cutbacks in
heavy duty truck production, may adversely affect the demand for
our products. If the financial condition of these auto
manufacturers continues to be unsteady or if any of the three
seek restructuring or relief through bankruptcy proceedings, the
demand for our products may decline, adversely affecting our net
sales and profitability. Any decline in the demand for new
automobiles, particularly in the United States, could have a
material adverse effect on our financial position, results of
operations and cash flows. Seasonality experienced by the
automotive industry in the third and fourth quarters of the
calendar year also affects our financial position, results of
operations and cash flows.
12
Risk factors
Because our products are often components of our
customers products, reductions in demand for our products
may be more severe than, and may occur prior to reductions in
demand for, our customers products.
Our products are often components of the end-products of our
customers. Customers purchasing our fabricated aluminum
products, such as those in the cyclical automotive and aerospace
industries, generally require significant lead time in the
production of their own products. Therefore, demand for our
products may increase prior to demand for our customers
products. Conversely, demand for our products may decrease as
our customers anticipate a downturn in their respective
businesses. As demand for our customers products begins to
soften, our customers typically reduce or eliminate their demand
for our products and meet the reduced demand for their products
using their own inventory without replenishing that inventory,
which results in a reduction in demand for our products that is
greater than the reduction in demand for their products. This
amplified reduction in demand for our products in the event of a
downswing in our customers respective businesses may
adversely affect our financial position, results of operations
and cash flows.
Our business is subject to unplanned business interruptions
which may adversely affect our performance.
The production of fabricated aluminum products is subject to
unplanned events such as explosions, fires, inclement weather,
natural disasters, accidents, transportation interruptions and
supply interruptions. Operational interruptions at one or more
of our production facilities, particularly interruptions at our
Trentwood facility in Spokane, Washington where our production
of plate and sheet is concentrated, could cause substantial
losses in our production capacity. Furthermore, because
customers may be dependent on planned deliveries from us,
customers that have to reschedule their own production due to
our delivery delays may be able to pursue financial claims
against us, and we may incur costs to correct such problems in
addition to any liability resulting from such claims. Such
interruptions may also harm our reputation among actual and
potential customers, potentially resulting in a loss of
business. To the extent these losses are not covered by
insurance, our financial position, results of operations and
cash flows may be adversely affected by such events.
Covenants and events of default in our debt instruments could
limit our ability to undertake certain types of transactions and
adversely affect our liquidity.
Our revolving credit facility and term loan facility contain
negative and financial covenants and events of default that may
limit our financial flexibility and ability to undertake certain
types of transactions. For instance, we are subject to negative
covenants that restrict our activities, including restrictions
on creating liens, engaging in mergers, consolidations and sales
of assets, incurring additional indebtedness, providing
guaranties, engaging in different businesses, making loans and
investments, making certain dividends, debt and other restricted
payments, making certain prepayments of indebtedness, engaging
in certain transactions with affiliates and entering into
certain restrictive agreements. If we fail to satisfy the
covenants set forth in our revolving credit facility and term
loan facility or another event of default occurs under these
facilities, the maturity of the loans could be accelerated or,
in the case of the revolving credit facility, we could be
prohibited from borrowing for our working capital needs. If the
loans are accelerated and we do not have sufficient cash on hand
to pay all amounts due, we could be required to sell assets, to
refinance all or a portion of our indebtedness or to obtain
additional financing. Refinancing may not be possible and
additional financing may not be available on commercially
acceptable terms, or at all. If we cannot borrow under the
revolving credit facility to meet our working capital needs, we
would need to seek additional financing, if available, or
curtail our operations.
13
Risk factors
We depend on our subsidiaries for cash to meet our
obligations and pay any dividends.
We are a holding company. Our subsidiaries conduct all of our
operations and own substantially all of our assets.
Consequently, our cash flow and our ability to meet our
obligations or pay dividends to our stockholders depend upon the
cash flow of our subsidiaries and the payment of funds by our
subsidiaries to us in the form of dividends, tax sharing
payments or otherwise. Our subsidiaries ability to make
any payment will depend on their earnings, the terms of their
indebtedness (including the revolving credit facility and term
loan facility), tax considerations and legal restrictions.
We may not be able to successfully implement our productivity
and cost reduction initiatives.
We have undertaken and may continue to undertake productivity
and cost reduction initiatives to improve performance, including
deployment of company-wide business improvement methodologies,
such as the Kaiser Production System, which involves the
integrated utilization of application and advanced process
engineering and business improvement methodologies such as lean
enterprise, total productive maintenance and six sigma. We
cannot assure you that these initiatives will be completed or
beneficial to us or that any estimated cost saving from such
activities will be realized. Even if we are able to generate new
efficiencies successfully in the short to medium term, we may
not be able to continue to reduce cost and increase productivity
over the long term.
Our profitability could be adversely affected by increases in
the cost of raw materials.
The price of primary aluminum has historically been subject to
significant cyclical price fluctuations, and the timing of
changes in the market price of aluminum is largely
unpredictable. Although our pricing of fabricated aluminum
products is generally intended to pass the risk of price
fluctuations on to our customers, we may not be able to pass on
the entire cost of such increases to our customers or offset
fully the effects of higher costs for other raw materials, which
may cause our profitability to decline. There will also be a
potential time lag between increases in prices for raw materials
under our purchase contracts and the point when we can implement
a corresponding increase in price under our sales contracts with
our customers. As a result, we may be exposed to fluctuations in
raw materials prices, including aluminum, since, during the time
lag, we may have to bear the additional cost of the price
increase under our purchase contracts. If these events were to
occur, they could have a material adverse effect on our
financial position, results of operations and cash flows.
Furthermore, we are party to arrangements based on fixed prices
that include the primary aluminum price component, so that we
bear the entire risk of rising aluminum prices, which may cause
our profitability to decline. In addition, an increase in raw
materials prices may cause some of our customers to substitute
other materials for our products, adversely affecting our
results of operations due to both a decrease in the sales of
fabricated aluminum products and a decrease in demand for the
primary aluminum produced at Anglesey.
We are responsible for selling alumina to Anglesey in proportion
to our ownership percentage at a predetermined price. Such
alumina currently is purchased under contracts that extend
through 2007 at prices that are tied to primary aluminum prices.
We will need to secure a new alumina contract for the period
after 2007. We cannot assure you that we will be able to secure
a source of alumina at comparable prices. If we are unable to do
so, our financial position, results of operations and cash flows
associated with our primary aluminum business segment may be
adversely affected.
The price volatility of energy costs may adversely affect our
profitability.
Our income and cash flows depend on the margin above fixed and
variable expenses (including energy costs) at which we are able
to sell our fabricated aluminum products. The volatility in
costs of fuel, principally natural gas, and other utility
services, principally electricity, used by our production
facilities affect operating costs. Fuel and utility prices have
been, and will continue to be, affected by factors outside our
control, such as supply and demand for fuel and utility services
in both local and
14
Risk factors
regional markets. The price of the front-month futures contract
for natural gas per million British thermal units as reported on
NYMEX ranged between $4.43 and $9.58 in 2003, between $4.57 and
$8.75 in 2004, between $5.79 and $15.38 in 2005 and between
$5.89 and $11.43 in the nine month period ended
September 30, 2006. Typically, electricity prices fluctuate
with natural gas prices which increases our exposure to energy
costs. Future increases in fuel and utility prices may have an
adverse effect on our financial position, results of operations
and cash flows.
Our hedging programs may limit the income and cash flows we
would otherwise expect to receive if our hedging program were
not in place.
From time to time in the ordinary course of business, we may
enter into hedging transactions to limit our exposure to price
risks relating to primary aluminum prices, energy prices and
foreign currency. To the extent that these hedging transactions
fix prices or exchange rates and the prices for primary aluminum
exceed the fixed or ceiling prices established by these hedging
transactions or energy costs or foreign exchange rates are below
the fixed prices, our income and cash flows will be lower than
they otherwise would have been.
The expiration of the power agreement for Anglesey may
adversely affect our cash flows and affect our hedging
programs.
The agreement under which Anglesey receives power expires in
September 2009, and the nuclear facility which supplies such
power is scheduled to cease operations shortly thereafter. As of
the date of this prospectus, Anglesey has not identified a
source from which to obtain sufficient power to sustain its
operations on reasonably acceptable terms thereafter, and we
cannot assure you that Anglesey will be able to do so. If, as a
result, Angleseys aluminum production is curtailed or its
costs are increased, our cash flows may be adversely affected.
In addition, any decrease in Angleseys production would
reduce or eliminate the natural hedge against rising
primary aluminum prices created by our participation in the
primary aluminum market and, accordingly, we may deem it
appropriate to increase our hedging activity to limit exposure
to such price risks, potentially adversely affecting our
financial position, results of operations and cash flows.
If Anglesey cannot obtain sufficient power, Angleseys
operations will likely be shut down. Given the potential for
future shutdown and related costs, we expect that dividends from
Anglesey may be suspended or curtailed either temporarily or
permanently while Anglesey studies future cash requirements. The
shutdown process may involve significant costs to Anglesey which
would decrease or eliminate its ability to pay dividends. The
process of shutting down operations may involve transition
complications which may prevent Anglesey from operating at full
capacity until the expiration of the power contract. As a
result, our financial position, results of operations and cash
flows may be negatively affected even before the September 2009
expiration of the power contract.
Our ability to keep key management and other personnel in
place and our ability to attract management and other personnel
may affect our performance.
We depend on our senior executive officers and other key
personnel to run our business. The loss of any of these officers
or other key personnel could materially and adversely affect our
operations. Competition for qualified employees among companies
that rely heavily on engineering and technology is intense, and
the loss of qualified employees or an inability to attract,
retain and motivate additional highly skilled employees required
for the operation and expansion of our business could hinder our
ability to improve manufacturing operations, conduct research
activities successfully or develop marketable products.
15
Risk factors
Our production costs may increase and we may not sustain our
sales and earnings if we fail to maintain satisfactory labor
relations.
A significant number of our employees are represented by labor
unions under labor contracts with varying durations and
expiration dates. We may not be able to renegotiate our labor
contracts when they expire on satisfactory terms or at all. A
failure to do so may increase our costs or cause us to limit or
halt operations before a new agreement is reached. In addition,
our existing labor agreements may not prevent a strike or work
stoppage, and any work stoppage could have a material adverse
effect on our financial position, results of operations and cash
flows.
Our business is regulated by a wide variety of health and
safety laws and regulations and compliance may be costly and may
adversely affect our results of operations.
Our operations are regulated by a wide variety of health and
safety laws and regulations. Compliance with these laws and
regulations may be costly and could have a material adverse
effect on our results of operations. In addition, these laws and
regulations are subject to change at any time, and we can give
you no assurance as to the effect that any such changes would
have on our operations or the amount that we would have to spend
to comply with such laws and regulations as so changed.
Environmental compliance, clean up and damage claims may
decrease our cash flow and adversely affect our results of
operations.
We are subject to numerous environmental laws and regulations
with respect to, among other things: air and water emissions and
discharges; the generation, storage, treatment, transportation
and disposal of solid and hazardous waste; and the release of
hazardous or toxic substances, pollutants and contaminants into
the environment. Compliance with these environmental laws is and
will continue to be costly.
Our operations, including our operations conducted prior to our
emergence from chapter 11 bankruptcy, have subjected, and
may in the future subject, us to fines or penalties for alleged
breaches of environmental laws and to obligations to perform
investigations or clean up of the environment. We may also be
subject to claims from governmental authorities or third parties
related to alleged injuries to the environment, human health or
natural resources, including claims with respect to waste
disposal sites, the clean up of sites currently or formerly used
by us or exposure of individuals to hazardous materials. Any
investigation, clean-up or other remediation costs, fines or
penalties, or costs to resolve third-party claims may be costly
and could have a material adverse effect on our financial
position, results of operations and cash flows.
We have accrued, and will accrue, for costs relating to the
above matters that are reasonably expected to be incurred based
on available information. However, it is possible that actual
costs may differ, perhaps significantly, from the amounts
expected or accrued, and such differences could have a material
adverse effect on our financial position, results of operations
and cash flows. In addition, new laws or regulations or changes
to existing laws and regulations may occur, and we cannot assure
you as to the amount that we would have to spend to comply with
such new or amended laws and regulations or the effects that
they would have on our financial position, results of operations
and cash flows.
Other legal proceedings or investigations or changes in the
laws and regulations to which we are subject may adversely
affect our results of operations.
In addition to the environmental matters described above, we may
from time to time be involved in, or be the subject of,
disputes, proceedings and investigations with respect to a
variety of matters, including matters related to health and
safety, personal injury, employees, taxes and contracts, as well
as other disputes and proceedings that arise in the ordinary
course of business. It could be costly to defend against these
claims or any investigations involving them, whether meritorious
or not, and legal
16
Risk factors
proceedings and investigations could divert managements
attention as well as operational resources, negatively affecting
our financial position, results of operations and cash flows. It
could also be costly to make payments on account of any such
claims.
Additionally, as with the environmental laws and regulations to
which we are subject, the other laws and regulations which
govern our business are subject to change at any time, and we
cannot assure you as to the amount that we would have to spend
to comply with such laws and regulations as so changed or
otherwise as to the effect that any such changes would have on
our operations.
Product liability claims against us could result in
significant costs or negatively affect our reputation and could
adversely affect our results of operations.
We are sometimes exposed to warranty and product liability
claims. We cannot assure you that we will not experience
material product liability losses arising from such claims in
the future. We generally maintain insurance against many product
liability risks but we cannot assure you that our coverage will
be adequate for liabilities ultimately incurred. In addition, we
cannot assure you that insurance will continue to be available
to us on terms acceptable to us. A successful claim that exceeds
our available insurance coverage could have a material adverse
effect on our financial position, results of operations and cash
flows.
Our Trentwood expansion project may not be completed as
scheduled.
We are currently in the process of a $105 million expansion
of production capacity and gauge capability at our Trentwood
facility. While the project is currently on schedule to be
completed in 2008, with substantially all costs being incurred
in 2006 and 2007, our ability to fully complete this project,
and the timing and costs of doing so, are subject to various
risks associated with all major construction projects, many of
which are beyond our control, including technical or mechanical
problems. If we are unable to fully complete this project or if
the actual costs for this project exceed our current
expectations, our financial position, results of operations and
cash flows would be adversely affected. In addition, we have
contracts currently in place expected to be fulfilled with
production from the expanded facility. If completion of the
expansion is significantly delayed or the expansion is not fully
completed, we may not be able to meet shipping deadlines on time
or at all, which would adversely affect our results of
operations, may lead to litigation and may damage our
relationships with these customers and our reputation generally.
We may not be able to successfully execute our strategy of
growth through acquisitions.
A component of our growth strategy is to acquire fabricated
products assets in order to complement our product portfolio.
Our ability to do so will be dependent upon a number of factors,
including our ability to identify acceptable acquisition
candidates, consummate acquisitions on favorable terms,
successfully integrate acquired assets, obtain financing to fund
acquisitions and support our growth and many other factors
beyond our control. Risks associated with acquisitions include
those relating to:
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diversion of managements
time and attention from our existing business;
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challenges in managing the
increased scope, geographic diversity and complexity of
operations;
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difficulties in integrating the
financial, technological and management standards, processes,
procedures and controls of the acquired business with those of
our existing operations;
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liability for known or unknown
environmental conditions or other contingent liabilities not
covered by indemnification or insurance;
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greater than anticipated
expenditures required for compliance with environmental or other
regulatory standards or for investments to improve operating
results;
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17
Risk factors
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difficulties in achieving
anticipated operational improvements;
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incurrence of additional
indebtedness to finance acquisitions or capital expenditures
relating to acquired assets; and
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issuance of additional equity,
which could result in further dilution of the ownership
interests of existing stockholders.
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We may not be successful in acquiring additional assets, and any
acquisitions that we do consummate may not produce the
anticipated benefits or may have adverse effects on our
financial position, results of operations and cash flows.
We have reported one material weakness relating to hedge
accounting in our internal control over financial reporting,
which resulted in the restatement of our financial statements,
and one significant deficiency.
During the first quarter of 2006 as part of the reporting and
closing process relating to the preparation of our
December 31, 2005 financial statements, we concluded that
our controls and procedures were not effective as of
December 31, 2005 because a material weakness in internal
control over financial reporting existed relating to our
accounting for derivative financial instruments. A material
weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that
a material misstatement of our annual or interim financial
statements would not be prevented or detected. We concluded that
our procedures relating to hedging transactions were not
designed effectively and that our documentation did not comply
with certain accounting rules, thus requiring us to account for
our derivatives on a mark-to-market basis. While we are working
to modify our documentation, requalify certain derivative
transactions for treatment as hedges, and have engaged outside
experts to perform periodic reviews, we cannot assure you that
such improved controls will prevent any or all instances of
non-compliance. As a result of the material weakness, we
restated our financial statements for the quarters ended
March 31, 2005, June 30, 2005 and September 30,
2005 to reflect mark-to-market accounting. See
Managements discussion and analysis of financial
condition and results of operations Controls and
Procedures for more information. Until we requalify our
derivatives for hedge accounting treatment, we will not consider
this matter to be fully remediated.
We also concluded that the appropriate post-emergence accounting
treatment for VEBA payments made in 2005 required presentation
of VEBA payments as a reduction of pre-petition retiree medical
obligations rather than as a period expense, as we had concluded
in prior quarters. Our prior treatment of VEBA payments was
identified as a significant deficiency in our internal control
over financial reporting at December 31, 2005. We corrected
this deficiency during the preparation of our December 31,
2005 financial statements and, accordingly, such deficiency did
not exist at the end of subsequent periods.
Although we believe we have or will address these issues with
the remedial measures that we have implemented or plan to
implement, the measures we have taken to date and any future
measures may not be effective, and we may not be able to
implement and maintain effective internal control over financial
reporting in the future. In addition, other deficiencies in our
internal controls may be discovered in the future.
Any failure to implement new or improved controls, or
difficulties encountered in their implementation, could cause us
to fail to meet our reporting obligations or result in material
misstatements in our financial statements. Any such failure also
could affect the ability of our management to certify that our
internal controls are effective when it provides an assessment
of our internal control over financial reporting, and could
affect the results of our independent registered public
accounting firms attestation report regarding our
managements assessment. Inferior internal
18
Risk factors
controls and further related restatements could also cause
investors to lose confidence in our reported financial
information, which could have a negative effect on the trading
price of our stock.
We will be exposed to risks relating to evaluations of
controls required by Section 404 of the Sarbanes-Oxley Act
of 2002.
We are required to comply with Section 404 of the
Sarbanes-Oxley Act of 2002 by no later than December 31,
2007. We are in the process of evaluating our internal controls
systems to allow management to report on, and our independent
auditors to audit, our internal controls over financial
reporting. We will be performing the system and process
evaluation and testing (and any necessary remediation) required
to comply with the management certification and auditor
attestation requirements of Section 404. However, we cannot
be certain as to the timing of completion of our evaluation,
testing and remediation actions or the impact of the same on our
operations. Furthermore, upon completion of this process, we may
identify control deficiencies of varying degrees of severity
under applicable Securities and Exchange Commission and Public
Company Accounting Oversight Board rules and regulations that
remain unremediated. We will be required to report, among other
things, control deficiencies that constitute a material
weakness or changes in internal controls that, or are
reasonably likely to, materially affect internal controls over
financial reporting. A material weakness is a
significant deficiency, or combination of significant
deficiencies that results in more than a remote likelihood that
a material misstatement of the annual or interim financial
statements will not be prevented or detected. If we fail to
implement the requirements of Section 404 in a timely
manner, we might be subject to sanctions or investigation by
regulatory authorities such as the Securities and Exchange
Commission or by Nasdaq. Additionally, failure to comply with
Section 404 or the report by us of a material weakness may
cause investors to lose confidence in our financial statements
and our stock price may be adversely affected. If we fail to
remedy any material weakness, our financial statements may be
inaccurate, we may not have access to the capital markets, and
our stock price may be adversely affected.
We may not be able to adequately protect proprietary rights
to our technology.
Our success will depend in part upon our proprietary technology
and processes. Although we attempt to protect our intellectual
property through patents, trademarks, trade secrets, copyrights,
confidentiality and nondisclosure agreements and other measures,
these measures may not be adequate to protect such intellectual
property, particularly in foreign countries where the laws may
offer significantly less intellectual property protection than
is offered by the laws of the United States. In addition, any
attempts to enforce our intellectual property rights, even if
successful, could result in costly and prolonged litigation,
divert managements attention and adversely affect income
and cash flows. Failure to adequately protect our intellectual
property may adversely affect our results of operations as our
competitors would be able to utilize such property without
having had to incur the costs of developing it, thus potentially
reducing our relative profitability. Furthermore, we may be
subject to claims that our technology infringes the intellectual
property rights of another. Even if without merit, those claims
could result in costly and prolonged litigation, divert
managements attention and adversely affect our income and
cash flows. In addition, we may be required to enter into
licensing agreements in order to continue using technology that
is important to our business. However, we may be unable to
obtain license agreements on acceptable terms, which could
negatively affect our financial position, results of operations
and cash flows.
We may not be able to utilize all of our net operating loss
carry-forwards.
We have net operating loss carry-forwards and other significant
tax attributes that we believe could together offset in the
range of $550 to $900 million of otherwise taxable income.
The amount of net operating loss carry-forwards available in any
year to offset our net taxable income will be reduced or
eliminated if we experience a change of ownership as
defined in the Internal Revenue Code. We have entered into a
stock transfer restriction agreement with the Union VEBA Trust,
our largest stockholder, and our certificate of incorporation
prohibits and voids certain transfers of our common stock in
order to
19
Risk factors
reduce the risk that a change of ownership will jeopardize our
net operating loss carry-forwards. See Description of
capital stockRestrictions on Transfer of Common
Stock. Because U.S. tax law limits the time during
which carry-forwards may be applied against future taxes, we may
not be able to take full advantage of the carry-forwards for
federal income tax purposes. In addition, the tax laws
pertaining to net operating loss carry-forwards may be changed
from time to time such that the net operating loss
carry-forwards may be reduced or eliminated. If the net
operating loss carry-forwards become unavailable to us or are
fully utilized, our future income will not be shielded from
federal income taxation, thereby reducing funds otherwise
available for general corporate purposes.
RISKS RELATING TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR
COMMON STOCK
Our current common stock has a limited trading history and a
small public float which may limit development of a market for
our common stock and increase the likelihood of significant
volatility in the market for our common stock.
In order to reduce the risk that any change in our ownership
would jeopardize the preservation of our federal income tax
attributes, including net operating loss carry-forwards, for
purposes of Sections 382 and 383 of the Internal Revenue
Code, upon emergence from chapter 11 bankruptcy, we entered
into a stock transfer restriction agreement with our largest
stockholder, the Union VEBA Trust, and amended and restated our
certificate of incorporation to include restrictions on
transfers involving 5% ownership. These transfer restrictions
could hinder development of an active market for our common
stock. In addition, the market price of our common stock may be
subject to significant fluctuations in response to numerous
factors, including variations in our annual or quarterly
financial results or those of our competitors, changes by
financial analysts in their estimates of our future earnings,
substantial amounts of our common stock being sold into the
public markets upon the expiration of share transfer
restrictions, which expire in July 2016, or upon the occurrence
of certain events relating to tax benefits available under
section 382 of the Internal Revenue Code, conditions in the
economy in general or in the fabricated aluminum products
industry in particular or unfavorable publicity.
Our net sales, operating results and profitability may vary
from period to period, which may lead to volatility in the
trading price of our stock.
Our financial and operating results may be significantly below
the expectations of public market analysts and investors and the
price of our common stock may decline due to the following
factors:
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volatility in the spot market
for primary aluminum and energy costs;
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our annual accruals for variable
payment obligations to the Union VEBA Trust and Salaried Retiree
VEBA Trust (see Note 7 to our interim consolidated
financial statements);
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non-cash charges including
last-in, first-out, or LIFO, inventory charges and impairments;
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global economic conditions;
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unanticipated interruptions of
our operations for any reason;
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variations in the maintenance
needs for our facilities;
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unanticipated changes in our
labor relations; and
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cyclical aspects impacting
demand for our products.
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Our annual variable payment obligation to the Union VEBA
Trust and Salaried Retiree VEBA Trust are linked with our
profitability, which means that not all of our earnings will be
available to our stockholders.
We are obligated to make annual payments to the Union VEBA Trust
and Salaried Retirees VEBA Trust calculated based on our
profitability and therefore not all of our earnings will be
available to our stockholders. The aggregate amount of our
annual payments to these VEBAs is capped, however, at
$20 million and is subject to other limitations. As a
result of these payment obligations, our earnings and cash flows
may be reduced.
20
Risk factors
A significant percentage of our stock is held by the Union
VEBA Trust which may exert significant influence over us.
The Union VEBA Trust currently owns 42.9% of our common stock.
After completion of this offering, the Union VEBA Trust will
hold 30.7% of our common stock, or 28.8% if the underwriters
exercise their over-allotment option in full. As a result, the
Union VEBA Trust will continue to have significant influence
over matters requiring stockholder approval, including the
composition of our board of directors. Further, to the extent
that the Union VEBA Trust and some or all of the other
substantial stockholders were to act in concert, they could
control any action taken by our stockholders. This concentration
of ownership could also facilitate or hinder proxy contests,
tender offers, open market purchase programs, mergers or other
purchases of our common stock that might otherwise give
stockholders the opportunity to realize a premium over the then
prevailing market price of our common stock or cause the market
price of our common stock to decline. We cannot assure you that
the interests of our major stockholders will not conflict with
our interests or the interests of our other investors.
The USW has director nomination rights through which it may
influence us, and USW interests may not align with our interests
or the interests of our other investors.
Pursuant to an agreement, the United Steel, Paper and Forestry,
Rubber, Manufacturing, Energy, Allied Industrial and Service
Workers International Union, AFL-CIO, CLC, or USW, has been
granted rights to nominate 40% of the candidates to be submitted
to our stockholders for election to our board of directors. As a
result, the directors nominated by the USW may have a
significant voice in the decisions of our board of directors.
We do not currently anticipate paying any dividends, and our
payment of dividends and stock repurchases are subject to
restriction.
We have not declared or paid any cash dividends on our common
stock since we filed chapter 11 bankruptcy in 2002. We
currently intend to retain all earnings for the operation and
expansion of our business and do not currently anticipate paying
any dividends on our common stock. The declaration and payment
of dividends, if any, in the future will be at the discretion of
the board of directors and will be dependent upon our results of
operations, financial condition, cash requirements, future
prospects and other factors. Accordingly, from time to time, the
board may declare dividends, though we can give you no assurance
in this regard. Moreover, our revolving credit facility and our
term loan facility restrict our ability to declare or pay
dividends or repurchase any shares of our common stock. In
addition, significant repurchases of our shares of common stock
may jeopardize the preservation of our federal income tax
attributes, including our net operating loss carry-forwards.
Our certificate of incorporation includes transfer
restrictions that may void transactions in our common stock
effected by 5% stockholders.
Our certificate of incorporation places restrictions on transfer
of our equity securities if either (1) the transferor holds
5% or more of the fair market value of all of our issued and
outstanding equity securities or (2) as a result of the
transfer, either any person would become such a 5% stockholder
or the percentage stock ownership of any such 5% stockholder
would be increased. These restrictions are subject to exceptions
described in Description of capital stock. Any
transfer that violates these restrictions will be unwound as
provided in our certificate of incorporation. Moreover, as
indicated below, these provisions may make our stock less
attractive to large institutional holders, and may also
discourage potential acquirers from attempting to take over our
company. As a result, these transfer restrictions may have the
effect of delaying or deterring a change of control of our
company and may limit the price that investors might be willing
to pay in the future for shares of our common stock.
21
Risk factors
Delaware law, our governing documents and the stock transfer
restriction agreement we entered into as part of our plan of
reorganization may impede or discourage a takeover, which could
adversely affect the value of our common stock.
Provisions of Delaware law, our certificate of incorporation and
the stock transfer restriction agreement with the Union VEBA
Trust may have the effect of discouraging a change of control of
our company or deterring tender offers for our common stock. We
are currently subject to anti-takeover provisions under Delaware
law. These anti-takeover provisions impose various impediments
to the ability of a third party to acquire control of us, even
if a change of control would be beneficial to our existing
stockholders. Additionally, provisions of our certificate of
incorporation and bylaws impose various procedural and other
requirements, which could make it more difficult for
stockholders to effect some corporate actions. For example, our
certificate of incorporation authorizes our board of directors
to determine the rights, preferences and privileges and
restrictions of unissued shares of preferred stock without any
vote or action by our stockholders. Thus, our board of directors
can authorize and issue shares of preferred stock with voting or
conversion rights that could adversely affect the voting or
other rights of holders of common stock. Our certificate of
incorporation also divides our board of directors into three
classes of directors who serve for staggered terms. A
significant effect of a classified board of directors may be to
deter hostile takeover attempts because an acquirer could
experience delays in replacing a majority of directors.
Moreover, stockholders are not permitted to call a special
meeting. As indicated above, our certificate of incorporation
prohibits certain transactions in our common stock involving 5%
stockholders or parties who would become 5% stockholders as a
result of the transaction. In addition, we are party to a stock
transfer restriction agreement with the Union VEBA Trust which
limits its ability to transfer our common stock. The general
effect of the transfer restrictions in the stock transfer
restriction agreement and our certificate of incorporation is to
ensure that a change in ownership of more than 45% of our
outstanding common stock cannot occur in any three-year period.
These rights and provisions may have the effect of delaying or
deterring a change of control of our company and may limit the
price that investors might be willing to pay in the future for
shares of our common stock. See Description of capital
stock.
22
Special note regarding forward-looking statements
This prospectus contains statements which constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These
statements appear throughout this prospectus, including in the
sections entitled Prospectus summary, Risk
factors, Managements discussion and analysis
of financial condition and results of operations, Recent
reorganization, Industry overview and
Business. These forward-looking 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 of
the foregoing or other variations thereon or comparable
terminology, or by discussions of strategy.
Potential investors 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 from those in the forward-looking statements as a result of
various factors. These factors include:
|
|
|
the effectiveness of
managements strategies and decisions;
|
|
|
general economic and business
conditions, including cyclicality and other conditions in the
aerospace and other end markets we serve;
|
|
|
developments in technology;
|
|
|
new or modified statutory or
regulatory requirements;
|
|
|
changing prices and market
conditions; and
|
|
|
the other factors discussed
under Risk factors.
|
Potential investors are urged to consider these factors and the
other factors described under Risk factors carefully
in evaluating any forward-looking statements and are cautioned
not to place undue reliance on these forward-looking statements.
The forward-looking statements included herein are made only as
of the date of this prospectus, and we undertake no obligation
to update any information contained in this prospectus or to
publicly release the results of any revisions to any
forward-looking statements that may be made to reflect events or
circumstances that occur, or that we become aware of, after the
date of this prospectus.
23
Use of proceeds
All of the shares of common stock offered in this prospectus are
being sold by the selling stockholder. We will not receive any
proceeds from the sale of shares by the selling stockholder.
Dividend policy
We have not declared or paid any cash dividends on our common
stock since we filed chapter 11 bankruptcy in 2002. We
currently intend to retain all earnings for the operation and
expansion of our business and do not currently anticipate paying
any dividends on our common stock. The declaration and payment
of dividends, if any, in the future will be at the discretion of
the board of directors and will be dependent upon our results of
operations, financial condition, cash requirements, future
prospects and other factors. Accordingly, from time to time, the
board may declare dividends, though we can give no assurance in
this regard.
In addition, our revolving credit facility and our term loan
facility restrict our ability to declare or pay, directly or
indirectly, dividends. Under these credit arrangements we may
pay cash dividends only if:
|
|
|
we are not in default or would
not be in default as a result of the dividend; and
|
|
|
the amount of the dividends,
together with the aggregate amount of all other dividend
payments made by us after July 6, 2006, is less than the
sum of (1) 50% of our net income for the period from
July 6, 2006 to the end of our most recently ended fiscal
quarter or if such net income is a deficit, less 100% of such
deficit, (2) up to 100% of the proceeds to us from the sale
or issuance of any of our equity securities remaining after
making any mandatory prepayment under the revolving credit
facility and term loan facility from the proceeds, provided that
the proceeds are not used to make any investments or other
dividend payments, and (3) $2.0 million.
|
We cannot assure you that we will ever pay dividends or, if we
do, as to the amount, frequency or form of any dividends.
Price range of common stock
Our common stock is traded on the Nasdaq Global Market under the
symbol KALU. The following table sets forth the high
and low sales prices of our common stock for each quarterly
period since our common stock began trading on the Nasdaq Global
Market on July 7, 2006:
|
|
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|
|
|
|
|
|
|
|
High | |
|
Low | |
| |
2006:
|
|
|
|
|
|
|
|
|
Third Quarter 2006 (from July 7, 2006)
|
|
$ |
51.00 |
|
|
$ |
36.50 |
|
Fourth Quarter 2006 (through November 20, 2006)
|
|
$ |
50.56 |
|
|
$ |
43.00 |
|
|
On November 20, 2006, the last reported sale price for our
common stock on the Nasdaq Global Market was $49.60 per
share. As of October 31, 2006, there were approximately
406 common stockholders of record.
24
Capitalization
The following table sets forth our cash and cash equivalents and
our consolidated capitalization as of September 30, 2006.
You should read this table in conjunction with Selected
historical consolidated financial data,
Managements discussion and analysis of financial
condition and results of operations and our consolidated
financial statements and the notes thereto included elsewhere in
this prospectus.
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|
|
|
|
|
|
|
|
As of | |
|
|
September 30, | |
|
|
2006 | |
| |
(dollars in millions, except share and per share amounts) |
|
|
Cash and cash equivalents
|
|
$ |
52.7 |
|
|
|
|
|
Debt, including current portion
|
|
|
|
|
|
Revolving credit facility
|
|
$ |
|
|
|
Term loan facility
|
|
|
50.0 |
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
50.0 |
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Common stock, $0.01 par value, 45,000,000 shares
authorized; 20,525,660 shares issued and
outstanding(1)
|
|
|
0.2 |
|
|
Additional capital
|
|
|
482.5 |
|
|
Retained earnings
|
|
|
14.3 |
|
|
Common stock owned by the Union VEBA Trust subject to transfer
restrictions, at reorganization value, 6,291,945 shares at
September 30,
2006(2)
|
|
|
(151.1 |
) |
|
|
|
|
|
|
Total stockholders equity
|
|
|
345.9 |
|
|
|
|
|
|
|
Total capitalization
|
|
|
395.9 |
|
|
|
|
|
|
|
|
(1) |
Excludes 1,696,562 shares of common stock reserved and
available for issuance under our Equity Incentive Plan. |
|
|
|
(2) |
See Note 7 to our interim consolidated financial
statements for a discussion of the treatment of the Union VEBA
Trusts shares that are subject to transfer
restrictions. |
|
25
Selected historical consolidated financial data
The following table sets forth selected historical consolidated
financial data for our company. The selected consolidated
statement of income data for the years ended December 31,
2001 and 2002, and the selected consolidated balance sheet data
as of December 31, 2001, 2002 and 2003, are derived from
our audited consolidated financial statements for the years
ended December 31, 2001, 2002 and 2003, which are not
included in this prospectus. The selected consolidated statement
of income data for the years ended December 31, 2003, 2004
and 2005, and the selected consolidated balance sheet data as of
December 31, 2004 and 2005, are derived from our audited
consolidated financial statements included elsewhere in this
prospectus.
As a result of the effectiveness of our plan of reorganization
on July 6, 2006, we adopted fresh start accounting in
accordance with
SOP 90-7 as of
July 1, 2006. Because
SOP 90-7 requires
us to restate our stockholders equity to our
reorganization value and to allocate such value to our assets
and liabilities based on their fair values, our financial
condition and results of operations after June 30, 2006
will not be comparable in some material respects to the
financial condition or results of operations reflected in our
historical financial statements at dates or for periods prior to
July 1, 2006. This makes it difficult to assess our future
prospects based on historical performance.
Our emergence from chapter 11 bankruptcy and adoption of
fresh start accounting resulted in a new reporting entity for
accounting purposes. Although we emerged from chapter 11
bankruptcy on July 6, 2006, we adopted fresh start
accounting under the provisions of
SOP 90-7 effective
as of the beginning of business on July 1, 2006. As such,
it was assumed that the emergence was completed instantaneously
at the beginning of business on July 1, 2006 such that all
operating activities during the three months ended
September 30, 2006 are reported as applying to the new
reporting entity. We believe that this is a reasonable
presentation as there were no material transactions between
July 1, 2006 and July 6, 2006 other than plan of
reorganization-related transactions.
The accompanying financial statements include our financial
statements for both before and after emergence. Financial
information related to the newly emerged entity is generally
referred to throughout this prospectus as successor
information and financial information related to the
pre-emergence entity is generally referred to as
predecessor information. The financial information
of the successor entity is not comparable to that of the
predecessor given the effect of the plan of reorganization,
implementation of fresh start reporting and other factors.
The selected consolidated financial data as of and for the
nine months ended September 30, 2005 and 2006 are
derived from our unaudited consolidated financial statements
included elsewhere in this prospectus. We have prepared our
unaudited consolidated financial statements on the same basis as
our audited consolidated financial statements (except as set
forth in Note 2 of our interim consolidated financial
statements) and have included all adjustments, consisting of
normal and recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating
results for the unaudited periods. The selected consolidated
financial and operating data as of and for the nine months
ended September 30, 2005 and 2006 are not necessarily
indicative of the results that may be obtained for a full year.
26
Selected historical consolidated financial data
The following selected consolidated financial data should be
read in conjunction with Managements discussion and
analysis of financial condition and results of operations
and the consolidated financial statements and notes thereto
included elsewhere in this prospectus.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
|
|
|
|
|
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September 30, 2006 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
|
|
|
|
Predecessor | |
|
period from | |
|
Period from | |
|
|
Predecessor | |
|
nine months | |
|
January 1, | |
|
July 1, 2006 | |
|
|
year ended December 31, | |
|
ended | |
|
2006 | |
|
through | |
|
|
| |
|
September 30, | |
|
to July 1, | |
|
September 30, | |
Statements of income data: |
|
2001(1) | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
| |
(dollars in millions, except share and per share data) |
|
|
|
|
(unaudited) | |
|
(unaudited) | |
|
(unaudited) | |
|
|
|
|
(restated)(2) | |
|
|
|
|
Net sales
|
|
$ |
889.5 |
|
|
$ |
709.0 |
|
|
$ |
710.2 |
|
|
$ |
942.4 |
|
|
$ |
1,089.7 |
|
|
$ |
815.9 |
|
|
$ |
689.8 |
|
|
$ |
331.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
823.4 |
|
|
|
671.4 |
|
|
|
681.2 |
|
|
|
852.2 |
|
|
|
951.1 |
|
|
|
710.9 |
|
|
|
596.4 |
|
|
|
291.8 |
|
|
Depreciation and amortization
|
|
|
32.1 |
|
|
|
32.3 |
|
|
|
25.7 |
|
|
|
22.3 |
|
|
|
19.9 |
|
|
|
15.0 |
|
|
|
9.8 |
|
|
|
2.8 |
|
|
Selling, administrative, research and development, and general
|
|
|
93.7 |
|
|
|
118.6 |
|
|
|
92.5 |
|
|
|
92.3 |
|
|
|
50.9 |
|
|
|
38.0 |
|
|
|
30.3 |
|
|
|
18.0 |
|
|
Other operating charges (credits),
net(3)
|
|
|
30.1 |
|
|
|
31.8 |
|
|
|
141.6 |
|
|
|
793.2 |
|
|
|
8.0 |
|
|
|
6.5 |
|
|
|
0.9 |
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
979.3 |
|
|
|
854.1 |
|
|
|
941.0 |
|
|
|
1,760.0 |
|
|
|
1,029.9 |
|
|
|
770.4 |
|
|
|
637.4 |
|
|
|
309.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(89.8 |
) |
|
|
(145.1 |
) |
|
|
(230.8 |
) |
|
|
(817.6 |
) |
|
|
59.8 |
|
|
|
45.5 |
|
|
|
52.4 |
|
|
|
21.7 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense(4)
|
|
|
(106.2 |
) |
|
|
(19.0 |
) |
|
|
(9.1 |
) |
|
|
(9.5 |
) |
|
|
(5.2 |
) |
|
|
(4.2 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
Reorganization
items(5)
|
|
|
|
|
|
|
(33.3 |
) |
|
|
(27.0 |
) |
|
|
(39.0 |
) |
|
|
(1,162.1 |
) |
|
|
(25.3 |
) |
|
|
3,093.1 |
|
|
|
|
|
|
Other, net
|
|
|
(68.7 |
) |
|
|
(0.9 |
) |
|
|
(5.2 |
) |
|
|
4.2 |
|
|
|
(2.4 |
) |
|
|
(1.5 |
) |
|
|
1.2 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and discontinued operations
|
|
|
(264.7 |
) |
|
|
(198.3 |
) |
|
|
(272.1 |
) |
|
|
(861.9 |
) |
|
|
(1,109.9 |
) |
|
|
14.5 |
|
|
|
3,145.9 |
|
|
|
22.6 |
|
Provision for income taxes
|
|
|
(523.4 |
) |
|
|
(4.4 |
) |
|
|
(1.5 |
) |
|
|
(6.2 |
) |
|
|
(2.8 |
) |
|
|
(6.0 |
) |
|
|
(6.2 |
) |
|
|
(8.3 |
) |
Minority interests
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(788.3 |
) |
|
|
(202.7 |
) |
|
|
(273.6 |
) |
|
|
(868.1 |
) |
|
|
(1,112.7 |
) |
|
|
8.5 |
|
|
|
3,139.7 |
|
|
|
14.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of income taxes,
including minority interests
|
|
|
165.3 |
|
|
|
(266.0 |
) |
|
|
(514.7 |
) |
|
|
(5.3 |
) |
|
|
(2.5 |
) |
|
|
21.3 |
|
|
|
4.3 |
|
|
|
|
|
|
Gain from sale of commodity interests
|
|
|
163.6 |
|
|
|
|
|
|
|
|
|
|
|
126.6 |
|
|
|
366.2 |
|
|
|
365.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations(6)
|
|
|
328.9 |
|
|
|
(266.0 |
) |
|
|
(514.7 |
) |
|
|
121.3 |
|
|
|
363.7 |
|
|
|
386.9 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect on years prior to 2005 of adopting accounting
for conditional asset retirement obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.7 |
) |
|
|
(4.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(459.4 |
) |
|
$ |
(468.7 |
) |
|
$ |
(788.3 |
) |
|
$ |
(746.8 |
) |
|
$ |
(753.7 |
) |
|
$ |
390.7 |
|
|
$ |
3,144.0 |
|
|
$ |
14.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
basic(7):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
(9.82 |
) |
|
$ |
(2.52 |
) |
|
$ |
(3.41 |
) |
|
$ |
(10.88 |
) |
|
$ |
(13.97 |
) |
|
$ |
0.11 |
|
|
$ |
39.42 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$ |
4.09 |
|
|
$ |
(3.30 |
) |
|
$ |
(6.42 |
) |
|
$ |
1.52 |
|
|
$ |
4.57 |
|
|
$ |
4.85 |
|
|
$ |
0.05 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from cumulative effect on years prior to 2005 of adopting
accounting for conditional asset retirement obligations
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(5.73 |
) |
|
$ |
(5.82 |
) |
|
$ |
(9.83 |
) |
|
$ |
(9.36 |
) |
|
$ |
(9.46 |
) |
|
$ |
4.90 |
|
|
$ |
39.47 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per
sharediluted(7):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
(9.82 |
) |
|
$ |
(2.52 |
) |
|
$ |
(3.41 |
) |
|
$ |
(10.88 |
) |
|
$ |
(13.97 |
) |
|
$ |
0.11 |
|
|
$ |
39.42 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$ |
4.09 |
|
|
$ |
(3.30 |
) |
|
$ |
(6.42 |
) |
|
$ |
1.52 |
|
|
$ |
4.57 |
|
|
$ |
4.85 |
|
|
$ |
0.05 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from cumulative effect on years prior to 2005 of adopting
accounting for conditional asset retirement obligations
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$ |
(5.73 |
) |
|
$ |
(5.82 |
) |
|
$ |
(9.83 |
) |
|
$ |
(9.36 |
) |
|
$ |
(9.46 |
) |
|
$ |
4.90 |
|
|
$ |
39.47 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
80,235 |
|
|
|
80,578 |
|
|
|
80,175 |
|
|
|
79,815 |
|
|
|
79,675 |
|
|
|
79,676 |
|
|
|
79,672 |
|
|
|
20,002 |
|
|
Diluted
|
|
|
80,235 |
|
|
|
80,578 |
|
|
|
80,175 |
|
|
|
79,815 |
|
|
|
79,675 |
|
|
|
79,676 |
|
|
|
79,672 |
|
|
|
20,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(footnotes on following page) |
27
Selected historical consolidated financial data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
As of September 30, | |
|
|
| |
|
| |
Balance sheet data: |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
| |
(dollars in millions) |
|
|
|
(unaudited) | |
|
|
|
|
(restated) | |
|
(2) | |
Cash and cash equivalents
|
|
$ |
154.1 |
|
|
$ |
77.4 |
|
|
$ |
35.5 |
|
|
$ |
55.4 |
|
|
$ |
49.5 |
|
|
|
43.3 |
|
|
$ |
52.7 |
|
Working
capital(8)
|
|
|
(44.2 |
) |
|
|
183.0 |
|
|
|
104.9 |
|
|
|
73.0 |
|
|
|
119.7 |
|
|
|
85.6 |
|
|
|
212.1 |
|
Total assets
|
|
|
2,743.7 |
|
|
|
2,225.4 |
|
|
|
1,623.5 |
|
|
|
1,882.4 |
|
|
|
1,538.9 |
|
|
|
2,197.8 |
|
|
|
621.1 |
|
Long-term debt
|
|
|
678.7 |
|
|
|
20.7 |
|
|
|
2.2 |
|
|
|
2.8 |
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
50.0 |
|
Stockholders equity (deficit)
|
|
|
(441.1 |
) |
|
|
(1,085.6 |
) |
|
|
(1,738.7 |
) |
|
|
(2,384.2 |
) |
|
|
(3,141.2 |
) |
|
|
(2,006.8 |
) |
|
|
345.9 |
|
|
|
|
(1) |
Statement of income data and balance sheet data for 2001
reflect our financial results and position prior to our filing
for chapter 11 bankruptcy in February 2002. Such data
includes the impact of our concluding a valuation allowance was
required in respect of recorded tax attributes and from the
partial sale of one of our commodity-related interests. |
|
|
(2) |
We restated our operating results for the nine months ended
September 30, 2005. See Note 15 to our interim
consolidated financial statements for information regarding the
restatement. |
|
|
|
(3) |
Other operating charges (credits), net in 2003 and 2004
include certain significant charges associated with the
termination of certain pension and post-retirement medical
plans, a settlement in respect of a past labor matter and other
items. These items are detailed in Note 6 to our audited
consolidated financial statements and Note 10 to our
interim consolidated financial statements. |
|
|
|
(4) |
Excludes unrecorded contractual interest expense of
$84.0 million in 2002, $95.0 million in each of 2003,
2004 and 2005, $71.2 million for the nine months ended
September 30, 2005 and $47.4 million for the period
from January 1, 2006 to July 1, 2006. |
|
|
|
(5) |
Reorganization items for 2005 includes an approximate
$1.1 billion charge as a result of the value of an
intercompany note treated as being for the benefit of certain
creditors. See Note 1 to our audited consolidated financial
statements. Reorganization items for the period from
January 1, 2006 to July 1, 2006 includes a gain of
approximately $3.1 billion in connection with the
implementation of our plan of reorganization and fresh start
accounting. See Note 13 to our interim consolidated
financial statements. |
|
|
(6) |
Income (loss) from discontinued operations includes the
operating results associated with commodity interests sold as
well as certain significant gains and losses associated with the
dispositions. See Note 3 to our audited consolidated
financial statements for information in respect of 2003, 2004
and 2005. |
|
|
(7) |
Earnings (loss) per share and share information prior to our
emergence from chapter 11 bankruptcy may not be meaningful
because, pursuant to our plan of reorganization, on July 6,
2006, all outstanding equity interests were cancelled without
consideration. |
|
|
|
(8) |
Working capital represents total current assets, including
cash, minus total current liabilities. |
|
28
Managements discussion and analysis of financial condition
and results of operations
You should read the following discussion together with the
consolidated financial statements and the notes thereto included
elsewhere in this prospectus. This discussion contains
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The cautionary
statements made in this prospectus should be read as applying to
all related forward-looking statements wherever they appear in
this prospectus. Forward-looking statements are not guarantees
of future performance and involve significant risks and
uncertainties. Actual results may vary from those in
forward-looking statements as a result of a number of factors,
including those we discuss under Risk factors and
elsewhere in this prospectus. You should read Risk
factors and Special note regarding forward-looking
statements.
In the discussion of operating results below, certain items
are referred to as non-run-rate items. For purposes of each
discussion, non-run-rate items are items that, while they may
recur from period to period, are (1) particularly material
to results, (2) affect costs as a result of external market
factors, and (3) may not recur in future periods if the
same level of underlying performance were to occur. Non-run-rate
items are part of our business and operating environment but are
worthy of being highlighted for benefit of the users of the
financial statements. Our intent is to allow users of the
financial statements to consider our results both in light of
and separately from fluctuations in underlying metal prices.
The following discussion gives effect to the restatement
discussed in Note 15 of our notes to interim consolidated
financial statements.
OVERVIEW
Our primary line of business is the production and sale of
fabricated aluminum products. In addition, we own a 49% interest
in Anglesey, an aluminum smelter. Historically, we operated in
all principal sectors of the aluminum industry including the
production and sale of bauxite, alumina and primary aluminum in
domestic and international markets. However, as a part of our
reorganization, we sold substantially all of our commodities
operations other than Anglesey. The balances and results of
operations in respect of the commodities interests sold
(including our interests in and related to Queensland Alumina
Limited, or QAL, sold in April 2005) are now considered
discontinued operations.
Changes in global, regional, or country-specific economic
conditions can have a significant impact on overall demand for
aluminum-intensive fabricated products in the markets for our
Aero / HS, general engineering and custom automotive and
industrial products. These changes in demand can directly affect
our earnings by impacting the overall volume and mix of our
fabricated products sold.
Changes in primary aluminum prices also affect our primary
aluminum business unit and expected earnings under fixed price
fabricated products contracts. We manage the risk of
fluctuations in the price of primary aluminum through a
combination of pricing policies, internal hedging and financial
derivatives. Our operating results are also, albeit to a lesser
degree, sensitive to changes in prices for power and natural gas
and changes in certain foreign exchange rates. All of the
foregoing have been subject to significant price fluctuations
over recent years. For a discussion of the possible impacts of
the reorganization on our sensitivity to changes in market
conditions, see Quantitative and qualitative
disclosures about market risks Sensitivity.
During the nine months ended September 30, 2005, the
average London Metal Exchange transaction price, or LME price,
per pound of primary aluminum was $0.83. During the nine months
ended
29
Managements discussion and analysis of financial
condition and results of operations
September 30, 2006, the average LME price per pound for
primary aluminum was approximately $1.14. At October 31,
2006, the LME price per pound was approximately $1.29.
Emergence from chapter 11 bankruptcy
During the past four years, we operated under chapter 11 of
the United States Bankruptcy Code under the supervision of the
United States Bankruptcy Court for the District of Delaware. We
emerged from chapter 11 bankruptcy on July 6, 2006.
Pursuant to our plan of reorganization:
|
|
|
all of our material pre-petition
debt, pension and post-retirement medical obligations and
asbestos and other tort liabilities, along with other
pre-petition claims (which in total aggregate in our
June 30, 2006 balance sheet approximately
$4.4 billion) were addressed and resolved; and
|
|
|
all of the equity interests of
our pre-emergence stockholders were cancelled without
consideration and our post-emergence equity was issued and
delivered to a third party disbursing agent for distribution to
certain claimholders.
|
Please see Recent reorganization Corporate
Structure for a diagram of our simplified post-emergence
corporate structure.
Impacts of emergence from chapter 11 bankruptcy on
future financial statements
All financial statement information as of June 30, 2006 and
for all prior periods relates to our company before emergence
from chapter 11 bankruptcy. Our financial statements for
the quarter ending September 30, 2006 are the first set of
financial statements that reflect financial information after
our emergence. As more fully discussed below, there will be a
number of differences between our financial statements before
and after emergence that will make comparisons of our future and
past financial information difficult to make.
As a result of our emergence from chapter 11 bankruptcy, we
have applied fresh start accounting to our opening July 1,
2006 consolidated balance sheet as required by generally
accepted accounting principles. As such, we have taken the
following steps:
|
|
|
|
We have adjusted our
stockholders equity to equal the reorganization value of
our company;
|
|
|
|
|
We have reset items such as
accumulated depreciation, accumulated deficit and accumulated
other comprehensive income (loss) to zero; and
|
|
|
|
|
We have allocated the
reorganization value to our individual assets and liabilities
based on their estimated fair value. Such items as current
liabilities, accounts receivable, and cash reflect values
similar to those reported prior to emergence. Items such as
inventory, property, plant and equipment, long-term assets and
long-term liabilities have been significantly adjusted from
amounts previously reported. As more fully discussed in the
notes to our financial statements, these adjustments may
adversely affect our future results.
|
|
We also made post-emergence changes to our accounting policies
and procedures. In general, our accounting policies are the same
as or are similar to those we have historically used to prepare
our financial statements. In certain cases, however, we have
adopted different accounting policies or applied methodologies
differently to our post-emergence financial statement
information. For instance, we changed our accounting
methodologies with respect to inventory accounting. While we
will account for inventories on a LIFO basis after emergence, we
are applying LIFO differently than we did in the past.
Specifically, we will view each quarter on a standalone basis
for computing LIFO; whereas in the past we recorded LIFO amounts
with a view to the entire fiscal year which, with certain
exceptions, tended to result in LIFO charges being recorded in
the fourth quarter or second half of the year.
30
Managements discussion and analysis of financial
condition and results of operations
Additionally, certain items such as earnings per share and
Statement of Financial Accounting Standards No. 123-R,
Share-Based Payment (see discussion in Predecessor section
below), which had few, if any, implications while we were in
chapter 11 bankruptcy will have increased importance in our
future financial statement information.
Capital structure
After emergence from chapter 11 bankruptcy
On the July 6, 2006 effective date of our plan of
reorganization, pursuant to the plan, all equity interests held
by our stockholders immediately prior to the effective date were
cancelled without consideration and we issued 20,000,000 new
shares of common stock to a third-party disbursing agent for
distribution in accordance with our plan of reorganization. Of
such 20,000,000 new shares, a total of 8,809,900 shares
were distributed to, and are currently held by, the Union VEBA
Trust, and a total of 1,113,915 shares were distributed to,
and are currently held by, the Kaiser Aluminum &
Chemical Corporation Asbestos Personal Injury Trust, or Asbestos
PI Trust, which was established under our plan of reorganization
to assume responsibility for all asbestos personal injury
claims. As of October 31, 2006, there were also outstanding
525,660 shares that were issued to our employees and
directors under our equity incentive plan on and after the
effective date of our plan of reorganization. As a result, the
Union VEBA Trust and the Asbestos PI Trust held approximately
42.9% and 5.4%, respectively, of our outstanding common stock as
of October 31, 2006. On November 15, 2006, we were
notified that the Asbestos PI Trust had sold 200,000 shares
of our common stock, thereby decreasing its beneficial ownership
of our common stock to less than 5%. See Principal and
Selling Stockholders. The Asbestos PI Trust may receive
additional distributions of common stock from time to time in
the future pursuant to the terms of our plan of reorganization.
See Recent reorganization. There are restrictions on
the transfer of our common stock. In addition, under our
revolving credit facility and term loan facility, there are
restrictions on our purchase of common stock and limitations on
our ability to pay dividends. See Description of capital
stock and Liquidity and Capital
Resources Financing facilities After
emergence from chapter 11 bankruptcy for more
detailed discussions of these restrictions.
Prior to emergence from chapter 11 bankruptcy
Prior to the effective date of our plan of reorganization,
MAXXAM Inc. and one of its wholly-owned subsidiaries
collectively owned approximately 63% of our common stock, with
the remaining approximately 37% of our common stock being
publicly held. However, as discussed in Note 2 to our
interim consolidated financial statements, pursuant to our plan
of reorganization, all equity interests held by our stockholders
immediately prior to the effective date of our plan of
reorganization were cancelled without consideration upon our
emergence from chapter 11 bankruptcy.
31
Managements discussion and analysis of financial
condition and results of operations
RESULTS OF OPERATIONS
Our main line of business is the production and sale of
fabricated aluminum products. In addition, we own a 49% interest
in Anglesey, which owns and operates an aluminum smelter in
Holyhead, Wales.
The table below provides selected operational and financial
information on a consolidated basis with respect to the fiscal
years ended December 31, 2003, 2004 and 2005 and the nine
months ended September 30, 2005 and 2006 (unaudited
in millions of dollars, except shipments and prices). The
following data should be read in conjunction with our
consolidated financial statements and the notes thereto
contained elsewhere in this prospectus. Interim results are not
necessarily indicative of those for a full year.
Our emergence from chapter 11 bankruptcy and adoption of
fresh start accounting resulted in a new reporting entity for
accounting purposes. Although we emerged from chapter 11
bankruptcy on July 6, 2006, we adopted fresh start
accounting under the provisions of SOP 90-7, effective as
of the beginning of business on July 1, 2006. As such, it
was assumed that the emergence was completed instantaneously at
the beginning of business on July 1, 2006 so that all
operating activities during the three months ended
September 30, 2006 are reported as applying to the new
reporting entity. We believe that this is a reasonable
presentation as there were no material transactions between
July 1, 2006 and July 6, 2006 other than plan of
reorganization related transactions.
The selected operational and financial information after the
effective date of our plan of reorganization are those of the
successor and are not comparable to those of the Predecessor.
However, for purposes of this discussion (in the table below),
the successors results for the period from July 1,
2006 through September 30, 2006 have been combined with the
predecessors results for the period from January 1,
2006 to July 1, 2006 and are compared to the
predecessors results for the nine months ended
September 30, 2005. Differences between periods due to
fresh start accounting are explained when material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
Year ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
Operating data (unaudited) |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
| |
Shipments (millions of pounds):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated products
|
|
|
372.3 |
|
|
|
458.6 |
|
|
|
481.9 |
|
|
|
365.2 |
|
|
|
399.7 |
|
|
Primary aluminum
|
|
|
158.7 |
|
|
|
156.6 |
|
|
|
155.6 |
|
|
|
115.7 |
|
|
|
117.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
531.0 |
|
|
|
615.2 |
|
|
|
637.5 |
|
|
|
480.9 |
|
|
|
516.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average realized third party sales price (per pound):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated
products(2)
|
|
$ |
1.61 |
|
|
$ |
1.76 |
|
|
$ |
1.95 |
|
|
$ |
1.94 |
|
|
$ |
2.18 |
|
|
Primary
aluminum(3)
|
|
$ |
0.71 |
|
|
$ |
0.85 |
|
|
$ |
0.95 |
|
|
$ |
0.93 |
|
|
$ |
1.27 |
|
(footnotes on following page) |
32
Managements discussion and analysis of financial
condition and results of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
Year ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
Statements of income data: |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
| |
(dollars in millions) |
|
(unaudited) |
|
|
(Restated)(1) | |
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated products
|
|
$ |
597.8 |
|
|
$ |
809.3 |
|
|
$ |
939.0 |
|
|
$ |
707.7 |
|
|
$ |
872.5 |
|
|
Primary aluminum
|
|
|
112.4 |
|
|
|
133.1 |
|
|
|
150.7 |
|
|
|
108.2 |
|
|
|
148.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$ |
710.2 |
|
|
$ |
942.4 |
|
|
$ |
1,089.7 |
|
|
$ |
815.9 |
|
|
$ |
1,021.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
(loss)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fabricated
products(4)(5)
|
|
$ |
(21.2 |
) |
|
$ |
33.0 |
|
|
$ |
87.2 |
|
|
$ |
66.3 |
|
|
$ |
90.3 |
|
|
Primary
aluminum(6)
|
|
|
6.7 |
|
|
|
13.9 |
|
|
|
16.4 |
|
|
|
13.4 |
|
|
|
15.2 |
|
|
Corporate and other
|
|
|
(74.7 |
) |
|
|
(71.3 |
) |
|
|
(35.8 |
) |
|
|
(27.7 |
) |
|
|
(33.4 |
) |
|
Other operating credits (charges), net
(7)
|
|
|
(141.6 |
) |
|
|
(793.2 |
) |
|
|
(8.0 |
) |
|
|
(6.5 |
) |
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
$ |
(230.8 |
) |
|
$ |
(817.6 |
) |
|
$ |
59.8 |
|
|
$ |
45.5 |
|
|
$ |
74.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization
items(8)
|
|
$ |
(27.0 |
) |
|
$ |
(39.0 |
) |
|
$ |
(1,162.1 |
) |
|
$ |
(25.3 |
) |
|
$ |
3,093.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
(9)
|
|
$ |
(514.7 |
) |
|
$ |
121.3 |
|
|
$ |
363.7 |
|
|
$ |
386.9 |
|
|
$ |
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect on years prior to 2005 of adopting accounting
for conditional asset retirement
obligation(10)
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(4.7 |
) |
|
$ |
(4.7 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)(1)
|
|
$ |
788.3 |
|
|
$ |
(746.8 |
) |
|
$ |
(753.7 |
) |
|
$ |
390.7 |
|
|
$ |
3,158.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net of accounts payable (excluding
discontinued operations)
|
|
$ |
8.9 |
|
|
$ |
7.6 |
|
|
$ |
31.0 |
|
|
$ |
20.4 |
|
|
$ |
39.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
We restated our operating results for the nine months ended
September 30, 2005. See Note 15 to our interim
consolidated financial statements for information regarding the
restatement. |
|
|
(2) |
Average realized prices for our fabricated products business
unit are subject to fluctuations due to changes in product mix
as well as underlying primary aluminum prices and are not
necessarily indicative of changes in underlying
profitability. |
|
(3) |
Average realized prices for our primary aluminum business
unit exclude hedging revenues. |
|
|
(4) |
Operating results for the nine months ended September 30,
2005 included metal losses of $2.3 million. Operating
results for the nine months ended September 30, 2006
include a non-cash LIFO inventory charge of $18.4 million
and metal profits of approximately 13.9 million. |
|
|
|
(5) |
Includes non-cash mark-to-market losses of $1.5 million
in the nine months ended September 30, 2006. For further
discussion regarding mark-to-market matters see Note 9 to
our interim consolidated financial statements. |
|
|
|
(6) |
Includes non-cash
mark-to-market gains
(losses) totaling $(4.5) million and $8.1 million in
the nine months ended September 30, 2005 and 2006,
respectively. For further discussion regarding mark-to-market
matters see Note 9 to our interim consolidated financial
statements. |
|
|
|
(7) |
Other operating credits (charges), net in 2003 and 2004
include certain significant charges associated with the
termination of certain pension and post-retirement medical
plans, a settlement in respect of a past labor matter and other
items. These items are detailed in Note 6 to our audited
consolidated financial statements. |
|
33
Managements discussion and analysis of financial
condition and results of operations
|
|
|
(8) |
Reorganization items for 2005 includes an approximate
$1.1 billion charge as a result of the value of an
intercompany note treated as being for the benefit of certain
creditors. See Note 1 to our audited consolidated financial
statements. Reorganization items for the period from
January 1, 2006 to July 1, 2006 includes a gain of
approximately $3.1 billion in connection with the
implementation of our plan of reorganization and fresh start
accounting. See Note 13 to our interim consolidated
financial statements. |
|
|
|
(9) |
Income (loss) from discontinued operations includes a
substantial impairment charge in 2003 and gains in 2004 and 2005
in connection with the sale of certain of our commodity-related
interests. See Note 3 to our audited consolidated financial
statements. |
|
|
|
(10) |
See Note 2 to our interim consolidated financial
statements for a discussion of the change in accounting for
conditional asset retirement obligations. |
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2005
Summary
For the nine months ended September 30, 2006, we reported
net income of $3,158.3 million, compared to net income of
$390.7 million for the same period in 2005. Net income for
the nine months ended September 30, 2006 includes a
non-cash gain of $3,113.1 million related to the
implementation of our plan of reorganization and application of
fresh start accounting. Net income for the nine months ended
September 30, 2005 includes $365.6 million related to
the gain on the sale of QAL and favorable QAL operating results
prior to its sale on April 1, 2005. In addition, the nine
months ended September 30, 2005 and 2006 include a number
of non-run-rate items that are more fully explained in the
section below.
Net sales for the nine months ended September 30, 2006
totaled $1,021.2 million compared to $815.9 million
for the nine months ended September 30, 2005. As more fully
discussed below, the increase in net sales is primarily the
result of the increase in the market price for primary aluminum.
Increases in the market price for primary aluminum do not
necessarily directly translate to increased profitability
because (1) a substantial portion of the primary aluminum
price increases and decreases experienced by our fabricated
products business is passed on directly to customers and
(2) our hedging activities, while limiting our risk of
losses, also limit our ability to participate in price increases.
Fabricated aluminum products
For the nine month period ended September 30, 2006, net
sales of fabricated products increased by 23% to
$872.5 million as compared to the same period in 2005,
primarily due to a 12% increase in average realized prices and a
9% increase in shipments. The increase in the average realized
prices primarily reflects higher underlying primary aluminum
prices. The increase in volume in 2006 was led by aerospace and
defense-related shipments. Shipments improved for all broad
product lines in the nine months ended September 30, 2006.
Operating income for the nine months ended September 30,
2006 of $90.3 million was approximately $24 million
higher than the prior year period. Operating income for the nine
months ended September 30, 2006 also included an
approximate $28 million of favorable impact compared to the
prior year from higher shipments, stronger conversion prices
(representing the value added from the fabrication process) and
favorable scrap raw material costs. Higher energy prices had an
approximate $4 million adverse impact on the nine months
ended September 30, 2006 versus the nine months ended
September 30, 2005, but a majority of this impact was
offset by favorable cost performance. Major maintenance costs
during the nine months ended September 30, 2006 were
comparable to the same period in 2005. Depreciation and
amortization in the nine months ended September 30, 2006
34
Managements discussion and analysis of financial
condition and results of operations
was approximately $2.2 million lower than the prior year
period as a result of the adoption of fresh start accounting.
Both the nine months ended September 30, 2005 and 2006
include non-run-rate items. These items which are listed below,
had a combined approximate $6.0 million adverse impact on
the nine months ended September 30, 2006, which is
approximately $3.7 million worse than the comparable prior
year period:
|
|
|
|
Metal profits in the nine months
ended September 30, 2006 (before considering LIFO
implications) of approximately $13.9 million, which is
approximately $16.2 million better than the prior year
period.
|
|
|
|
|
A non-cash LIFO inventory charge
of $18.4 million in the nine months ended
September 30, 2006. There were no LIFO charges or benefits
in the comparable 2005 period.
|
|
|
|
|
Mark-to-market charges on energy
hedging in the nine months ended September 30, 2006 were
approximately $1.5 million. During the nine months ended
September 30, 2005 there were no mark-to-market charges or
gains.
|
|
Segment operating results for 2006 and 2005 include gains on
intercompany hedging activities with the primary aluminum
business unit totaling $31.5 million for the nine months
ended September 30, 2006 and $3.4 million for the nine
months ended September 30, 2005. These amounts eliminate in
consolidation. Operating results for our fabricated products
segment for the nine months ended September 30, 2005,
exclude defined contribution savings plan charges of
approximately $5.4 million.
We have begun to obtain production from the first furnace added
as a part of the $105 million expansion project at our
Trentwood facility. We currently expect that furnace to reach
full production in the fourth quarter of 2006. A second furnace
that is a part of the Trentwood expansion has begun production
and is expected to ramp up to full production no later than
early 2007. The third furnace expansion and the addition of the
stretcher, which will enable us to produce heavier gauge plate
products, are both expected to be on-line by early 2008. The
additional production capacity from the first two furnace
expansions should provide the opportunity for increased
aerospace and defense-related shipments beginning in the fourth
quarter of 2006 and should help offset the potential for
lackluster automotive-related shipments due to the current
industry decline in automotive sales.
Primary aluminum
During the nine months ended September 30, 2006, third
party net sales of primary aluminum increased 37%, compared to
the same period in 2005. The increase was almost entirely
attributable to the increase in average realized primary
aluminum prices.
The following table sets forth (in millions of dollars) the
differences in the major components of operating results for our
primary aluminum segment between the nine months ended
September 30, 2006 and the corresponding prior year period,
as well as the primary factors leading to such
35
Managements discussion and analysis of financial
condition and results of operations
differences. Many of the factors indicated are items that are
subject to significant fluctuation from period to period and are
largely impacted by items outside managements control.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended | |
|
|
|
|
September 30, | |
|
|
|
|
2006 vs. 2005 | |
|
|
|
|
| |
|
|
|
|
Operating | |
|
Better | |
|
|
Component |
|
income | |
|
(worse) | |
|
Factor |
|
Sales of production from Anglesey
|
|
$ |
38 |
|
|
$ |
15 |
|
|
Market price for primary aluminum |
Internal hedging with fabricated products segment
|
|
|
(32 |
) |
|
|
(29 |
) |
|
Eliminates in consolidation |
Derivative settlements
|
|
|
1 |
|
|
|
3 |
|
|
Impacted by positions and market prices |
Mark-to-market on derivative instruments
|
|
|
8 |
|
|
|
13 |
|
|
Impacted by positions and market prices |
|
|
|
|
|
|
|
|
|
|
|
$ |
15 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
The improvement in Anglesey-related results, as well as the
offsetting adverse internal hedging results, in the nine months
ended September 30, 2006 over the comparable 2005 period
was driven primarily by increases in primary aluminum market
prices. The primary aluminum market-driven improvement in
Anglesey-related operating results was offset by an approximate
15% contractual increase in Angleseys power costs
affecting the 2006 period, an increase of approximately
$1 million per quarter. Beginning in the second quarter of
2006, the Anglesey-related results were adversely affected
(versus 2005) by a 20% increase in contractual alumina costs
related to a new alumina purchase contract that runs through
2007. Power and alumina costs, in general, represent
approximately two-thirds of Angleseys costs, and as such,
future results will be adversely affected by these changes. The
nuclear plant that supplies power to Anglesey is currently
slated for decommissioning in late 2010. For Anglesey to be able
to operate past September 2009 when its current power contract
expires, Anglesey will have to secure a new or alternative power
contract at prices that make its operation viable. We cannot
assure you that Anglesey will be successful in this regard.
In addition, given the potential for future shutdown and related
costs, we expect that dividends from Anglesey may be suspended
or curtailed either temporarily or permanently while Anglesey
studies future cash requirements. Dividends over the past five
years have fluctuated substantially depending on various
operational and market factors. During the last five years and
the nine months ended September 30, 2006, cash dividends
received were as follows (in millions of dollars):
2001 $2.8, 2002 $6.0, 2003
$4.3, 2004 $4.5, 2005 $9.0, and
2006 $11.7.
Corporate and other
Corporate operating expenses represent corporate general and
administrative expenses that are not allocated to our business
segments. Corporate operating expenses for the nine months ended
September 30, 2006 were approximately $5.7 million
higher than the comparable period in 2005. Incentive
compensation accruals were approximately $5.0 million
higher than the nine months ended September 30, 2005,
including a $2.2 million non-cash charge associated with
vested and non-vested stock grants. Additionally, we incurred
certain costs we considered largely non-run-rate, including
$1.8 million of preparation costs related to the
Sarbanes-Oxley Act of 2002, $0.7 million of higher post
emergence tax service/preparation costs and $1.1 million of
costs associated with certain computer upgrades. The remaining
change in the nine months ended September 30, 2006
primarily reflects lower salary and other costs related to the
movement toward a post emergence structure.
36
Managements discussion and analysis of financial
condition and results of operations
Once the activity with our emergence, which will continue
through the balance of 2006 and perhaps early 2007, and
incremental Sarbanes-Oxley adoption-related activities are
complete, we expect there will be a substantial decline in
corporate and other operating costs.
Corporate operating results for the nine months ended
September 30, 2005, discussed above, exclude defined
contribution savings plan charges of approximately
$0.5 million.
Discontinued operations
Operating results from discontinued operations for the nine
months ended September 30, 2006 consist of a
$7.5 million payment from an insurer for certain residual
claims we had in respect of the 2000 incident at our Gramercy,
Louisiana alumina facility, which was sold in 2004, and the
$1.1 million surcharge refund related to certain energy
surcharges, which have been pending for a number of years,
offset, in part, by a $5.0 million charge resulting from an
agreement between us and the Bonneville Power Administration for
a rejected electric power contract. Operating results from
discontinued operations for the nine months ended
September 30, 2005 include the $365.6 million gain
resulting from the sale of our interests in and related to QAL
on April 1, 2005 and the favorable operating results of our
interests in and related to QAL prior to sale.
Reorganization items
Reorganization items increased substantially in the nine months
ended September 30, 2006 as compared to the comparable
periods in 2005 as a result of the non-cash gain on the
implementation of our plan of reorganization and application of
fresh start accounting of approximately $3,113.1 million in
the third quarter of 2006.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED
DECEMBER 31, 2004
We reported a net loss of $753.7 million in 2005 compared
to a net loss of $746.8 million in 2004. Net sales in 2005
totaled $1,089.7 million compared to $942.4 million
in 2004.
Fabricated aluminum products
Net sales of fabricated products increased by 16% during 2005 as
compared to 2004 primarily due to a 10% increase in average
realized prices and a 6% increase in shipments. The increase in
the average realized prices reflected (in relatively equal
proportions) higher conversion prices and higher underlying
primary aluminum prices. The higher conversion prices were
primarily attributable to continued strength in fabricated
aluminum product markets, particularly for Aero/ HS products, as
well as a favorable mix in the type of Aero/ HS products in the
early part of 2005. Current period shipments were higher than
2004 shipments due primarily to the increased Aero/ HS product
demand.
Segment operating results (before other operating charges, net)
for 2005 improved over 2004 by approximately $54 million.
The improvement consisted of improved sales performance
(primarily due to factors cited above) of $64 million
offset by higher operating costs, particularly for natural gas.
Higher natural gas prices had a particularly significant impact
on the fourth quarter of 2005. As of March 2006 natural gas
prices had decreased somewhat but had not decreased to the price
level experienced during the first nine months of 2005. Lower
2005 charges for legacy pension and retiree medical-related
costs of $5 million were largely offset by other cost
increases versus 2004, including $6 million of higher
non-cash LIFO inventory charges, $9 million in 2005 versus
$3.2 million in 2004. Segment operating results for 2005
and 2004 included gains on intercompany hedging activities with
our primary aluminum business which totaled $11.1 million
and $8.6 million, respectively. These amounts eliminate in
consolidation.
37
Managements discussion and analysis of financial
condition and results of operations
Segment operating results for 2005, discussed above, excluded
deferred contribution savings plan charges of approximately
$6.3 million.
Primary aluminum
Third party net sales of primary aluminum in 2005 increased by
approximately 13% as compared to 2004. The increase was almost
entirely attributable to the increase in average realized
primary aluminum prices.
Segment operating results for 2005 included approximately
$32 million related to the sale of primary aluminum
resulting from our ownership interests in Anglesey offset by
(1) losses on intercompany hedging activities with our
fabricated products business (which eliminate in consolidation)
which totaled approximately $11.1 million, and
(2) approximately $4.1 million of non-cash charges
associated with the discontinuance of hedge accounting treatment
of derivative instruments as more fully discussed in
Notes 2, 12 and 16 to our audited consolidated financial
statements. Primary aluminum hedging transactions with third
parties were essentially neutral in 2005. In 2004, segment
operating results consisted of approximately $21 million
related to sales of primary aluminum resulting from our
ownership interests in Anglesey and approximately
$2 million of gains from third-party hedging activities,
offset by approximately $8.6 million of losses on
intercompany hedging activities with our fabricated products
business (which eliminate in consolidation). The improvement in
Anglesey-related results in 2005 versus 2004 resulted primarily
from the improvement in primary aluminum market prices discussed
above. The primary aluminum market price increases were offset
by an approximate 15% contractual increase in Angleseys
power costs during the fourth quarter of 2005 as well as an
increase in major maintenance costs incurred in 2005.
Corporate and other
In 2005, corporate operating expenses consisted of
$30 million of expenses related to ongoing operations and
$5 million related to retiree medical expenses. In 2004,
corporate operating expenses consisted of $21 million of
expenses related to ongoing operations and $50 million of
retiree medical expenses.
The increase in expenses related to ongoing operations in 2005
compared to 2004 was due to an increase in professional expenses
associated primarily with our initiatives to comply with
Sarbanes-Oxley by December 31, 2006, and bankruptcy
emergence-related activity, relocation of our corporate
headquarters and transition costs. These increased expenses were
offset by the fact that key personnel ceased receiving retention
payments as of the end of the first quarter of 2004 pursuant to
our Key Employee Retention Program. The decline in
retiree-related expenses was primarily attributable to the
termination of the Inactive Pension Plan in 2004 and the change
in retiree medical payments.
Corporate operating results for 2005, discussed above, exclude
defined contribution savings plan charges of approximately
$0.5 million.
Reorganization items
Reorganization items consist primarily of income, expenses
(including professional fees) and losses that were realized or
incurred by us due to our reorganization. Reorganization items
increased substantially in 2005 over 2004 as a result of a
non-cash charge of approximately of $1,131.5 million in the
fourth quarter of 2005. The non-cash charge was recognized in
connection with the consummation of the plans of liquidation
filed by certain of our subsidiaries pursuant to which the value
associated with an intercompany note was assigned for the
benefit of certain third-party creditors. See Note 1 to our
audited consolidated financial statements for a more complete
discussion.
38
Managements discussion and analysis of financial
condition and results of operations
Discontinued operations
Discontinued operations in 2005 included the operating results
of our interests in and related to QAL for the first quarter of
2005 and the gain that resulted from the sale of such interests
on April 1, 2005. Discontinued operations in 2004 included
a full year of operating results attributable to our interests
in and related to QAL, as well as the operating results of the
commodity interests that were sold at various times during 2004.
Income from discontinued operations for 2005 increased
approximately $242 million over 2004. The primary factor
for the improved results was the larger gain on the sale of our
QAL interests (approximately $366 million) in 2005 compared
to the gains from the sale of our interests in and related to
Alumina Partners of Jamaica, or Alpart, and the sale of our Mead
facility (approximately $127 million) in 2004. The adverse
impacts in 2005 of a $42 million non-cash contract
rejection charge were largely offset by improved operating
results in 2005 associated with QAL of $12 million and the
avoidance of $33 million of net losses by other
commodity-related interests in 2004.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED
DECEMBER 31, 2003
We reported a net loss of $746.8 million in 2004 compared
to a net loss of $788.3 million for 2003. Net sales in 2004
totaled $942.4 million compared to $710.2 million
in 2003.
Fabricated aluminum products
Net sales of fabricated products increased by 35% during 2004 as
compared to 2003 primarily due to a 23% increase in shipments
and a 9% increase in average realized prices. Shipments in 2004
were higher than 2003 shipments as a result of improved demand
for most of our fabricated aluminum products, especially
aluminum plate for the general engineering market as well as
extrusions and forgings for the automotive market. Demand for
our products in the Aero/ HS market was also markedly higher in
2004 than in 2003. The increase in the average realized price
reflected changes in the mix of products sold, stronger demand
and higher underlying metal prices. Extrusion prices were
thought to have recovered from the recessionary lows experienced
in 2002 and 2003 but were still below prices experienced during
peaks in the business cycle. Plate prices increased to near
peak-level pricing in response to strong near-term demand.
Segment operating results (before other operating charges, net)
for 2004 improved over 2003 primarily due to the increased
shipment and price levels noted above, improved market
conditions and improved cost performance offset, in part, by
modestly increased natural gas prices and a $12.1 million
non-cash LIFO inventory charge. Operating results for 2003
included increased energy costs, a $3.2 million non-cash
LIFO inventory charge, and higher pension related expenses
offset, in part, by reductions in overhead and other operating
costs as a result of cost cutting initiatives. Segment operating
results for 2004 and 2003 included gains (losses) on
intercompany hedging activities with the primary aluminum
business unit totaling $8.6 million and
$(2.3) million. These amounts eliminate in consolidation.
Segment operating results for 2003, discussed above, exclude a
net gain of approximately $3.9 million from the sale of
equipment.
Primary aluminum
Third party net sales of primary aluminum increased 18% for 2004
as compared to the same period in 2003, primarily as a result of
a 20% increase in third-party average realized prices offset by
a 1% decrease in third party shipments. The increases in the
average realized prices were primarily due to the increases in
primary aluminum market prices. Shipments in 2004 were better
than the prior year primarily due to the timing of shipments.
39
Managements discussion and analysis of financial
condition and results of operations
Segment operating results (before other operating charges, net)
for 2004 improved over 2003 primarily due to the increases in
prices and shipments discussed above. Segment operating results
for 2004 and 2003 include gains (losses) on intercompany hedging
activities with the fabricated products business unit totaling
$(8.6) million and $2.3 million. These amounts
eliminate in consolidation.
Segment operating results for 2003, discussed above, exclude a
pre-filing date claim of approximately $3.2 million related
to a restructured transmission agreement and a net gain of
approximately $9.5 million from the sale of our Tacoma,
Washington smelter.
Corporate and other
In 2004, corporate operating costs consisted of
$21.2 million of expenses related to ongoing operations and
$50 million of retiree-related expenses. In 2003, corporate
operating costs consisted of expenses related to ongoing
operations of $39 million and $35 million of
retiree-related expenses. The decline in expenses related to
ongoing operations from 2003 to 2004 was primarily attributable
to lower salary ($1 million), retention ($4 million)
and incentive compensation ($2.5 million) costs as well as
lower accruals for pension-related costs primarily as a result
of the December 2003 termination by the PBGC of our salaried
employees pension plan ($2.5 million). The increase in
retiree-related expenses in 2004 from 2003 reflects
managements decision to allocate to the corporate segment
the excess of post-retirement medical costs related to the
fabricated products business unit and discontinued operations
for the period May 1, 2004 through December 31, 2004
over the amount of such segments allocated share of VEBA
contributions offset, in part, by lower pension-related accruals
as a result of the December 2003 termination by the PBGC of our
salaried employees pension plan.
Corporate operating results for 2004, discussed above, exclude:
(1) pension charges of $310.0 million related to
terminated pension plans whose responsibility was assumed by the
PBGC, (2) a settlement charge of $175.0 million
related to the USW settlement, and (3) settlement charges
of $312.5 million related to the termination of the
post-retirement medical benefit plans (all of which are included
in other operating charges, net). Corporate operating results
for 2003 exclude a pension charge of $121.2 million related
to the terminated salaried employees pension plan assumed by the
PBGC, an environmental multi-site settlement charge of
$15.7 million and hearing loss claims of $15.8 million
(all of which are included in other operating charges, net).
Discontinued operations
Discontinued operations include the operating results for
Alpart, our alumina smelter located in Gramercy, Louisiana and
associated interest in Kaiser Jamaica Bauxite Company, or
Gramercy/ KJBC, Volta Aluminum Company Limited, or Valco, QAL
and our Mead facility and gains from the sale of our interests
in and related to these interests (except for the gain on the
sale of our interests in and related to QAL which was sold in
April 2005). Results for discontinued operations for 2004
improved $636.0 million over 2003. Approximately
$460 million of such improvement resulted from three
nonrecurring items: (1) the approximate $126.6 million
gain on the sale of our interests in and related to Alpart and
the sale of our Mead facility; (2) the $368.0 million
of impairment charges in respect of our interests in and related
to commodities interests in 2003; and
(3) $33.0 million of Valco-related impairment charges
in 2004. The balance of the improvement primarily resulted from
approximately $132 million of improved operating results at
Alpart, Gramercy/ KJBC and QAL, a substantial majority of which
was related to the improvement in average realized alumina
prices.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash generated from
operating activities and borrowings under our revolving credit
facility. We believe that the cash and cash equivalents, cash
flows from operations
40
Managements discussion and analysis of financial
condition and results of operations
and cash available under the revolving credit facility will be
sufficient to satisfy the anticipated cash requirements
associated with our existing operations for at least the next
12 months. Our ability to generate sufficient cash from our
operating activities depends on our future performance, which is
subject to general economic, political, financial, competitive
and other factors beyond our control. In addition, our future
capital expenditures and other cash requirements could be higher
than we currently expect as a result of various factors,
including any expansion of our business that we complete.
As a result of the filing of the chapter 11 bankruptcy
proceedings, claims against us for principal and accrued
interest on secured and unsecured indebtedness existing on the
respective filing dates of our company and each of our
subsidiaries were stayed while we continued business operations
as
debtors-in-possession,
subject to the control and supervision of the bankruptcy court.
These obligations were extinguished upon our emergence from
chapter 11 bankruptcy.
Operating activities
During the nine months ended September 30, 2006, fabricated
products operating activities provided $42 million of cash
compared to $67 million of cash for the nine months ended
September 30, 2005. Cash provided by fabricated products in
the nine months ended September 30, 2006 was primarily due
to improved operating results offset, in part, by increased
working capital cash requirements. The increase in 2006 working
capital cash requirements was primarily the result of the impact
of higher primary aluminum prices and increased demand for
fabricated aluminum products on inventories and accounts
receivable, which was only partially offset by increases in
accounts payable. Cash provided by fabricated products in the
nine months ended September 30, 2005 was primarily due to
improved operating results associated with improved demand for
fabricated aluminum products. Working capital change in the nine
months ended September 30, 2005 was modest. Fabricated
products cash flow excluded consideration of pension and retiree
cash payments made in respect of current and former employees of
the fabricated products facilities. Such amounts are part of the
legacy costs that we classify as a corporate cash
outflow.
Cash flows attributable to Anglesey provided $22 million
and $17 million in the nine months ended September 30,
2006 and 2005, respectively.
Corporate and other operating activities used $82 million
of cash in the nine months ended September 30, 2006 and
2005. Cash outflows for corporate and other operating activities
in the nine months ended September 30, 2006 and 2005
included:
|
|
|
|
$12 million and
$18 million, respectively, for medical obligations and VEBA
funding for all former and current operating units;
|
|
|
|
|
$16 million and
$30 million, respectively, for reorganization costs; and
|
|
|
|
|
$30 million and
$20 million, respectively, for general and administrative
costs.
|
|
Cash outflows for corporate and other operating activities for
the nine months ended September 30, 2006 also included
$25 million of payments made pursuant to our plan of
reorganization.
In the nine months ended September 30, 2006, discontinued
operation activities provided $9 million of cash compared
to $13 million in the nine months ended September 30,
2005. Cash provided by discontinued operations in the nine
months ended September 30, 2006 consisted of, as discussed
above, the proceeds from an $8 million payment from an
insurer and a $1 million refund from commodity interests
energy vendors. Cash provided in the nine months ended
September 30, 2005 resulted from favorable operating
results of QAL offset, in part, by foreign tax payments of
$10 million.
41
Managements discussion and analysis of financial
condition and results of operations
In 2005, fabricated products operating activities provided
$88 million of cash, substantially all of which was
generated from operating results. Working capital changes were
modest. In 2004, fabricated products operating activities
provided approximately $35 million of cash,
$70 million of which was generated from operating results
offset by increases in working capital of approximately
$35 million. In 2003, fabricated products operating
activities provided approximately $30 million of cash,
substantially all of which was generated from operating results.
Working capital changes were modest. The increases in cash
provided by fabricated products operating results in 2005 and
2004 were primarily due to improving demand for fabricated
aluminum products. The increase in working capital in 2004
reflected the increase in demand as well as the significant
increase in primary aluminum prices. In 2003, cost-cutting
initiatives offset reduced product prices and shipments so that
cash provided by operations approximated that in 2002. The
foregoing analysis of fabricated products cash flow excludes
consideration of pension and retiree cash payments made in
respect of current and former employees of our fabricated
products segment. Such amounts are part of the
legacy costs that we internally categorize as a
corporate cash outflow.
Cash flows attributable to our interests in and related to our
primary aluminum business provided $20 million,
$14 million and $12 million in 2005, 2004 and 2003,
respectively. The increase in cash flows between 2005 and 2004
was primarily attributable to increases in primary aluminum
market prices. Higher primary aluminum prices in 2004 caused the
cash flows attributable to sales of primary aluminum production
from Anglesey to be approximately $2 million higher in 2004
than in 2003. The balance of the differences in cash flows
between 2004 and 2003 was primarily attributable to timing of
shipments, payments and receipts.
Corporate and other operating activities utilized
$108 million, $150 million and $100 million of
cash in 2005, 2004 and 2003, respectively. Cash outflows from
corporate and other operating activities in 2005, 2004 and 2003
included: (1) $37 million, $57 million and
$60 million, respectively, in respect of retiree medical
obligations and VEBA funding for former and current operating
units; (2) payments for reorganization costs of
$39 million, $35 million and $27 million,
respectively; and (3) payments in respect of general and
administrative costs totaling approximately $29 million,
$26 million and $27 million, respectively. Corporate
operating cash flow in 2003 included asbestos related insurance
receipts of approximately $18 million. Cash outflows in
2004 also included $27 million to settle certain multi-site
environmental claims.
In 2005, discontinued operation activities provided
$17 million of cash. This compares with 2004 and 2003 when
discontinued operation activities provided $64 million and
used $29 million of cash, respectively. The decrease in
cash provided by discontinued operations in 2005 over 2004
resulted primarily from a decrease in favorable operating
results due to the sale of substantially all of our commodity
interests between the second half of 2004 and early 2005. The
remaining commodity interests were sold as of April 1,
2005. The increase in cash provided by discontinued operations
in 2004 over 2003 resulted from improved operating results due
primarily to the improvement in average realized alumina prices.
Investing activities
Total capital expenditures for our fabricated products business
were $38.7 million and $20.1 million for the nine
months ended September 30, 2006 and 2005, respectively.
Total capital expenditures for our fabricated products business
are currently expected to be in the $65 million to
$75 million range for 2006 and in the $60 million to
$70 million range for 2007. The higher level of capital
spending primarily reflects incremental investments,
particularly at our Trentwood facility. We initially announced a
$75 million expansion project of our Trentwood facility
and, in August 2006, announced a follow-on investment of an
additional $30 million. These investments are being made
primarily for new equipment and furnaces that will enable us to
supply heavy gauge, heat treat stretched plate to
42
Managements discussion and analysis of financial
condition and results of operations
the aerospace and general engineering markets and will provide
incremental capacity. Since the inception of the project during
2005, approximately $45 million has been incurred as of
September 30, 2006. Besides the Trentwood facility
expansion, our remaining capital spending in 2006 and 2007 will
be spread among all manufacturing locations. A majority of the
remaining capital spending is expected to reduce operating
costs, improve product quality or increase capacity. However, we
have not committed to any individual projects of significant
size, other than the Trentwood expansion, at this time.
Total capital expenditures for fabricated products were
$30.6 million, $7.6 million, and $8.9 million in
2005, 2004 and 2003, respectively. The capital expenditures were
made primarily to improve production efficiency, reduce
operating costs and expand capacity at existing facilities.
Total capital expenditures for discontinued operations were
$3.5 million and $28.3 million in 2004 and 2003,
respectively (of which $1.0 million and $8.9 million
were funded by the minority partners in certain foreign joint
ventures).
Our level of capital expenditures may be adjusted from time to
time depending on our business plans, price outlook for metal
and other products, our ability to maintain adequate liquidity
and other factors. If our sales growth continues and the
relevant market factors remain positive we may increase our
capital spending over the 2006 and 2007 period from the amounts
described above and if our sales decline or the market factors
do not remain positive, our capital spending may be decreased
from the amounts described above.
Depending upon conditions in the capital markets and other
factors, we will from time to time consider the issuance of debt
or equity securities, or other possible capital markets
transactions, the proceeds of which could be used to refinance
current indebtedness or for other corporate purposes. Pursuant
to our growth strategy, we will also consider from time to time
acquisitions of, and investments in, assets or businesses that
complement our existing assets and businesses. Acquisition
transactions, if any, are expected to be financed through cash
on hand and from operations, bank borrowings, the issuance of
debt or equity securities or a combination of two or more of
those sources.
Financing facilities
After emergence from chapter 11 bankruptcy
On July 6, 2006, we entered into a $200.0 million
revolving credit facility with a group of lenders, of which up
to a maximum of $60.0 million may be utilized for letters
of credit. Under the revolving credit facility, we may borrow
(or obtain letters of credit) from time to time in an aggregate
amount equal to the lesser of $200.0 million and a
borrowing base comprised of eligible accounts receivable,
eligible inventory and certain eligible machinery, equipment and
real estate, reduced by certain reserves, all as specified in
the revolving credit facility. The revolving credit facility has
a five-year term and matures in July 2011, at which time all
principal amounts outstanding thereunder will be due and
payable. Borrowings under the revolving credit facility bear
interest at a rate equal to either a base prime rate or LIBOR,
at our option, plus a specified variable percentage determined
by reference to the then remaining borrowing availability under
the revolving credit facility. The revolving credit facility
may, subject to certain conditions and the agreement of lenders
thereunder, be increased up to $275.0 million.
Concurrently with the execution of the revolving credit
facility, we also entered into a term loan facility that
provides for a $50.0 million term loan and is guaranteed by
certain of our domestic operating subsidiaries. The term loan
facility was fully drawn on August 4, 2006. The term loan
facility has a five-year term and matures in July 2011, at which
time all principal amounts outstanding
43
Managements discussion and analysis of financial
condition and results of operations
thereunder will be due and payable. Borrowings under the term
loan facility bear interest at a rate equal to either a premium
over a base prime rate or LIBOR, at our option.
Amounts owed under each of the revolving credit facility and the
term loan facility may be accelerated upon the occurrence of
various events of default set forth in each agreement, including
the failure to make principal or interest payments when due, and
breaches of covenants, representations and warranties set forth
in each agreement.
The revolving credit facility is secured by a first priority
lien on substantially all of our assets and the assets of our
domestic operating subsidiaries that are also borrowers
thereunder. The term loan facility is secured by a second lien
on substantially all of our assets and the assets of our
domestic operating subsidiaries that are the borrowers or
guarantors thereof.
Both credit facilities place restrictions on our ability to,
among other things, incur debt, create liens, make investments,
pay dividends, repurchase our common stock, sell assets,
undertake transactions with affiliates and enter into unrelated
lines of business.
During July 2006, we borrowed and repaid $8.6 million under
the revolving credit facility. At October 31, 2006, there
were no borrowings outstanding under the revolving credit
facility, there was approximately $15.9 million outstanding
under letters of credit and there was $50.0 million
outstanding under the term loan facility.
Prior to emergence from chapter 11 bankruptcy
On February 11, 2005, we entered into a new financing
agreement with a group of lenders under which we were provided
with a replacement for the existing post-petition credit
facility and a commitment for a multi-year exit financing
arrangement upon our emergence from our chapter 11
bankruptcy proceedings. The financing agreement was replaced by
our revolving credit facility and term loan on July 6,
2006, the effective date of our plan of reorganization.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes our significant contractual obligations
at September 30, 2006 (dollars in millions):
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|
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Payments due in | |
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| |
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Less than | |
|
2-3 | |
|
4-5 | |
|
More than | |
Contractual obligations |
|
Total | |
|
1 year | |
|
years | |
|
years | |
|
5 years | |
| |
Long-term debt
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|
$ |
50.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
50.0 |
|
|
$ |
|
|
Operating leases
|
|
|
7.4 |
|
|
|
2.6 |
|
|
|
3.1 |
|
|
|
1.6 |
|
|
|
0.1 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash contractual
obligations(1)
|
|
$ |
57.4 |
|
|
$ |
2.6 |
|
|
$ |
3.1 |
|
|
$ |
51.6 |
|
|
$ |
0.1 |
|
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|
|
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|
(1) |
Total contractual obligations excludes future annual variable
cash contributions to the VEBAs, which cannot be determined at
this time. See Off Balance Sheet and Other
Arrangements below for a summary of possible annual
variable cash contribution amounts at various levels of earnings
and cash expenditures. |
OFF BALANCE SHEET AND OTHER ARRANGEMENTS
As of September 30, 2006, outstanding letters of credit
under our revolving credit facility were approximately
$17.7 million, substantially all of which expire within
approximately twelve months. The letters of credit relate
primarily to insurance, environmental and other activities.
44
Managements discussion and analysis of financial
condition and results of operations
We have agreements to supply alumina to and purchase aluminum
from Anglesey. Both the alumina sales agreement and primary
aluminum purchase agreement are tied to primary aluminum prices.
After the effective date of our plan of reorganization, the
following employee benefit plans remain in effect:
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A commitment to provide one or
more defined contribution plans as a replacement for the five
defined benefit pension plans for hourly bargaining unit
employees at four of our production facilities and one inactive
operation. The defined contribution plans at the four production
facilities will likely be terminated during the fourth quarter
of 2006, effective as of October 10, 2006, pursuant to a
court ruling received in July 2006. We anticipate that the
replacement defined contribution plans for the production
facilities will provide for an annual contribution of one dollar
per hour worked by bargaining unit employee and, in certain
instances, will provide for certain matching of contributions.
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|
A defined contribution savings
plan for hourly bargaining unit employees at all of our other
production facilities. Pursuant to the terms of the defined
contribution plan for hourly bargaining unit employees, we will
be required to make annual contributions to the Steelworkers
Pension Trust on the basis of one dollar per USW employee
hour worked at two facilities. We will also be required to make
contributions to a defined contribution savings plan for active
USW employees that will range from $800 to $2,400 per
employee per year, depending on the employees age. Similar
defined contribution savings plans have been established for
non-USW hourly employees subject to collective bargaining
agreements. We currently estimate that contributions to all such
plans will range from $3 million to $6 million per
year.
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A defined contribution savings
plan for salaried and non-bargaining unit hourly employees
providing for a match of certain contributions made by employees
plus a contribution of between 2% and 10% of their salary
depending on their age and years of service.
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An annual variable cash
contribution to the VEBAs. The amount to be contributed to the
VEBAs will be 10% of the first $20.0 million of annual cash
flow (defined generally as earnings before interest expense,
provision for income taxes and depreciation and amortization
(EBITDA) less cash payments for, among other things,
interest, income taxes and capital expenditures (Cash
Payments)) plus 20% of annual cash flow, as defined, in
excess of $20.0 million. Such annual payments will not
exceed $20.0 million and will also be limited (with no
carryover to future years) to the extent that the payments would
cause our liquidity to be less than $50.0 million. Such
amounts will be determined on an annual basis and payable no
later than March 31 of the following year. However, we have
the ability to offset amounts that would otherwise be due to the
VEBAs with approximately $12.7 million of excess
contributions made to the VEBAs prior to the effective date of
our plan of reorganization.
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45
Managements discussion and analysis of financial
condition and results of operations
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The following table shows (in millions of dollars) the estimated
amount of variable VEBA payments that would occur at differing
levels of EBITDA and Cash Payments in respect of, among other
items, interest, income taxes and capital expenditures. The
table below does not consider the liquidity limitation, the
$12.7 million of advances available to us to offset VEBA
obligations as they become due and certain other factors that
could effect the amount of variable VEBA payments due and,
therefore, should be considered only for illustrative purposes. |
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Cash Payments | |
|
|
| |
EBITDA |
|
$25.0 | |
|
$50.0 | |
|
$75.0 | |
|
$100.0 | |
| |
$ 20.0
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
40.0
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
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60.0
|
|
|
5.0 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
80.0
|
|
|
9.0 |
|
|
|
4.0 |
|
|
|
0.5 |
|
|
|
|
|
100.0
|
|
|
13.0 |
|
|
|
8.0 |
|
|
|
3.0 |
|
|
|
|
|
120.0
|
|
|
17.0 |
|
|
|
12.0 |
|
|
|
7.0 |
|
|
|
2.0 |
|
140.0
|
|
|
20.0 |
|
|
|
16.0 |
|
|
|
11.0 |
|
|
|
6.0 |
|
160.0
|
|
|
20.0 |
|
|
|
20.0 |
|
|
|
15.0 |
|
|
|
10.0 |
|
180.0
|
|
|
20.0 |
|
|
|
20.0 |
|
|
|
19.0 |
|
|
|
14.0 |
|
200.0
|
|
|
20.0 |
|
|
|
20.0 |
|
|
|
20.0 |
|
|
|
18.0 |
|
|
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|
|
A short-term incentive plan for
management, payable in cash, which is based primarily on
earnings, adjusted for certain safety and performance factors.
Most of our locations have similar programs for both hourly and
salaried employees.
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A stock based long-term
incentive plan for key managers. As more fully discussed in
Note 7 to our interim consolidated financial statements an
initial, emergence-related award was made under this program.
Additional awards are expected to be made in future years.
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In connection with the sale of our interests in and related to
the Gramercy/ KJBC, we agreed to indemnify the buyers for up to
$5 million of losses suffered by the buyers that result
from any failure of our representations and warranties to be
true. Upon the closing of the transaction, such amount was
recorded in long-term liabilities in the accompanying financial
statements. A claim for the full amount of the indemnity was
made initially. However, in October 2006, the claimant filed a
revised report to indicate that its claim was approximately
$2 million and separately filed for summary judgment in
respect to its claim. We continue to evaluate the claim and, as
such, have no basis nor enough information to revise the
accrual. The indemnity expired with respect to additional claims
in October 2006.
During the third quarter of 2005 and August 2006, we placed
orders for certain equipment and services intended to augment
our heat treat and aerospace capabilities at our Trentwood
facility. We expect to become obligated for costs related to
these orders of approximately $105 million, approximately
$45 million of such cost was incurred in 2005 and through
the third quarter of 2006. The balance will likely be incurred
primarily over the remainder of 2006 and 2007, with the majority
of the remaining costs being incurred in 2007.
At September 30, 2006, there was approximately
$7.1 million of accrued, but unpaid professional fees that
have been approved for payment by the bankruptcy court.
Additionally, certain professionals had success fees
due upon our emergence from chapter 11 bankruptcy.
Approximately $5.0 million of such amounts were borne by us
and were recorded in connection with emergence and fresh start
accounting.
46
Managements discussion and analysis of financial
condition and results of operations
NEW ACCOUNTING PRONOUNCEMENTS
Please see Note 2 to our interim consolidated financial
statements for a discussion of new accounting pronouncements.
Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R), SFAS No. 158,
was issued in September 2006. SFAS No. 158 requires a
company to recognize the overfunded or underfunded status of
single-employer defined benefit postretirement plan(s) as an
asset or liability in its statement of financial position and to
recognize changes in that funded status in comprehensive income
in the year in which the changes occur. Prior standards only
required the overfunded or underfunded status of a plan to be
disclosed in the notes to the financial statements. In addition,
SFAS No. 158 requires that a company disclose in the
notes to the financial statements additional information about
certain effects on net periodic benefit cost for the next fiscal
year that arise from delayed recognition of the gains or losses,
prior service costs or credits, and transition asset or
obligations. We must adopt SFAS No. 158 in our 2006
annual financial statements. Given the application of fresh
start reporting in the third quarter of 2006, the funded status
of our defined benefit pension plans is fully reflected in our
September 30, 2006 balance sheet and therefore we expect
SFAS No. 158 to have no material impact on our balance
sheet reporting for these plans. However, we have not yet
completed our review of the possible impacts of
SFAS No. 158 in respect of the net assets or
obligations of the Salaried Retiree VEBA Trust and the Union
VEBA Trust and cannot, therefore, predict what, if any, impacts
adoption of SFAS No. 158 will have on the balance
sheet in regard to the VEBAs.
Statement of Financial Accounting Standards No. 157,
Fair Value Measurements, SFAS No. 157, was
issued in September 2006 to increase consistency and
comparability in fair value measurements and to expand related
disclosures. The new standard includes a definition of fair
value as well as a framework for measuring fair value. The
provisions of this standard apply to other accounting
pronouncements that require or permit fair value measurements.
The standard is effective for fiscal periods beginning after
November 15, 2007 and should be applied prospectively,
except for certain financial instruments where it must be
applied retrospectively as a cumulative-effect adjustment to the
balance of opening retained earnings in the year of adoption. We
are still evaluating SFAS No. 157 but do not currently
anticipate that the adoption of this standard will have a
material impact on our financial statements.
Staff Accounting Bulletin No. 108, Guidance for
Quantifying Financial Statement Misstatements,
SAB No. 108, was issued by the Securities and Exchange
Commission staff in September 2006. SAB No. 108
establishes a specific approach for the quantification of
financial statement errors based on the effects of the error on
each of our financial statements and the related financial
statement disclosures. The provisions of SAB No. 108
are effective for our 2006 annual financial statements. We do
not anticipate that the adoption of this bulletin will have a
material impact on its financial statements.
CRITICAL ACCOUNTING POLICIES
Successor
Critical accounting policies fall into two broad categories. The
first type of critical accounting policies includes those that
are relatively straight forward in their application, but which
can have a significant impact on the reported balances and
operating results, like revenue recognition policies and
inventory accounting methods. The first type of critical
accounting policies is outlined in Note 2 of our interim
consolidated financial statements and is not addressed below.
The second type of critical accounting policies includes those
that are both very important to the portrayal of our financial
condition and results, and require managements most
difficult, subjective and/or complex judgments. Typically, the
47
Managements discussion and analysis of financial
condition and results of operations
circumstances that make these judgments difficult, subjective
and/or complex have to do with the need to make estimates about
the effect of matters that are inherently uncertain. Our
critical accounting policies after emergence from
chapter 11 will, in some cases, be different from those
before emergence, as many of the significant judgments affecting
the financial statements related to matters or items directly a
result of the chapter 11 proceedings or related to
liabilities that were resolved pursuant to our plan of
reorganization. See the Notes to our interim consolidated
financial statements for discussion of possible differences.
While we believe that all aspects of our financial statements
should be studied and understood in assessing our current and
expected future financial condition and results, we believe that
the accounting policies that warrant additional attention
include:
Application of fresh start accounting
Upon our emergence from chapter 11, we applied fresh
start accounting to our consolidated financial statements
as required by
SOP 90-7. As such,
in July 2006, we adjusted stockholders equity to equal the
reorganization value of the entity at emergence. Additionally,
items such as accumulated depreciation, accumulated deficit and
accumulated other comprehensive income (loss) were reset to
zero. We allocated the reorganization value to our individual
assets and liabilities based on their estimated fair value at
the emergence date based, in part, on information from a third
party appraiser. Such items as current liabilities, accounts
receivable and cash reflected values similar to those reported
prior to emergence. Items such as inventory, property, plant and
equipment, long-term assets and long-term liabilities were
significantly adjusted from amounts previously reported. Because
fresh start accounting was adopted at emergence and because of
the significance of liabilities subject to compromise that were
relieved upon emergence, meaningful comparisons between the
historical financial statements and the financial statements
from and after emergence are difficult to make.
Our judgments and estimates with respect to commitments and
contingencies
Valuation of legal and other contingent claims is subject to a
great deal of judgment and substantial uncertainty. Under GAAP,
companies are required to accrue for contingent matters in their
financial statements only if the amount of any potential loss is
both probable and the amount (or a range) of
possible loss is estimatable. In reaching a
determination of the probability of an adverse ruling in respect
of a matter, we typically consult outside experts. However, any
such judgments reached regarding probability are subject to
significant uncertainty. We may, in fact, obtain an adverse
ruling in a matter that we did not consider a
probable loss and which, therefore, was not accrued
for in our financial statements. Additionally, facts and
circumstances in respect of a matter can change causing key
assumptions that were used in previous assessments of a matter
to change. It is possible that amounts at risk in respect of one
matter may be traded off against amounts under
negotiations in a separate matter. Further, in estimating the
amount of any loss, in many instances a single estimation of the
loss may not be possible. Rather, we may only be able to
estimate a range for possible losses. In such event, GAAP
requires that a liability be established for at least the
minimum end of the range assuming that there is no other amount
which is more likely to occur.
Our judgments and estimates in respect of our employee
defined benefit plans
Defined benefit pension and post retirement medical obligations
included in the consolidated financial statements at
June 30, 2006 and at prior dates are based on assumptions
that were subject to variation from
year-to-year. Such
variations could have caused our estimate of such obligations to
vary significantly. Restructuring actions relating to our exit
from most of our commodities businesses (such as the indefinite
curtailment of the Mead smelter) also had a significant impact
on such amounts.
The most significant assumptions used in determining the
estimated year-end obligations were the assumed discount rate,
long-term rate of return, or LTRR, and the assumptions regarding
future
48
Managements discussion and analysis of financial
condition and results of operations
medical cost increases. Since recorded obligations represent the
present value of expected pension and postretirement benefit
payments over the life of the plans, decreases in the discount
rate (used to compute the present value of the payments) would
cause the estimated obligations to increase. Conversely, an
increase in the discount rate would cause the estimated present
value of the obligations to decline. The LTRR on plan assets
reflects an assumption regarding what the amount of earnings
would be on existing plan assets (before considering any future
contributions to the plans). Increases in the assumed LTRR would
cause the projected value of plan assets available to satisfy
pension and postretirement obligations to increase, yielding a
reduced net expense in respect of these obligations. A reduction
in the LTRR would reduce the amount of projected net assets
available to satisfy pension and postretirement obligations and,
thus, cause the net expense in respect of these obligations to
increase. As the assumed rate of increase in medical costs goes
up, so does the net projected obligation. Conversely, if the
rate of increase was assumed to be smaller, the projected
obligation declines.
Our judgments and estimates in respect to environmental
commitments and contingencies
We are subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches
of such laws and regulations and to claims and litigation based
upon such laws and regulations. Based on our evaluation of
environmental matters, we have established environmental
accruals, primarily related to potential solid waste disposal
and soil and groundwater remediation matters. These
environmental accruals represent our estimate of costs
reasonably expected to be incurred on a going concern basis in
the ordinary course of business based on presently enacted laws
and regulations, currently available facts, existing technology
and our assessment of the likely remediation action to be taken.
However, making estimates of possible environmental remediation
costs is subject to inherent uncertainties. 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.
See Note 8 of our notes to interim consolidated financial
statements for additional information in respect of
environmental contingencies.
Our judgments and estimates in respect of conditional asset
retirement obligations
Companies are required to estimate incremental costs for special
handling, removal and disposal costs of materials that may or
will give rise to conditional asset retirement obligations and
then discount the expected costs back to the current year using
a credit adjusted risk free rate. Under current accounting
guidelines, liabilities and costs for conditional asset
retirement obligations must be recognized in a companys
financial statements even if it is unclear when or if the
conditional asset retirement obligations will be triggered. If
it is unclear when or if a conditional asset retirement
obligation will be triggered, companies are required to use
probability weighting for possible timing scenarios to determine
the probability weighted amounts that should be recognized in
our financial statements. We have evaluated our exposures to
conditional asset retirement obligations and determined that we
have conditional asset retirement obligations at several of our
facilities. The vast majority of such conditional asset
retirement obligations consist of incremental costs that would
be associated with the removal and disposal of asbestos (all of
which is believed to be fully contained and encapsulated within
walls, floors, ceilings or piping) of certain of the older
facilities if such facilities were to undergo major renovation
or be demolished. No plans currently exist for any such
renovation or demolition of such facilities and our current
assessment is that the most probable scenarios are that no such
conditional asset retirement obligation would be triggered for
20 or more years, if at all. Nonetheless, we have recorded an
estimated conditional asset retirement obligation liability of
approximately $2.7 million at December 31, 2005 and we
expect that this amount will increase substantially over time.
49
Managements discussion and analysis of financial
condition and results of operations
The estimation of conditional asset retirement obligations is
subject to a number of inherent uncertainties including:
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the timing of when any such
conditional asset retirement obligation may be incurred;
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the ability to accurately
identify all materials that may require special handling or
treatment;
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the ability to reasonably
estimate the total incremental special handling and other costs;
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the ability to assess the
relative probability of different scenarios which could give
rise to a conditional asset retirement obligation; and
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other factors outside our
control including changes in regulations, costs, and interest
rates.
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Actual costs and the timing of such costs may vary significantly
from the estimates, judgments, and probable scenarios we
considered, which could, in turn, have a material impact on our
future financial statements.
require special handling, treatment, etc., (3) the ability
to reasonably estimate the total incremental special handling
and other costs, (4) the ability to assess the relative
probability of different scenarios which could give rise to a
CARO, and (5) other factors outside a companys
control including changes in regulations, costs, interest rates,
etc. As such, actual costs and the timing of such costs may vary
significantly from the estimates, judgments and probable
scenarios considered by us, which could, in turn, have a
material impact on our future financial statements.
Recoverability of recorded asset values
Under GAAP, assets to be held and used are evaluated for
recoverability differently than assets to be sold or disposed
of. Assets to be held and used are evaluated based on their
expected undiscounted future net cash flows. So long as we
reasonably expects that such undiscounted future net cash flows
for each asset will exceed the recorded value of the asset being
evaluated, no impairment is required. However, if plans to sell
or dispose of an asset or group of assets meet a number of
specific criteria, then, under GAAP, such assets should be
considered held for sale/disposition and their recoverability
should be evaluated, based on expected consideration to be
received upon disposition. Sales or dispositions at a particular
time will be affected by, among other things, the existing
industry and general economic circumstances as well as out own
circumstances, including whether or not assets will (or must) be
sold on an accelerated or more extended timetable. Such
circumstances may cause the expected value in a sale or
disposition scenario to differ materially from the realizable
value over the normal operating life of assets, which would
likely be evaluated on long-term industry trends.
Income Tax Provisions in Interim Periods
In accordance with GAAP, financial statements for interim
periods are to include an income tax provision based on the
effective tax rate expected to be incurred in the current year.
Accordingly, estimates and judgments must be made for each
applicable taxable jurisdiction as to the amount of taxable
income that may be generated, the availability of deductions and
credits expected and the availability of net operating loss
carryforwards or other tax attributes to offset taxable income.
Making such estimates and judgments is subject to inherent
uncertainties given the difficulty of predicting such factors as
future market conditions, customer requirements, the cost for
key inputs such as energy and primary aluminum, its overall
operating efficiency and many other items. For purposes of
preparing our September 30, 2006 interim consolidated
financial statements, we have considered our actual operating
results in the nine months ended September 30, 2006 as well
as our
50
Managements discussion and analysis of financial
condition and results of operations
forecasts for the balance of the year. Based on this and other
available information, we do not expect to generate
U.S. taxable income for the full year. However, among other
things, should:
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actual results for the balance
of 2006 vary from that in the nine months ended
September 30, 2006 and our forecasts due to one or more of
the factors cited above or elsewhere in this prospectus for the
year ended December 31, 2005;
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income be distributed
differently than expected among tax jurisdictions;
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one or more material events or
transactions occur which were not contemplated; or
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certain expected deductions,
credits or carryforwards not be available;
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then, it is possible that the effective tax rate for 2006 could
vary materially from the assessments used to prepare the
September 30, 2006 interim consolidated financial
statements included elsewhere in this prospectus. Additionally,
post emergence, our tax provision will be affected by the
impacts of our plan of reorganization and by the application of
fresh start accounting.
Predecessor
Critical accounting policies are those that are both very
important to the portrayal of our financial condition and
results, and require managements most difficult,
subjective, and/or complex judgments. Typically, the
circumstances that make these judgments difficult, subjective
and/or complex have to do with the need to make estimates about
the effect of matters that are inherently uncertain. Our
critical accounting policies after emergence from
chapter 11 bankruptcy will, in some cases, be different
from those before emergence. Many of the significant judgments
affecting our financial statements relate to matters related to
our chapter 11 bankruptcy proceedings or liabilities that
were resolved pursuant to our plan of reorganization.
While we believe all aspects of our financial statements should
be studied and understood in assessing our current and future
financial condition and results, we believe that the accounting
policies that warrant additional attention include:
Our judgments and estimates with respect to commitments and
contingencies
Valuation of legal and other contingent claims is subject to
judgment and substantial uncertainty. Under generally accepted
accounting standards, or GAAP, companies are required to accrue
for contingent matters in their financial statements only if the
amount of any potential loss is both probable and
the amount or range of possible loss is estimatable.
In reaching a determination of the probability of an adverse
rulings, we typically consult outside experts. However, any
judgments reached regarding probability are subject to
significant uncertainty. We may, in fact, obtain an adverse
ruling in a matter that we did not consider a
probable loss and which was not accrued for in our
financial statements. Additionally, facts and circumstances
causing key assumptions that were used in previous assessments
are subject to change. It is possible that amounts at risk in
one matter may be traded off against amounts
under negotiation in a separate matter. Further, in many
instances a single estimation of a loss may not be possible.
Rather, we may only be able to estimate a range for possible
losses. In such event, GAAP requires that a liability be
established for at least the minimum end of the range assuming
that there is no other amount which is more likely to occur.
Prior to our emergence from chapter 11 bankruptcy, we had
two potentially material contingent obligations that were
subject to significant uncertainty and variability in their
outcome: (1) the USW unfair labor practice claim, and
(2) the net obligation in respect of personal
injury-related matters. See Business Legal
Proceedings.
51
Managements discussion and analysis of financial
condition and results of operations
As more fully discussed in Note 19 of our interim
consolidated financial statements, we accrued an amount in the
fourth quarter of 2004 for the USW unfair labor practice
matter. We did not accrue any amount prior to the fourth quarter
of 2004 because we did not consider the loss to be
probable. Our assessment had been that the possible
range of loss in this matter ranged from zero to
$250.0 million based on the proof of claims filed (and
other information provided) by the National Labor Relations
Board, or NLRB, and the USW in connection with our
reorganization proceedings. While we continued to believe that
the unfair labor practice charges were without merit, during
January 2004, we agreed to allow a claim in favor of the USW in
the amount of the $175.0 million as a compromise and in
return for the USW agreeing to substantially reduce or eliminate
certain benefit payments as more fully discussed in Note 19
to our interim consolidated financial statements. However, this
settlement was not recorded at that time because it was still
subject to bankruptcy court approval. The settlement was
ultimately approved by the bankruptcy court in February 2005
and, as a result of the contingency being removed with respect
to this item (which arose prior to the December 31, 2004
balance sheet date), a
non-cash charge of
$175.0 million was reflected in our consolidated financial
statements at December 31, 2004.
Also, as more fully discussed in Note 19 to our interim
consolidated financial statements, we were one of many
defendants in personal injury claims by a large number of
persons who assert that their injuries were caused by, among
other things, exposure to asbestos during, or as a result of,
their employment or association with us or by exposure to
products containing asbestos last produced or sold by us more
than 20 years ago. We have also previously disclosed that
certain other personal injury claims had been filed in respect
of alleged pre-filing date exposure to silica and coal tar pitch
volatiles. Due to the chapter 11 bankruptcy proceedings,
existing lawsuits in respect of all such personal injury claims
were stayed and new lawsuits could not be commenced against us.
Our June 30, 2006 balance sheet includes a liability for
estimated asbestos-related costs of $1,115 million, which
represents our estimate of the minimum end of a range of costs.
The upper end of our estimate of costs was approximately
$2,400 million and we are aware that certain constituents
have asserted that they believed that actual costs could exceed
the top end of our estimated range, by a potentially material
amount. No estimation of our liabilities in respect of such
matters occurred as a part of our plan of reorganization.
However, given that our plan of reorganization was implemented
in July 2006, all such obligations in respect of personal injury
claims have been resolved and will not have a continuing effect
on our financial condition after emergence.
Our June 30, 2006 balance sheet includes a long-term
receivable of $963.3 million for estimated insurance
recoveries in respect of personal injury claims. We believed
that, prior to the implementation of our plan of reorganization,
recovery of this amount was probable (if our plan of
reorganization was not approved) and additional amounts may be
recoverable in the future if additional liability is ultimately
determined to exist. However, we could not provide assurance
that all such amounts would be collected. However, as our plan
of reorganization was implemented in July 2006, the rights to
the proceeds from these policies has been transferred (along
with the applicable liabilities) to certain personal injury
trusts set up as a part of our plan of reorganization and we
have no continuing interests in such policies.
Our judgments and estimates related to employee benefit
plans
Pension and post-retirement medical obligations included in the
consolidated balance sheet at June 30, 2006 and at prior
dates were based on assumptions that were subject to variation
from year to year. Such variations can cause our estimate of
such obligations to vary significantly. Restructuring actions
relating to our exit from most of our commodities businesses
also had a significant impact on the amount of these obligations.
52
Managements discussion and analysis of financial
condition and results of operations
For pension obligations, the most significant assumptions used
in determining the estimated
year-end obligation are
the assumed discount rate and long-term rate of return on
pension assets. Since recorded pension obligations represent the
present value of expected pension payments over the life of the
plans, decreases in the discount rate used to compute the
present value of the payments would cause the estimated
obligations to increase. Conversely, an increase in the discount
rate would cause the estimated present value of the obligations
to decline. The long-term rate of return on pension assets
reflects our assumption regarding what the amount of earnings
would be on existing plan assets before considering any future
contributions to the plans. Increases in the assumed long-term
rate of return would cause the projected value of plan assets
available to satisfy pension obligations to increase, yielding a
reduced net pension obligation. A reduction in the long-term
rate of return would reduce the amount of projected net assets
available to satisfy pension obligations and, thus, caused the
net pension obligation to increase.
For post-retirement obligations, the key assumptions used to
estimate the year-end
obligations were the discount rate and the assumptions regarding
future medical costs increases. The discount rate affected the
post-retirement obligations in a similar fashion to that
described above for pension obligations. As the assumed rate of
increase in medical costs went up, so did the net projected
obligation. Conversely, as the rate of increase was assumed to
be smaller, the projected obligation declined.
Since our largest pension plans and the post retirement medical
plans were terminated in 2003 and 2004, the amount of
variability in respect of such plans was substantially reduced.
However, there were five remaining defined benefit pension plans
that were still ongoing pending the resolution of certain
litigation with the PBGC. We prevailed in the litigation against
the PBGC in August 2006. Accordingly, four of the five remaining
plans likely will be terminated during the fourth quarter of
2006, effective as of October 10, 2006, and will be replaced by
defined contribution plans.
Given that all of our significant benefit plans after the
emergence date are defined contribution plans or have limits on
the amounts to be paid, our future financial statements will not
be subject to the same volatility as our financial statements
prior to emergence and the termination of the plans.
Our judgments and estimates related to environmental
commitments and contingencies
We are subject to a number of environmental laws and
regulations, to fines or penalties that may be assessed for
alleged breaches of such laws and regulations, and to clean-up
obligations and other claims and litigation based upon such laws
and regulations. We have in the past been and may in the future
be subject to a number of claims under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980,
as amended by the Superfund Amendments Reauthorization Act of
1986, or CERCLA.
Based on our evaluation of these and other environmental
matters, we have established environmental accruals, primarily
related to investigations and potential remediation of the soil,
groundwater and equipment at our current operating facilities
that may have been adversely impacted by hazardous materials,
including PCBs. These environmental accruals represent our
estimate of costs reasonably expected to be incurred on a going
concern basis in the ordinary course of business based on
presently enacted laws and regulations, currently available
facts, existing technology and our assessment of the likely
remedial action to be taken. However, making estimates of
possible environmental costs is subject to inherent
uncertainties. As additional facts are developed and definitive
remediation plans and necessary regulatory approvals for
implementation of remediation are established or alternative
technologies are developed, actual costs may exceed the current
environmental accruals.
Our judgments and estimates related to conditional asset
retirement obligations
Companies are required to estimate incremental costs for special
handling, removal and disposal costs of materials that may or
will give rise to conditional asset retirement obligations and
then discount the
53
Managements discussion and analysis of financial
condition and results of operations
expected costs back to the current year using a credit adjusted
risk free rate. Under current accounting guidelines, liabilities
and costs for conditional asset retirement obligations must be
recognized in a companys financial statements even if it
is unclear when or if the conditional asset retirement
obligations will be triggered. If it is unclear when or if a
conditional asset retirement obligation will be triggered,
companies are required to use probability weighting for possible
timing scenarios to determine the probability weighted amounts
that should be recognized in our financial statements. We have
evaluated our exposures to conditional asset retirement
obligations and determined that we have conditional asset
retirement obligations at several of our facilities. The vast
majority of such conditional asset retirement obligations
consist of incremental costs that would be associated with the
removal and disposal of asbestos (all of which is believed to be
fully contained and encapsulated within walls, floors, ceilings
or piping) of certain of the older facilities if such facilities
were to undergo major renovation or be demolished. No plans
currently exist for any such renovation or demolition of such
facilities and our current assessment is that the most probable
scenarios are that no such conditional asset retirement
obligation would be triggered for 20 or more years, if at all.
Nonetheless, we have recorded an estimated conditional asset
retirement obligation liability of approximately
$2.7 million at December 31, 2005 and we expect that
this amount will increase substantially over time.
The estimation of conditional asset retirement obligations is
subject to a number of inherent uncertainties including:
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the timing of when any such
conditional asset retirement obligation may be incurred;
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the ability to accurately
identify all materials that may require special handling or
treatment;
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the ability to reasonably
estimate the total incremental special handling and other costs;
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the ability to assess the
relative probability of different scenarios which could give
rise to a conditional asset retirement obligation; and
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other factors outside our
control including changes in regulations, costs, and interest
rates.
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Actual costs and the timing of such costs may vary significantly
from the estimates, judgments, and probable scenarios we
considered, which could, in turn, have a material impact on our
future financial statements.
Recoverability of recorded asset values
Under GAAP, assets to be held and used are evaluated for
recoverability differently than assets to be sold or disposed
of. Assets to be held and used are evaluated based on their
expected undiscounted future net cash flows. So long as we
reasonably expect that such undiscounted future net cash flows
for each asset will exceed the recorded value of the asset being
evaluated, no impairment is required. However, if plans to sell
or dispose of an asset or group of assets meet a number of
specific criteria, then, under GAAP, such assets should be
considered held for sale or disposition and their recoverability
should be evaluated, based on expected consideration to be
received upon disposition. Sales or dispositions at a particular
time will be affected by, among other things, the existing
industry and general economic circumstances as well as our own
circumstances, including whether or not assets will be sold on
an accelerated or extended timetable. Such circumstances may
cause the expected value in a sale or disposition scenario to
differ materially from the realizable value over the normal
operating life of an asset, which would likely be evaluated on
long-term industry trends.
Income tax provisions in interim periods
In accordance with GAAP, financial statements for interim
periods are to include an income tax provision based on the
effective tax rate expected to be incurred in the current year.
Accordingly,
54
Managements discussion and analysis of financial
condition and results of operations
estimates and judgments must be made for each applicable taxable
jurisdiction as to the amount of taxable income that may be
generated, the availability of deductions and credits expected
and the availability of net operating loss carryforwards or
other tax attributes to offset taxable income. Making such
estimates and judgments is subject to inherent uncertainties
given the difficulty of predicting such factors as future market
conditions, customer requirements, the cost for key inputs such
as energy and primary aluminum, its overall operating efficiency
and many other items. For purposes of preparing our
September 30, 2006 interim consolidated financial
statements, we have considered our actual operating results in
the nine months ended September 30, 2006 as well as our
forecasts for the balance of the year. Based on this and other
available information, we do not expect to generate
U.S. taxable income for the full year. However, among other
things, should:
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actual results for the balance
of 2006 vary from that in the nine months ended
September 30, 2006 and our forecasts due to one or more of
the factors cited above or elsewhere in this prospectus for the
year ended December 31, 2005;
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income be distributed
differently than expected among tax jurisdictions;
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one or more material events or
transactions occur which were not contemplated; or
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certain expected deductions,
credits or carryforwards not be available;
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then, it is possible that the effective tax rate for 2006 could
vary materially from the assessments used to prepare the
September 30, 2006 interim consolidated financial
statements included elsewhere in this prospectus. Additionally,
post emergence, our tax provision will be affected by the
impacts of our plan of reorganization and by the application of
fresh start accounting.
Predecessor reporting while in reorganization
Consolidated financial statements and information for the
periods prior to July 1, 2006 were prepared on a
going concern basis in accordance with
SOP 90-7, and did
not include the impacts of our plan of reorganization including
adjustments relating to recorded asset amounts, the resolution
of liabilities subject to compromise, or the cancellation of the
equity interests of our pre-emergence stockholders. Adjustments
related to our plan of reorganization materially affected our
consolidated financial statements included in this prospectus.
In addition, during the course of the chapter 11 bankruptcy
proceedings, there were material impacts including:
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Additional
pre-filing date claims
were identified through the proof of claim reconciliation
process and arose in connection with our actions in the
chapter 11 bankruptcy proceedings. For example, while we
considered rejection of the Bonneville Power Administration
contract to be in our best long-term interests, the rejection
resulted in an approximate $75.0 million claim by the
Bonneville Power Administration. In the quarter ended
June 30, 2006 an agreement with the Bonneville Power
Administration was approved by the bankruptcy court under which
the claim was settled for a
pre-petition claim of
$6.1 million. |
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As more fully discussed below,
the amount of
pre-filing date claims
ultimately allowed by the bankruptcy court related to contingent
claims and benefit obligations may be materially different from
the amounts reflected in our consolidated financial
statements. |
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As more fully discussed below,
changes in our business plan precipitated by the chapter 11
bankruptcy proceedings resulted in significant charges
associated with the disposition of assets.
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55
Managements discussion and analysis of financial
condition and results of operations
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our operating results 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. As discussed more fully in Notes 3 and
13 to our consolidated financial statements, we have utilized
hedging transactions to lock in a specified price or range of
prices for certain products which we sell or consume in our
production process and to mitigate our exposure to changes in
foreign currency exchange rates.
Sensitivity
Primary Aluminum
Our share of primary aluminum production from Anglesey is
approximately 150 million pounds annually. Because we
purchase alumina for Anglesey at prices linked to primary
aluminum prices, only a portion of our net revenues associated
with Anglesey are exposed to price risk. We estimate the net
portion of our share of Anglesey production exposed to primary
aluminum price risk to be approximately 100 million pounds
annually (before considering income tax effects).
Our pricing of fabricated aluminum products is generally
intended to lock in a conversion margin (representing the value
added from the fabrication process) and to pass metal price risk
on to our customers. However, in certain instances we enter into
firm price arrangements. In such instances, we have price risk
on our anticipated primary aluminum purchase for the
customers order. Total fabricated products shipments
during 2003, 2004 and 2005 for which we had price risk were (in
millions of pounds) 97.6, 119.0 and 155.0, respectively,
representing 26%, 26% and 32% of the total pounds of fabricated
products shipped in each year. Total fabricated products
shipments during the nine month periods ended September 30,
2005 and 2006 for which we had price risk were (in millions
of pounds) 109.6 and 153.0, respectively, representing 29% and
38% of total fabricated products shipments in each period.
During the last three years, our net exposure to primary
aluminum price risk at Anglesey substantially offset or roughly
equaled the volume of fabricated products shipments with
underlying primary aluminum price risk. As such, we consider our
access to Anglesey production overall to be a
natural hedge against any fabricated products firm
metal-price risk. However, since the volume of fabricated
products shipped under firm prices may not match up on a
month-to-month basis
with expected Anglesey-related primary aluminum shipments, we
may use third-party hedging instruments to eliminate any net
remaining primary aluminum price exposure existing at any time.
At September 30, 2006, our fabricated products business
held contracts for the delivery of fabricated aluminum products
that have the effect of creating price risk on anticipated
primary aluminum purchases for the fourth quarter of 2006 and
the period 2007 2010 totaling approximately (in millions
of pounds): 2006: 69, 2007: 116, 2008: 94, and
2009: 71 and 2010: 72.
Foreign currency
From time to time we will enter into forward exchange contracts
to hedge material cash commitments for foreign currencies. After
considering the completed sales of our commodities interests,
our primary foreign exchange exposure is the Anglesey-related
commitment that we fund in Great Britain Pound Sterling. We
estimate that, before consideration of any hedging activities, a
US $0.01 increase (decrease) in the value of the
Great Britain Pound Sterling results in an approximate
$0.5 million (decrease) increase in our annual
pre-tax operating
income.
56
Managements discussion and analysis of financial
condition and results of operations
Energy
We are exposed to energy price risk from fluctuating prices for
natural gas. We estimate that each $1.00 change in natural gas
prices (per thousand cubic feet) impacts our annual
pre-tax operating
results by approximately $4 million.
From time to time, in the ordinary course of business, we enter
into hedging transactions with major suppliers of energy and
energy-related financial investments. As of October 1,
2006, we had fixed price contracts that would cap the average
price we would pay for natural gas so that, when combined with
price limits in the physical gas supply agreement, our exposure
to increases in natural gas prices has been substantially
limited for approximately 76% of the natural gas purchases for
October 2006 through December 2006, approximately 31% of our
natural gas purchases from January 2007 through March 2007 and
approximately 14% of our natural gas purchases from April 2007
through June 2007.
CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
reports under the Securities Exchange Act of 1934, or Exchange
Act, is processed, recorded, summarized and reported within the
time periods specified in the SECs rules and forms and
that such information is accumulated and communicated to
management, including the principal executive officer and
principal financial officer, to allow for timely decisions
regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
Evaluation of disclosure controls and procedures
An evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures was performed as of
December 31, 2005 under the supervision of and with the
participation of our management, including the principal
executive officer and principal financial officer. Based on that
evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and
procedures were not effective for the reasons described below.
During the final reporting and closing process relating to our
first quarter of 2005, we evaluated the accounting treatment for
the VEBA payments and concluded that such payments should be
presented as a period expense. As more fully discussed in
Note 16 of the notes to consolidated financial statements
included elsewhere in this prospectus, during our reporting and
closing process relating to the preparation of our
December 31, 2005 financial statements and analyzing the
appropriate
post-emergence
accounting treatment for the VEBA payments, we concluded that
the VEBA payments made in 2005 should have been presented as a
reduction of
pre-petition retiree
medical obligations rather than as a period expense. While the
incorrect accounting treatment employed relating to the VEBA
payments did indicate that a deficiency in our internal controls
over financial reporting existed at December 31, 2005, such
deficiency was fully remediated during the final reporting and
closing process in connection with the preparation of our
December 31, 2005 financial statements and, accordingly,
did not exist at the end of subsequent periods.
During the first quarter of 2006 as part of the final reporting
and closing process relating to the preparation of our
December 31, 2005 financial statements, we concluded that
our controls and procedures were not effective as of
December 31, 2005 because a material weakness in internal
control over financial reporting existed relating to our
accounting for derivative financial instruments under Statement
of Financial Accounting Standards 133, Accounting for Derivative
Instruments and Hedging
57
Managements discussion and analysis of financial
condition and results of operations
Activities (SFAS No. 133). Specifically,
we lacked sufficient technical expertise as to the application
of SFAS 133, and our procedures relating to hedging
transactions were not designed effectively such that each of the
complex documentation requirements for hedge accounting
treatment set forth in SFAS No. 133 were evaluated
appropriately. More specifically, our documentation did not
comply with SFAS No. 133 with respect to our methods
for testing and supporting that changes in the market value of
the hedging transactions would correlate with fluctuations in
the value of the forecasted transaction to which they relate. We
believed that the derivatives we were using would qualify for
the
short-cut
method whereby regular assessments of correlation would not be
required. However, we ultimately concluded that, while the terms
of the derivatives were essentially the same as the forecasted
transaction, they were not identical and, therefore, we should
have done certain mathematical computations to prove the ongoing
correlation of changes in value of the hedge and the forecasted
transaction.
We have concluded that, had we completed our documentation in
strict compliance with SFAS No. 133, the derivative
transactions would have qualified for hedge
(e.g. deferral) treatment. The rules provide that, once
de-designation has
occurred, we can modify our documentation and
re-designate the
derivative transactions as hedges and, if
appropriately documented,
re-qualify the
transactions for prospectively deferring changes in market
fluctuations after such corrections are made.
We are working to modify our documentation and to
re-qualify open and
post 2005 derivative transactions for treatment as hedges.
Specifically, we will, as a part of the
re-designation process,
modify the documentation in respect of all our derivative
transactions to require the long form method of
testing and supporting correlation. We also intend to have
outside experts review our revised documentation once completed
and to use such experts to perform reviews of documentation in
respect of any new forms of documentation on future transactions
and to do periodic reviews to help reduce the risk that other
instances of
non-compliance with
SFAS No. 133 will occur. However, as
SFAS No. 133 is a complex document and different
interpretations are possible, absolute assurances cannot be
provided that such improved controls will prevent any/all
instances of
non-compliance.
As a result of the material weakness, we restated our financial
statements for the quarters ended March 31, 2005,
June 30, 2005 and September 30, 2005. In light of
these restatements, our management, including our principal
executive officer and principal financial officer, determined
that this deficiency constituted a material weakness in our
internal control over financial reporting at December 31,
2005. Having identified the material weakness prior to the end
of the first quarter of 2006, we changed our accounting for
derivative instruments from hedge treatment to
mark-to-market
treatment in our financial statements for the first quarter of
2006 and subsequent periods in order to comply with GAAP. While
we believe this change in our accounting for derivative
instruments technically resolves the material weakness from a
GAAP perspective, we believe that hedge accounting is more
desirable than mark-to-market accounting treatment and,
accordingly, we will not, from our own perspective, consider
this matter to be fully remediated until we complete all the
steps outlined above and requalify our derivatives for hedge
accounting treatment under GAAP.
Changes in internal controls over financial reporting
We did not have any change in our internal controls over
financial reporting during the third quarter of 2006 that has
materially affected, or is reasonably likely to affect, our
internal controls over financial reporting. However, as more
fully described below, we do not currently believe our internal
control environment is as strong as it has been in the past.
We relocated our corporate headquarters from Houston, Texas to
Foothill Ranch, California. Staff transition occurred starting
in late 2004 and was ongoing primarily during the first half of
2005. A small core group of Houston corporate personnel were
retained throughout 2005 to supplement the Foothill Ranch staff
and handle certain of the remaining chapter 11
bankruptcy-related matters.
58
Managements discussion and analysis of financial
condition and results of operations
During the second half of 2005, the monthly and quarterly
accounting, financial reporting and consolidation processes were
thought at that time to have functioned adequately.
As previously announced, in January 2006, our Vice President and
Chief Financial Officer resigned. His decision to resign was
based on a personal relationship with another employee, which we
determined to be inappropriate. The resignation was in no way
related to our internal controls, financial statements,
financial performance or financial condition. We formed the
Office of the CFO and split the CFOs duties
between our Chief Executive Officer and two long tenured
financial officers, the
VP-Treasurer and
VP-Controller. In
February 2006, a person with a significant corporate accounting
role resigned. This persons duties were split between the
VP-Controller and other
key managers in the corporate accounting group. We also used
certain former personnel to augment the corporate accounting
team. In May 2006, we hired a new CFO, and over recent
months, we have upgraded our corporate accounting and financial
staffs with respect to certain key roles.
The relocation and changes in personnel described above have
made the 2005 year-end
and 2006 accounting and reporting processes more difficult due
to the combined loss of the two individuals and reduced amounts
of institutional knowledge in the new corporate accounting
group. For these reasons, while we have applied our normal
internal controls over financial reporting in the preparation of
our 2005 and 2006 financial reports, we note that the level of
assurance we have with respect to our internal controls over
financial reporting is not as strong as it has been in past
periods.
59
Recent reorganization
Between the first quarter of 2002 and the first quarter of 2003,
Kaiser and 25 of our then existing subsidiaries filed voluntary
petitions for relief under chapter 11 of the United States
Bankruptcy Code. While in chapter 11 bankruptcy, we
continued to manage our business in the ordinary course as
debtors-in-possession
subject to the control and administration of the bankruptcy
court.
We and 16 of our subsidiaries filed the chapter 11
bankruptcy in the first quarter of 2002 primarily because of our
liquidity and cash flow problems that arose in late 2001 and
early 2002. We were facing significant near-term debt maturities
at a time of unusually weak aluminum industry business
conditions, depressed aluminum prices and a broad economic
slowdown that was further exacerbated by the events of
September 11, 2001. In addition, we had become increasingly
burdened by asbestos litigation and growing legacy obligations
for retiree medical and pension costs. The confluence of these
factors created the prospect of continuing operating losses and
negative cash flows, resulting in lower credit ratings and an
inability to access the capital markets.
In the first quarter of 2003, nine of our other subsidiaries
filed chapter 11 bankruptcy in order to protect the assets
held by those subsidiaries against possible statutory liens that
might have otherwise arisen and been enforced by the PBGC.
On December 20, 2005, the bankruptcy court entered an order
confirming two separate joint plans of liquidation for four of
our subsidiaries. On December 22, 2005, these plans of
liquidation became effective and all restricted cash and other
assets held on behalf of or by the subsidiaries, consisting
primarily of approximately $686.8 of net cash proceeds from the
sale of interests in and related to certain alumina refineries
in Australia and Jamaica, were transferred to a trustee for
subsequent distribution to holders of claims against the
subsidiaries in accordance with the terms of the plans of
liquidation. In connection with the plans of liquidation, these
four subsidiaries were dissolved and their corporate existence
was terminated.
On February 6, 2006, the bankruptcy court entered an order
confirming a plan of reorganization for us and our other
remaining subsidiaries that had filed chapter 11
bankruptcy. On May 11, 2006, the District Court for the
District of Delaware entered an order affirming the confirmation
order and adopting the bankruptcy courts findings of fact
and conclusions of law regarding confirmation of our plan of
reorganization. On July 6, 2006, our plan of reorganization
became effective and was substantially consummated, whereupon we
emerged from chapter 11 bankruptcy.
Pursuant to our plan of reorganization, on July 6, 2006,
the pre-petition ownership interests in Kaiser were cancelled
without consideration and approximately $4.4 billion of
pre-petition claims against us, including claims in respect of
debt, pension and post-retirement medical obligations and
asbestos and other tort liabilities, were resolved as follows:
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Claims in Respect of Retiree
Medical Obligations.
Pursuant to settlements reached with representatives of hourly
and salaried retirees in early 2004:
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an aggregate of 11,439,900 shares of our common stock were
delivered to the Union VEBA Trust and entities that prior to
July 6, 2006 acquired from the Union VEBA Trust rights to
receive a portion of such shares; and |
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an aggregate of 1,940,100 shares of our common stock were
delivered to the Salaried Retiree VEBA Trust and entities that
prior to July 6, 2006 acquired from the Salaried Retiree
VEBA Trust rights to receive a portion of such shares. |
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Priority Claims and Secured
Claims. All
pre-petition priority claims, pre-petition priority tax claims
and pre-petition secured claims were paid in full in cash.
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60
Recent reorganization
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Unsecured
Claims. With respect
to pre-petition unsecured claims (other than the personal injury
claims specified below):
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all pre-petition unsecured claims of the PBGC against our
Canadian subsidiaries were satisfied by the delivery of
2,160,000 shares of common stock and $2.5 million in
cash; and |
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all pre-petition general unsecured claims against us, other than
our Canadian subsidiaries, including claims of the PBGC and
holders of our public debt, were satisfied by the issuance of
4,460,000 shares of our common stock to a third-party
disbursing agent, with such shares to be delivered to the
holders of such claims in accordance with the terms of our plan
of reorganization (to the extent that such claims do not
constitute convenience claims that have been or will be
satisfied with cash payments). Of such 4,460,000 shares of
common stock, approximately 331,000 shares are being held
by the third-party disbursing agent as a reserve pending
resolution of disputed claims. To the extent a holder of a
disputed claim is not entitled to shares reserved in respect of
such claim, such shares will be distributed to holders of
allowed claims. |
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Personal Injury
Claims. Certain
trusts, the PI Trusts, were formed to receive distributions from
us, assume responsibility from us for present and future
asbestos personal injury claims, present and future silica
personal injury claims, present and future coal tar pitch
personal injury claims and present but not future noise-induced
hearing personal injury claims, and to make payments in respect
of such personal injury claims. We contributed to the
PI Trusts:
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the rights with respect to proceeds associated with personal
injury-related insurance recoveries reflected on our
consolidated financial statements at June 30, 2006 as a
receivable having a value of $963.3 million; |
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$13.0 million in cash (less approximately $0.3 million
advanced prior to July 6, 2006); |
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the stock of a subsidiary whose primary asset was approximately
145 acres of real estate located in Louisiana and the
rights as lessor under a lease agreement for such real property
that produces modest rental income; and |
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75% of a pre-petition general unsecured claim against one of our
subsidiaries in the amount of $1,106.0 million, entitling
the PI Trusts to a share of the 4,460,000 shares of common
stock distributed to unsecured claimholders. |
The PI Trusts assumed all liability and responsibility for
present and future asbestos personal injury claims, present and
future silica personal injury claims, present and future coal
tar pitch personal injury claims and present but not future
noise-induced hearing personal injury claims. As of July 6,
2006, injunctions were entered prohibiting any person from
pursuing any claims against us or any of our affiliates in
respect of such matters.
In general, the rights afforded under our plan of reorganization
and the treatment of claims under our plan of reorganization are
in complete satisfaction of and discharge all claims arising on
or before July 6, 2006. However, our plan of reorganization
does not limit any rights that the United States of America or
the individual states may have under environmental laws to seek
to enforce equitable remedies against us, though we may raise
any and all available defenses in any action to enforce such
equitable remedies. Further, with regard to certain non-owned
sites specified in the environmental settlement agreement
entered into in connection with our plan of reorganization as to
which we and the United States of America had not reached
settlement by the confirmation date, all our rights and defenses
and those of the United States of America are preserved and not
affected by our plan of reorganization. With respect to sites
owned by us after the confirmation date, specified categories of
claims of the United States of America and the individual states
party to the environmental settlement agreement are not
discharged, impaired or affected in any way by our plan of
reorganization, and we
61
Recent reorganization
maintain any and all defenses to any such claims except for any
defense alleging such claims were discharged under our plan of
reorganization.
CORPORATE STRUCTURE
Pursuant to our plan of reorganization, in connection with our
emergence from chapter 11 bankruptcy, we engaged in a
number of transactions in order to simplify our corporate
structure. The following diagram illustrates our corporate
structure as of October 31, 2006:
62
Industry overview
The aluminum fabricated products market is broadly defined as
the markets for flat-rolled, extruded, drawn, forged and cast
aluminum products, which are used in a variety of end-use
applications. We participate in certain portions of the markets
for flat-rolled, extruded/drawn and forged products focusing on
highly engineered products for aerospace and high strength,
general engineering and custom automotive and industrial
applications. The portions of markets in which we participate
accounted for approximately 20% of total North American
shipments of aluminum fabricated products in 2005.
END MARKETS
We have chosen to focus on the manufacture of aluminum
fabricated products primarily for aerospace and high strength,
general engineering and custom automotive and industrial
applications.
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Products sold for aerospace and
high strength applications represented 29% of our 2005
fabricated products shipments. We offer various aluminum
fabricated products to service aerospace and high strength
customers, including heat treat plate and sheet products, as
well as cold finish bars and seamless drawn tubes. Heat treated
products are distinguished from common alloy products by higher
strength, fracture toughness and other desired product
attributes.
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Products sold for general
engineering applications represented 44% of our 2005 fabricated
products shipments. This market consists primarily of
transportation and industrial end customers who purchase a
variety of extruded, drawn and forged fabricated products
through large North American distributors.
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Products sold for custom
automotive and industrial applications represented 27% of 2005
fabricated products shipments. These products include custom
extruded, drawn and forged aluminum products for a variety of
applications. While we are capable of producing forged products
for most end use applications, we concentrate our efforts on
meeting demand for forged products, other than wheels, in the
automotive industry.
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We have elected not to participate in certain end markets for
fabricated aluminum products, including beverage and food cans,
building and construction materials, and foil used for
packaging, which represented approximately 95% of the North
American flat rolled products market and approximately 45% of
the North American extrusion market in 2005. We believe our
chosen end markets present better opportunities for sales growth
and premium pricing of differentiated products.
North American Flat-Rolled & Extrusion Market
Size
Kaiser Served & Unserved Segments
Source: 2005 Aluminum Association, Kaiser estimates
63
Industry overview
Aerospace and defense applications
We are a leading supplier of high quality sheet, plate, drawn
tube and bar products to the global aerospace and defense
industry. Our products for these end-use applications are heat
treat plate and sheet, as well as cold finish bar and seamless
drawn tube that are manufactured to demanding specifications.
The aerospace and defense markets consumption of
fabricated aluminum products is driven by overall levels of
industrial production, cyclical airframe build rates and defense
spending, as well as the potential availability of competing
materials such as composites. According to Airline Monitor, the
global build rate of commercial aircraft over 50 seats is
expected to rise at a 4.6% compound annual growth rate through
2025. Additionally, demand growth is expected to increase for
thick plate with growth in monolithic construction
of commercial and other aircraft. In monolithic construction,
aluminum plate is heavily machined to form the desired part from
a single piece of metal (as opposed to creating parts using
aluminum sheet, extrusions or forgings that are affixed to one
another using rivets, bolts or welds). In addition to commercial
aviation demand, military applications for heat treat plate and
sheet include aircraft frames and skins and armor plating to
protect ground vehicles from explosive devices.
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Global Commercial Aircraft Build
> 50 Seats
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U.S. Index of Industrial Production
Seasonally Adjusted |
Source: Airline Monitors July 2006 Forecast
Source: Federal Reserve
General engineering applications
General engineering products consist primarily of standard
catalog items sold to large metal distributors. These products
have a wide range of uses, many of which involve further
fabrication of these products for numerous transportation and
industrial end-use applications where machining of plate, rod
and bar is intensive. Demand growth and cyclicality for general
engineering products tend to mirror broad economic patterns and
industrial activity in North America. Demand is also impacted by
the destocking and restocking of inventory in the full supply
chain.
Custom automotive and industrial applications
We manufacture custom extruded/drawn and forged aluminum
products for many automotive and industrial end uses, including
consumer durables, electrical, machinery and equipment,
automobile, light truck, heavy truck and truck trailer
applications. Examples of the wide variety of custom
64
Industry overview
products that we supply to the automotive industry are extruded
products for anti-lock braking systems, drawn tube for drive
shafts and forgings for suspension control arms and drive train
yokes. For some custom products, we perform limited fabrication,
including sawing and cutting to length. Demand growth and
cyclicality tend to mirror broad economic patterns and
industrial activity in North America, with specific individual
market segments such as automotive, heavy truck and truck
trailer applications tracking their respective build rates.
PRODUCTS AND MANUFACTURING PROCESSES
Flat-Rolled Products
Aluminum rolled products are semi-fabricated plate, sheet and
foil that are further processed into finished goods, including
aluminum cans, automotive body panels, household foil, aircraft
body structures and skins and many other industrial products.
There are two main processes used in the fabrication of
flat-rolled products: (1) a continuous casting process in
which molten aluminum is cast directly into sheets; and
(2) a hot mill process in which heated ingots (large
rectangular slabs of aluminum) are repeatedly squeezed between
large rolls to elongate the ingot to reduce thickness. The
continuous casting process can produce sheet and foil, and the
hot mill process can produce plate, sheet and foil.
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Plate (0.025 inch or
more) Plate is used in heavy duty aerospace, machinery and
transportation applications. Plate applications include
structural sections for rail cars and large ships, structural
components and skins of jumbo jets and spacecraft fuel tanks as
well as armor protection for military vehicles.
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Sheet (0.006 to
0.0249 inch) Sheet is the most widely used form of
aluminum. Sheet applications include packaging (beverage cans
and closures), home appliances and cookware, automobile panels,
aircraft skins and building products such as siding, roofing and
awnings.
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Foil (less than
0.006 inch) Foil is the thinnest of the flat-rolled
aluminum products. Foil applications include flexible packaging,
household foil and fin stock for air conditioning, industrial
and automotive applications.
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We use the hot mill process to produce plate and sheet, but do
not produce foil products. Aluminum rolled products are
manufactured using a variety of alloy mixtures, a range of
tempers (hardness), gauges (thickness) and widths, and
various coatings and finishes. Additional steps can be taken to
achieve desired metallurgical, dimensional and/or performance
properties, including annealing, heat treating, stretching and
leveling.
Extruded and Drawn Products
The extrusion process converts cast billet (a cylindrical log of
aluminum) into semi-finished rods and bars, pipes and tubes, or
profiles for direct end use or further fabrication.
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Rods and Bars Rods and
bars are used in aerospace, and general machinery applications.
Examples include rivets, screws, bolts, and machinery parts.
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Pipes and Tubes Pipes and
tubes are used in aerospace, automotive, building and
construction and consumer durable applications. Examples include
automotive drive shafts, fluid circulation and control systems
for air conditioning, hydraulics and irrigation, and light poles.
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Profiles (or
shapes) Profiles are used in automotive,
consumer durable and building and construction applications.
Examples include truck trailers, automobile bumpers, heat
distribution systems (heat sinks), doors, windows, commercial
building facades, ladders and scaffolds.
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65
Industry overview
In the extrusion process, the billet is heated to an elevated
temperature to make the metal malleable and then pressed, or
extruded, through a die that gives the material a desired two
dimensional cross section. After the extrusions are straightened
and cut to specified lengths, there can be various processing
and finishing options. Finishing options include polishing,
painting, anodizing and powder coating. Some of our presses can
produce seamless tube, a product with higher structural
integrity than extruded tube with welded seams.
Additionally, extruded tubes and rods can be pulled through a
die, or drawn, to create tubes or rods of more precise
dimensions.
Forged Products
Forging is a manufacturing process in which metal is pressed,
pounded or squeezed under great pressure into high strength
parts known as forgings. Forged parts are heat treated before
final shipment to the customer. The end-use applications are
primarily in transportation, where high
strength-to-weight
ratios in products are valued. We focus our production of forged
products on certain types of automotive applications.
RAW MATERIALS
The rolling ingots used as the starting material for flat-rolled
products and the billets used for extrusions and forgings are
cast from primary aluminum (produced in aluminum smelters),
secondary aluminum (recycled from aluminum scrap such as used
beverage cans and other post-consumer aluminum, as well as
internally generated scrap from internal manufacturing
operations) or a combination thereof. Primary aluminum is
readily available and can generally be purchased at prices set
on the London Metal Exchange plus a premium that varies by
geographic region of delivery, form and alloy. Secondary
aluminum, or scrap, is also readily available and trades at a
discount to primary metal, depending mainly on its alloy and
form.
66
Business
COMPANY OVERVIEW
We are a leading independent fabricated aluminum products
manufacturing company with 2005 net sales of approximately
$1.1 billion. We were founded in 1946 and operate 11
production facilities in the United States and Canada. We
manufacture rolled, extruded, drawn and forged aluminum products
within three product categories consisting of aerospace and high
strength products (which we refer to as Aero/ HS products),
general engineering products and custom automotive and
industrial products.
We produced and shipped approximately 482 million pounds of
fabricated aluminum products in 2005, which comprised 86% of our
total net sales. Of our total fabricated product shipments in
2005, approximately 29% were Aero/ HS products, approximately
44% were general engineering products and the remaining
approximately 27% consisted of custom automotive and industrial
products. Of our total fabricated products net sales in 2005,
approximately 38% were Aero/ HS products, approximately 38% were
general engineering products and the remaining approximately 24%
consisted of custom automotive and industrial products.
In order to capitalize on the significant growth in demand for
high quality heat treat aluminum plate products in the market
for Aero/ HS products, we have begun a major expansion at our
Trentwood facility in Spokane, Washington. We anticipate that
the Trentwood expansion will significantly increase our aluminum
plate production capacity and enable us to produce thicker gauge
aluminum plate. The $105 million expansion will be
completed in phases, with one new heat treat furnace currently
operational and expected to reach full production in the fourth
quarter of 2006, a second such furnace currently operational and
expected to reach full production no later than early 2007 and a
third such furnace becoming operational in early 2008. A new
heavy gauge stretcher, which will enable us to produce thicker
gauge aluminum plate, will also become operational in early 2008.
We have long-standing relationships with our customers, which
include leading aerospace companies, automotive suppliers and
metal distributors. We strive to tightly integrate the
management of our fabricated products operations across multiple
production facilities, product lines and target markets in order
to maximize the efficiency of product flow to our customers. In
our served markets, we seek to be the supplier of choice by
pursuing
best-in-class
customer satisfaction and offering a product portfolio that is
unmatched in breadth and depth by our competitors.
In addition to our core fabricated products operations, we have
a 49% ownership interest in Anglesey Aluminium Limited, an
aluminum smelter based in Holyhead, Wales. Anglesey has produced
in excess of 140,000 metric tons for each of the last three
fiscal years, of which 49% is available to us. We sell our
portion of Angleseys primary aluminum output to a single
third party at market prices. During 2005, sales of our portion
of Angleseys output represented 14% of our total net
sales. Because we also purchase primary aluminum for our
fabricated products at market prices, Angleseys production
acts as a natural hedge for our fabricated products operations.
Please see Risk factors The expiration of the power
agreement for Anglesey may adversely affect our cash flows and
affect our hedging programs for a discussion regarding the
potential closure of Anglesey, which could occur as soon as 2009.
COMPETITIVE STRENGTHS
We believe that the following competitive strengths will enable
us to enhance our position as one of the leaders in the
fabricated aluminum products industry:
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Leading market positions in
value-added niche markets for fabricated
products. We have
repositioned our business to concentrate on products in which we
believe we have strong
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67
Business
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production capability, well-developed technical expertise and
high product quality. We believe that we hold a leading market
share position in niche markets that represented approximately
85% of our 2005 net sales from fabricated aluminum
products. Our leading market position extends throughout our
broad product offering, including plate, sheet, seamless
extruded and drawn tube, rod, bar, extrusions and forgings for
use in a variety of value-added aerospace, general engineering
and custom automotive and industrial applications. |
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Well-positioned growth platform. We have substantial
organic growth opportunities in the production of aluminum
plate, extrusions and forgings. We are in the midst of a
$105 million expansion of our Trentwood facility that will
allow us to significantly increase production capacity and
enable us to produce thicker gauge aluminum plate. We also have
the ability to add presses and other manufacturing equipment at
several of our current facilities in order to increase extrusion
and forging capacity. Additionally, we believe our platform
provides us with flexibility to create additional stockholder
value through selective acquisitions. |
|
|
Supplier of choice. We pursue
best-in-class
customer satisfaction through the consistent, on-time delivery
of high quality products on short lead times. We offer our
customers a portfolio of both highly engineered and industry
standard products that is unmatched in breadth and depth by most
of our competitors. Our continuous improvement culture is
grounded in our production system, the Kaiser Production System,
which involves an integrated utilization of application and
advanced process engineering and business improvement
methodologies such as lean enterprise, total productive
maintenance and six sigma. We believe that our broad product
portfolio of highly engineered products and the Kaiser
Production System, together with our established record of
product innovation, will allow us to remain the supplier of
choice for our customers and further enhance our competitive
position. |
|
|
Blue-chip customer base and diverse end markets. Our
fabricated products customers include leading aerospace
companies, automotive suppliers and metal distributors, such as
A.M. Castle-Raytheon, Airbus Industrie, Boeing, Bombardier,
Eclipse Aviation, Reliance Steel & Aluminum and
Transtar-Lockheed Martin. We have long-term relationships with
our top customers, many of which we have served for decades. Our
customer base spans a variety of end markets, including
aerospace and defense, automotive, consumer durables, machinery
and equipment, and electrical. |
|
|
|
Financial strength. We have little debt and significant
liquidity as a result of our recent reorganization. We also have
net operating loss carry-forwards and other significant tax
attributes that we believe could together offset in the range of
$550 to $900 million of otherwise taxable income and may
accordingly reduce our future cash payments of U.S. income
tax. |
|
|
|
Strong and experienced management. The members of our
senior management team have, on average, 20 years of
industry work experience, particularly within the areas of
operations, technology, marketing and finance. Our management
team has repositioned our fabricated products business and led
us through our recent reorganization, creating a focused
business with financial and competitive strength. |
STRATEGY
Our principal strategies to increase stockholder value are to:
|
|
|
Pursue organic
growth. We will
continue to utilize our manufacturing platform to increase
growth in areas where we are well-positioned such as aluminum
plate, forgings and extrusions. For instance, we anticipate that
the expansion of our Trentwood facility will enable us to
significantly increase our production capacity and enable us to
produce thicker gauge aluminum plate, allowing us to capitalize
on the significant growth in demand for high quality heat treat
aluminum plate
|
68
Business
|
|
|
products in the market for Aero/ HS products. Further, our
well-equipped extrusion and forging facilities provide a
platform to expand production as we take advantage of
opportunities and our strong customer relationships in the
aerospace and industrial end markets. |
|
|
Continue to differentiate our products and provide superior
customer support. As part of our ongoing supplier of choice
efforts, we will continue to strive to achieve
best-in-class
customer satisfaction. We will also continue to offer a broad
portfolio of differentiated, superior-quality products with high
engineering content, tailored to the needs of our customers. For
instance, our unique
T-Form®
sheet provides aerospace customers with high formability as well
as requisite strength characteristics, enabling these customers
to substantially lower their production costs. Additionally, we
believe our Kaiser
Select®
Rod established a new industry benchmark for quality and
performance in automatic screw applications. By continually
striving for
best-in-class
customer satisfaction and offering a broad portfolio of
differentiated products, we believe we will be able to maintain
our premium product pricing, increase our sales to current
customers and gain new customers, thereby increasing our market
share. |
|
|
Continue to enhance our operating efficiencies. During
the last five years, we have significantly reduced our costs by
narrowing our product focus, strategically investing in our
production facilities and implementing the Kaiser Production
System. We will continue to implement additional measures to
enhance our operating efficiency and productivity, which we
believe will further decrease our production costs. |
|
|
Maintain financial strength. We intend to employ debt
judiciously in order to remain financially strong throughout the
business cycle and to maintain our flexibility to capitalize on
growth opportunities. |
|
|
Enhance our product portfolio and customer base through
selective acquisitions. We may seek to grow through
acquisitions and strategic partnerships. We will selectively
consider acquisition opportunities that we believe will
complement our product portfolio and add long-term stockholder
value. |
FABRICATED PRODUCTS OPERATIONS
Products
We produced and shipped approximately 482 million pounds of
fabricated aluminum products in 2005, which comprised 86% of our
total net sales. Of our total fabricated product shipments in
2005, approximately 29% were Aero/ HS products, approximately
44% were general engineering products and the remaining
approximately 27% consisted of custom automotive and industrial
products. Of our total fabricated products net sales in 2005,
approximately 38% were Aero/ HS products, approximately 38% were
general engineering products and the remaining approximately 24%
consisted of custom automotive and industrial products.
Aerospace and High Strength Products. Our Aero/ HS
products consist of products that are used in applications that
demand high tensile strength, superior fatigue resistance
properties and exceptional durability even in harsh
environments. For instance, aerospace manufacturers use
high-strength alloys for a variety of structures that must
perform consistently under extreme variations in temperature and
altitude. Our Aero/ HS products are used for a wide variety of
end uses. We make aluminum plate and tube for aerospace
applications, and we manufacture a variety of specialized rod
and bar products that are incorporated in goods as diverse as
baseball bats and racecars.
General Engineering Products. Our general engineering
products consist of 6000-series alloy rod, bar, tube, sheet,
plate and standard extrusions. 6000-series alloy is an
extrudable medium-strength alloy that is heat treatable and
extremely versatile. Our general engineering products have a
wide range of
69
Business
uses and applications, many of which involve further fabrication
of these products for numerous transportation and other
industrial end uses. For example, our products are used in the
specialized manufacturing process for liquid crystal display
screens, and we produce aluminum sheet and plate that is used in
the vacuum chamber in which semiconductors are made. We also
produce aluminum plate that is used to further enhance military
vehicle protection. Our rod and bar products are manufactured
into rivets, nails, screws, bolts and parts of machinery and
equipment.
Custom Automotive and Industrial Products. Our custom
products consist of extruded, drawn and forged aluminum products
for applications in many North American automotive and
industrial end uses, including consumer durables, electrical,
machinery and equipment, automobile, light truck, heavy truck
and truck trailer applications. We supply a wide variety of
automotive products, including extruded products for anti-lock
braking systems, drawn tube for drive shafts, and forgings for
suspension control arms and drive train yokes. A significant
portion of our other custom product sales in recent years has
been for water heater anodes, truck trailers and
electrical/electronic heat exchangers.
Fabricated products pricing
The price we pay for primary aluminum, the principal raw
material for our fabricated aluminum products business, consists
of two components: the price quoted for primary aluminum ingot
on the London Metals Exchange, or the LME, and the
Midwest Transaction Premium, a premium to LME reflecting
domestic market dynamics as well as the cost of shipping and
warehousing. Because aluminum prices are volatile, we manage the
risk of fluctuations in the price of primary aluminum through a
combination of pricing policies, internal hedging and financial
derivatives. Our three principal pricing mechanisms are as
follows:
|
|
|
Spot
price. Some of our
customers pay a product price that incorporates the spot price
of primary aluminum in effect at the time of shipment to a
customer. This pricing mechanism typically allows us to pass
commodity price risk to the customer.
|
|
|
Index-based
price. Some of our
customers pay a product price that incorporates an index-based
price for primary aluminum such as Platts Midwest price
for primary aluminum. This pricing mechanism also typically
allows us to pass commodity price risk to the customer.
|
|
|
|
Fixed
price. Some of our
customers pay a fixed price. During 2003, 2004, 2005 and the
nine months ended September 30, 2006, approximately
97.6 million pounds (or approximately 26%),
119.0 million pounds (or approximately 26%),
155.0 million pounds (or approximately 32%) and
153.0 million pounds (or approximately 38%), respectively,
of our fabricated products were sold at a fixed price. We bear
commodity price risk on fixed-price contracts, which we normally
hedge though a combination of financial derivatives and
production from Anglesey.
|
|
Sales, marketing and distribution
Sales are made directly to customers by our sales personnel
located in the United States, Canada and Europe, and by
independent sales agents in Asia, Mexico and the Middle East.
Our sales and marketing efforts are focused on the Aero/ HS,
general engineering and custom automotive and industrial product
markets.
Aerospace and High Strength Products. A majority of our
Aero/ HS products are sold to distributors with the remainder
sold directly to customers. Sales are made either under
contracts (with terms spanning from one year to several years)
or on an order-by-order basis. We serve this market with a North
American sales force focused on Aero/ HS and general engineering
products and direct sales representatives in Western Europe. Key
competitive dynamics for Aero/ HS products include the level of
70
Business
commercial aircraft construction spending (which in turn is
often subject to broader economic cycles) and defense spending.
General Engineering Products. A substantial majority of
our general engineering products are sold to large distributors
in North America, with orders primarily consisting of standard
catalog items shipped with a relatively short lead-time. We
service this market with a North American sales force focused on
general engineering and Aero/ HS products. Key competitive
dynamics for general engineering products include product price,
product-line breadth, product quality, delivery performance and
customer service.
Custom Automotive and Industrial Products. Our custom
products are sold primarily to first tier automotive suppliers
and industrial end users. Sales contracts are typically medium
to long term in length. Almost all sales of custom products
occur through direct channels using a North American direct
sales force that works closely with our technical sales
organization. Key demand drivers for our automotive products
include the level of North American light vehicle manufacturing
and increased use of aluminum in vehicles in response to
increasingly strict governmental standards for fuel efficiency.
Demand for industrial products is directly linked to the
strength of the U.S. industrial economy.
Kaiser
Selecttm
In 2002, we launched our Kaiser
Selecttm
brand of products to further differentiate the quality of our
general engineering products from those of our competitors. We
are able to produce high-quality Kaiser
Selecttm
products due to our process and application engineering
expertise, research and development resources, equipment design
and the Kaiser Production System, which involves a integrated
utilization of application and advanced process engineering and
business improvement methodologies such as lean enterprise,
total productive maintenance and six sigma. We believe Kaiser
Selecttm
products are the highest quality products in the industry.
Customers
In 2005 and for the nine months ended September 30, 2006,
we had more than 550 and 525 fabricated products customers,
respectively. The largest and top five customers for fabricated
products accounted for approximately 11% and 33%, respectively,
of our net sales in 2005 and 19% and 42%, respectively, of our
net sales for the nine months ended September 30, 2006. The
increase in the percentage of our net sales to our largest
fabricated products is the result of our largest fabricated
products customer, Reliance Steel & Aluminum, acquiring
one of our other top five customers in the second quarter of
2006. Sales to Reliance and the other customer (on a combined
basis) accounted for approximately 19% of our net sales in 2005
and for the nine months ended September 30, 2006. The loss
of Reliance as a customer would have a material adverse effect
on our results of operations and cash flows. However, we believe
our relationship with Reliance is good and the risk of loss of
Reliance as a customer is remote.
Manufacturing processes
We utilize the following manufacturing processes to produce our
fabricated products:
Flat rolling. The traditional manufacturing process for
aluminum flat-rolled products uses ingot as the starter
material. The ingot is processed through a series of rolling
operations, both hot and cold. Finishing steps may include heat
treatment, annealing, coating, stretching, leveling or slitting
to achieve the desired metallurgical, dimensional and
performance characteristics. Aluminum flat-rolled products are
manufactured using a variety of alloy mixtures, a range of
tempers (hardness), gauges (thickness) and widths, and various
coatings and finishes. Flat-rolled aluminum semi-finished
products are generally either sheet (under 0.25 inches in
thickness) or plate (up to 15 inches in thickness). The vast
71
Business
majority of the North American market for aluminum flat-rolled
products uses common alloy material for construction
and other applications and beverage/food can sheet. However,
these are products and markets in which we have chosen not to
participate. Rather, we have focused our efforts on heat
treat products. Heat treat products are distinguished from
common alloy products by higher strength and other desired
product attributes. The primary end use of heat treat
flat-rolled sheet and plate is for aerospace and general
engineering products.
Extrusion. The extrusion process typically starts with a
cast billet, which is an aluminum cylinder of varying length and
diameter. The first step in the process is to heat the billet to
an elevated temperature whereby the metal is malleable. The
billet is put into an extrusion press and pushed, or extruded,
through a die that gives the material the desired
two-dimensional cross section. The material is either quenched
as it leaves the press, or subjected to a post-extrusion heat
treatment cycle, to control the materials physical
properties. The extrusion is then straightened by stretching and
cut to length before being hardened in aging ovens. The largest
end uses of extruded products are in the construction, general
engineering and custom markets. Building and construction
products represents the single largest end-use market for
extrusions by a significant amount. However, we have chosen to
focus our efforts on general engineering and custom products
because we believe we have strong production capability,
well-developed technical expertise and high product quality with
respect to these products.
Drawing. Drawing is a fabrication operation pursuant to
which extruded tubes and rods are pulled through a die, or
drawn. The purpose of drawing is to reduce the diameter and wall
thickness while improving physical properties and dimensions.
Material may go through multiple drawing steps to achieve the
final dimensional specifications. The primary end use of drawn
products is for Aero/ HS products.
Forging. Forging is a manufacturing process in which
metal is pressed, pounded or squeezed under great pressure into
high-strength parts known as forgings. Forged parts are heat
treated before final shipment to the customer. The end-use
applications are primarily in transportation, where high
strength-to-weight
ratios in products are valued. We focus our production on
certain types of automotive applications.
Production facilities
A description of the manufacturing processes utilized and
products made at each of our 11 production facilities is shown
below:
|
|
|
|
|
Location |
|
Manufacturing process |
|
Products |
|
Chandler, Arizona
|
|
Drawing |
|
Aero/HS |
Greenwood, South Carolina
|
|
Forging |
|
Custom |
Jackson, Tennessee
|
|
Extrusion and drawing |
|
Aero/HS and general engineering |
London, Ontario
|
|
Extrusion |
|
Custom |
Los Angeles, California
|
|
Extrusion |
|
General engineering and custom |
Newark, Ohio
|
|
Extrusion and rolling |
|
Aero/HS and general engineering |
Richland, Washington
|
|
Extrusion |
|
Aero/HS and general engineering |
Richmond, Virginia
|
|
Extrusion and drawing |
|
General engineering and custom |
Sherman, Texas
|
|
Extrusion |
|
Custom |
Spokane, Washington
|
|
Rolling |
|
Aero/HS and general engineering |
Tulsa, Oklahoma
|
|
Extrusion |
|
General engineering |
Many of our facilities employ the same basic manufacturing
processes and produce the same type of products. Over the past
several years, given the similar economic and other
characteristics at each
72
Business
location, we have made a significant effort to more tightly
integrate the management of our fabricated products operations
across multiple production facilities, product lines, and target
markets in order to maximize the efficiency of product flow to
our customers. A substantial portion of purchasing of primary
aluminum for fabrication is centralized in an effort to maximize
price, payment terms and other benefits. Because many customers
purchase a variety of our products that are produced at
different plants, we have also substantially integrated our
sales force. We believe that integration of our operations
allows us to capture efficiencies while allowing plant personnel
to remain highly focused on particular product lines.
Research and development
We operate three research and development centers. Our Rolling
and Heat Treat Center and our Metallurgical Analysis Center are
both located at our Trentwood facility in Spokane, Washington.
The Rolling and Heat Treat Center has complete hot rolling, cold
rolling and heat treat capabilities to simulate, in small lots,
processing of flat-rolled products for process and product
development on an experimental scale. The Metallurgical Analysis
Center consists of a full metallographic laboratory and a
scanning electron microscope to support research development
programs as well as respond to plant technical service requests.
The third center, our Solidification and Casting Center, is
located in Newark, Ohio and has a short stroke experimental
caster with ingot cast rolling capabilities for the experimental
rolling mill and for extrusion billet used in plant extrusion
trials. Due to our research and development efforts, we have
been able to introduce products such as our unique
T-Form®
sheet which provides aerospace customers with high formability
as well as requisite strength characteristics, enabling these
customers to substantially lower their production costs.
Raw materials
We purchase substantially all of the primary aluminum and
recycled and scrap aluminum used to make our fabricated products
from third party suppliers. In a majority of the cases, we
purchase primary aluminum ingot and recycled and scrap aluminum
in varying percentages depending on market factors such as price
and availability. Primary aluminum is typically based on the
Average Midwest Transaction Price, or Midwest Price, which has
typically ranged between $0.03 to $0.075 per pound above
the price traded on the LME depending on primary aluminum supply
and demand dynamics in North America. Recycled and scrap
aluminum are typically purchased at a modest discount to ingot
prices but can require additional processing. In addition to
producing fabricated aluminum products for sale to third
parties, certain of our production facilities provide one
another with billet, log or other intermediate materials in lieu
of purchasing such items from third party suppliers. For
example, a substantial majority of the product from our
Richland, Washington facility is used as base input at our
Chandler, Arizona facility; our Sherman, Texas plant is
currently supplying billet and logs to our Tulsa, Oklahoma
facility; our Richmond, Virginia facility typically receives
some portion of its metal supply from our London, Ontario or
Newark, Ohio facilities, or both; and our Newark, Ohio facility
also supplies billet and log to our Jackson, Tennessee facility
and extruded forge stock to our Greenwood, South Carolina
facility.
PRIMARY ALUMINUM OPERATIONS
We own a 49% interest in Anglesey, which owns an aluminum
smelter at Holyhead, Wales. Rio Tinto Plc owns the remaining 51%
ownership interest in Anglesey and has
day-to-day operating
responsibility for Anglesey, although certain decisions require
the unanimous approval of both shareholders.
Anglesey has produced in excess of 140,000 metric tons for each
of the last three fiscal years. We supply 49% of Angleseys
alumina requirements and purchase 49% of Angleseys
aluminum output, in
73
Business
each case based on a market related pricing formula. Anglesey
produces billet, rolling ingot and sow for the U.K. and European
marketplace. We sell our share of Angleseys output to a
single third party at market prices. The price received for
sales of production from Anglesey typically approximates the LME
price. We also realize a premium (historically between $0.05 and
$0.12 per pound above the LME price depending on the
product) for sales of value added products such as billet and
rolling ingot.
To meet our obligation to sell alumina to Anglesey in proportion
to our ownership percentage, we purchase alumina under contracts
that extend through 2007 at prices that are tied to market
prices for primary alumina. We will need to secure a new alumina
contract for the period after 2007. We can give no assurance
regarding our ability to secure a source of alumina on
comparable terms. If we are unable to do so, the results of our
primary aluminum operations may be affected.
Anglesey operates under a power agreement that provides
sufficient power to sustain its operations at full capacity
through September 2009. The nuclear facility which supplies
power to Anglesey is scheduled to cease operations shortly
thereafter. Angleseys ability to operate past September
2009 is dependent upon finding adequate power at an acceptable
purchase price. We can give no assurance that Anglesey will be
able to do so. The process of shutting down Anglesey due to
power unavailability or otherwise would involve significant
costs to Anglesey which would decrease or eliminate its ability
to pay dividends to us. The process of shutting down Anglesey
may also involve transition issues which may prevent Anglesey
from operating at full capacity until the expiration of the
current power agreement.
COMPETITION
The fabricated aluminum industry is highly competitive. We
concentrate our fabricating operations on selected products for
which we believe we have production capability, technical
expertise, high-product quality, and geographic and other
competitive advantages. Competition in the sale of fabricated
aluminum products is driven by quality, availability, price and
service, including delivery performance. Our primary competition
in flat-rolled products is Alcoa, Inc. and Alcan Inc. In the
extrusion market, we compete with many regional participants as
well as larger firms with national reach such as Alcoa, Norsk
Hydro ASA and Indalex. Many of our competitors are substantially
larger, have greater financial resources, and may have other
strategic advantages, including more efficient technologies or
lower raw material and energy costs.
Our fabricated aluminum products facilities are located in North
America. To the extent our competitors have production
facilities located outside North America, they may be able to
produce similar products at a lower cost. We may not be able to
adequately reduce cost to compete with these products. Increased
competition could cause a reduction in our shipment volume and
profitability or increase our expenditures, any one of which
could have a material adverse effect on our results of
operations.
In addition, our fabricated aluminum products compete with
products made from other materials, such as steel and
composites, for various applications, including aircraft
manufacturing. The willingness of customers to accept
substitutions for aluminum and the ability of large customers to
exert leverage in the marketplace to reduce the pricing for
fabricated aluminum products could adversely affect our results
of operations.
For the heat treat plate and sheet products, new competition is
limited by technological expertise that only a few companies
have developed through significant investment in research and
development. Further, use of plate and sheet in safety critical
applications make quality and product consistency critical
factors. Suppliers must pass rigorous qualification process to
sell to airframe manufacturers.
74
Business
Additionally, significant investment in infrastructure and
specialized equipment is required to supply heat treat plate and
sheet.
Barriers to entry are lower for extruded and forged products,
mostly due to the lower required investment in equipment.
However, the products that we produce are somewhat
differentiated from the majority of products sold by
competitors. We maintain a competitive advantage by using
application engineering and advanced process engineering to
distinguish our company and our products. Our metallurgical
expertise and controlled manufacturing processes enable superior
product consistency and are difficult for competitors to offer,
limiting their ability to effectively compete in many of our
product niches.
SEGMENT AND GEOGRAPHICAL AREA FINANCIAL INFORMATION
The information set forth in note 15 to our consolidated
financial statements for the year ended December 31, 2005
regarding our operating segments and our geographical operating
areas is incorporated herein by reference.
EMPLOYEES
At December 31, 2005, we had approximately 2,400 employees,
of which approximately 2,350 were employed in the fabricated
products operations and approximately 50 were employed in our
corporate offices in Foothill Ranch, California. We consider our
present relations with our employees to be good.
The table below shows each manufacturing location, the primary
union affiliation, if any, and the expiration date for the
current union contract.
|
|
|
|
|
Location |
|
Union |
|
Contract expiration date |
|
Chandler, Arizona
|
|
Non-union |
|
NA |
Greenwood, South Carolina
|
|
Non-union |
|
NA |
Jackson, Tennessee
|
|
Non-union |
|
NA |
London, Ontario
|
|
USW Canada |
|
February 2009 |
Los Angeles, California
|
|
Teamsters |
|
May 2009 |
Newark, Ohio
|
|
USW |
|
September 2010 |
Richland, Washington
|
|
Non-union |
|
NA |
Richmond, Virginia
|
|
USW/ IAM |
|
November 2010 |
Sherman, Texas
|
|
IAM |
|
December 2007 |
Spokane, Washington
|
|
USW |
|
September 2010 |
Tulsa, Oklahoma
|
|
USW |
|
November 2010 |
As part of our chapter 11 reorganization, we entered into a
settlement with the USW regarding, among other things, pension
and retiree medical obligations. Under the terms of the
settlement, we agreed to adopt a position of neutrality
regarding the unionization of any of our employees.
ENVIRONMENTAL MATTERS
We are subject to numerous environmental laws and regulations
with respect to, among other things: air and water emissions and
discharges; the generation, storage, treatment, transportation
and disposal of solid and hazardous waste; and the release of
hazardous or toxic substances, pollutants and contaminants into
the environment. Compliance with these environmental laws is and
will continue to be costly.
Our operations, including our operations conducted prior to our
emergence from chapter 11 bankruptcy, have subjected, and
may in the future subject, us to fines or penalties for alleged
breaches
75
Business
of environmental laws and to obligations to perform
investigations or clean up of the environment. We may also be
subject to claims from governmental authorities or third parties
related to alleged injuries to the environment, human health or
natural resources, including claims with respect to waste
disposal sites, the clean up of sites currently or formerly used
by us or exposure of individuals to hazardous materials. Any
investigation, clean-up or other remediation costs, fines or
penalties, or costs to resolve third-party claims may be costly
and could have a material adverse effect on our financial
position, results of operations and cash flows.
We have accrued, and will accrue, for costs relating to the
above matters that are reasonably expected to be incurred based
on available information. However, it is possible that actual
costs may differ, perhaps significantly, from the amounts
expected or accrued, and such differences could have a material
adverse effect on our financial position, results of operations
and cash flows. In addition, new laws or regulations or changes
to existing laws and regulations may occur, and we cannot assure
you as to the amount that we would have to spend to comply with
such new or amended laws and regulations or the effects that
they would have on our financial position, results of operations
and cash flows.
LEGAL PROCEEDINGS
Between the first quarter of 2002 and the first quarter of 2003,
Kaiser and 25 of our then-existing subsidiaries filed voluntary
petitions for relief under chapter 11 of the United States
Bankruptcy Code. Pursuant to our plan of reorganization, we
emerged from chapter 11 bankruptcy on July 6, 2006.
Notwithstanding the effectiveness of our plan of reorganization,
the bankruptcy court continues to have jurisdiction to, among
other things, resolve disputed prepetition claims against us,
resolve matters related to the assumption, assumption and
assignment, or rejection of executory contracts pursuant to our
plan of reorganization, and to resolve other matters that may
arise in connection with or related to our plan of
reorganization. Our plan of reorganization resolved all of our
material prepetition liabilities.
We are working with regulatory authorities and performing
studies and remediation pursuant to several consent orders with
the State of Washington relating to the historical use of oils
containing PCBs at our Trentwood facility in Spokane, Washington
prior to 1978. During April 2004, we were served with a subpoena
for documents and notified by Federal authorities that they are
investigating the alleged non-compliant release of waste water
containing PCBs at our Trentwood facility. This investigation is
ongoing. We believe we are currently in compliance in all
material respects with all applicable environmental laws and
requirements at the Trentwood facility. While we intend to
vigorously defend any claim or charges, if any should result, we
cannot assess what, if any, impact this matter may have on our
financial statements.
Various other lawsuits and claims are pending against us.
Because 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, we do not know whether
that the resolution of such uncertainties and the incurrence of
such costs could have a negative impact on our consolidated
financial position, results of operations or liquidity.
76
Management
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names and ages of each of the
current executive officers and directors of our company and the
positions they held as of October 31, 2006.
|
|
|
|
|
Name |
|
Age |
|
Position(s) |
|
Jack A. Hockema
|
|
60 |
|
President, Chief Executive Officer and Chairman of the Board;
Director |
Joseph P. Bellino
|
|
56 |
|
Executive Vice President and Chief Financial Officer |
John Barneson
|
|
55 |
|
Senior Vice President and Chief Administrative Officer |
John M. Donnan
|
|
45 |
|
Vice President, Secretary and General Counsel |
Daniel D. Maddox
|
|
46 |
|
Vice President and Controller |
Daniel J. Rinkenberger
|
|
47 |
|
Vice President and Treasurer |
George Becker
|
|
78 |
|
Director |
Carl B. Frankel
|
|
71 |
|
Director |
Teresa A. Hopp
|
|
47 |
|
Director |
William F. Murdy
|
|
64 |
|
Director |
Alfred E. Osborne, Jr., Ph.D.
|
|
61 |
|
Director |
Georganne C. Proctor
|
|
50 |
|
Director |
Jack Quinn
|
|
55 |
|
Director |
Thomas M. Van Leeuwen
|
|
50 |
|
Director |
Brett E. Wilcox
|
|
53 |
|
Director |
Experience of executive officers
Set forth below are brief descriptions of the business
experience of each of our executive officers.
Jack A. Hockema has served as our President and Chief
Executive Officer and a director since October 2001, and as
Chairman of the Board since July 2006. He previously served as
Executive Vice President and President of the Kaiser Fabricated
Products division from January 2000 to October 2001, and
Executive Vice President of Kaiser from May 2000 to October
2001. He served as Vice President of Kaiser from May 1997 to May
2000. Mr. Hockema was President of Kaiser Engineered
Products from March 1997 to January 2000. He served as President
of Kaiser Extruded Products and Engineered Components from
September 1996 to March 1997. Mr. Hockema served as a
consultant to Kaiser and acting President of Kaiser Engineered
Components from September 1995 to September 1996.
Mr. Hockema was an employee of Kaiser from 1977 to 1982,
working at our Trentwood facility, and serving as plant manager
of our former Union City, California can plant and as operations
manager for Kaiser Extruded Products. In 1982, Mr. Hockema
left Kaiser to become Vice President and General Manager of Bohn
Extruded Products, a division of Gulf+Western, and later served
as Group Vice President of American Brass Specialty Products
until June 1992. From June 1992 to September 1996,
Mr. Hockema provided consulting and investment advisory
services to individuals and companies in the metals industry. He
holds a Master of Science degree in Industrial Management and a
Bachelor of Science degree in Civil Engineering, both from
Purdue University.
Joseph P. Bellino has served as our Executive Vice
President and Chief Financial Officer since May 2006. Prior to
joining Kaiser, Mr. Bellino was employed by Steel
Technologies Inc., a flat-rolled steel processor, where he
served as chief financial officer and treasurer for nine years
and was a member of the board of directors from 2002 to 2004.
From 1996 to 1997, Mr. Bellino was president of Beacon
Capital Advisors Company, a consulting firm specializing in
mergers and acquisitions, valuations and executive advisory
services. Prior to 1996, Mr. Bellino held senior executive
positions with a privately
77
Management
held holding company with investments in the manufacturing and
distribution industries for 15 years. Mr. Bellino
holds a Bachelor of Science degree in finance and a Master of
Business Administration degree, both from Ohio State University.
John Barneson has served as our Senior Vice President and
Chief Administrative Officer since August 2001. He previously
served as our Vice President and Chief Administrative Officer
from December 1999 through August 2001. He served as Engineered
Products Vice President of Business Development and Planning
from September 1997 to December 1999. Mr. Barneson served
as Flat-Rolled Products Vice President of Business Development
and Planning from April 1996 to September 1997.
Mr. Barneson has been an employee of Kaiser since September
1975 and has held a number of staff and operation management
positions within the Flat-Rolled and Engineered Products
business units. He holds a Master of Science degree and a
Bachelor of Science degree in Industrial Engineering from Oregon
State University.
John M. Donnan has served as our Vice President,
Secretary and General Counsel since January 2005.
Mr. Donnan joined the legal staff of Kaiser in 1993 and was
named Deputy General Counsel of Kaiser in 2000. Prior to joining
Kaiser, Mr. Donnan was an associate in the Houston, Texas
office of the law firm of Chamberlain, Hrdlicka, White,
Williams & Martin. He holds a Juris Doctorate degree
from the University of Arkansas School of Law and Bachelor of
Business Administration degrees in finance and accounting from
Texas Tech University. He is a member of the Texas and
California bars.
Daniel D. Maddox has served as our Vice President and
Controller since September 1998. He served as our Controller,
Corporate Consolidation and Reporting from October 1997 through
September 1998. Mr. Maddox previously served as our
Assistant Corporate Controller from May 1997 to September 1997.
Mr. Maddox was with Arthur Andersen LLP from 1982 until
joining Kaiser in June 1996. He holds a Bachelor of Business
Administration degree from the University of Texas.
Daniel J. Rinkenberger has served as our Vice President
and Treasurer since January 2005. He previously served as our
Vice President of Economic Analysis and Planning from February
2002 through January 2005. He served as Vice President, Planning
and Business Development of Kaiser Fabricated Products division
from June 2000 through February 2002. Prior to that, he served
as Vice President, Finance and Business Planning of Kaiser
Flat-Rolled Products division from February 1998 to February
2000, and as our Assistant Treasurer from January 1995 through
February 1998. Before joining Kaiser, he held a series of
progressively responsible positions in the Treasury Department
at Pennzoil Corporation. He holds a Master of Business
Administration degree in Finance from the University of Chicago
and a Bachelor of Education degree from Illinois State
University. He is a Chartered Financial Analyst.
Experience of directors
Set forth below are brief descriptions of the business
experience of each of our independent directors.
George Becker has served as a director of Kaiser since
July 2006. Mr. Becker was with the United Steel Workers of
America for more than 40 years until his retirement in
2001, where he served two terms as President, two terms as
International Vice President and two terms as International Vice
President of Administration. Mr. Becker is currently
chairman of the labor advisory committee to the
United States Trade Representative and the Department of
Labor, appointed by President Bill Clinton and reappointed by
President George W. Bush. He is also a member of the
United StatesChina Economic & Security
Review Commission chartered by Congress to study and report on a
wide range of issues. Mr. Becker previously served as an
AFL-CIO vice president, chairing the AFL-CIO Executive
Councils key economic policy committee. During that time
Mr. Becker also served as an executive member of the
International Metalworkers Federation and Chairman of the World
Rubber Council of the International Federation of Chemical,
Energy, Mine and General Workers Unions.
78
Management
Carl B. Frankel has served as a director of Kaiser since
July 2006. Mr. Frankel currently serves as a
union-nominated member of LTV Steel Corporations board of
directors and as a member of the board of directors of Us TOO, a
prostate cancer support and advocacy organization. Previously,
Mr. Frankel was General Counsel to the USW from May 1997
until his retirement in September 2000. Prior to May 1997,
Mr. Frankel served as Assistant General Counsel and
Associate General Counsel of the USW for 29 years. From
1987 through 1999, Mr. Frankel served at the staff level of
the Collective Bargaining Forum, a government sponsored
tripartite committee consisting of government, union and
employer representatives designed to improve labor relations in
the United States. Mr. Frankel is also an elected
fellow of the College of Labor and Employment Lawyers and a
published author of several articles. Mr. Frankel has
earned the Sustained Superior Performance Award from the
National Labor Relations Board, or NLRB, and the Outstanding
Performance Award from the NLRB. Mr. Frankel earned a
Bachelors degree and Juris Doctorate from the University
of Chicago.
Teresa A. Hopp has served as a director of Kaiser since
July 2006. Ms. Hopp currently serves as a board member and
audit committee chair for On Assignment, Inc., a provider of
skilled contract professionals to the life sciences and
healthcare industries, where she is responsible for oversight of
Sarbanes-Oxley compliance. Prior to Ms. Hopps
retirement, she was the Chief Financial Officer for Western
Digital Corporation, a hard disk manufacturer, from January 2000
to October 2001 and its Vice President, Finance from September
1998 to December 1999. Prior to her employment with Western
Digital Corporation, Ms. Hopp was with Ernst &
Young LLP from 1981 where she served as an audit partner for
four years. During her tenure at Ernst & Young LLP, she
managed audit department resource planning and scheduling, and
served as internal education director and information systems
audit and security director. She graduated summa cum laude from
the California State University, Fullerton, with a
Bachelors degree in Business Administration.
William F. Murdy has served as a director of Kaiser since
July 2006. Mr. Murdy has been the Chairman and Chief
Executive Officer of Comfort Systems USA, a commercial heating,
ventilation and air conditioning construction and service
company, since June 2000. Mr. Murdy previously served as
President and Chief Executive Officer of Club Quarters, and
Chairman, President and Chief Executive Officer of Landcare USA,
Inc. Mr. Murdy has also served as President and Chief
Executive Officer of General Investment & Development,
and as President and Managing General Partner with Morgan
Stanley Venture Capital, Inc. He previously served as Senior
Vice President and Chief Operating Officer of Pacific Resources,
Inc. Mr. Murdy currently serves on the board of directors
of Comfort Systems USA and UIL Holdings Corp. He holds a
Bachelor of Science degree in Engineering from the
U.S. Military Academy, West Point, and a Masters
degree in Business Administration from the Harvard Business
School.
Alfred E. Osborne, Jr., Ph.D., has served as a
director of Kaiser since July 2006. Dr. Osborne has been
the Senior Associate Dean at the UCLA Anderson School of
Management since July 2003 and an Associate Professor of Global
Economics and Management since July 1978. From July 1987 to June
2003, Dr. Osborne served as the Director of the Harold and
Pauline Price Center for Entrepreneurial Studies at the UCLA
Anderson School of Management. He also served as Faculty
Director of The Head Start Johnson & Johnson Management
Fellows Program. Previously, he held various administrative
posts at UCLA, including terms as chairman of the Business
Economics faculty and Director of the MBA program.
Dr. Osborne currently serves on the board of directors of
K2, Inc., EMAK Worldwide, Inc., FPA New Income Fund Inc.,
FPA Capital Fund Inc. and FPA Crescent Fund, Inc. and
serves as a trustee of the WM Group of Funds. He holds a
Doctorate degree in Business Economics, a Masters degree
in Business Administration, a Master of Arts degree in Economics
and a Bachelors degree in Electrical Engineering from
Stanford University.
Georganne C. Proctor has served as a director of Kaiser
since July 2006. Ms. Proctor is currently the Executive
Vice President and Chief Financial Officer of TIAA-CREF, a
financial services company.
79
Management
Previously, Ms. Proctor was the Executive Vice
PresidentFinance for Golden West Financial Corp., the
second largest financial thrift in the United States and holding
company of World Savings Bank, from February 2003 to April 2005.
From July 1997 through September 2002, Ms. Proctor was
Senior Vice President and Chief Financial Officer of Bechtel
Corporation and served as the Vice President and Chief Financial
Officer of Bechtel Enterprises, one of its subsidiaries, from
June 1994 through June 1997. Ms. Proctor was a member of
the board of directors of Bechtel Corporation from April 1999 to
December 2002. She also served in several other financial
positions with the Bechtel Group from
1982-1991. From 1991
through 1994, Ms. Proctor was Director of Project and
Division Finance of Walt Disney Imagineering and Director of
Finance & Accounting for Buena Vista Home Video
International. Ms. Proctor currently serves on the board of
directors of Redwood Trust, Inc. She holds a Masters
degree in Business Administration from California State
University, Hayward, and a Bachelors degree in Business
Administration from the University of South Dakota.
Jack Quinn has served as a director of Kaiser since July
2006. Mr. Quinn has been the President of
Cassidy & Associates, a government relations firm,
since January 2005. Mr. Quinn assists clients to promote
policy and appropriations objectives in Washington, D.C.
with a focus on transportation, aviation, railroad, highway,
infrastructure, corporate and industry clients. From January
1993 to January 2005, Mr. Quinn served as a
United States Congressman for the state of New York.
While in Congress Mr. Quinn was Chairman of the
Transportation and Infrastructure Subcommittee on Railroads. He
was also a senior member of the Transportation Subcommittees on
Aviation, Highways and Mass Transit. In addition, Mr. Quinn
was Chairman of the Executive Committee in the Congressional
Steel Caucus. Prior to his election to Congress, Congressman
Quinn served as supervisor of the town of Hamburg, New York.
Mr. Quinn currently serves as a trustee of the AFL-CIO
Housing Investment Trust. Mr. Quinn received a
Bachelors degree from Siena College in Loudonville,
New York, and a Masters degree from the State
University of New York, Buffalo. Mr. Quinn received
honorary Doctorate of Law degrees from Medaille College and
Siena College. Mr. Quinn is also a certified school
district superintendent through the New York State
Education Department.
Thomas M. Van Leeuwen has served as a director of Kaiser
since July 2006. Mr. Van Leeuwen served as a
DirectorSenior Equity Research Analyst for Deutsche Bank
Securities Inc. from March 2001 until his retirement in May
2002. Prior to that, Mr. Van Leeuwen served as a
DirectorSenior Equity Research Analyst for Credit Suisse
First Boston from May 1993 to November 2000. Prior to that time,
Mr. Van Leeuwen was First Vice President of Equity Research
with Lehman Brothers. Mr. Van Leeuwen held the position of
research analyst with Sanford C. Bernstein & Co., Inc.,
and systems analyst with The Procter & Gamble Company.
Mr. Van Leeuwen holds a Masters degree in Business
Administration from the Harvard Business School and a Bachelor
of Science degree in Operations Research and Industrial
Engineering from Cornell University.
Brett E. Wilcox has served as a director of Kaiser since
July 2006. Mr. Wilcox has been an executive consultant for
a number of metals and energy companies since 2005. From 1986 to
2005, Mr. Wilcox served as Chief Executive Officer of
Golden Northwest Aluminum Company and its predecessors. Golden
Northwest Aluminum Company, together with its subsidiaries,
filed a petition for reorganization under the United States
Bankruptcy Code on December 22, 2003. Mr. Wilcox has
also served as Executive Director of Direct Services Industries,
Inc., a trade association of large aluminum and other
energy-intensive companies; an attorney with Preston,
Ellis & Gates in Seattle, Washington; Vice Chairman of
the Oregon Progress Board; a member of the Oregon
Governors Comprehensive Review of the Northwest Regional
Power System; a member of the Oregon Governors Task Forces
on structure and efficiency of state government, employee
benefits and compensation, and government performance and
accountability. Mr. Wilcox serves as a director of Oregon
Steel Mills, Inc. Mr. Wilcox received a Bachelors
degree from the Woodrow Wilson School of Public and
International Affairs at Princeton University and a Juris
Doctorate from Stanford Law School.
80
Management
BOARD OF DIRECTORS
Our board of directors currently has ten members, consisting of
Mr. Hockema, our President and Chief Executive Officer, and
nine independent directors, Messrs. Becker, Frankel, Murdy,
Osborne, Quinn, Van Leeuwen and Wilcox and Mmes. Hopp and
Proctor. Mr. Hockema serves as the Chairman of the Board,
and Dr. Osborne serves as the lead independent director.
Our certificate of incorporation and bylaws provide for a
classified board of directors consisting of three classes. The
term of the initial Class I directors will expire at the
2007 annual meeting of the stockholders; the term of the initial
Class II directors will expire at the 2008 annual meeting
of the stockholders; and the term of the Class III
directors will expire at the 2009 annual meeting of the
stockholders. Beginning in 2007, at each annual meeting of
stockholders, successors to the class of directors whose terms
expire in that year will be elected to three-year terms and
until their respective successors are elected and qualified. The
following table sets forth the class of each director.
|
|
|
|
|
Name |
|
|
|
|
Class | |
| |
Alfred E. Osborne, Jr., Ph.D.
|
|
|
Class I |
|
Jack Quinn
|
|
|
Class I |
|
Thomas M. Van Leeuwen
|
|
|
Class I |
|
George Becker
|
|
|
Class II |
|
Jack A. Hockema
|
|
|
Class II |
|
Georganne C. Proctor
|
|
|
Class II |
|
Brett E. Wilcox
|
|
|
Class II |
|
Carl B. Frankel
|
|
|
Class III |
|
Teresa A. Hopp
|
|
|
Class III |
|
William F. Murdy
|
|
|
Class III |
|
DIRECTOR DESIGNATION AGREEMENT WITH THE USW
On July 6, 2006, we entered into a Director Designation
Agreement with the USW under which the USW has certain rights to
nominate individuals to serve on our board of directors and
committees until December 31, 2012. The USW has the right
to nominate, for submission to our stockholders for election at
each annual meeting, the minimum number of candidates necessary
to ensure that, assuming such candidates are included in the
slate of director candidates recommended by our board of
directors in our proxy statement relating to the annual meeting
and our stockholders elect each candidate so included, at least
40% of the members of our board of directors immediately
following such election are directors who were either designated
by the USW pursuant to our plan of reorganization or have been
nominated by the USW in accordance with the Director Designation
Agreement. The Director Designation Agreement contains
requirements as to the timeliness, form and substance of the
notice the USW must give to our nominating and corporate
governance committee in order to nominate such candidates. The
nominating and corporate governance committee will determine in
good faith whether each candidate properly submitted by the USW
satisfies the qualifications set forth in the Director
Designation Agreement. If our nominating and corporate
governance committee determines that such candidate satisfies
the qualifications, the committee will, unless otherwise
required by its fiduciary duties, recommend such candidate to
our board of directors for inclusion in the slate of directors
to be recommended by the board of directors in our proxy
statement. The board of directors will, unless otherwise
required by its fiduciary duties, accept the recommendation and
include the director candidate in the slate of directors the
board of directors recommends.
The Director Designation Agreement also provides that the USW
will have the right to nominate an individual to fill a vacancy
on the board of directors resulting from the death, resignation,
81
Management
disqualification or removal of a director who was either
designated by the USW to serve on the board of directors
pursuant to our plan of reorganization or has been nominated by
the USW in accordance with the Director Designation Agreement.
The Director Designation Agreement further provides that, in the
event of newly created directorships resulting from an increase
in the number of our directors, the USW will have the right to
nominate the minimum number of individuals to fill such newly
created directorships necessary to ensure that at least 40% of
the members of the board of directors immediately following the
filling of the newly created directorships are directors who
were either designated by the USW pursuant to our plan of
reorganization or have been nominated by the USW in accordance
with the Director Designation Agreement. In each such case, the
USW, our nominating and corporate governance committee and the
board of directors will be required to follow the nomination and
approval procedures described above.
A candidate nominated by the USW may not be an officer,
employee, director or member of the USW or any of its local or
affiliated organizations as of the date of his or her
designation as a candidate or election as a director. Each
candidate nominated by the USW must satisfy:
|
|
|
the applicable independence
criteria contained in the Nasdaq Marketplace Rules or other
applicable criteria of the National Association of Securities
Dealers, or NASD;
|
|
|
the qualifications to serve as a
director as set forth in any applicable corporate governance
guidelines adopted by the board of directors and policies
adopted by our nominating and corporate governance committee
establishing criteria to be utilized by it in assessing whether
a director candidate has appropriate skills and experience; and
|
|
|
any other qualifications to
serve as director imposed by applicable law.
|
Finally, the Director Designation Agreement provides that, so
long as our the board of directors maintains an audit committee,
executive committee or nominating and corporate governance
committee, each such committee will, unless otherwise required
by the fiduciary duties of the board of directors, include at
least one director who was either designated by the USW to serve
on the board of directors pursuant to our plan of reorganization
or has been nominated by the USW in accordance with the Director
Designation Agreement (provided at least one such director is
qualified to serve on such committee as determined in good faith
by the board of directors).
Current members of our board of directors that were designated
by the USW pursuant to our plan of reorganization are
Messrs. Becker, Frankel, Quinn and Wilcox.
COMMITTEES OF THE BOARD OF DIRECTORS
Currently, we have four standing committees of the board of
directors: an executive committee; an audit committee; a
compensation committee; and a nominating and corporate
governance committee.
Executive committee
The executive committee of the board of directors manages our
business and affairs that require attention prior to the next
regular meeting of our board of directors. However, the
executive committee does not have the power to (1) approve
or adopt, or recommend to our stockholders, any action or matter
expressly required by law to be submitted to our stockholders
for approval, (2) adopt, amend or repeal any bylaw of our
company, or (3) take any other action reserved for action
by the board of directors pursuant to a resolution of the board
of directors or otherwise prohibited to be taken by the
executive committee by law or pursuant to our certificate of
incorporation or bylaws. The members of the executive committee
must include the Chairman of the Board and at least one of the
directors either designated by the USW pursuant to our plan of
reorganization or nominated by the USW in accordance with the
Director Designation Agreement (so long as at least one such
director is
82
Management
qualified to serve thereon). A majority of the members of the
executive committee must satisfy the general independence
criteria set forth in the Nasdaq Marketplace Rules or other
applicable criteria of the NASD, as determined by the board of
directors reasonably and in good faith. We refer to these
criteria as the general independence criteria. Our executive
committee consists of Messrs. Hockema, Becker and Wilcox
and Ms. Hopp. Mr. Hockema currently serves as the
chair of the executive committee.
Audit committee
The audit committee oversees our accounting and financial
reporting practices and processes and the audits of our
financial statements on behalf of the board of directors. The
audit committee is responsible for appointing, compensating,
retaining and overseeing the work of our independent auditors.
Other duties and responsibilities of the audit committee include:
|
|
|
establishing hiring policies for
employees or former employees of the independent auditors;
|
|
|
reviewing our systems of
internal accounting controls;
|
|
|
discussing risk management
policies;
|
|
|
approving related party
transactions;
|
|
|
establishing procedures for
complaints regarding financial statements or accounting
policies; and
|
|
|
performing other duties
delegated to the audit committee by the board of directors from
time to time.
|
The members of the audit committee must include at least one of
the directors either designated by the USW pursuant to our plan
of reorganization or nominated by the USW in accordance with the
Director Designation Agreement (so long as at least one such
director is appropriately qualified). Each member of the audit
committee:
|
|
|
must satisfy the general
independence criteria;
|
|
|
may not, other than as a member
of the board of directors or a committee thereof, accept any
consulting, advisory or other compensatory fee from the company
or its subsidiaries (other than fixed amounts of compensation
under a retirement plan for prior service, provided such
compensation is not contingent on continued service);
|
|
|
may not be our affiliate;
|
|
|
must not have participated in
the preparation of our financial statements at any time during
the three years prior to July 6, 2006; and
|
|
|
must be able to read and
understand fundamental financial statements.
|
At least one member of the audit committee must have past
employment experience in finance or accounting, the requisite
professional certification in accounting or comparable
experience or background that results in financial
sophistication. Our audit committee consists of Mmes. Hopp and
Proctor and Messrs. Osborne, Van Leeuwen and Wilcox.
Ms. Hopp currently serves as the chair of the audit
committee.
Compensation committee
The compensation committee of the board of directors establishes
and administers our policies, programs and procedures for
compensating our senior management, including determining and
83
Management
approving the compensation of our executive officers. Other
duties and responsibilities of the compensation committee
include:
|
|
|
administering plans adopted by
the board of directors that contemplate administration by the
compensation committee, including our Equity Incentive Plan;
|
|
|
overseeing regulatory compliance
with respect to compensation matters;
|
|
|
reviewing director compensation;
and
|
|
|
performing other duties
delegated to the compensation committee by the board of
directors from time to time.
|
Each member of the compensation committee must satisfy the
general independence criteria, as well as qualify as a
non-employee
director within the meaning of
Rule 16b-3 of the
Securities Exchange Act of 1934, or the Exchange Act. Our
compensation committee is composed of Messrs. Murdy and
Quinn and Ms. Proctor. Mr. Murdy currently serves as
the chair of the compensation committee.
Nominating and corporate governance committee
The nominating and corporate governance committee of the board
of directors identifies individuals qualified to become members
of our board of directors, recommends candidates to fill
vacancies and newly-created positions on our board of directors,
recommends director nominees for the election by stockholders at
the annual meetings of stockholders and develops and recommends
to the board of directors our corporate governance principles.
Other duties and responsibilities of the nominating and
corporate governance committee include:
|
|
|
evaluating stockholder
recommendations for director nominations;
|
|
|
assisting in succession planning;
|
|
|
considering possible conflicts
of interest of members of the board of directors and management
and making recommendations to prevent, minimize or eliminate
such conflicts of interests;
|
|
|
making recommendations to the
board of directors regarding the appropriate size of the board
of directors; and
|
|
|
performing other duties
delegated to the nominating and corporate governance committee
by the board of directors from time to time.
|
The members of the nominating and corporate governance committee
must include at least one of the directors either designated by
the USW pursuant to our plan of reorganization or nominated by
the USW in accordance with the Director Designation Agreement
(so long as at least one such director is appropriately
qualified). Each member of the nominating and governance
committee must satisfy the general independence criteria. Our
nominating and corporate governance committee consists of
Messrs. Osborne, Frankel, Murdy, Quinn and Van Leeuwen.
Dr. Osborne currently serves as the chair of the nominating
and corporate governance committee.
DIRECTOR COMPENSATION
Each non-employee director receives the following compensation:
|
|
|
an annual retainer of
$30,000 per year;
|
|
|
an annual grant of restricted
stock having a value equal to $30,000;
|
|
|
a fee of $1,500 per day for
each meeting of the board of directors attended in person and
$750 per day for each such meeting attended by
phone; and
|
84
Management
|
|
|
a fee of $1,500 per day for
each committee meeting of the board of directors attended in
person on a date other than a date on which a meeting of the
board of directors is held and $750 per day for each such
meeting attended by phone.
|
In addition, our lead independent director, currently
Dr. Osborne, receives an additional annual retainer of
$10,000, the chair of our audit committee, currently
Ms. Hopp, receives an additional annual retainer of
$10,000, the chair of our compensation committee, currently
Mr. Murdy, receives an additional annual retainer of $5,000
and the chair of our nominating and corporate governance
committee, currently Dr. Osborne, receives an additional
annual retainer of $5,000, with all such amounts payable at the
same time as the annual retainer. Each non-employee director may
elect to receive shares of common stock in lieu of any or all of
his or her annual retainer, including any additional annual
retainer for service as the lead independent director or the
chairman of a committee of the board of directors.
We paid the annual retainers and made the first grant of
restricted stock pursuant to the compensation arrangements
described above as of August 1, 2006.
We reimburse all directors for reasonable and customary travel
and other disbursements relating to meetings of the board of
directors and committees thereof, and non-employee directors are
provided accident insurance with respect to Kaiser-related
business travel.
85
Management
EXECUTIVE COMPENSATION
The following table provides a summary of the compensation
awarded to, earned by or paid to our chief executive officer and
each of our other five most highly compensated executive
officers for the year ended December 31, 2005 and the two
previous years. We refer to these individuals as our named
executive officers.
Summary compensation table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual compensation | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Other annual | |
|
All other | |
|
|
|
|
Salary | |
|
Bonus | |
|
compensation | |
|
compensation | |
Name and Principal Position |
|
Year | |
|
($) | |
|
($) | |
|
($)(1) | |
|
($) | |
| |
Jack A. Hockema
|
|
|
2005 |
|
|
|
730,000 |
|
|
|
600,000 |
|
|
|
|
|
|
|
24,276 |
(2) |
President, Chief Executive Officer and
|
|
|
2004 |
|
|
|
730,000 |
|
|
|
378,500 |
|
|
|
|
|
|
|
199,193 |
(2)(3)(4) |
Chairman of the Board
|
|
|
2003 |
|
|
|
730,000 |
|
|
|
|
|
|
|
|
|
|
|
365,000 |
(3) |
|
John Barneson
|
|
|
2005 |
|
|
|
275,000 |
|
|
|
150,000 |
|
|
|
|
|
|
|
23,875 |
(2) |
Senior Vice President and
|
|
|
2004 |
|
|
|
275,000 |
|
|
|
94,625 |
|
|
|
|
|
|
|
81,200 |
(2)(3) |
Chief Administrative Officer
|
|
|
2003 |
|
|
|
275,000 |
|
|
|
|
|
|
|
|
|
|
|
125,000 |
(3) |
|
John M. Donnan
|
|
|
2005 |
|
|
|
260,000 |
|
|
|
108,000 |
|
|
|
|
|
|
|
20,733 |
(2) |
Vice President, General Counsel and
|
|
|
2004 |
|
|
|
200,000 |
|
|
|
45,420 |
|
|
|
|
|
|
|
109,000 |
(2)(3) |
Secretary
|
|
|
2003 |
|
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
|
200,000 |
(3) |
|
Daniel D. Maddox
|
|
|
2005 |
|
|
|
200,000 |
|
|
|
84,000 |
|
|
|
|
|
|
|
19,720 |
(2) |
Vice President and Controller
|
|
|
2004 |
|
|
|
200,000 |
|
|
|
52,990 |
|
|
|
|
|
|
|
116,000 |
(2)(3) |
|
|
|
2003 |
|
|
|
200,000 |
|
|
|
|
|
|
|
24,721 |
(5) |
|
|
200,000 |
(3) |
|
Edward F.
Houff(6)
|
|
|
2005 |
|
|
|
250,000 |
(7) |
|
|
103,125 |
(8) |
|
|
|
|
|
|
1,481,526 |
(2)(9) |
Chief Restructuring Officer
|
|
|
2004 |
|
|
|
400,000 |
|
|
|
219,625 |
(8) |
|
|
|
|
|
|
118,450 |
(2)(3) |
|
|
|
2003 |
|
|
|
400,000 |
|
|
|
125,000 |
(8) |
|
|
|
|
|
|
200,000 |
(3) |
|
Kerry A.
Shiba(10)
|
|
|
2005 |
|
|
|
270,000 |
|
|
|
114,000 |
|
|
|
|
|
|
|
20,825 |
(2) |
Executive Vice President and
|
|
|
2004 |
|
|
|
242,500 |
|
|
|
68,130 |
|
|
|
|
|
|
|
115,500 |
(2)(3) |
Chief Financial Officer
|
|
|
2003 |
|
|
|
190,000 |
|
|
|
|
|
|
|
|
|
|
|
190,000 |
(3) |
|
|
(1) |
Excludes perquisites and other personal benefits, which in
the aggregate amount do not exceed the lesser of either $50,000
or 10% of the total of annual salary and bonus reported for the
named executive officer. |
|
(2) |
Includes contributions under our Savings Plan described below
made with respect to 2004 and 2005, respectively, in the amount
of $16,400 and $23,983 for Mr. Hockema; $18,450 and $5,863
for Mr. Houff; $18,700 and $23,875 for Mr. Barneson;
$9,000 and $20,733 for Mr. Donnan; $16,000 and $19,720 for
Mr. Maddox; and $20,500 and $20,825 for Mr. Shiba. For
additional information, see discussion under
Retirement Plans Savings and Investment
Plan below. |
(footnotes continued on following page)
86
Management
|
|
(3) |
Includes retention payments made during 2003 and 2004,
respectively, under the Retention Plan in the amount of $365,000
and $182,500 for Mr. Hockema; $200,000 and $100,000 for
Mr. Houff; $125,000 and $62,500 for Mr. Barneson;
$200,000 and $100,000 for Mr. Donnan; $200,000 and $100,000
for Mr. Maddox; and $190,000 and $95,000 for
Mr. Shiba. As described in more detail below, the program
was not extended beyond March 2004, and no further retention
payments were made after March 2004, except for the following
withheld amounts. Excludes additional retention payments earned
under the Retention Plan with respect to the years 2002, 2003
and 2004, respectively, for each of Messrs Hockema and Barneson
as follows: $182,333, $365,000 and $182,500 for
Mr. Hockema; and $62,500, $125,000 and $62,500 for
Mr. Barneson. Pursuant to the Retention Plan, these
additional retention payments were withheld for distribution to
Messrs. Hockema and Barneson of one-half upon emergence
from chapter 11 bankruptcy and one-half one year
thereafter, subject to continued employment on that date. For
additional information regarding retention payments made
pursuant to the Retention Plan, see discussion under
Key Employee Retention Program Retention Plan
and Agreements below. |
|
(4) |
Includes $293 paid to Mr. Hockema for unused allowances
under our benefit program. |
|
(5) |
Includes an auto allowance of $22,217 and personal use of
company car of $2,504. |
|
(6) |
Mr. Houffs employment was terminated
August 15, 2005. Mr. Houff remained the Chief
Restructuring Officer and served as a consultant through
July 6, 2006. |
|
(7) |
Reflects the base salary paid to Mr. Houff in 2005
through the termination of his employment on August 15,
2005. |
|
(8) |
Under the terms of his employment agreement, Mr. Houff
was guaranteed a bonus of $125,000 annually. For 2005,
Mr. Houffs bonus was pro rated as of the termination
of his employment on August 15, 2005. Includes additional
short-term incentive payments made to Mr. Houff in 2004 and
2005 in the amount of $94,625 and $25,000, respectively. |
|
(9) |
Includes $1,200,000 in the form of payments made to
Mr. Houff in 2005 in connection with the termination of his
employment and $275,663 in the form of payments to
Mr. Houff under the terms of Mr. Houffs
non-exclusive consulting agreement for services provided in
2005. For additional information, see discussion under
Employment-Related Contracts Agreements with
Edward F. Houff below. |
|
|
(10) |
Mr. Shiba resigned effective January 23, 2006. |
Key Employee Retention Program
Effective September 3, 2002, in connection with our
chapter 11 proceeding, we adopted our Key Employee
Retention Program. The components of the Key Employee Retention
that are currently in effect consist of: a Retention Plan,
including related agreements; a Severance Plan, including
related agreements; a Change in Control Severance Program,
including related agreements; and a Long-Term Incentive Plan.
The following summary is qualified in its entirety by reference
to the full text of the Retention Plan, Severance Plan, Change
in Control Severance Program and Long-Term Incentive Plan, which
are filed as exhibits to our registration statement of which
this prospectus forms a part.
Retention Plan
Effective September 3, 2002, we adopted the Kaiser
Aluminum & Chemical Corporation Key Employee Retention
Plan, or Retention Plan, and entered into retention agreements
with selected key employees, including Messrs. Hockema,
Barneson, Donnan, Maddox and Shiba.
In general, awards payable under the Retention Plan vested, as
applicable, on September 30, 2002, March 31, 2003,
September 30, 2003 and March 31, 2004. The Retention
Plan was not extended
87
Management
beyond March 2004. Except with respect to payments of the
withheld amounts (as described below) to Messrs. Hockema
and Barneson, no further payments are payable under the
Retention Plan.
For Messrs. Hockema and Barneson, $730,000 and $250,000,
respectively of vested awards payable under the Retention Plan
were withheld for subsequent payment. One-half of such withheld
amount was paid in a lump sum in August 2006 upon our emergence
from chapter 11 bankruptcy and one-half is payable in a
lump sum on July 6, 2007 unless Messrs. Hockema or
Barneson, as applicable, is terminated by us for cause or
voluntarily terminates his employment prior to that date.
Severance Plan
Effective September 3, 2002, we adopted the Kaiser
Aluminum & Chemical Corporation Severance Plan, or
Severance Plan, to provide selected executive officers,
including Messrs. Hockema, Barneson, Donnan, Maddox and
Shiba, and other key employees with appropriate protection in
the event of certain terminations of employment and entered into
severance agreements with plan participants.
Mr. Hockemas employment agreement discussed below
replaces his participation in the Severance Plan and supersedes
his severance agreement. Mr. Shibas resignation effective
January 23, 2006 did not trigger rights under the Severence
Plan or his severance agreement. The Severance Plan and related
severance agreements terminate on July 6, 2007.
Our Severance Plan provides for payment of a severance benefit
and continuation of welfare benefits in the event of certain
terminations of employment. Participants are eligible for the
severance payment and continuation of benefits in the event the
participants employment is terminated without cause or the
participant terminates his or her employment with good reason.
The severance payment and continuation of welfare benefits are
not available if:
|
|
|
the participant receives
severance compensation or benefit continuation pursuant to a
Change in Control Agreement (as described below);
|
|
|
|
the participants
employment is terminated other than by us without cause or by
the participant for good reason; or
|
|
|
|
the participant declines to
sign, or subsequently revokes, a designated form of release.
|
In consideration for the severance payment and continuation of
welfare benefits, a participant will be subject to
noncompetition, nonsolicitation and confidentiality restrictions
following the participants termination of employment.
The severance payment payable under the Severance Plan to
Messrs. Barneson, Donnan and Maddox consists of a lump-sum
cash payment equal to two times (for Mr. Barneson) or one
time (for Messrs. Donnan and Maddox) his base salary. In
addition, medical, dental, vision, life insurance and disability
benefits are continued for a period of two years (for
Mr. Barneson) or one year (for Messrs. Donnan and
Maddox) following termination of employment. Severance payments
payable under the Severance Plan are in lieu of any severance or
other termination payments provided for under any of our other
plans or any other agreement we have with the participant.
Change in Control Severance Program
In 2002, we entered into change in control severance agreements,
or Change in Control Agreements, with certain key executives,
including Messrs. Hockema, Barneson, Donnan, Maddox and
Shiba, in order to provide them with appropriate protection in
the event of a termination of employment in connection with a
change in control or, except as otherwise provided, a
significant restructuring. Mr. Hockemas employment
agreement discussed below supersedes his Change in Control
Agreement. Mr. Shibas resignation effective
January 23, 2006 did not trigger rights under his Change in
Control
88
Management
Agreement. The Change in Control Agreements terminate on the
second anniversary of a change in control.
The Change in Control Agreements provide for severance payments
and continuation of medical, dental, vision, life insurance and
disability benefits in the event of certain terminations of
employment. The participants are eligible for severance benefits
if their employment is terminated by us without cause or by the
participant with good reason during a period that commences
90 days prior to the change in control and ends on the
second anniversary of the change in control. Participants
(including Messrs. Donnan and Maddox, but excluding
Mr. Barneson) also are eligible for severance benefits if
their employment is terminated by us due to a significant
restructuring outside of the period commencing 90 days
prior to a change in control and ending on the second
anniversary of such change in control. These benefits are not
available if:
|
|
|
the participant receives
severance compensation or benefit continuation pursuant to the
Severance Plan or any other prior agreement;
|
|
|
|
the participants
employment is terminated other than by us without cause or by
the participant for good reason; or
|
|
|
|
the participant declines to
sign, or subsequently revokes, a designated form of release.
|
In consideration for the severance payment and continuation of
benefits, a participant will be subject to noncompetition,
nonsolicitation and confidentiality restrictions following his
or her termination of employment with us.
Upon a qualifying termination of employment,
Messrs. Barneson, Donnan and Maddox are entitled to receive
the following:
|
|
|
three times (for
Mr. Barneson) or two times (for Messrs. Donnan and
Maddox) the sum of his base pay and most recent short-term
incentive target;
|
|
|
a pro-rated portion of his
short-term incentive target for the year of termination; and
|
|
|
a pro-rated portion of his
long-term incentive target in effect for the year of his
termination, provided that such target was achieved.
|
In addition, medical, dental, vision, life insurance and
disability benefits and perquisites are continued for a period
of three years (for Mr. Barneson) or two years (for
Messrs. Donnan and Maddox) after termination of employment
with us. Participants are also entitled to a payment in an
amount sufficient, after the payment of taxes, to pay any excise
tax due by him or her under Section 4999 of the Internal
Revenue Code or any similar state or local tax.
Severance payments payable under the Change in Control
Agreements are in lieu of any severance or other termination
payments provided for under any of our other plans or any other
agreement we have with the executive officer.
Long-Term Incentive Plan
During 2002, we adopted a long-term incentive plan under which
key management employees, including Messrs. Hockema,
Barneson, Donnan, Maddox and Shiba, became eligible to receive a
cash award based on our attainment of sustained cost reductions
above a stipulated threshold for the period 2002 through our
emergence from chapter 11 bankruptcy on July 6, 2006.
We refer to this plan as our Long-Term Incentive Plan. Under the
Long-Term Incentive Plan, 15% of cost reductions above the
stipulated threshold were placed in a pool to be shared by
participants based on the percentage their individual targets
comprised of the aggregate target for all participants.
89
Management
In general, one-half of the award payable under the Long-Term
Incentive Plan was paid in August 2006, and the remaining
one-half will be paid on July 6, 2007, unless the
participant is terminated for cause or voluntarily terminates
his or her employment (other than at normal retirement) prior to
that date. Pursuant to the terms of a release we entered into
with Mr. Shiba in connection with his resignation, all amounts
earned by him under the Long-Term Incentive Plan were paid to
him in early 2006.
The following table and accompanying footnotes further describe
the awards that were earned by the named executive officers
under the Long-Term Incentive Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payouts under non-stock price-based plans | |
|
|
| |
|
|
Inception to | |
|
Annual | |
|
Annual | |
Name |
|
date actual(1) | |
|
target(2) | |
|
maximum(2) | |
| |
Jack A.
Hockema(3)
|
|
|
$3,298,880 |
|
|
|
$1,500,000 |
|
|
|
$4,500,000 |
|
John
Barneson(4)
|
|
|
693,876 |
|
|
|
350,000 |
|
|
|
1,050,000 |
|
John M.
Donnan(5)
|
|
|
208,575 |
|
|
|
200,000 |
|
|
|
600,000 |
|
Edward F.
Houff(6)
|
|
|
670,582 |
|
|
|
300,000 |
|
|
|
900,000 |
|
Daniel D.
Maddox(7)
|
|
|
227,228 |
|
|
|
100,000 |
|
|
|
300,000 |
|
Kerry A.
Shiba(8)
|
|
|
111,716 |
|
|
|
258,000 |
|
|
|
774,000 |
|
|
|
(1) |
This column reflects the total amount earned under the
Long-Term Incentive Plan from February 2002 through July 6,
2006. Participants were paid one-half of this amount in August
2006, following our emergence from chapter 11 bankruptcy,
and will receive the remainder on July 6, 2007, the first
anniversary of our emergence from chapter 11 bankruptcy,
assuming continued employment at such date. |
|
(2) |
The target and maximum payout amounts are per annum. |
|
(3) |
Individual amounts earned by year for Mr. Hockema under
the Long-Term Incentive Plan were $2,324,557 in 2002 and 2003,
$918,818 in 2004, ($240,819) in 2005 and $296,324 in 2006. |
|
(4) |
Individual amounts earned by year for Mr. Barneson under
the Long-Term Incentive Plan were $466,534 in 2002 and 2003,
$214,391 in 2004, ($56,191) in 2005 and $69,142 in 2006. |
|
(5) |
Individual amounts earned by year for Mr. Donnan under
the Long-Term Incentive Plan were $146,045 in 2002 and 2003,
$55,129 in 2004, ($32,109) in 2005 and $39,510 in 2006. The
initial target and maximum for Mr. Donnan were $90,000 and
$270,000, respectively. These amounts were increased to the
levels indicated in the table effective January 2005 in
connection with Mr. Donnans promotion to General
Counsel. |
|
(6) |
Individual amounts earned by year for Mr. Houff under
the Long-Term Incentive Plan were $486,818 in 2002 and 2003, and
$183,764 in 2004. |
|
(7) |
Individual amounts earned by year for Mr. Maddox under
the Long-Term Incentive Plan were $162,273 in 2002 and 2003,
$61,255 in 2004, ($16,055) in 2005 and $19,755 in 2006. |
|
(8) |
In connection with his Release Agreement discussed below,
Mr. Shiba settled his rights under the Long-Term Incentive
Plan for a total of $111,176. |
2006 SHORT-TERM INCENTIVE PLAN
Upon our emergence from chapter 11 bankruptcy, our
compensation committee approved our 2006 Short-Term Incentive
Plan for key managers, our STI Plan, which is summarized below.
This summary is qualified in its entirety by the detailed
description of the STI Plan filed as an exhibit to our
registration statement of which this prospectus forms a part.
90
Management
Incentive awards under the STI Program are based upon:
|
|
|
the fabricated products business
units operating income plus depreciation and amortization,
as adjusted for extraordinary items, which may be spread over a
period of years based upon the recommendation of our chief
executive officer and approval of the compensation committee;
|
|
|
the fabricated products business
units safety performance as measured by total case
incident rate;
|
|
|
|
performance of the particular
business to which a participant is assigned; and
|
|
|
|
individual performance
objectives.
|
Under the STI Plan, a participant may receive an incentive award
between zero to three times the individuals target amount.
Set forth below are the minimum, target and maximum award
amounts for each of the named executive officers (excluding
Messrs. Houff and Shiba, who are no longer employed by us)
and Mr. Bellino for 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum | |
|
Target | |
|
Maximum | |
Name |
|
award amount | |
|
award amount | |
|
award amount | |
| |
Jack A. Hockema
|
|
|
|
|
|
$ |
500,050 |
|
|
$ |
1,500,150 |
|
Joseph P. Bellino
|
|
|
|
|
|
$ |
175,000 |
|
|
$ |
525,000 |
|
John Barneson
|
|
|
|
|
|
$ |
126,000 |
|
|
$ |
378,000 |
|
John M. Donnan
|
|
|
|
|
|
$ |
117,000 |
|
|
$ |
351,000 |
|
Daniel D. Maddox
|
|
|
|
|
|
$ |
75,000 |
|
|
$ |
225,000 |
|
2006 EQUITY AND PERFORMANCE INCENTIVE PLAN
Upon our emergence from chapter 11 bankruptcy, our 2006
Equity and Performance Incentive Plan, our Equity Incentive
Plan, which is summarized below, became effective. This summary
is qualified in its entirety by the full text of the Equity
Incentive Plan, a copy of which is filed as an exhibit to our
registration statement of which this prospectus forms a part.
The Equity Incentive Plan is administered by a committee of
non-employee directors of our board of directors, currently the
compensation committee. The compensation committee may from time
to time delegate all or any part of its authority under the
Equity Incentive Plan to a subcommittee of the compensation
committee, as constituted from time to time.
Officers and other key employees of our company as selected by
the compensation committee, are eligible to participate in the
Equity Incentive Plan. As of July 31, 2006, approximately
40 officers and other key employees had been selected by the
compensation committee to receive awards under the Equity
Incentive Plan. Our non-employee directors also participate in
the Equity Incentive Plan.
Subject to certain adjustments that may be required from time to
time to prevent dilution or enlargement of the rights of
participants under the Equity Incentive Plan, a maximum of
2,222,222 shares of common stock may be issued under the
Equity Incentive Plan, of which 525,660 have been issued to our
directors, officers and key employees as restricted stock and
were outstanding as of October 31, 2006. Shares of common
stock issued pursuant to the Equity Incentive Plan may be shares
of original issuance or treasury shares or a combination of
both. For additional information regarding the grants of
restricted stock to our executive officers and directors, see
the beneficial ownership table in Principal and selling
stockholders.
Our Equity Incentive Plan permits the granting of awards in the
form of options to purchase our common stock, stock appreciation
rights, shares of restricted stock, restricted stock units,
performance shares, performance units and other awards.
91
Management
The Equity Incentive Plan will expire on July 6, 2016. No
grants will be made under the Equity Incentive Plan after that
date, but all grants made on or prior to such date will continue
in effect thereafter subject to the terms thereof and of the
Equity Incentive Plan.
Our board of directors may, in its discretion, terminate the
Equity Incentive Plan at any time. The termination of the Equity
Incentive Plan will not affect the rights of participants or
their successors under any awards outstanding and not exercised
in full on the date of termination.
The compensation committee may at any time and from time to time
amend the Equity Incentive Plan in whole or in part. Any
amendment which must be approved by our stockholders in order to
comply with applicable law or the rules of the principal
securities exchange, association or quotation system on which
our common stock is then traded or quoted will not be effective
unless and until such approval has been obtained. The
compensation committee will not, without the further approval of
the stockholders, authorize the amendment of any outstanding
option right or appreciation right to reduce the option price or
base price. Furthermore, no option right will be cancelled and
replaced with awards having a lower option price without further
approval of the stockholders.
RETIREMENT PLANS
Defined Benefit Plan
We previously maintained a qualified, defined-benefit retirement
plan for our salaried employees who met certain eligibility
requirements, the Defined Benefit Plan. Effective
December 17, 2003, the Pension Benefit Guaranty
Corporation, or PBGC, terminated and effectively assumed
responsibility for making benefit payments in respect of the
Defined Benefit Plan. As a result of the termination, all
benefit accruals under the Defined Benefit Plan were terminated
and benefits available to certain executive officers, including
Messrs. Hockema and Barneson, were significantly reduced
due to the limitation on benefits payable by the PBGC. For
example, benefits payable to participants will be reduced to a
maximum of $34,742 annually for retirement at age 62, a
lower amount for retirement prior to age 62, and a higher
amount for retirements after age 62, up to $43,977 at
age 65, and participants will not accrue additional
benefits. In addition, the PBGC will not make lump-sum payments
to participants.
Savings and Investment Plan
We sponsor a tax-qualified profit sharing and 401(k) plan, the
Kaiser Aluminum Savings and Investment Plan, our Savings Plan,
in which eligible salaried employees may participate. Pursuant
to our Savings Plan, employees may elect to reduce their current
annual compensation up to the lesser of 75% or the statutorily
prescribed limit of $15,000 in calendar year 2006, and have the
amount of any reduction contributed to our Savings Plan. Our
Savings Plan is intended to qualify under Sections 401(a)
and 401(k) of the Internal Revenue Code, so that contributions
by us or our employees to our Savings Plan, and income earned on
contributions, are not taxable to employees until withdrawn from
our Savings Plan, and so that contributions will be deductible
by us when made. We match 100% of the amount an employee
contributes to our Savings Plan, subject to a 4% maximum based
on the employees compensation as defined in our Savings
Plan. Employees are immediately vested 100% in our matching
contributions to our Savings Plan.
We also make annual fixed-rate contributions on behalf of our
employees in the following amounts:
|
|
|
For our employees who were
employed with us on or before January 1, 2004, we
contribute in a range from 2% to 10% of the employees
compensation, based upon the sum of the employees age and
years of continuous service as of January 1, 2004; and
|
92
Management
|
|
|
For our employees who were
employed with us after January 1, 2004, we contribute 2% of
the employees compensation.
|
An employee is required to be employed on the last day of the
year in order to receive the fixed-rate contribution. Employees
are vested 100% in our fixed-rate contributions to our Savings
Plan after five years of service. The total amount of elective,
matching and fixed-rate contributions in any year cannot exceed
the lesser of 100% of an employees compensation or $42,000
(adjusted annually). We may amend or terminate these matching
and fixed-rate contributions at any time by an appropriate
amendment to our Savings Plan. The trustee of our Savings Plan
invests the assets of our Savings Plan as directed by
participants.
This summary is qualified in its entirety by reference to full
text of the Savings Plan, a copy of which is filed as an exhibit
to our registration statement of which this prospectus forms a
part.
Restoration Plan
We also sponsor a nonqualified, unfunded, unsecured deferred
compensation plan, the Kaiser Aluminum Fabricated Products
Restoration Plan, our Restoration Plan, in which a select group
of our management and highly compensated employees may
participate. Eligibility to participate in our Restoration Plan
is determined by our compensation committee which currently
administers our Restoration Plan. The purpose of our Restoration
Plan is to restore the benefit of matching and fixed-rate
contributions that we would have otherwise paid to participants
under our Savings Plan but for the limitations on benefit
accruals and payments imposed by the Internal Revenue Code. We
maintain an account on behalf of each participant in our
Restoration Plan and contributions to a participants
Restoration Plan account to restore benefits under our Savings
Plan are made generally in the manner described below:
|
|
|
If our matching contributions to
a participant under our Savings Plan are limited in any year, we
will make an annual contribution to that participants
account under our Restoration Plan equal to the difference
between:
|
|
|
|
|
|
The matching contributions that
we could have made to that participants account under our
Savings Plan if the Internal Revenue Code did not impose any
limitations; and
|
|
|
|
The maximum contribution we
could in fact make to that participants account under our
Savings Plan in light of the limitations imposed by the Internal
Revenue Code.
|
|
|
|
A participant is required to be making elective contributions
under our Savings Plan on the first day of the year in order to
receive a matching contribution from us under our Restoration
Plan for that year. However, matching contributions under our
Restoration Plan are calculated as though the participant
elected to make the maximum permissible elective contributions
under our Savings Plan sufficient to receive the maximum
matching contribution from us under our Savings Plan, without
regard for the participants actual elective contributions.
Participants are immediately vested 100% in our matching
contributions to our Restoration Plan. |
|
|
|
Annual fixed-rate contributions
to the participants account under our Restoration Plan are
made in an amount equal to between 2% and 10% of the
participants excess compensation, as defined in
Section 401(a)(17) of the Internal Revenue Code. The actual
fixed-rate contribution percentage is determined based upon the
sum of the participants age and years of continuous
service as of January 1, 2004. If a participant is employed
with us after January 1, 2004, the fixed-rate contribution
percentage is 2%. A participant is required to be employed on
the last day of the year in order to receive the fixed-rate
contribution. Further, to the extent that fixed-rate
contributions to a participant under our Savings Plan on
compensation that is not excess compensation, as defined in
Internal Revenue Code Section 401(a)(17), cannot be made
under the Savings Plan due to
|
93
Management
|
|
|
Internal Revenue Code limitations, such fixed-rate contributions
will be made to such participants account under our
Restoration Plan. Participants are vested 100% in our fixed-rate
contributions to our Restoration Plan after five years of
service, or upon retirement, death, disability or a change of
control. |
A participant is entitled to distributions six months following
his or her termination of service, except that any participant
who is terminated for cause will forfeit the entire amount of
matching and fixed-rate contributions made by us to that
participants account under our Restoration Plan.
The Restoration Plan was deemed effective as of May 1,
2005, the date on which the Kaiser Aluminum Supplemental
Benefits Plan was terminated. The lump-sum actuarial equivalent
amount of the benefit accrued to a participant under the Kaiser
Aluminum Supplemental Benefits Plan has been transferred to such
participants account under the Restoration Plan.
We may amend or terminate these matching and fixed-rate
contributions at any time by an appropriate amendment to our
Restoration Plan. The value of each participants account
under our Restoration Plan is based upon the performance of
hypothetical investment benchmarks designated by the participant.
This summary is qualified in its entirety by reference to the
full text of the Restoration Plan, a copy of which is filed as
an exhibit to our registration statement of which this
prospectus forms a part.
EMPLOYMENT-RELATED CONTRACTS
Employment agreement with Jack A. Hockema
On July 6, 2006, in connection with our emergence from
chapter 11 bankruptcy, we entered into an employment
agreement with Jack A. Hockema, pursuant to which
Mr. Hockema will continue his duties as our President and
Chief Executive Officer. Under the terms of his employment
agreement, Mr. Hockemas initial base salary is
$730,000, and his annual short-term incentive target is equal to
68.5% of his base salary. The short-term incentive is payable in
cash, but is subject to both our meeting the applicable
underlying performance thresholds and an annual cap of three
times the target. The short-term incentive is payable pro rata
if Mr. Hockemas employment is terminated other than
for cause or without good reason. Under the employment
agreement, Mr. Hockema received an initial long-term
incentive grant of 185,000 restricted shares of common stock on
July 6, 2006, which will vest on July 6, 2009, or
earlier upon a change in control or certain events of
termination of employment. Starting in 2007, he will be eligible
to receive annual equity awards (such as restricted stock, stock
options or performance shares) with an economic value of 165% of
his base salary. The terms of all equity grants to
Mr. Hockema will be similar to the terms of equity grants
made to other senior executives at the time they are made,
except that the grants will provide for full vesting at
retirement. Mr. Hockema is also entitled to severance and
change-in-control
benefits under the terms of the employment agreement. In the
event Mr. Hockemas employment is terminated by us
without cause or by Mr. Hockema with good reason,
Mr. Hockema will be entitled to receive a lump-sum payment
of two times the sum of his base salary and annual short-term
incentive target, plus the continuation of benefits for two
years, and Mr. Hockemas equity awards outstanding at
that time will vest in accordance with the equity awards, but at
least on a pro rata basis (except the initial grant of
185,000 shares which will immediately vest in full). In the
event Mr. Hockemas employment is terminated without
cause or terminated by Mr. Hockema with good reason within
two years following a change in control, Mr. Hockema will
be entitled to receive a lump-sum payment of three times the sum
of his base salary and annual short-term incentive target, plus
the continuation of benefits for three years, and
Mr. Hockemas equity awards outstanding at that time
will vest in accordance with the equity awards, but at least on
a pro rata basis (except the initial grant of
185,000 shares which will immediately vest in full). In
addition, if a lump-sum payment payable upon either a change of
94
Management
control or as result of Mr. Hockemas termination
without cause or for good reason is subject to federal excise
tax, we will gross up the payment to include such excise tax.
These provisions of Mr. Hockemas employment agreement
replace his coverage under participation in the Severance Plan
and Change in Control Severance Program and supersede his
agreements thereunder. The initial term of his employment
agreement is five years and it will be automatically renewed and
extended for one-year periods unless either party provides
notice one year prior to the end of the initial term or any
extension period. Mr. Hockema also participates in the
various retirement and benefit plans for salaried employees.
This summary is qualified in its entirety by reference to the
full text of Mr. Hockemas agreement, a copy of which
is filed as an exhibit to our registration statement of which
this prospectus forms a part.
Employment agreement with Joseph P. Bellino
On July 6, 2006, in connection with our emergence from
chapter 11 bankruptcy, we entered into an employment
agreement with Joseph P. Bellino, pursuant to which
Mr. Bellino will continue his duties as our Executive Vice
President and Chief Financial Officer. The agreement supersedes
an employment agreement with Mr. Bellino that was entered
into when he joined our company in May 2006. Under the terms of
his employment agreement, Mr. Bellinos initial base
salary is $350,000, and his annual short-term incentive target
is equal to 50% of his base salary. The short-term incentive is
payable in cash, but is subject to both our meeting the
applicable underlying performance thresholds and an annual cap
of three times the target. The short-term incentive is payable
pro rata if Mr. Bellinos employment is terminated
other than for cause or without good reason. For 2006,
Mr. Bellinos short-term incentive award will not be
prorated. Under the employment agreement, Mr. Bellino
received an initial long-term incentive grant of 15,000
restricted shares of common stock on July 6, 2006, which
will vest on July 6, 2009, or earlier upon a change in
control or certain events of termination of employment. Starting
in 2007, he will be entitled to receive annual equity awards
(such as restricted stock, stock options or performance shares)
with an economic value of $450,000. The terms of all equity
grants will be similar to the terms of equity grants made to
other senior executives at the time they are made.
Mr. Bellino is also entitled to severance and
change-in-control
benefits under the terms of the employment agreement. In the
event Mr. Bellinos employment is terminated without
cause or terminated by Mr. Bellino with good reason,
Mr. Bellino will be entitled to receive a lump-sum payment
of two times his base salary plus the continuation of benefits
for two years, and Mr. Bellinos equity awards
outstanding at that time will vest in accordance with the terms
of the equity awards. In the event Mr. Bellinos
employment is terminated without cause or terminated by
Mr. Bellino with good reason within two years following a
change in control, Mr. Bellino will be entitled to receive
a lump-sum payment of three times the sum of his base salary and
annual short-term incentive target, plus the continuation of
benefits for three years, and Mr. Bellinos equity
awards outstanding at that time will vest in accordance with the
terms of the equity awards. In addition, if a lump-sum payment
payable upon either a change of control or as result of
Mr. Bellinos termination without cause or for good
reason is subject to federal excise tax, we will gross up the
payment to include such excise tax. The initial term of his
employment agreement is through May 15, 2009 and will be
automatically renewed and extended for one-year periods unless
either party provides notice one year prior to the end of the
initial term or any extension period. Mr. Bellino also
participates in the various retirement and benefit plans for
salaried employees.
This summary is qualified in its entirety by reference to the
full text of Mr. Bellinos agreement, a copy of which
is filed as an exhibit to our registration statement of which
this prospectus forms a part.
95
Management
Employment agreement with Daniel D. Maddox
On July 6, 2006, in connection with our emergence from
chapter 11 bankruptcy, we entered into an employment
agreement with Daniel D. Maddox, pursuant to which
Mr. Maddox will continue his duties as our Vice President
and Controller. Under the terms of his employment agreement,
Mr. Maddoxs initial base salary is $225,000 and his
annual short-term incentive target is equal to $75,000, prorated
for partial years. The short-term incentive is payable in cash,
but is subject to our meeting the applicable underlying
performance thresholds. Under the employment agreement,
Mr. Maddox received an initial long-term incentive grant of
11,334 restricted shares of common stock on July 6, 2006.
The terms of the equity grant to Mr. Maddox are similar to
the terms of equity grants made to other senior executives on
July 6, 2006. Mr. Maddox is also entitled to payments
and benefits under the Key Employee Retention Program described
above. The term of his employment agreement continues until the
earlier of a mutually agreed upon termination date and
March 31, 2007. If Mr. Maddox terminates his
employment upon the conclusion of this agreement, he will
receive benefits under his Change in Control Agreement as if
both a change in control had occurred prior to his departure and
he was terminating his employment for good reason.
Mr. Maddox also participates in the various retirement and
benefit plans for salaried employees.
This summary is qualified in its entirety by reference to the
full text of Mr. Maddoxs agreement, which is filed as
an exhibit to our registration statement of which this
prospectus forms a part.
Agreements with Edward F. Houff
On August 15, 2005, Mr. Houffs employment with
us was terminated by mutual agreement in anticipation of our
emergence from chapter 11 bankruptcy. Upon his termination,
we executed a release with Mr. Houff and agreed to pay him
severance benefits under his severance agreement. Concurrently,
we entered into a consulting agreement with Mr. Houff, and
thereafter amended it several times, in order to secure his
continued services as our Chief Restructuring Officer and a
consultant through our emergence from chapter 11 bankruptcy.
Under the release and severance agreement, Mr. Houff
received a severance payment in an amount equal to two times his
base salary, or $800,000. In addition, medical, dental, vision,
life insurance and disability benefits were continued through
the earlier of August 15, 2007 and the date Mr. Houff
becomes eligible for comparable medical coverage under another
employers health insurance plans. Mr. Houff also
released us from all claims he may have had prior to his
termination.
Under the consulting agreement, Mr. Houff earned the
following:
|
|
|
from August 15, 2005 to
February 14, 2006, Mr. Houff received a monthly base
fee of $43,200 per month, plus $360 per hour for each
hour worked in excess of 120 hours per month, subject to a
monthly cap of 200 billable hours;
|
|
|
from February 15, 2006 to
February 28, 2006, Mr. Houff received a base fee of
$22,500, plus $450 per hour for each hour worked in excess
of 50 hours, subject to a cap of 75 billable hours;
|
|
|
from March 1, 2006 to
March 31, 2006, Mr. Houff received a base fee of
$33,750, plus $450 per hour for each hour worked in excess
of 75 hours, subject to a cap of 100 billable hours;
|
|
|
from April 1, 2006 to
June 30, 2006, Mr. Houff received a monthly base fee
of $22,500, plus $450 per hour for each hour worked in
excess of 50 hours per month, subject to a monthly cap of
75 billable hours;
|
|
|
during July 2006, until our
emergence from chapter 11 bankruptcy, Mr. Houff was
paid an hourly fee of $450 for each hour worked.
|
96
Management
In addition, we reimbursed Mr. Houff for reasonable and
customary expenses incurred while providing us with consulting
services. Upon our emergence from chapter 11 bankruptcy on
July 6, 2006, the consulting agreement terminated, and
Mr. Houff ceased to be our Chief Restructuring Officer,
whereupon the position was eliminated.
This summary is qualified in its entirety by reference to the
form of severance agreement for Mr. Houff, and the full
text of Mr. Houffs release and consulting agreement,
which are filed as exhibits to our registration statement of
which this prospectus forms a part.
Release with Kerry A. Shiba
Kerry A. Shiba resigned as our Vice President and Chief
Financial Officer effective January 23, 2006. In connection
with his resignation, we entered into a release with
Mr. Shiba. Pursuant to the terms of the release, in lieu of
all other benefits to which Mr. Shiba might otherwise be
entitled and in consideration of his satisfaction of certain
post-termination obligations, Mr. Shiba received payments
of $686,554 in the aggregate, which included payments of his
earned long-term incentive awards for 2002, 2003, 2004 and 2005,
earned short-term incentive award for 2005 and accrued unpaid
vacation.
We also agreed to pay Mr. Shibas COBRA premiums for
his medical and dental coverage through the earlier of
February 28, 2007 and the date Mr. Shiba becomes
eligible for comparable medical coverage under another
employers health insurance plans. Mr. Shiba has
obtained subsequent employment, and we no longer have any
obligation to pay his COBRA premiums. The release also provides
for a mutual release and subjects Mr. Shiba to certain
non-competition, non-disclosure and non-solicitation obligations.
This summary is qualified in its entirety by reference to the
full text of Mr. Shibas release, a copy of which is
filed as an exhibit to our registration statement of which this
prospectus forms a part.
AGGREGATED OPTION/ SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/ SAR VALUES
The table below provides information on the 2005 fiscal year-end
value of unexercised options. During 2005, we did not have any
stock appreciation rights, or SARS, outstanding. Immediately
prior to our emergence from chapter 11 bankruptcy on
July 6, 2006, the equity interests of our then existing
stockholders were cancelled without consideration. Concurrently,
all options to purchase common stock from our company existing
immediately prior to our emergence from bankruptcy, including
those listed in the table below, were also cancelled.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities | |
|
Value of unexercised | |
|
|
underlying unexercised | |
|
in-the-money | |
|
|
options/SARs | |
|
options/SARs | |
|
|
at fiscal year end (#) | |
|
at fiscal year-end ($) | |
|
|
| |
|
| |
Name |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable | |
| |
Jack A. Hockema
|
|
|
375,770 |
(1) |
|
|
28,184 |
(1) |
|
|
|
(2) |
|
|
|
(2) |
John Barneson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John M. Donnan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward F. Houff
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel D. Maddox
|
|
|
35,715 |
(1) |
|
|
|
|
|
|
|
(2) |
|
|
|
|
Kerry A. Shiba
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents shares of our then existing common stock
underlying stock options. |
|
(2) |
No value is shown because the exercise price was higher than
the closing price of $0.03 per share for our then existing
common stock on the OTC Bulletin Board on December 30,
2005. |
97
Management
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION
On July 6, 2006, all of our non-employee directors resigned
and the compensation policy committee and the
Section 162(m) compensation committee of our board were
dissolved. On the same date, new directors were appointed to our
board and a new compensation committee was formed. For
additional information on our new directors or our current
compensation committee, see Executive Officers and
Directors Experience of directors and
Committees of the Board of Directors
Compensation Committee respectively, above.
During 2005, Robert J. Cruikshank, James T. Hackett, Ezra G.
Levin (Chairman) and John D. Roach were members of our
compensation policy committee, and Messrs. Cruikshank and
Hackett (Chairman) were members of our Section 162(m)
compensation policy committee. Mr. Hackett resigned as a
director of our company as of the end of February 2005,
whereupon Mr. Cruikshank became the sole member of our
Section 162(m) compensation policy committee.
Mr. Roach was appointed to our compensation policy
committee on May 24, 2005.
During 2005, no member of the compensation policy committee or
the Section 162(m) compensation committee of our board of
directors was an officer or employee of Kaiser or any of our
subsidiaries, or was formerly an officer of Kaiser or any of our
subsidiaries, or had any relationships requiring disclosure by
us under Item 404 of
Regulation S-K.
During 2005, none of our executive officers served as:
|
|
|
a member of the compensation
committee (or other board committee performing equivalent
functions) of another entity, one of whose executive officers
served on our compensation policy committee or our
Section 162(m) compensation committee;
|
|
|
a director of another entity,
one of whose executive officers served on our compensation
policy committee or our Section 162(m) compensation
committee; or
|
|
|
a member of the compensation
committee (or other board committee performing equivalent
functions) of another entity, one of whose executive officers
served as one of our directors.
|
98
Principal and selling stockholders
The following table sets forth the number and percentage of
outstanding shares of our common stock beneficially owned as of
October 31, 2006, by:
|
|
|
each named executive officer, as
well as Messrs. Bellino and Rinkenberger;
|
|
|
each of our directors;
|
|
|
all our directors and current
executive officers as a group;
|
|
|
each person known to us to
beneficially own 5% or more of our common stock; and
|
|
|
the selling stockholder.
|
Unless otherwise indicated by footnote, and subject to
applicable community property laws, the persons named in the
table have sole voting and investment power over the common
stock shown as beneficially owned by them. The percentage of
beneficial ownership is calculated on the basis of
20,525,660 shares of our common stock outstanding as of
October 31, 2006.
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|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially | |
|
|
|
Shares Beneficially | |
|
|
Owned | |
|
|
|
Owned | |
|
|
Prior to Offering | |
|
|
|
After Offering | |
|
|
| |
|
Number of | |
|
| |
Name |
|
Number | |
|
% | |
|
Shares Offered | |
|
Number | |
|
% | |
| |
Directors and Executive
Officers(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack A. Hockema
|
|
|
185,000 |
|
|
|
* |
|
|
|
|
|
|
|
185,000 |
|
|
|
* |
|
John Barneson
|
|
|
48,000 |
|
|
|
* |
|
|
|
|
|
|
|
48,000 |
|
|
|
* |
|
Joseph P. Bellino
|
|
|
15,000 |
|
|
|
* |
|
|
|
|
|
|
|
15,000 |
|
|
|
* |
|
John M. Donnan
|
|
|
45,000 |
|
|
|
* |
|
|
|
|
|
|
|
45,000 |
|
|
|
* |
|
Edward F. Houff
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel D. Maddox
|
|
|
11,334 |
|
|
|
* |
|
|
|
|
|
|
|
11,334 |
|
|
|
* |
|
Daniel J. Rinkenberger
|
|
|
24,000 |
|
|
|
* |
|
|
|
|
|
|
|
24,000 |
|
|
|
* |
|
Kerry A. Shiba
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George Becker
|
|
|
1,039 |
|
|
|
* |
|
|
|
|
|
|
|
1,039 |
|
|
|
* |
|
Carl B. Frankel
|
|
|
1,213 |
|
|
|
* |
|
|
|
|
|
|
|
1,213 |
|
|
|
* |
|
Teresa A. Hopp
|
|
|
924 |
|
|
|
* |
|
|
|
|
|
|
|
924 |
|
|
|
* |
|
William F. Murdy
|
|
|
1,097 |
|
|
|
* |
|
|
|
|
|
|
|
1,097 |
|
|
|
* |
|
Alfred E. Osborne, Jr., Ph.D.
|
|
|
693 |
|
|
|
* |
|
|
|
|
|
|
|
693 |
|
|
|
* |
|
Georganne C. Proctor
|
|
|
1,386 |
|
|
|
* |
|
|
|
|
|
|
|
1,386 |
|
|
|
* |
|
Jack Quinn
|
|
|
1,386 |
|
|
|
* |
|
|
|
|
|
|
|
1,386 |
|
|
|
* |
|
Thomas M. Van Leeuwen
|
|
|
1,386 |
|
|
|
* |
|
|
|
|
|
|
|
1,386 |
|
|
|
* |
|
Brett E. Wilcox
|
|
|
1,386 |
|
|
|
* |
|
|
|
|
|
|
|
1,386 |
|
|
|
* |
|
All directors and current executive officers as a group
(15 persons)
|
|
|
338,844 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
338,844 |
|
|
|
1.7 |
% |
5% Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Union VEBA
Trust(3)
|
|
|
8,809,900 |
|
|
|
42.9 |
% |
|
|
2,517,955 |
|
|
|
6,291,945 |
|
|
|
30.7 |
% |
Jeffrey A.
Altman(4)
|
|
|
1,406,179 |
|
|
|
6.9 |
% |
|
|
|
|
|
|
1,406,179 |
|
|
|
6.9 |
% |
Witmer Asset
Management(5)
|
|
|
1,071,216 |
|
|
|
5.2 |
% |
|
|
|
|
|
|
1,071,216 |
|
|
|
5.2 |
% |
Charles H.
Witmer(5)
|
|
|
1,100,216 |
|
|
|
5.4 |
% |
|
|
|
|
|
|
1,100,216 |
|
|
|
5.4 |
% |
Meryl B.
Witmer(5)
|
|
|
1,090,216 |
|
|
|
5.3 |
% |
|
|
|
|
|
|
1,090,216 |
|
|
|
5.3 |
% |
Selling Stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Union VEBA
Trust(3)
|
|
|
8,809,900 |
|
|
|
42.9 |
% |
|
|
2,517,955 |
|
|
|
6,291,945 |
|
|
|
30.7 |
% |
(footnotes on following page)
99
Principal and selling stockholders
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|
* |
Indicates less than 1% |
|
(1) |
The shares held by our executive officers were received under
our Equity Incentive Plan. Pursuant to the plan, these shares
are restricted and are subject to forfeiture until July 6,
2009 and, consequently, may not be traded in the public market
until such date. |
|
(2) |
Each of our independent directors received 693 shares of
our common stock on August 1, 2006 under our Equity
Incentive Plan. Pursuant to the plan, these shares are
restricted and are subject to forfeiture until August 1,
2007 and, consequently, may not be traded in the public market
until such date. In addition, certain of our directors elected
to receive shares of our common stock in lieu of all or a
portion of their annual cash retainer, including
Messrs. Becker (346 shares), Frankel
(520 shares), Murdy (404 shares), Quinn
(693 shares), Van Leeuwen (693 shares) and Wilcox
(693 shares) and Mmes. Hopp (231 shares) and Proctor
(693 shares). |
|
|
(3) |
Shares beneficially owned by the Union VEBA Trust are as
reported on the Form 13G filed on July 24, 2006. The
number of shares offered and the number and percentage of shares
beneficially owned after the offering by the Union VEBA Trust
assume that the underwriters do not exercise their option to
purchase additional shares from the Union VEBA Trust to cover
any over allotment. The principal address of the Union VEBA
Trust is c/o National City Bank, as Trustee for Kaiser VEBA
Trust, 20 Stanwix Street, Locator 46-25162, Pittsburgh, PA
15222. |
|
|
|
(4) |
Shares beneficially owned by Jeffrey Altman are as reported
on the Form 13G filed on October 5, 2006. Of these
shares, Owl Creek I, L.P. has shared investment and voting power
with respect to 55,096 shares directly owned by it; Owl
Creek II, L.P. has shared investment and voting power with
respect to 472,960 shares directly owned by it; Owl Creek
Advisors, LLC has shared investment and voting power with
respect to 528,056 shares directly owned by Owl Creek I,
L.P. and Owl Creek II, L.P.; Owl Creek Asset Management, L.P.
has shared investment and voting power with respect to
878,123 shares directly owned by Owl Creek Overseas Fund,
Ltd., Owl Creek Overseas Fund II, Ltd. and Owl Creek
Socially Responsible Investment Fund, Ltd.; and Jeffrey Altman
has shared investment and voting power with respect to
1,406,179 shares directly owned by Owl Creek I, L.P., Owl
Creek II, L.P., Owl Creek Overseas Fund, Ltd., Owl Creek
Overseas Fund II, Ltd. and Owl Creek Socially Responsible
Investment Fund, Ltd. Jeffrey Altman is the managing member of
Owl Creek Advisors, LLC and the managing member of the general
partner of Owl Creek Asset Management, L.P. and in that capacity
directs their operations. The principal address of Jeffrey
Altman is 640 Fifth Avenue, 20th Floor, New York, NY
10019. |
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(5) |
Shares beneficially owned by Witmer Asset Management, Charles
Witmer and Meryl Witmer are as reported on its Form 13G
filed on September 28, 2006. Witmer Asset Management has
shared investment and voting power with respect to
1,071,216 shares. Charles Witmer has sole investment and
voting power with respect to 10,000 shares and has shared
investment and voting power with respect to
1,090,216 shares. Meryl Witmer has shared investment and
voting power with respect to 1,090,216 shares. The
principal addresses of Witmer Asset Management, Charles Witmer
and Meryl Witmer are One Dag Hammarskjold Plaza, 885
2nd Avenue, 31st Floor, New York, NY 10017. |
|
100
Certain relationships and related transactions
For a description of the Director Designation Agreement with the
USW, see ManagementDirector Designation Agreement
with the USW.
For a description of the Stock Transfer Restriction Agreement
with the trustee of the Union VEBA Trust, see Description
of capital stockStock Transfer Restriction Agreement.
For a description of the Registration Rights Agreement with, and
the registration rights granted to, the Union VEBA Trust, see
Shares eligible for future saleRegistration
Rights.
The registration statement of which this prospectus forms a part
was filed pursuant to a request made by the Union VEBA Trust
pursuant to the Registration Rights Agreement. The Union VEBA
Trust is offering 2,517,955 shares of our common stock
pursuant to this offering, constituting the maximum number of
shares of our common stock that, as of the date of this
prospectus, it may include in this offering under the Stock
Transfer Restriction Agreement absent approval of our board of
directors. At the request of the Union VEBA Trust, pursuant to
the Stock Transfer Restriction Agreement and our certificate of
incorporation, our board of directors has approved the sale by
the Union VEBA Trust of up to 377,693 additional shares of
our common stock pursuant to a 30-day option granted to the
underwriters to cover over-allotments, if any, in connection
with this offering. See Underwriting. In connection
with such approval, the Union VEBA Trust agreed that, for
purposes of determining whether any transfer of shares of common
stock by the Union VEBA Trust following this offering is
permissible under the Stock Transfer Restriction Agreement, the
Union VEBA Trust will be deemed to have effected the transfer of
any such additional shares sold by it pursuant to such option at
the earliest possible date or dates the Union VEBA Trust would
have been permitted to effect such transfer under the Stock
Transfer Restriction Agreement absent such approval.
101
Description of capital stock
Our authorized capital stock consists of 45,000,000 shares
of common stock, par value $0.01 per share, and
5,000,000 shares of preferred stock, par value
$0.01 per share, the rights and preferences of which may be
established from time to time by our board of directors. As of
October 31, 2006, there were 20,525,660 outstanding shares
of common stock and 1,696,562 shares reserved and available
for issuance under our Equity Incentive Plan. There are no
outstanding shares of preferred stock. This offering will have
no effect on the number of shares of common stock or preferred
stock outstanding. The following description of our capital
stock is only a summary, does not purport to be complete and is
subject to and qualified by the full text of our certificate of
incorporation and bylaws, copies of which are filed as exhibits
to the registration statement of which this prospectus forms a
part, and of the applicable provisions of Delaware law.
COMMON STOCK
Holders of our common stock are entitled to one vote for each
share on all matters voted upon by our stockholders, including
the election of directors, and do not have cumulative voting
rights. Our common stockholders are entitled to receive ratably
any dividends that may be declared by our board of directors out
of funds legally available for payment of dividends. While we
currently have no intention to pay regular dividends on our
common stock, we may pay such dividends from time to time. The
declaration and payment of dividends on our common stock, if
any, will be at the discretion of our board of directors and
will be dependent upon our results of operations, financial
condition, cash requirements, future prospects and other factors
deemed relevant by the board of directors. In addition, our
financing arrangements place restrictions on our ability to pay
dividends. For a more complete description of these limitations,
see Dividend policy. Holders of our common stock are
entitled to share ratably in our net assets upon our dissolution
or liquidation after payment or provision for all liabilities
and any preferential liquidation rights of our preferred stock
then outstanding. Holders of our common stock do not have
preemptive rights to purchase shares of our stock. Holders of
our common stock do not have subscription, redemption or
conversion rights. The rights, preferences and privileges of
holders of our common stock will be subject to those of the
holders of any shares of our preferred stock we may issue in the
future.
BLANK CHECK PREFERRED STOCK
Our board of directors may, from time to time, authorize the
issuance of one or more classes or series of preferred stock
without stockholder approval. We have no current intention to
issue any shares of preferred stock.
Our certificate of incorporation permits us to issue up to
5,000,000 shares of preferred stock from time to time.
Subject to the provisions of our certificate of incorporation
and limitations prescribed by law, our board of directors is
authorized to issue preferred shares and to fix before issuance
the number of preferred shares to be issued and the designation,
relative powers, preferences, rights and qualifications,
limitations or restrictions of the preferred shares, terms of
redemption, conversion rights and liquidation preferences, in
each case without any action or vote by our stockholders.
The issuance of preferred stock may adversely affect the rights
of our common stockholders by, among other things:
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restricting dividends on the
common stock;
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diluting the voting power of the
common stock;
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impairing the liquidation rights
of the common stock; or
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delaying or preventing a change
in control without further action by the stockholders.
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102
Description of capital stock
As a result of these or other factors, the issuance of preferred
stock could have an adverse effect on the market price of our
common stock.
RESTRICTIONS ON TRANSFER OF COMMON STOCK
Amended and restated certificate of incorporation
In order to reduce the risk that any change in our ownership
would jeopardize the preservation of our federal income tax
attributes, including net operating loss carryovers, for
purposes of Sections 382 and 383 of the Internal Revenue
Code, our certificate of incorporation, as amended and restated
upon our emergence from chapter 11 bankruptcy, prohibits
certain transfers of our equity securities until the date,
referred to as the Restriction Release Date, that is the
earliest of:
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July 6, 2016;
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the repeal, amendment or
modification of Section 382 of the Internal Revenue Code in
such a way as to render us no longer subject to the restrictions
imposed by Section 382;
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the beginning of a taxable year
in which none of the income tax benefits in existence on
July 6, 2006 are currently available or will be available;
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the determination by the board
of directors that the restrictions will no longer apply;
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a determination by the board of
directors or the Internal Revenue Service that we are ineligible
to use Section 382(l)(5) of the Internal Revenue Code
permitting full use of the income tax benefits existing on
July 6, 2006; and
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an election by us for
Section 382(l)(5) of the Internal Revenue Code not to apply.
|
Generally, our amended and restated certificate of incorporation
prohibits a transfer of our equity securities if either:
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the transferor is deemed a
5-percent shareholder of our company pursuant to the
Treasury Regulations, a 5% stockholder; or
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as a result of such transfer,
either (1) any person or group of persons would become a 5%
stockholder, or (2) the percentage stock ownership of any
5% stockholder would be increased.
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These transfers are referred to as 5% Transactions. The
restrictions on transfer will not apply, however, if:
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the transferor or transferee
obtains the prior written approval of the board of directors;
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|
in the case of a 5% Transaction
by any holder of equity securities (other than the Union VEBA
Trust), prior to such transaction, the board of directors
determines in good faith, upon request of the transferor or
transferee, that the proposed transfer is a 5% Transaction:
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- |
which, together with any 5% Transactions consummated during the
previous three years, or since July 6, 2006, if shorter,
represent aggregate 5% Transactions involving transfers of less
than 45% of our equity securities issued and outstanding at the
time of transfer; and |
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- |
which, together with any 5% Transactions consummated during the
previous three years, or since July 6, 2006, if shorter,
and all 5% Transactions that the Union VEBA Trust may consummate
without breach of the Stock Transfer Restriction Agreement,
described below, during the three years following the time of
transfer, represent, during any period of three consecutive
years during the three years prior to the transfer, or since
July 6, 2006, if shorter, and the three years after the |
103
Description of capital stock
|
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|
|
|
transfer, aggregate 5% Transactions involving transfers of less
than 45% of the equity securities issued and outstanding at the
time of transfer; or |
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|
in the case of a 5% Transaction
by the Union VEBA Trust, such 5% Transaction does not result in
a breach of the Stock Transfer Restriction Agreement, so long
as, contemporaneously with such 5% Transaction, the Union VEBA
Trust delivers to our board of directors a written notice
setting forth the number and type of equity securities involved
in, and the date of, such 5% Transaction.
|
Any approval or determination by the board of directors requires
the affirmative vote of a majority of the total number of
directors (assuming no vacancies). As a condition to granting
any such approval or in connection with making any such
determination, the board of directors may, in its discretion,
require (at the expense of the transferor and/or transferee) an
opinion of counsel selected by the transferor or the transferee,
which counsel must be reasonably acceptable to the board of
directors, that the consummation of the proposed transfer will
not result in the application of any limitation under
Section 382 of the Internal Revenue Code on the use of the
tax benefits described above taking into account any and all
other transfers that have been consummated prior to receipt of
the request relating to the proposed transfer, any and all other
proposed transfers that have been approved by the board of
directors prior to receipt of the request relating to the
proposed transfer and any and all other proposed transfers for
which the requests relating thereto have been received prior to
receipt of the request relating to the proposed transfer.
Each certificate representing our equity securities issued prior
to the Restriction Release Date will contain a legend referring
to these restrictions on transfer and any purported transfer of
our equity securities in violation of such restrictions will be
null and void. The purported transferor will remain the owner of
such transferred securities and the purported transferee will be
required to turn over the transferred securities, together with
any distributions received by the purported transferee with
respect to the transferred securities after the purported
transfer, to an agent authorized to sell such securities, if it
can do so, in arms-length transactions that do not violate
such restrictions. If the purported transferee resold such
securities prior to receipt of our demand that they be so
surrendered, the purported transferee will generally be required
to transfer the proceeds from such distribution, together with
any distributions received by the purported transferee with
respect to the transferred securities after the purported
transfer, to the agent. Any amounts held by the agent will be
applied first to reimburse the agent for its expenses, then to
reimburse the transferee for any payments made by the purported
transferee to the transferor, and finally, if any amount
remains, to pay the purported transferor. Any resale by the
purported transferee will itself be subject to these
restrictions on transfer.
Stock Transfer Restriction Agreement
On July 6, 2006, in connection with our emergence from
chapter 11 bankruptcy, we also entered into a Stock
Transfer Restriction Agreement with the trustee of the Union
VEBA Trust. This summary is qualified in its entirety by the
full text of the Stock Transfer Restriction Agreement, a copy of
which is filed as an exhibit to the registration statement of
which this prospectus forms a part.
Pursuant to the Stock Transfer Restriction Agreement, until the
Restriction Release Date, except as described below the trustee
of the Union VEBA Trust will be prohibited from transferring or
otherwise disposing of more than 15% of the total number of
shares of common stock issued pursuant to our plan of
reorganization to the Union VEBA Trust in any
12-month period without
the prior written approval of the board of directors in
accordance with our amended and restated certificate of
incorporation. Pursuant to the Stock Transfer Restriction
Agreement, the trustee of the Union VEBA Trust also expressly
acknowledged and agreed to comply with the restrictions on the
transfer of our securities contained in our certificate of
incorporation.
104
Description of capital stock
Simultaneously with the execution and delivery of the Stock
Transfer Restriction Agreement, we entered into a registration
rights agreement, or Registration Rights Agreement, with the
trustee of the Union VEBA Trust and transferees of the Union
VEBA Trust pursuant to the pre-effective date sales protocol
discussed below. The Stock Transfer Restriction Agreement
provides that, notwithstanding the general restriction on
transfer described above, the Union VEBA Trust may transfer a
larger percentage of its holdings through an underwritten
offering.
Prior to March 31, 2007, the Union VEBA Trust may request
in writing that we file a registration statement covering the
resale of shares of our common stock equal to a maximum of 30%
of the total number of shares of common stock received by the
Union VEBA Trust pursuant to the plan of reorganization in an
underwritten offering, as contemplated by the Registration
Rights Agreement, so long as:
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|
the number of shares of common
stock to be sold is not more than 45% of the total number of
shares of common stock received by the Union VEBA Trust pursuant
to the plan of reorganization, less the number of shares
included in all other transfers previously effected by the Union
VEBA Trust during the preceding 36 months or since
July 6, 2006, if shorter; and
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the shares of common stock to be
sold have a market value of not less than $60.0 million on
the date the request is made.
|
In the event that no underwritten offering has been effected
prior to, or is pending on, March 31, 2007, the Union VEBA
Trust may transfer, in an underwritten offering as contemplated
by the Registration Rights Agreement, a number of shares of our
common stock equal to 45% of the total number of shares of
common stock received by the Union VEBA Trust pursuant to the
plan of reorganization, less the number of shares included in
all other transfers previously effected by the Union VEBA Trust
during the preceding 36 months or since July 6, 2006,
if shorter, so long as:
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no such underwritten offering
has been previously effected from a shelf registration statement;
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|
the demand for such underwritten
offering is made by the Union VEBA Trust between March 31,
2007 and April 1, 2008; and
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|
the shares of common stock to be
sold have a market value of not less than $60.0 million on
the date such request is made.
|
If, through an underwritten offering, the Union VEBA Trust
transfers a greater number of shares than the Union VEBA Trust
could transfer under the general restriction on transfer
described above, then, for purposes of determining whether any
future transfer of shares of common stock by the Union VEBA
Trust is permissible under the general restriction, the Union
VEBA Trust will be deemed to have effected the transfer of the
excess shares at the earliest possible date or dates the Union
VEBA Trust would have been permitted to effect such transfer
under the general restriction absent these exceptions. See
Certain relationships and related transactions.
The plan of reorganization stated that on its effective date,
11,439,900 shares of our common stock would be contributed
to the Union VEBA Trust. Prior to the effective date of the plan
of reorganization, in accordance with a sales protocol
established by order of the bankruptcy court, the Union VEBA
Trust sold interests entitling the purchasers thereof to receive
2,630,000 shares of common stock that otherwise would have
been issuable to the Union VEBA Trust on the effective date of
the plan of reorganization. Accordingly, on the effective date,
8,809,900 shares of common stock were issued to the Union
VEBA Trust. Pursuant to the terms of the sale protocol, unless
we otherwise agree or it is determined in a ruling by the
Internal Revenue Service that any such sale does not constitute
a sale of shares on or following the effective date of the plan
of reorganization for purposes of the applicable limitations of
section 382 of the Internal Revenue Code, the shares
attributable to a sale of all or part of the interest of the
Union VEBA Trust will be deemed to have been received by the
105
Description of capital stock
Union VEBA Trust on the effective date and sold on or after the
effective date out of the permitted sale allocation under the
Stock Transfer Restriction Agreement as if sold at the earliest
possible date or dates such sales would have been permitted
thereunder for purposes of determining the permissibility of
future sales of shares under the Stock Transfer Restriction
Agreement. The Union VEBA Trust has informed us that it intends
to seek such a ruling from the Internal Revenue Service.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR
CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation and our bylaws, together with
our contractual arrangements with the USW and applicable
Delaware state law, may discourage or make more difficult the
acquisition of control of our company by means of a tender
offer, open market purchase, proxy fight or otherwise. These
provisions are intended to discourage, or may have the effect of
discouraging, certain types of coercive takeover practices and
inadequate takeover bids and are also intended to encourage a
person seeking to acquire control of our company to first
negotiate with us. We believe that these measures, many of which
are substantially similar to the anti-takeover related measures
in effect for numerous other publicly held companies, enhance
our potential ability to negotiate with the proponent of an
unsolicited proposal to acquire or restructure the company,
providing benefits that outweigh the disadvantages of
discouraging such proposals because, among other things, such
negotiation could improve the terms of such a proposal and
protect the stockholders from takeover bids that the board of
directors have determined to be inadequate. A description of
these provisions is set forth below.
Classified board of directors
Our certificate of incorporation divides our board of directors
into three classes of directors serving staggered three year
terms. The existence of a classified board will make it more
difficult for a third party to gain control of our board of
directors by preventing such third party from replacing a
majority of the directors at any given meeting of stockholders.
Removal of directors and filling vacancies in
directorships
Our certificate of incorporation and bylaws provide that
directors may be removed by the stockholders, with or without
cause, only at a meeting of stockholders and by the affirmative
vote of the holders of at least 67% of our stock generally
entitled to vote in the election of directors. Our certificate
of incorporation and bylaws provide that any vacancy on our
board of directors or newly created directorship may be filled
solely by the affirmative vote of a majority of the directors
then in office or by a sole remaining director, and that any
director so elected will hold office for the remainder of the
full term of the class of directors in which the vacancy
occurred or the new directorship was created and until such
directors successor has been elected and qualified. The
limitations on the removal of directors and the filling of
vacancies may deter a third party from seeking to remove
incumbent directors and simultaneously gaining control of our
board of directors by filling the vacancies created by such
removal with its own nominees.
Stockholder action and meetings of stockholders
Our certificate of incorporation and bylaws provide that special
meetings of the stockholders may only be called by our chairman
of the board, chief executive officer or president, or by the
secretary of the company within ten calendar days after the
receipt of the written request of a majority of the total number
of directors (assuming no vacancies), and further provide that,
at any special meeting of stockholders, the only business that
may be considered or conducted is business that is specified in
the notice of such meeting or is otherwise properly brought
before the meeting by the presiding officer or by or at the
direction of a majority of the directors (assuming no
vacancies), effectively precluding the
106
Description of capital stock
right of the stockholders to raise any business at any special
meeting. Our certificate of incorporation also provides that the
stockholders may not act by written consent in lieu of a meeting.
Advance notice requirements for stockholder proposals
Our bylaws provide that a stockholder seeking to bring business
before an annual meeting of stockholders provide timely notice
in writing to the corporate secretary. To be timely, a
stockholders notice must be received not less than 60, nor
more than 90, calendar days prior to the first anniversary date
of the date on which we first mailed proxy materials for the
prior years annual meeting of stockholders, except that,
if there was no annual meeting in the prior year or if the
annual meeting is called for a date that is not within 30
calendar days before or after that anniversary, notice must be
so delivered not later than the close of business on the later
of the 90th calendar day prior to such annual meeting and
the 10th calendar day following the date on which public
disclosure of the date of the annual meeting is first made. Our
bylaws also specify requirements as to the form and substance of
notice. These provisions may make it more difficult for
stockholders to bring matters before an annual meeting of
stockholders.
Director nomination procedures
Nominations in accordance with our bylaws
Our bylaws provide that the nominations for election of
directors by the stockholders will be made either by or at the
direction of our board of directors or a committee thereof, or
by any stockholder entitled to vote for the election of
directors at the annual meeting at which such nomination is
made. The bylaws require that stockholders intending to nominate
candidates for election as directors provide timely notice in
writing. To be timely, a stockholders notice must be
delivered to or mailed and received at our principal executive
offices not less than 60, nor more than 90, calendar days prior
to the first anniversary of the date on which we first mailed
our proxy materials for the prior years annual meeting of
stockholders, except that, if there was no annual meeting during
the prior year or if the annual meeting is called for a date
that is not within 30 calendar days before or after that
anniversary, notice by stockholders to be timely must be
delivered not later than the close of business on the later of
the 90th calendar day prior to the annual meeting and the
10th calendar day following the day on which public
disclosure of the date of such meeting is first made. Our bylaws
also specify requirements as to the form and substance of
notice. These provisions of our bylaws make it more difficult
for stockholders to make nominations of directors.
Nominating and corporate governance committee
Our nominating and corporate governance committee is responsible
for recommending to the board of directors director nominee
candidates to be submitted to the stockholders for election at
each annual meeting of stockholders. In accordance with this
responsibility, the committee has adopted policies regarding the
consideration of candidates for a position on our board of
directors, including the procedures by which stockholders may
propose candidates directly to the committee for consideration.
Such policies provide an alternative to the rights granted to
the stockholders by law and pursuant to our bylaws. These
policies provide that a single stockholder or a group of
stockholders that has beneficially owned more than 5% of the
then outstanding common stock for at least one year as of the
date of recommendation of a director candidate will be eligible
to propose a director candidate to the nominating and corporate
governance committee for consideration and evaluation by notice
to such committee in accordance with such policies, including
timely notice. To be timely, a stockholders notice must be
received by the Nominating and Corporate Governance Committee
not less than 120, nor more than 150, calendar days prior to the
first anniversary of the date on which we first mailed proxy
materials for the prior years annual meeting of
stockholders, except that, if there was no annual meeting in the
prior year or if the annual meeting is called for a date that is
not within
107
Description of capital stock
30 calendar days before or after that anniversary, notice
must be received by the nominating and corporate governance
committee no later than the close of business on the
10th calendar day following the date on which public
disclosure of the date of the annual meeting is first made,
unless such public disclosure specifies a different date. The
policies also provide that any such candidate must (1) be
independent in accordance with applicable independence criteria,
(2) may not, other than as a member of our board of
directors or a committee thereof, accept any consulting,
advisory or other compensatory fee from us or our subsidiaries
(other than the fixed amounts of compensation under a retirement
plan for prior service, provided such compensation is not
contingent on continued service), and (3) may not be an
affiliated with us or any of our subsidiaries. Further, these
policies establish criteria to be used by such committee to
assess whether a candidate for a position on our board of
directors has appropriate skills and experience. In addition,
the USW will be able to nominate director candidates in
accordance with the Director Designation Agreement described
below.
Director Designation Agreement with the USW
Upon our emergence from chapter 11 bankruptcy, we entered
into a Director Designation Agreement with the USW, in order to
effectuate the rights of the USW to nominate individuals to
serve on our board of directors and specified committees
thereof. Please see Management Director Designation
Agreement with the USW for a discussion of the Director
Designation Agreement.
Authorized but unissued shares
Authorized but unissued shares of our common stock and preferred
stock under our certificate of incorporation will be available
for future issuance without stockholder approval, unless
otherwise required pursuant to the rules of any national
securities exchange or association on which our securities are
traded from time to time. These additional shares will give our
board of directors the flexibility to issue shares for a variety
of proper corporate purposes, including in connection with
future public offerings to raise additional capital or corporate
acquisitions, without incurring the time and expense of
soliciting a stockholder vote. The existence of authorized but
unissued shares of common stock and preferred stock could render
more difficult or discourage an attempt to obtain control of our
company by means of a proxy contest, tender offer, merger or
otherwise. In addition, any future issuance of shares of common
stock or preferred stock, whether or not in connection with an
anti-takeover measure, could have the effect of diluting the
earnings per share, book value per share and voting power of
shares held by our stockholders.
Supermajority vote requirements
Delaware law provides generally that the affirmative vote, as a
class, of the holders of a majority of each class of shares
entitled to vote on any matter will be required to amend a
corporations certificate of incorporation and that the
affirmative vote of the holders of a majority of the shares
present in person or represented by proxy identified to vote on
any matter will be required to amend a corporations
bylaws, unless the corporations certificate of
incorporation or bylaws, as the case may be, require a vote by
the holders of a greater number of shares. Our certificate of
incorporation and bylaws require the affirmative vote of the
holders of at least 67% of the shares of our stock generally
entitled to vote in the election of directors in order to amend,
repeal or adopt any provision inconsistent with certain
provisions of our certificate of incorporation or bylaws, as the
case may be, relating to (1) the time and place of meetings
of the stockholders, (2) the calling of special meetings of
stockholders, (3) the conduct or consideration of business
at meetings of stockholders, (4) the filling of any
vacancies on the board of directors or newly created
directorships, (5) the removal of directors, (6) the
nomination and election of directors, (7) the ability of
the stockholders to act by written consent in lieu of a meeting,
or (8) the number and terms of directors.
108
Description of capital stock
DELAWARE ANTI-TAKEOVER LAW
Section 203 of the Delaware General Corporation Law
provides that, subject to exceptions specified therein, an
interested stockholder of a Delaware corporation
shall not engage in any business combination with
the corporation for a three-year period following the time that
such stockholder becomes an interested stockholder unless:
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prior to such time, the board of
directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder
becoming an interested stockholder;
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upon consummation of the
transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding
specified shares); or
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on or subsequent to such time,
the business combination is approved by the board of directors
of the corporation and authorized at an annual or special
meeting of stockholders, and not by written consent, by the
affirmative vote of at least
662/3%
of the outstanding voting stock not owned by the interested
stockholder.
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Under Section 203, the restrictions described above also do
not apply to specified business combinations proposed by an
interested stockholder following the announcement or
notification of one of the specified transactions involving the
corporation and a person who had not been an interested
stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the
corporations directors, if such transaction is approved or
not opposed by a majority of the directors who were directors
prior to any person becoming an interested stockholder during
the previous three years or were recommended for election or
elected to succeed such directors by a majority of such
directors.
Except as otherwise specified in Section 203, a
business combination is defined to include:
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any merger or consolidation
involving the corporation and the interested stockholder;
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any sale, transfer, pledge or
other disposition involving the interested stockholder of 10% or
more of the assets of the corporation;
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subject to exceptions, any
transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder;
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subject to exceptions, any
transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; and
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the receipt by the interested
stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the
corporation.
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Except as otherwise specified in Section 203, an
interested stockholder is defined to include:
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any person that is the owner of
15% or more of the outstanding voting stock of the corporation,
or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the
corporation at any time within three years immediately prior to
the date of determination; and
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the affiliates and associates of
any such person.
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109
Description of capital stock
Under some circumstances, Section 203 makes it more
difficult for a person who is an interested stockholder to
effect various business combinations with us for a three-year
period. We have not elected to be exempt from the restrictions
imposed under Section 203.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS
Our certificate of incorporation limits the liability of our
directors to the fullest extent permitted by Delaware law, which
provides that a corporation may limit the personal liability of
its directors for monetary damages for breach of that
individuals fiduciary duties as a director except for
liability for any of the following: (1) a breach of the
directors duty of loyalty to the corporation or its
stockholders; (2) any act or omission not in good faith or
that involves intentional misconduct or a knowing violation of
the law; (3) certain unlawful payments of dividends or
unlawful stock repurchases or redemptions; or (4) any
transaction from which the director derived an improper personal
benefit. This limitation of liability does not apply to
liabilities arising under federal securities laws and does not
affect the availability of equitable remedies such as injunctive
relief or rescission.
Our certificate of incorporation provides that we are required
to indemnify our directors and officers to the fullest extent
permitted or required by Delaware law, although, except with
respect to certain actions, suits or proceedings to enforce
rights to indemnification, a director or officer will only be
indemnified with respect to any action, suit or proceeding such
person initiated to the extent such action, suit or proceeding
was authorized by the board of directors. Our certificate of
incorporation also requires us to advance expenses incurred by a
director or officer in connection with the defense of any
action, suit or proceeding arising out of that persons
status or service as director or officer of the company or as
director, officer, employee or agent of another enterprise, if
serving at our request. In addition, our certificate of
incorporation permits us to secure insurance to protect us and
any director, officer, employee or agent of the company or any
other corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss.
In addition, we have entered into indemnification agreements
with each of our directors and executive officers containing
provisions that obligate us to, among other things:
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indemnify, defend and hold
harmless the director or officer to the fullest extent permitted
or required by Delaware law, except that, subject to certain
exceptions, the director or officer will be indemnified with
respect to a claim initiated by such director or officer against
us or any other director or officer of the company only if we
have joined in or consented to the initiation of such claim;
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advance prior to the final
disposition of any indemnifiable claim any and all expenses
relating to, arising out of or resulting from any indemnifiable
claim paid or incurred by the director or officer or which the
director or officer determines is reasonably likely to be paid
or incurred by him or her; and
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utilize commercially reasonable
efforts to cause to be maintained in effect policies of
directors and officers liability insurance providing
coverage that is at least substantially comparable in scope and
amount to that provided by our policies of directors and
officers liability insurance at the time the parties enter
into such indemnification agreement.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Mellon
Investor Services LLC.
110
Shares eligible for future sale
Upon completion of this offering, based upon the number of our
shares of common stock outstanding as of October 31, 2006,
there will be outstanding 20,525,660 shares of our common
stock, of which 2,630,000 shares will be deemed
restricted securities, as that term is defined under
Rule 144 of the Securities Act. All of the shares sold in
this offering will be freely tradable without restriction under
the Securities Act, except for any shares of our common stock
purchased by our affiliates, as that term is defined
in Rule 144 under the Securities Act, which would be
subject to the limitations and restrictions described below.
Restricted securities may be sold in the United States public
market only if registered or if they qualify for an exemption
from registration under Rule 144 or 144(k) under the
Securities Act, which rules are described below.
Subject to the provisions of the
lock-up agreements, the
2,630,000 shares will be eligible for sale at various times
pursuant to Rules 144 or 144(k).
RULE 144
In general, under Rule 144 as currently in effect, a
person, or persons whose shares must be aggregated, who has
beneficially owned restricted shares of our common stock for at
least one year is entitled to sell within any three-month period
a number of shares that does not exceed the greater of the
following:
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one percent of the number of
shares of common stock then outstanding, which will equal
approximately 205,256 shares immediately after this
offering; or
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the average weekly trading
volume of our common stock on the Nasdaq Global Market during
the four calendar weeks preceding the date of filing of a notice
on Form 144 with respect to the sale, which equals
approximately 361,053 shares as of the date of this
prospectus.
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Sales under Rule 144 are also generally subject to certain
manner of sale provisions and notice requirements and to the
availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person, or persons whose shares must
be aggregated, who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale
and who has beneficially owned the shares proposed to be sold
for at least two years would be entitled to sell the shares
under Rule 144(k) without complying with the manner of
sale, public information, volume limitations or notice or public
information requirements of Rule 144. Therefore, unless
otherwise restricted, the shares eligible for sale under
Rule 144(k) may be sold immediately upon the completion of
this offering.
LOCK-UP AGREEMENTS
For a description of the
lock-up agreements with
the underwriters that restrict sales of shares by us, the
selling stockholder, certain other stockholders and our
executive officers and directors, see Underwriting
No Sales of Similar Securities.
REGISTRATION RIGHTS
Pursuant to the terms of a Registration Rights Agreement, we
have provided the Union VEBA Trust with registration rights,
including a demand registration right, a shelf registration
right and piggy-
111
Shares eligible for future sale
back registration rights, with respect to our common
stock. This registration has been effected because the Union
VEBA Trust exercised its demand registration right. Under the
Registration Rights Agreement, other selling stockholders may be
able to elect to participate in the registration on the same
terms as the Union VEBA Trust. Commencing April 1, 2007,
the Union VEBA Trust may demand that we prepare and file with
the Securities and Exchange Commission a shelf
registration statement covering the resale of certain securities
held by the Union VEBA Trust. Our obligations to effect a shelf
or piggy-back registration are subject to customary limitations.
We are obligated to pay all expenses incidental to such
registration, excluding underwriters discounts and
commissions and certain legal fees and expenses. This summary is
qualified in its entirety by reference to the full text of the
Registration Rights Agreement, a copy of which is filed as an
exhibit to our registration statement of which this prospectus
forms a part. See Certain relationships and related
transactions.
112
U.S. federal tax consequences to
non-U.S. holders
of common stock
The following is a general discussion of the material
U.S. federal income and estate tax consequences to
non-U.S. Holders
with respect to the acquisition, ownership and disposition of
our common stock. In general, a
Non-U.S. Holder
is any holder of our common stock other than:
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a citizen or resident of the
United States, including an alien individual who is a lawful
permanent resident of the United States or meets the
substantial presence test under
section 7701(b)(3) of the Internal Revenue Code;
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a corporation (or an entity
treated as a corporation) created or organized in or under the
laws of the United States, any state thereof, or the District of
Columbia;
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an estate, the income of which
is subject to U.S. federal income tax regardless of its
source; or
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a trust, if a U.S. court
can exercise primary supervision over the administration of the
trust and one or more U.S. persons can control all
substantial decisions of the trust, or certain other trusts that
have a valid election in effect to be treated as a
U.S. person pursuant to applicable Treasury Regulations.
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This discussion is based on current provisions of the Internal
Revenue Code, Treasury Regulations, judicial opinions, published
positions of the Internal Revenue Service, or IRS, and all other
applicable administrative and judicial authorities, all of which
are subject to change, possibly with retroactive effect. This
discussion does not address all aspects of U.S. federal
income and estate taxation or any aspects of state, local, or
non-U.S. taxation,
nor does it consider any specific facts or circumstances that
may apply to particular
Non-U.S. Holders
that may be subject to special treatment under the
U.S. federal income tax laws including, but not limited to,
insurance companies, tax-exempt organizations, pass-through
entities, financial institutions, brokers, dealers in securities
and U.S. expatriates. If a partnership or other entity
treated as a partnership for U.S. federal income tax
purposes is a beneficial owner of our common stock, the
treatment of a partner in the partnership generally will depend
upon the status of the partner and the activities of the
partnership. This discussion assumes that the
Non-U.S. Holder
will hold our common stock as a capital asset, which generally
is property held for investment.
Prospective investors are urged to consult their tax advisors
regarding the U.S. federal, state and local, and
non-U.S. income
and other tax considerations with respect to acquiring, holding
and disposing of shares of our common stock.
DIVIDENDS
In general, dividends paid to a
Non-U.S. Holder
(to the extent paid out of our current or accumulated earnings
and profits, as determined under U.S. federal income tax
principles) will be subject to U.S. withholding tax at a
rate equal to 30% of the gross amount of the dividend, or a
lower rate prescribed by an applicable income tax treaty, unless
the dividends are effectively connected with a trade or business
carried on by the
Non-U.S. Holder
within the United States. Under applicable Treasury Regulations,
a Non-U.S. Holder
will be required to satisfy certain certification requirements,
generally on IRS
Form W-8BEN,
directly or through an intermediary, in order to claim a reduced
rate of withholding under an applicable income tax treaty. If
tax is withheld in an amount in excess of the amount applicable
under an income tax treaty, a refund of the excess amount
generally may be obtained by filing an appropriate claim for
refund with the IRS.
113
U.S. federal tax consequences to
non-U.S. holders
of common stock
Dividends that are effectively connected with such a
U.S. trade or business generally will not be subject to
U.S. withholding tax if the
Non-U.S. Holder
files the required forms, including IRS
Form W-8ECI, or
any successor form, with the payor of the dividend, but instead
generally will be subject to U.S. federal income tax on a
net income basis in the same manner as if the
Non-U.S. Holder
were a resident of the United States. A corporate
Non-U.S. Holder
that receives effectively connected dividends may be subject to
an additional branch profits tax at a rate of 30%, or a lower
rate prescribed by an applicable income tax treaty, on the
repatriation from the United States of its effectively
connected earnings and profits, subject to adjustments.
GAIN ON SALE OR OTHER DISPOSITION OF COMMON STOCK
In general, a
Non-U.S. Holder
will not be subject to U.S. federal income tax on any gain
realized upon the sale or other taxable disposition of the
Non-U.S. Holders
shares of common stock unless:
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the gain is effectively
connected with a trade or business carried on by the
Non-U.S. Holder
within the United States (and, where an income tax treaty
applies, is attributable to a U.S. permanent establishment
of the
Non-U.S. Holder),
in which case the branch profits tax discussed above may also
apply if the
Non-U.S. Holder is
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the
Non-U.S. Holder is
an individual who holds shares of common stock as capital assets
and is present in the United States for 183 days or more in
the taxable year of disposition and certain other conditions are
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we are or have been a
U.S. real property holding corporation for
U.S. federal income tax purposes.
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Because of the real property and manufacturing assets we own, we
may be a U.S. real property holding
corporation. Generally, a corporation is a U.S. real
property holding corporation if the fair market value of its
U.S. real property interests, as defined in the Internal
Revenue Code and applicable Treasury Regulations equals or
exceeds 50% of the aggregate fair market value of its worldwide
real property interests and its other assets used or held for
use in a trade or business. If we are, have been, or become, a
U.S. real property holding corporation in the future, since
our common stock is regularly traded on an established
securities market, a
Non-U.S. Holder
who (actually or constructively) holds or held (at anytime
during the shorter of the five-year period preceding the
disposition or the holders holding period) more than 5% of
our common stock would be subject to U.S. federal income
tax on a disposition of our common stock but other
Non-U.S. Holders
generally would not be. If our common stock becomes not so
traded, all
Non-U.S. Holders
would be subject to U.S. federal income tax on a
disposition of our common stock.
You should consult your own tax advisor regarding our possible
status as a U.S. real property holding
corporation and its possible consequences in your
particular circumstances.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, we must report annually to the IRS the amount of
dividends paid, the name and address of the recipient, and the
amount, if any, of tax withheld. A similar report is sent to the
recipient. These information reporting requirements apply even
if withholding was not required because the dividends were
effectively connected dividends or withholding was reduced by an
applicable income tax treaty. Under income tax treaties or other
agreements, the IRS may make its reports available to tax
authorities in the recipients country of residence.
Dividends paid made to a
Non-U.S. Holder
that is not an exempt recipient generally will be subject to
backup withholding, currently at a rate of 28% of the gross
proceeds, unless a
Non-U.S. Holder
certifies on IRS
Form W-8BEN or
similar form as to its foreign status.
114
U.S. federal tax consequences to
non-U.S. holders
of common stock
Proceeds from the disposition of common stock by a
Non-U.S. Holder
effected by or through a U.S. office of a broker will be
subject to information reporting and backup withholding, unless
the
Non-U.S. Holder
certifies to the payor under penalties of perjury as to, among
other things, its address and foreign status or otherwise
establishes an exemption. Generally, U.S. information
reporting and backup withholding will not apply to a payment of
disposition proceeds if the transaction is effected outside the
United States by or through a
non-U.S. office.
However, if the broker is, for U.S. federal income tax
purposes, a U.S. person, a controlled foreign corporation,
a foreign person who derives 50% or more of its gross income for
specified periods from the conduct of a U.S. trade or
business, a U.S. branch of a foreign bank or insurance
company or a foreign partnership with various connections to the
United States, information reporting but not backup withholding
will apply unless:
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the broker has documentary
evidence in its files that the holder is a
Non-U.S. Holder
and certain other conditions are met; or |
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the holder otherwise establishes
an exemption.
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Backup withholding is not an additional tax. Rather, the amount
of tax withheld is applied as a credit to the U.S. federal
income tax liability of persons subject to backup withholding.
If backup withholding results in an overpayment of
U.S. federal income tax, a refund may be obtained, provided
the required documents are timely filed with the IRS.
ESTATE TAX
Our common stock owned or treated as owned by an individual who
is not a citizen or resident of the United States (as
specifically defined for U.S. federal estate tax purposes)
at the time of death will be includible in the individuals
gross estate for U.S. federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise.
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Underwriting
The selling stockholder is offering the shares of our common
stock described in this prospectus through the underwriters
named below. UBS Securities LLC and Bear, Stearns & Co.
Inc. are the joint bookrunners of this offering and
representatives of the underwriters. We and the selling
stockholder have entered into an underwriting agreement with the
representatives. Subject to the terms and