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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
COMMISSION FILE NUMBER 0-27918
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CENTURY ALUMINUM COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 13-3070826
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2511 GARDEN ROAD 93940
BUILDING A, SUITE 200 (Zip Code)
MONTEREY, CALIFORNIA
(Address of registrant's principal offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(831) 642-9300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $0.01 PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in a definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of February 28, 2002, 20,553,635 shares of common stock of the
registrant were issued and outstanding. Based upon the NASDAQ closing price on
February 28, 2002, the aggregate market value of the common stock held by
non-affiliates of the registrant was $136,033,726.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements. The Company has based
these forward-looking statements on current expectations and projections about
future events. Many of these statements may be identified by the use of
forward-looking words such as "expects," "anticipates," "plans," "believes,"
"projects," "estimates," "should," "will," and "potential" and variations of
such words. These forward-looking statements are subject to risks, uncertainties
and assumptions including, among other things, those discussed under "Part I,
Item 1 -- Business," "Part II, Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Part II, Item
8 -- Financial Statements and Supplementary Data," and:
- the Company's significant indebtedness and its ability to service its
indebtedness;
- general economic and business conditions;
- changes in demand for the Company's products or the products of its
customers;
- utilization of the Company's production facilities and equipment;
- the cost and availability of raw materials, power and skilled labor;
- disruptions of production as a result of labor disputes or otherwise;
- the impact of competition from domestic and foreign primary aluminum
producers;
- the Company's relationship with its principal shareholder and its
dependence on a few major customers;
- the cyclical nature of the aluminum industry and the end use markets;
- impact from environmental liabilities;
- the Company's ability to successfully implement its business strategy;
and
- the availability and cost of insurance.
Although the Company believes the expectations reflected in its
forward-looking statements are reasonable, the Company cannot guarantee its
future performance or results of operations. All forward looking statements in
this filing are based on information available to the Company on the date of
this filing; however, the Company is not obligated to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The risks described above should be considered when reading
any forward-looking statements in this filing. Given these uncertainties and
risks, the reader should not place undue reliance on these forward-looking
statements.
ITEM 1. BUSINESS
OVERVIEW
Century Aluminum Company ("Century" or the "Company") is a leading North
American producer of primary aluminum. The Company's aluminum reduction
facilities produce premium and commodity grade primary aluminum products ranging
from molten aluminum to premium cast products such as high-purity foundry ingot
and billet. Century is the second largest primary aluminum producer in the
United States, behind Alcoa, having produced over 918 million pounds of primary
aluminum in 2001 with net sales of $654.9 million. With the completion of the
Hawesville acquisition, as described below, the Company has an annual production
capacity of over 1.0 billion pounds of primary aluminum.
The Company currently owns all or part of three domestic primary aluminum
production facilities, which are located in Hawesville, Kentucky, Ravenswood,
West Virginia and Mt. Holly, South Carolina. See "Facilities and Production."
1
The Mt. Holly production facility is located in Mt. Holly, South Carolina.
The Mt. Holly facility, built in 1980, is the most recently constructed aluminum
reduction facility in the United States. In April of 2000, Century increased its
ownership interest in the Mt. Holly facility by 23% to 49.7%. The facility is
operated by our co-owner, Alcoa. The Mt. Holly facility has an annual production
capacity of 480 million pounds of primary aluminum, and Century's interest
represents 238 million pounds of that capacity.
The Ravenswood production facility is located in Ravenswood, West Virginia.
The Ravenswood facility, which the Company owns entirely, began operations in
1957 and is located on the Ohio River. The Ravenswood facility has an annual
production capacity of 375 million pounds of primary aluminum.
The Company acquired NSA Ltd. ("NSA") on April 1, 2001 from the Southwire
Company ("Southwire"), a privately-held wire and cable manufacturing company.
NSA owns and operates an aluminum reduction facility in Hawesville, Kentucky
("Hawesville facility"). The Hawesville facility began operations in 1970 with
four potlines. A fifth potline was added in 1999, increasing the annual
production capacity at the facility to 523 million pounds of primary aluminum.
In connection with the acquisition, the Company sold a 20% interest in the
Hawesville facility to Glencore International AG ("Glencore" and, together with
its subsidiaries, the "Glencore Group"). Century's 80% interest in the
Hawesville facility increased the Company's overall production capacity by 418
million pounds
The Company's strategic objective is to grow its primary aluminum business
and to further capitalize on anticipated improvements in industry fundamentals.
To better focus on the production of primary aluminum, the Company sold its
aluminum rolling and fabrication operations to Pechiney Rolled Products, LLC
("Pechiney") in September 1999.
Prior to April 1996, the Company was an indirect, wholly owned subsidiary
of Glencore. In April 1996, the Company completed an initial public offering of
its common stock. At December 31, 2001, the Glencore Group owned 38.6% of
Century's common shares outstanding and 100% of Century's convertible preferred
stock outstanding. Based upon its common and preferred stock ownership, the
Glencore Group beneficially owns 42.5% of Century's common stock.
FACILITIES AND PRODUCTION
RAVENSWOOD FACILITY
The Ravenswood facility is owned and operated by the Company's subsidiary,
Century Aluminum of West Virginia, Inc. ("Century of West Virginia"). Built in
1957, the Ravenswood facility operates four potlines with a total annual
production capacity of 375 million pounds. The facility is strategically located
on the Ohio River in Ravenswood, West Virginia, 165 miles southwest of
Pittsburgh, Pennsylvania and 45 miles north of Charleston, West Virginia. The
alumina used in the reduction process is transported by barge from the Gulf of
Mexico through the Mississippi and Ohio River systems to its unloading point at
the Ravenswood facility's dock.
The Ravenswood facility produces molten aluminum that is delivered to
Pechiney's adjacent fabricating facility and commodity ingot that Century sells
in the marketplace.
2
The following table shows primary aluminum shipments from the Ravenswood
facility during each of the periods indicated:
RAVENSWOOD FACILITY PRIMARY ALUMINUM SHIPMENTS
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000 2001
----- ----- -----
(IN MILLIONS OF POUNDS)
Molten aluminum............................................. 297.7(1) 335.8 291.3
Rolling ingot and sow....................................... 63.0 41.6 73.6
----- ----- -----
Total............................................. 360.7 377.4 364.9
===== ===== =====
---------------
(1) Reflects a decrease of approximately 15 million pounds of primary aluminum
shipments as a result of an illegal work stoppage at the Ravenswood facility
in August 1999.
The Company purchased the alumina used at the Ravenswood facility under a
fixed-price supply contract with Alcoa Alumina and Chemicals ("Alcoa Alumina").
That contract expired on December 31, 2001. Since January 1, 2002, the alumina
used at the Ravenswood facility has been supplied by Glencore under a new five-
year contract at a variable price determined by reference to the quoted London
Metals Exchange ("LME") market price for primary aluminum. The Company purchases
the electricity used at the Ravenswood facility under a fixed-price power supply
contract with Ohio Power, a subsidiary of American Electric Power, which extends
through July 31, 2003. The Company is eligible to enter into a new power supply
contract at the expiration of this contract. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
MT. HOLLY FACILITY
The Mt. Holly facility, built in 1980, is the most recently constructed
aluminum reduction facility in the United States. The facility consists of two
potlines with a total annual production capacity of 480 million pounds and
casting equipment used to cast molten aluminum into standard-grade ingot,
extrusion billet and other premium primary aluminum products. The Company's
49.7% interest represents 238 million pounds of the production capacity. Premium
primary aluminum products are sold at higher prices than commodity-priced
primary aluminum. Alumina used in the production process is delivered by ocean
vessel, unloaded at the port of Charleston, approximately 15 miles from the Mt.
Holly facility, and then transported to the facility by train.
Century's interest in the Mt. Holly facility is held through its wholly
owned indirect subsidiary, Berkeley Aluminum, Inc. ("Berkeley"). Effective April
1, 2000, the Company increased its 26.7% interest in the Mt. Holly facility to
49.7% when Berkeley purchased an additional 23% interest from Xstrata Aluminum
Corporation ("Xstrata"), a wholly owned subsidiary of Xstrata AG, for $94.7
million. Glencore is a major shareholder of Xstrata. Under the current Mt. Holly
ownership structure, the Company holds an undivided 49.7% interest in the
property, plant and equipment comprising the aluminum reduction operations at
the Mt. Holly facility and an equivalent share in the general partnership
responsible for the operation and maintenance of the facility. Alcoa owns the
remaining 50.3% interest in the Mt. Holly facility and an equivalent share of
the operating partnership. Under the terms of the operating partnership, Alcoa
is responsible for operating and maintaining the facility, while each partner
supplies its own alumina for conversion to primary aluminum. Each partner is
responsible for its proportionate share of operational and maintenance costs.
The Mt. Holly facility manufactures two basic product types:
- primary aluminum cast into ingots, which Century sells at commodity
prices; and
- primary aluminum alloyed and cast into value-added primary aluminum
products, such as rolling ingot, foundry alloys and extrusion billet,
which Century sells at premium prices.
3
The following table shows primary aluminum shipments from the Mt. Holly
facility during each of the periods indicated:
MT. HOLLY FACILITY PRIMARY ALUMINUM SHIPMENTS
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000(1) 2001
----- ------- -----
(IN MILLIONS OF POUNDS)
Commodity-priced primary aluminum........................... 72.4 107.4 104.1
Rolling ingot, foundry, alloys and extrusion billets........ 52.7 96.8 130.6
----- ----- -----
Total............................................. 125.1 204.2 234.7
===== ===== =====
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(1) The Company acquired an additional 23.0% interest in the Mt. Holly facility
in April 2000.
The Company purchased approximately 54% of its alumina requirements from
Alcoa for the Mt. Holly facility under a fixed-priced supply contract that
expired at the end of 2001. Since January 1, 2002, Glencore supplies all of the
Company's alumina requirements for the Mt. Holly facility, of which
approximately half is supplied under a new five year supply contract and the
remainder is supplied under an existing contract which runs through January 31,
2008. The price under both of the supply contracts is determined by reference to
the quoted LME market price for primary aluminum.
Alcoa, which operates the Mt. Holly facility, purchases all of the
facility's power requirements from the South Carolina Public Service Authority
under a power supply contract that expires at the end of 2005. The prices for
the power purchased under this contract are fixed, subject to a fuel cost
adjustment.
HAWESVILLE FACILITY
The Hawesville facility, which began operations in 1970, is strategically
located adjacent to the Ohio River near Hawesville, Kentucky. The Hawesville
facility originally had four potlines that produced 413 million pounds of
primary aluminum. In September 1999, a fifth potline became operational, adding
the capacity to produce an additional 110 million pounds of primary aluminum.
Alumina used in the production process is shipped by river barge and unloaded at
the facility's dock on the Ohio River.
The Hawesville facility has an annual production capacity of 523 million
pounds of primary aluminum. Under the owners agreement with Glencore, Century's
80% pro rata portion of the annual production capacity of the Hawesville
facility is 418 million pounds. The original four potlines at the Hawesville
facility are specially configured and operated so as to produce primary aluminum
with a high purity level. The average purity level of primary aluminum produced
by these potlines is 99.9%, compared to the purity of standard grade aluminum
which is approximately 99.7%. The high purity primary aluminum produced by the
four original potlines at the Hawesville facility provides the high conductivity
required by Hawesville's largest customer, Southwire, for its electrical wire
and cable products as well as for certain aerospace applications. Standard grade
aluminum would require the added expense of a chemical treatment to achieve the
same level of conductivity. The newly installed fifth potline at the Hawesville
facility produces standard grade aluminum.
4
The Hawesville facility produces primary aluminum in molten, ingot and sow
form. The following table shows primary aluminum shipments from the Hawesville
facility during each of the periods indicated:
HAWESVILLE FACILITY PRIMARY ALUMINUM SHIPMENTS
YEAR ENDED DECEMBER 31,
-------------------------
1999(1) 2000 2001(2)
------- ----- -------
(IN MILLION IN POUNDS)
Molten aluminum............................................. 271.9 280.7 295.9
Ingot, pig and sow.......................................... 129.7 206.6 166.3
Foundry alloys.............................................. 67.3 54.1 69.9
----- ----- -----
Total............................................. 468.9 541.4 532.1
===== ===== =====
---------------
(1) The fifth potline, which can produce approximately 110 million pounds of
standard grade aluminum per year, began production in September 1999.
(2) Effective April 1, 2001, Century completed the acquisition of the Hawesville
facility from Southwire. Simultaneously, Century effectively sold a 20%
interest in the Hawesville facility to Glencore. Shipments for the year
ended December 31, 2001 included 135 million pounds shipped by Southwire and
79 million pounds shipped by Glencore.
The alumina used by the Hawesville facility is purchased under a supply
contract with Kaiser Aluminum and Chemical Corporation ("Kaiser") which runs
through December 31, 2005. See discussion of the Kaiser bankruptcy at Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The price for alumina purchased under this contract is variable and
determined by reference to the quoted LME market price for primary aluminum. The
Hawesville facility purchases all of its power from Kenergy Corp. ("Kenergy"), a
local retail electric cooperative, under a power supply contract that expires at
the end of 2010. Kenergy acquires the power it provides to the Hawesville
facility under fixed price contracts, mostly with a subsidiary of LG&E Energy
Corp., with delivery guaranteed by LG&E. The Hawesville facility currently
purchases all of its power from Kenergy at fixed prices. Beginning in 2003,
approximately 15% of the Hawesville facility's requirements will become
unpriced. The unpriced portion of the contract will increase to approximately
26% in 2006.
INDUSTRY OVERVIEW
The most commonly used bench mark for pricing primary aluminum is the price
for aluminum transactions quoted on the London Metals Exchange ("LME"). The LME
price, however, does not represent the actual price paid for all aluminum
products. For example, products delivered to U.S. customers are often sold at a
premium to the LME price, typically referred to as the U.S. Midwest Market
Price. Historically, this premium has averaged approximately $0.03 to $0.05 per
pound. In addition, premiums are charged for adding certain alloys to aluminum
for use in specific applications and for casting aluminum into specific shapes,
such as extrusion billet or rolling slab.
During the 1990s, worldwide supply and demand levels for primary aluminum
fluctuated significantly. The fluctuations were primarily the result of
declining consumption in the former Soviet Union and Asia. In the former Soviet
Union, the declining consumption of primary aluminum during this period was due
in large part to a substantial and sudden decrease in demand from their defense
industry. During this period, imports to western economies from Eastern Bloc
countries increased substantially. As a result, worldwide inventory levels rose
dramatically through 1993, creating downward pressure on prices and leading to
the idling of production capacity.
From late 1993 to 1997, global demand for primary aluminum generally
increased and inventory levels began to decline, leading to improved pricing and
the reopening of some idled capacity. Global demand declined again in 1998 when
Asia experienced economic difficulties, but rebounded in late 1999 as worldwide
economic conditions improved. This growth in demand led to a further decline in
inventory levels and the
5
return to production of a substantial portion of the remaining idled capacity.
During the first half of 2000, demand generally remained strong, exceeding
supply and leading to a further reduction in global inventory levels. Starting
in the second half of 2000 and continuing through 2001, demand weakened.
Beginning in the fourth quarter of 2000, the idling of certain production
facilities, primarily in the northwestern United States and Brazil, reduced
global capacity by nearly 8%. These supply curtailments largely offset the
reduction in demand during the second half of 2000 and 2001. The market price
for primary aluminum declined throughout 2001 due, primarily, to the continued
decline in global demand for primary aluminum. The average LME cash price was
$0.66, $0.70 and $0.62 per pound for the years ended December 31, 2001, 2000 and
1999, respectively.
SALES AND DISTRIBUTION
The majority of the products produced at the Company's facilities are sold
to a limited number of customers. Giving pro forma effect to the Hawesville
acquisition, the Company would have derived a combined total of approximately
65% of its 2001 consolidated sales from Pechiney, Southwire and Glencore,
Century's three largest customers. Out of total pro forma revenues of $740.8
million for 2001, sales to Pechiney represented $203.4 million, or 27% of
Century's total pro forma revenues, sales to Southwire represented $167.1
million, or 23% of total pro forma revenues and sales to Glencore represented
$111.4 million or 15% of total pro forma revenues. The remaining $259.0 million,
or 35% of Century's total pro forma revenues, represented sales to approximately
50 customers.
RAVENSWOOD FACILITY
Sales of primary aluminum to Pechiney represented $202 million or 77% of
Century's revenues from the Ravenswood facility in 2001. Sales to parties other
than Pechiney represented $60 million or 23% of Ravenswood's revenues in 2001.
Century has a contract with Pechiney under which Pechiney will purchase 23 to 27
million pounds, per month, of molten aluminum produced at the Ravenswood
facility through July 31, 2003, at a price determined by reference to the U.S.
Midwest Market Price. This contract will be automatically extended through July
31, 2007 provided that the Company's power contract for the Ravenswood facility
is extended or replaced through that date. After July 31, 2003, Pechiney will
have the right, upon 12 months notice, to reduce its purchase obligations under
the contract by 50%. Through July 2003, sales to Pechiney will represent between
73% and 87% of the Company's production capacity at the Ravenswood facility.
MT. HOLLY FACILITY
Sales of primary aluminum to Glencore represented $89.7 million or 52.9% of
Century's revenues from the Mt. Holly facility in 2001. Sales to third parties
other than Glencore represented $79.8 million or 47.1% of revenues from the Mt.
Holly facility in 2001. Century has a contract to sell Glencore approximately
110 million pounds of primary aluminum produced at the Mt. Holly facility each
year through December 31, 2009. During 2001, the price was variable and
determined by reference to the quoted LME market price for primary aluminum,
while the remaining eight years of the contract will be at a fixed price. Sales
to Glencore under this contract represent 47% of the Company's production
capacity at the Mt. Holly facility.
HAWESVILLE FACILITY
Sales of primary aluminum to Southwire accounted for $123.6 million or
55.4% of Century's revenues from the Hawesville facility in 2001. Sales to third
parties accounted for the remaining $98.8 million or 44.6% of the Company's
revenues from the Hawesville facility during 2001. In connection with the
Hawesville acquisition, Century entered into a ten-year contract with Southwire
to supply 240 million pounds of high-purity molten aluminum annually to
Southwire's wire and cable manufacturing facility located adjacent to the
Hawesville facility. Under this contract, Southwire will also purchase 60
million pounds of standard grade molten aluminum each year for the first five
years of the contract, with an option to purchase an equal amount for each of
the remaining five years. The price under this agreement is variable and is
determined by reference to the U.S. Midwest Market Price. This contract will be
automatically renewed for additional five-year terms,
6
unless either party provides 12 months prior notice that it has elected not to
renew. Sales of primary aluminum to Southwire will represent up to 57% of the
Hawesville facility's production capacity for the first five years of the
contract. Under the owners' agreement with Glencore, both parties are
responsible for providing a pro rata portion of the aluminum supplied to
Southwire and each party is entitled to its pro rata portion of the remaining
production.
PRICING AND RISK MANAGEMENT
The Company's operating results are sensitive to changes in the price of
primary aluminum and the raw materials used in its production. As a result,
Century attempts to mitigate the effects of fluctuations in primary aluminum and
raw material prices through the use of various fixed-price commitments and
financial instruments. Although these efforts may limit the Company's ability to
take advantage of favorable changes in the market prices for primary aluminum or
raw materials, they mitigate the effect of cyclical prices for those goods and
are intended to ensure that the Company earns acceptable margins on its
products.
PRICING
The Company offers a number of pricing alternatives to its customers which,
combined with Century's metals risk management activities, are designed to lock
in a certain level of price stability on its primary aluminum sales. Pricing on
Century's products is generally offered either at a fixed-price, where the
customer pays an agreed-upon price over an extended period of time, or an
indexed (or "market") price, where the customer pays an agreed-upon premium over
the LME price or over other market indices.
In connection with the sale of its rolling and fabrication businesses in
September 1999, the Company entered into a long-term contract with Pechiney
under which Pechiney will purchase 23 to 27 million pounds, per month of molten
aluminum produced at the Ravenswood facility through July 31, 2003, at a price
determined by reference to the U.S. Midwest Market Price. After increasing its
ownership interest in the Mt. Holly facility, the Company entered into a
contract to sell to Glencore approximately 110 million pounds of the primary
aluminum produced at Mt. Holly each year through December 31, 2009. During 2001,
the price was variable and determined by reference to the quoted LME market
price for primary aluminum, while the remaining eight years of the contract are
at a fixed price. In connection with the Hawesville acquisition, the Company
entered into a 10-year contract with Southwire to supply 240 million pounds of
high-purity molten aluminum per year to Southwire's wire and cable manufacturing
facility located adjacent to the Hawesville facility at a price determined by
reference to the U.S. Midwest Market Price. Under this contract, Southwire will
also purchase 60 million pounds of standard-grade molten aluminum each year for
the first five years of the contract, with an option to purchase an equal amount
in each of the remaining five years. The Company and Glencore are each
responsible for providing a pro rata portion of the aluminum supplied to
Southwire under this agreement. In addition to the contracts with Pechiney,
Glencore and Southwire, the Company had fixed-price commitments to sell 115.7
million pounds of primary aluminum at December 31, 2001 and 50.3 million pounds
at December 31, 2000.
RISK MANAGEMENT
The Company manages its exposure to fluctuations in the price of primary
aluminum by selling aluminum at fixed prices for future delivery and through
financial instruments as well as by purchasing alumina under supply contracts
with prices tied to the same indices as the Company's aluminum sales contracts.
The Company's risk management activities do not include trading or speculative
transactions. Although the Company has not purchased material amounts of call or
put options, in cases where Century sells forward primary aluminum, it may
purchase call options to benefit from price increases which are significantly
above forward sales prices. In addition, it may purchase put options to protect
itself from price decreases.
To mitigate the volatility in its unpriced forward primary aluminum sales
contracts, the Company enters into fixed price financial sales contracts, which
settle in cash in the period corresponding to the intended delivery dates of the
forward sales contracts. At December 31, 2001, the Company had financial
instruments,
7
primarily with the Glencore Group, for 248.8 million pounds. These financial
instruments are scheduled for settlement at various dates in 2002 through 2003.
Based on market prices at December 31, 2001, the Company could have received
$14.6 million for early settlement of the financial sales contracts outstanding
on that date. The Company had no fixed price financial purchase contracts to
purchase aluminum at December 31, 2001. Additionally, to mitigate the volatility
of the natural gas markets, the Company enters into fixed price financial
purchase contracts, which settle in cash in the period corresponding to the
intended usage of natural gas. At December 31, 2001, the Company had financial
instruments for 3.1 million DTHs (one decatherm is equivalent to one million
British Thermal Units). These financial instruments are scheduled for settlement
at various dates in 2002 through 2005. Based on the fair value of the Company's
financial instruments as of December 31, 2001, the Company could have settled
these forward natural gas purchase contracts and paid $4.8 million.
On a hypothetical basis a $0.01 per pound increase or decrease in the
market price of primary aluminum is estimated to have an unfavorable or
favorable impact of $1.6 million after tax, respectively, on accumulated other
comprehensive income as a result of the forward primary aluminum financial sale
contracts entered into by the Company at December 31, 2001. This quantification
of the Company's exposure to the commodity price of aluminum is necessarily
limited, as it does not take into consideration the Company's inventory or
forward delivery contracts, or the offsetting impact upon the sales price of
primary aluminum products.
On a hypothetical basis, a $0.50 per DTH decrease or increase in the market
price of natural gas is estimated to have an unfavorable or favorable impact of
$1.0 million after tax, respectively, on accumulated other comprehensive income
as a result of the forward natural gas financial purchase contracts entered into
by the Company at December 31, 2001.
Effective January 1, 2001, the Company designated the financial sales and
purchase contracts as cash flow hedges. To the extent the Company's cash flow
hedges are effective, unrealized gains and losses on marking forward financial
purchase and sales contracts to market will be reported in accumulated other
comprehensive income until settled, rather than in the Statement of Operations.
Ineffectiveness of cash flow hedges will be reported in the Statement of
Operations.
Century monitors its overall position, and its metals and natural gas risk
management activities are subject to the management, control and direction of
senior management. These activities are regularly reported to the Board of
Directors of Century.
COMPETITION
The market for primary aluminum is diverse and highly competitive. The
Company competes in the production and sale of primary aluminum with numerous
other producers in North America and with other producers worldwide. The
Company's principal competitors in the U.S. market are Alcoa, Alcan, Russia, and
various other smaller primary aluminum producers. Some of the Company's
competitors have substantially greater manufacturing and financial resources,
and some have cost structures with respect to alumina, electricity and labor
that are more advantageous than the Company's. Aluminum also competes with other
materials such as steel, plastic and glass which may be used as alternatives for
some applications based upon relative pricing.
The Company anticipates that continuing industry consolidation will
intensify competition and further emphasize the importance of cost efficient
operations. With the acquisition of the Company's 80% interest in the Hawesville
facility and the integration of its operations with the Company's existing
facilities, Century expects to improve the competitiveness of the Company's
position on the industry cost curve and capture a significant share of the
high-purity segment of the market.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various environmental laws and
regulations. Century has spent and expects to spend in the future, significant
amounts for compliance with those laws and regulations. In addition, some the
Company's past manufacturing activities have resulted in environmental
consequences
8
which require remedial measures. Pursuant to certain environmental laws which
may impose liability regardless of fault, Century may be liable for the costs of
remediation of contaminated property or for amelioration for damage to natural
resources. Although Century believes, based upon information currently available
to the Company's management, that it will not be subject to environmental
liabilities which are likely to have a material adverse effect on the Company,
Century cannot be certain that future remedial requirements at its current and
formerly owned or operated properties or adjacent areas will not result in a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
The 1990 amendments to the Clean Air Act impose stringent standards on the
aluminum industry's air emissions. These amendments affect the operations of the
Company's facilities as technology-based standards relating to reduction
facilities and carbon plants have been instituted. Although the Company cannot
predict with certainty how much will be required to be spent to comply with
these standards, the Company's general capital expenditures plan includes
certain projects designed to improve its compliance with both known and
anticipated requirements.
The Company has planned capital expenditures related to environmental
matters, at all of its facilities, of $2.7 million in 2002, $0.7 million in 2003
and $0.3 million in 2004. In addition, the Company expects to incur operating
expenses relating to environmental matters of approximately $6.1 million, $5.9
million, and $6.5 million in 2002, 2003 and 2004, respectively. As part of its
general capital expenditures plan, the Company also expects to incur capital
expenditures for other capital projects that may, in addition to improving
operations, reduce certain environmental impacts. It is Century's policy to
accrue for costs associated with environmental assessments and remedial efforts
when it becomes probable that the Company is liable and the associated costs can
be reasonably estimated. The Company's aggregate environmental related accrued
liabilities were $1.8 million and $0.9 million at December 31, 2001 and 2000,
respectively. All accrued amounts have been recorded without giving effect to
any possible future recoveries, as explained more fully below. With respect to
ongoing environmental compliance costs, including maintenance and monitoring,
the Company expenses the costs when incurred.
RAVENSWOOD FACILITY
Century is aware of some environmental contamination at its Ravenswood
facility which is likely to require remedial measures. The Company believes that
a significant portion of this contamination is attributable to the operations of
a prior owner and will be the financial responsibility of that owner, as
discussed below.
Pursuant to an Environmental Protection Agency ("EPA") order issued in 1994
under Section 3008(h) (the "3008(h) order") of the Resource Conservation and
Recovery Act ("RCRA"), Century of West Virginia is performing remedial measures
at a former oil pond area at Ravenswood in connection with cyanide contamination
in the groundwater. Century of West Virginia also conducted and submitted to the
EPA a RCRA facility investigation ("RFI") evaluating other areas that may have
contamination, and it is carrying out interim remediation measures in two other
areas identified in the RFI. The Company is coordinating its interim remediation
work with the EPA, and it believes those interim remediation measures, which are
expected to be completed by year end 2002, will fulfill the work requirements
under the 3008(h) order.
Before the Company acquired the Ravenswood facility in 1989, Kaiser owned
and operated the facility for approximately thirty years. Many of the conditions
for which Century was investigated under the 3008(h) order exist because of
activities which occurred during Kaiser's ownership and operation of the
facility. With respect to those conditions, Kaiser will be responsible for the
costs of required cleanup under the terms of the Company's agreement to purchase
the Ravenswood facility. In addition, Kaiser retained title to certain land at
the Ravenswood facility and retains full responsibility for those areas. Under
current environmental laws, the Company may be required to undertake remedial
measures with respect to any contamination which was discharged from areas which
Kaiser owns or previously owned or operated. However, if such remediation is
required, the Company believes Kaiser will be liable for some or all of the
costs incurred by Century. On February 12, 2002, Kaiser and certain wholly owned
subsidiaries filed voluntary petitions under Chapter 11 of the Federal
Bankruptcy Code ("Kaiser Bankruptcy"). While the Company believes the Kaiser
Bankruptcy
9
will not relieve Kaiser of its obligations to do remediation work under
government orders, the ultimate outcome of the Kaiser Bankruptcy is uncertain.
Nevertheless, the Company does not expect the Kaiser Bankruptcy to have a
material adverse impact on the Company's financial condition, results of
operations or liquidity.
In connection with the sale of the Company's rolling and fabricating
businesses at Ravenswood to Pechiney, the Company transferred to Pechiney
certain indemnification rights under the agreement relating to Century's
previous purchase of such businesses. In addition, the agreement with Pechiney
provides further indemnification obligations by us to Pechiney which are
limited, in general, to pre-closing conditions which were not disclosed to
Pechiney or to off-site migration of hazardous substances from the Company's
pre-closing acts or omissions. In general, the Company's indemnification
obligations expire on September 20, 2005 and are payable only to the extent they
exceed $2.0 million in the aggregate.
MT. HOLLY FACILITY
The Company is not aware of any material cost of environmental compliance
or any material environmental liability for which it would be responsible at the
Mt. Holly facility.
HAWESVILLE FACILITY
The Hawesville Facility has been listed on the National Priorities List
under the federal Comprehensive Environmental Response, Compensation and
Liability Act. On July 6, 2000, the EPA issued a final Record of Decision
("ROD") which details response actions to be implemented at several locations at
the Hawesville site to address actual or threatened releases of hazardous
substances. Those actions include:
- removal and off-site disposal at approved landfills of certain soils
contaminated by polychlorinated biphenyls ("PCBs");
- management and containment of soils and sediments with low PCB
contamination in certain areas on-site; and
- the continued extraction and treatment of cyanide contaminated ground
water using the existing ground water treatment system.
The total costs for the remedial actions to be undertaken and paid for by
Southwire relative to this site are estimated under the ROD to be $12.6 million
and the forecast of annual operating and maintenance costs is $1.2 million.
Under the Company's agreement with Southwire to purchase NSA, Ltd. ("NSA"),
which owned the Hawesville facility, Southwire indemnified the Company against
all on-site environmental liabilities known to exist prior to the closing of the
acquisition, including all remediation, operation and maintenance obligations
under the ROD. On behalf of Southwire, Century will operate and maintain the
ground water treatment system required under the ROD. Southwire will reimburse
Century for any such expense that exceeds $0.4 million annually. Under the terms
of the Company's agreements with Glencore relating to the Company's ownership
and operation of the Hawesville Facility, Glencore will share pro rata in any
environmental costs (net of any amounts available under the indemnity provisions
in the Company's stock purchase agreement with Southwire) associated with the
Hawesville Facility.
If on-site environmental liabilities relating to NSA's pre-closing
activities that were not known to exist as of the date of the closing of the
acquisition become known within six years after the closing, the Company and
Glencore, based on each company's respective percentage interests in the
Hawesville Facility, will share the costs of remedial action with Southwire on a
sliding scale depending on the year the claim is brought. Any on-site
environmental liabilities arising from pre-closing activities which do not
become known until on or after the sixth anniversary of the closing of the
Hawesville acquisition will be the responsibility of Glencore and the Company.
In addition, the Company and Glencore will be responsible for a pro rata portion
of any post-closing environmental costs which result from a change in
environmental laws after the closing or from their own activities, including a
change in the use of the facility.
10
The Company acquired NSA by purchasing all of the outstanding equity
securities of its parent company, Metalsco, which was a wholly owned subsidiary
of Southwire. Metalsco previously owned certain assets which are unrelated to
NSA, including the stock of Gaston Copper Recycling Corporation ("Gaston"), a
secondary metals reduction facility in South Carolina. Gaston has numerous
liabilities related to environmental conditions at its reduction facility.
Gaston and all other non-NSA assets owned at any time by Metalsco were
identified in the Company's agreement with Southwire as unwanted property and
were distributed to Southwire prior to the closing of the Hawesville
acquisition. Southwire indemnified the Company for all liabilities related to
the unwanted property. Southwire also retained ownership of certain land
adjacent to the Hawesville Facility containing NSA's former potliner disposal
areas, which are the sources of cyanide contamination in the facility's
groundwater. Southwire retained full responsibility for this land, which was
never owned by Metalsco and is located on the north boundary of the Hawesville
site. In addition, Southwire indemnified the Company against all risks
associated with off-site hazardous material disposals by NSA which pre-date the
closing of the acquisition.
Under the terms of the Company's agreement to purchase NSA, Southwire
secured its indemnity obligations for environmental liabilities for seven years
after the closing by posting a $15 million letter of credit issued in the
Company's favor, with an additional $15 million to be posted if Southwire's net
worth drops below a pre-determined level during that period. The Company's
indemnity rights under the agreement are shared pro rata with Glencore. The
amount of security Southwire provides may increase (but not above $15 million or
$30 million, as applicable) or decrease (but not below $3 million) if certain
specified conditions are met. The Company cannot be certain that Southwire will
be able to meet its indemnity obligations. In that event, under certain
environmental laws which impose liability regardless of fault, the Company may
be liable for any outstanding remedial measures required under the ROD and for
certain liabilities related to the unwanted properties. If Southwire fails to
meet its indemnity obligations or if the Company's shared or assumed liability
is significantly greater than anticipated, the Company's financial condition,
results of operations and liquidity could be materially adversely affected.
VIALCO
The Company is aware of contamination at an alumina facility at St. Croix,
Virgin Islands which was previously owned through the Company's Virgin Islands
Alumina Corporation subsidiary, or "Vialco." Century is a party to an
Administrative Order on Consent with the Environmental Protection Agency
("Order") pursuant to which all past and present owners of the alumina facility
have agreed to carry out a Hydrocarbon Recovery Plan which provides for the
removal and management of oil which is floating on top of groundwater underlying
the facility. Pursuant to the Hydrocarbon Recovery Plan, recovered hydrocarbons
and groundwater will be delivered to an adjacent petroleum refinery where they
will be received and managed. The owner of the petroleum refinery will pay the
parties participating in the recovery efforts the fair market value of the
petroleum hydrocarbon recovered. Lockheed Martin Corporation ("Lockheed"), which
sold the facility to Vialco in 1989, has tendered indemnity and defense of this
matter to Vialco pursuant to terms of the Lockheed-Vialco Asset Purchase
Agreement.
Pursuant to the agreement under which the Company sold the premises to St.
Croix Alumina, LLC ("St. Croix"), an indirect subsidiary of Alcoa, Inc., Century
retained liability for environmental conditions existing at the time of the
sale, but only to the extent those conditions arose as a result of the Company's
operation of the facility. Century is only obligated to indemnify St. Croix for
amounts it spends on remediation which exceed $0.3 million but are no greater
than $18.0 million. Vialco's indemnification obligation to St. Croix expired on
July 24, 2001. Management does not believe Vialco's liability under this Order
or its indemnification obligation to St. Croix, if any, will have a material
adverse effect on the Company's financial condition, results of operations, or
liquidity.
RESEARCH AND DEVELOPMENT
Century performs ongoing process development work primarily using in-house
engineering resources. The Company has most recently been focusing on efforts to
refine the computer control of pots and to reduce electricity usage by using
different configurations for the anodes in each pot.
11
At the Ravenswood facility, the Company is participating in two cooperative
research agreements with the U.S. Department of Energy and other partners. These
projects are designed to improve the operating and energy efficiencies of the
primary aluminum production process. One project, which Century implemented in
1999, uses experimental system software to identify pots that are not operating
at optimal levels. The system operates on data from multiple sources including
any existing control system. Two newly developed software programs that allow
data mining for both targeted and previously unrecognized data patterns are
currently under evaluation. The Company's potline operators will be able to use
the information provided by the computer's databases to correct operational
inefficiencies in the potline.
In 1998, the Company began work on another project which focuses on the use
of additives to cathode blocks to prolong their life and improve operating
efficiency. The first phase of small scale testing has been successfully
completed and the next phase will involve placing carbon blocks with the
additives in active pots for evaluation. Construction of bench scale facilities
has just been completed and testing of half width cathode blocks began in the
fourth quarter of 2001.
At the Ravenswood facility, another capital project is under way which is
designed to improve the Company's ability to handle nearly 1,800 new and spent
anodes per day. This project which is expected to be completed in 2004, will
involve the installation of new automated cranes that will allow the crane
operator to perform most of the work associated with spent anode replacement and
eliminate much of the manual labor formerly required. The completion of this
project will require an investment of approximately $21.1 million, of which
$17.0 million has already been invested.
Expenditures for third-party research and development totaled $0.8 million
in 1999. No third-party expenditures were incurred in 2000 and 2001 and none are
planned for 2002.
INTELLECTUAL PROPERTY
The Company owns or has rights to use a number of patents or patent
applications relating to various aspects of its operations. The Company does not
consider its business to be materially dependent on any of these patents or
patent applications.
The Company owns the rights to the aluminum reduction technology used at
the Hawesville facility to the extent of its pro rata interest in the facility.
Southwire purchased the original technology from Kaiser, and under the terms of
the purchase agreement, ownership rights to the basic technology and certain
improvements vested in Southwire. These improvements included the redesign of
production systems, equipment and apparatus used in the reduction of alumina
into primary aluminum products. Southwire has licensed portions of this
technology to certain third parties.
EMPLOYEES AND LABOR RELATIONS
The Company employs a work force of approximately 1,540 persons, consisting
of approximately 1,230 hourly employees and approximately 310 salaried
employees. The Company has approximately 600 hourly employees and 120 salaried
employees at the Ravenswood facility, and approximately 630 hourly employees and
180 salaried employees at the Hawesville facility. The hourly employees at the
Ravenswood and Hawesville facilities are represented by the United Steelworkers
of America ("USWA"). The employees at the Mt. Holly facility are employed by
Alcoa and are not unionized. The Company's corporate office, located in
Monterey, California, has 14 salaried employees.
The hourly employees at the Ravenswood facility are covered by a four-year
labor agreement with the USWA which was to expire May 31, 2003. On March 8,
2002, the labor agreement was extended through May 31, 2006. The agreements call
for fixed increases in hourly wages and provide for certain benefit adjustments
each year. In August of 1999, the union employees at the Ravenswood facility
staged a one-day illegal work stoppage, which resulted in a partial plant
shutdown that damaged production equipment and led to estimated losses before
insurance of $10.0 million, including equipment damage and business interruption
losses. The Company received approximately $9.4 million in settlement of this
claim from its insurance carrier.
12
In connection with the Hawesville acquisition, Century negotiated a
five-year collective bargaining agreement which covers all of the represented
hourly employees at the Hawesville facility. Under this agreement, the Company
established the terms of employment for USWA employees and settled all claims
relating to a strike the USWA had taken against Southwire. This agreement, which
was ratified by the USWA local on September 28, 2000, became effective upon the
closing of the Hawesville acquisition. The agreement provides for fixed
increases in hourly wages in the first, third, fourth and fifth years and
certain benefit adjustments over the life of the agreement. The work rules under
the new collective bargaining agreement are substantially similar to those
previously in place at the Hawesville facility.
Century maintains noncontributory defined benefit pension plans for all
salaried employees and the hourly employees at the Ravenswood facility and the
Company contributes to a multi-employer benefit plan for the hourly employees at
the Hawesville facility. In addition, the Company maintains postretirement
healthcare and life insurance benefit plans and defined contribution 401(k)
plans for its salaried and hourly employees. Management believes that its
relations with its employees are good.
ITEM 2. PROPERTIES
The Ravenswood facility occupies 350 acres on a site totaling 2,290 acres
located on the Ohio River near Ravenswood, West Virginia, 165 miles southwest of
Pittsburgh, Pennsylvania and 45 miles north of Charleston, West Virginia. The
Ravenswood facility was built in 1957 and has an annual production capacity of
approximately 375 million pounds. See Item 1, "Business -- Facilities and
Production -- Ravenswood Facility."
The Mt. Holly facility occupies 1,000 acres on a site totaling 6,500 acres
located in Mt. Holly, South Carolina. The Mt. Holly facility was constructed in
1980 and is the most recently constructed reduction facility in the United
States. The Mt. Holly facility has a total production capacity of approximately
480 million pounds, of which Century owns a 49.67% interest. The remaining
interest in the Mt. Holly facility is owned by Alcoa. Alcoa manages and operates
the facility pursuant to an owners' agreement whereby each owner furnishes its
own alumina for conversion to aluminum and is responsible for its pro rata share
of the operating and conversion costs. See Item 1, "Business -- Facilities and
Production -- Mt. Holly Facility."
The Hawesville facility occupies 189 acres on a site totaling 747 acres
located on the Ohio River in Hawesville, Kentucky. The Hawesville facility began
operations in 1970. The Hawesville facility has a total production capacity of
approximately 523 million pounds. Century's pro rata portion of the annual
production capacity of the Hawesville facility is 418 million pounds. Each owner
is responsible for its pro rata share of alumina and operating and conversion
costs. See Item 1, "Business -- Facilities and Production -- Hawesville
Facility."
Equipment failures at the Ravenswood, Mt. Holly or Hawesville facilities
could limit or shut down the Company's production for a significant period of
time. In order to minimize the risk of equipment failure, the Company follows a
comprehensive maintenance and loss prevention program and periodically reviews
its failure exposure.
The Company is also subject to losses associated with equipment shutdowns,
caused by the loss or interruption of electrical power, as well as by labor
shortages and catastrophic events. Power interruptions may have a material
adverse effect on the Company's business because it uses large amounts of
electricity in the primary aluminum production process. Any loss of power which
causes an equipment shutdown can result in the hardening or "freezing" of molten
aluminum in the pots where it is produced. If this occurs, significant losses
can occur if the pots are damaged and require repair or replacement, a process
that could limit or shut down the Company's production operations for a
significant period of time. Certain shutdowns not covered by insurance could be
a default under the Company's revolving credit facility. No assurance can be
given that a material shutdown will not occur in the future or that such a
shutdown would not have a material adverse effect on the Company. In August
1999, as a result of manpower shortages caused by an illegal one-day work
stoppage, the Company was forced to cut power at the Ravenswood facility,
effectively shutting down one of the facility's four potlines. When the power
was cut, the molten metal in the affected pots froze, resulting in significant
equipment damage and other losses. The estimated cost of this shutdown was $10.0
million,
13
including equipment damage and losses due to business interruption. The Company
received approximately $9.4 million in settlement of this claim from its
insurance carrier.
Although the Company maintains property damage insurance to provide for the
repair or replacement of damaged equipment or property, as well as business
interruption insurance to mitigate losses resulting from any equipment failure
or production shutdown caused by a catastrophic event, the Company may still be
required to pay significant amounts under the deductible provisions of those
insurance policies. In addition, coverage may not be sufficient to cover all
losses which result from a catastrophic event. Furthermore, Century maintains
insurance to cover losses resulting from damage to our power suppliers'
facilities, or transmission lines that would cause an interruption of the power
supply to our facilities. This insurance contains large deductibles and
self-insured amounts and does not cover losses resulting from a power loss due
solely to lack of sufficient electrical power resulting from unusually high
usage in the regions. The market for property and business interruption
insurance has tightened considerably since September 11, 2001. As a result,
Century expects to pay significantly higher premiums for these policies upon
renewal in April, 2002. In addition, these renewal policies are likely to
contain higher deductibles and self retention amounts than the expiring
policies.
ITEM 3. LEGAL PROCEEDINGS
Century was a named defendant, along with many other companies, in
approximately 2,362 civil actions brought by employees of third party
contractors who allege asbestos-related diseases arising out of exposure at
facilities where they worked, including Ravenswood. All of the actions relating
to the Ravenswood facility have been settled with respect to the Company and as
to Kaiser. Only 14 plaintiffs were able to show they had been on the Ravenswood
premises during the period the Company owned the plant, and the Company has
agreed to settle all of those claims for non-material amounts. The Company is
awaiting receipt of final documentation of those settlements and the entry of
dismissal orders. The Company does not expect the Kaiser Bankruptcy will have
any effect on the settlements it has reached on asbestos claims. Management
believes there are no unsettled asbestos cases pending against the Company.
The Company has pending against it or may be subject to various other
lawsuits, claims and proceedings related primarily to employment, commercial,
environmental and safety and health matters. Although it is not presently
possible to determine the outcome of these matters, management believes their
ultimate disposition will not have a material adverse effect on the Company's
financial condition, results of operations, or liquidity. For a description of
certain environmental matters involving the Company, see Item 1 "Environmental
Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of 2001.
14
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the executive
officers of the Company. Each of such persons serves at the discretion of the
Board of Directors.
BUSINESS EXPERIENCE AND PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AGE DURING THE PAST 5 YEARS; POSITIONS HELD WITH COMPANY
---- --- ----------------------------------------------------------
Craig A. Davis.............. 61 Chairman and Chief Executive Officer of the Company for
more than five years.
Gerald A. Meyers............ 52 President and Chief Operating Officer of the Company for
more than five years.
Gerald J. Kitchen........... 61 Executive Vice President, General Counsel and Chief
Administrative Officer of the Company for more than five
years.
David W. Beckley............ 57 Executive Vice President and Chief Financial Officer of
the Company for more than five years.
E. Jack Gates............... 60 Vice President, Reduction Operations, of the Company since
December 2000; President and Chief Executive Officer of
F.G. Pruitt, Inc., from 1997 until December 2000; various
management positions with Reynolds Metals Company from
1964 until 1997.
Daniel J. Krofcheck......... 48 Vice President and Treasurer of the Company since
September 1998; Treasurer of the Company from September
1997 through August 1998; various positions with H.J.
Heinz Company from 1988 through September 1997.
Craig A. Davis has elected to step down as Chief Executive Officer of
Century at the end of 2002. Gerald A. Meyers, currently the President and Chief
Operating Officer, will succeed Mr. Davis. Mr. Davis will continue as Chairman
of the Board through 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the NASDAQ National Market tier of the
NASDAQ Stock Market under the Symbol: CENX. The following table sets forth, on a
quarterly basis, the high and low sales prices of the Common Stock during the
two most recent fiscal years.
HIGH LOW
------ ------
2001
First Quarter............................................. $16.81 $ 9.88
Second Quarter............................................ $23.06 $14.19
Third Quarter............................................. $20.35 $ 7.40
Fourth Quarter............................................ $16.12 $ 8.10
2000
First Quarter............................................. $16.88 $11.94
Second Quarter............................................ $15.44 $10.19
Third Quarter............................................. $13.63 $11.69
Fourth Quarter............................................ $12.56 $ 6.94
15
The Company declared and paid annual dividends of $0.20 per share of Common
Stock (paid in quarterly amounts of $0.05 per share) during 2001 and 2000.
Additionally, the Company declared and paid preferred dividends of $1.5 million
on its preferred stock in 2001. The Company's amended loan agreement contains,
among other things, restrictions on the payment of dividends by the Company. If
the Company does not generate sufficient cumulative earnings, as defined in the
Company's loan agreement, it would be required to suspend dividend distributions
on or before 2003. As of December 31, 2001, $8.2 million of retained earnings
was available for payment of dividends. See "Liquidity and Capital Resources" in
Item 7.
At December 31, 2001, there were 23 holders of record and approximately
2,242 beneficial owners of the Company's common stock.
EQUITY COMPENSATION PLAN INFORMATION
AS OF DECEMBER 31, 2001
NUMBER OF SHARES
REMAINING AVAILABLE FOR
NUMBER OF SHARES WEIGHTED FUTURE ISSUANCE UNDER
TO BE ISSUED UPON AVERAGE EQUITY COMPENSATION
EXERCISE OF EXERCISE RESTRICTED SHARES -- PLANS, EXCLUDING
PLAN CATEGORY OUTSTANDING OPTIONS PRICE PERFORMANCE SHARES OUTSTANDING OPTIONS
------------- ------------------- -------- -------------------- -----------------------
Equity compensation plans
approved by security
holders.................... 595,267 $12.82 272,840 780,338
Equity compensation plans not
approved by security
holders.................... -- -- -- --
------- ------ ------- -------
Total........................ 595,267 $12.82 272,840 780,338
======= ====== ======= =======
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents consolidated financial data of the Company for
the years indicated. The selected consolidated financial data for and as of the
end of each of the years in the three-year period ended December 31, 2001 are
derived from the Consolidated Financial Statements of the Company included
elsewhere herein which have been audited by Deloitte & Touche LLP. The selected
consolidated financial data for and as of the years ended December 31, 1998 and
1997 is derived from the audited consolidated financial statements of the
Company which are not included herein. The following historical financial data
includes the results from the Company's rolling and fabrication businesses until
their sale in September 1999, the results from the Company's additional 23%
interest in the Mt. Holly facility since its acquisition in April 2000, and the
results for the Company's 80% interest in the Hawesville facility since its
acquisition on April 1, 2001. Accordingly, the following results are not
indicative of the Company's current business. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and notes thereto appearing in Items 7 and 8, respectively.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001(3) 2000(2) 1999(1) 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales -- third party customers.... $543,453 $299,277 $497,475 $576,006 $615,467
Net sales -- related parties.......... 111,469 129,320 68,801 74,252 105,521
-------- -------- -------- -------- --------
Total net sales....................... 654,922 428,597 566,276 650,258 720,988
Cost of goods sold.................... 634,214 396,139 572,921 611,796 691,887
-------- -------- -------- -------- --------
Gross profit (loss)................... 20,708 32,458 (6,645) 38,462 29,101
Selling, general and administrative
expenses........................... 18,598 13,931 18,884 19,246 17,948
-------- -------- -------- -------- --------
Operating income (loss)............... 2,110 18,527 (25,529) 19,216 11,153
Gain on sale of fabricating
businesses......................... -- 5,156 41,130 -- --
Interest expense...................... (31,565) (408) (5,205) (2,204) (3,066)
Interest income....................... 891 2,675 1,670 -- --
Other income (expense)................ 2,592 6,461 (789) 553 419
Net gain (loss) on forward contracts
(4)................................ (203) 4,195 (5,368) 10,574 (6,837)
-------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary item and minority
interest........................... (26,175) 36,606 5,909 28,139 1,669
Income tax benefit (expense).......... 10,031 (11,301) (628) (10,202) (601)
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item and minority interest......... (16,144) 25,305 5,281 17,937 1,068
Minority interest -- net of income
taxes.............................. 2,442 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) before extraordinary
item............................... (13,702) 25,305 5,281 17,937 1,068
Extraordinary item -- write off of
deferred bank fees, net of income
tax benefit of $766................ -- -- (1,362) -- --
-------- -------- -------- -------- --------
Net income (loss)..................... (13,702) 25,305 3,919 17,937 1,068
Preferred dividends................... (1,500) -- -- -- --
-------- -------- -------- -------- --------
Earnings (loss) available to common
shareholders....................... $(15,202) $ 25,305 $ 3,919 $ 17,937 $ 1,068
======== ======== ======== ======== ========
17
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001(3) 2000(2) 1999(1) 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income (Loss) before extraordinary
item............................... $ (0.74) $ 1.25 $ 0.26 $ 0.90 $ 0.05
Extraordinary item.................... -- -- (0.07) -- --
-------- -------- -------- -------- --------
Net Income (loss)..................... $ (0.74) $ 1.25 $ 0.19 $ 0.90 $ 0.05
======== ======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER COMMON
SHARE:
Income (loss) before extraordinary
item............................... $ (0.74) $ 1.24 $ 0.26 $ 0.89 $ 0.05
Extraordinary item................. -- -- (0.07) -- --
-------- -------- -------- -------- --------
Net Income (loss).................. $ (0.74) $ 1.24 $ 0.19 $ 0.89 $ 0.05
======== ======== ======== ======== ========
DIVIDENDS PER COMMON SHARE.............. $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20
======== ======== ======== ======== ========
DECEMBER 31,
----------------------------------------------------
2001(3) 2000(2) 1999(1) 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA (AT PERIOD END):
Working capital....................... $ 66,380 $ 76,701 $124,391 $188,156 $180,524
Intangible asset -- power contract.... 146,002 -- -- -- --
Total assets.......................... 776,706 333,770 310,802 545,630 507,148
Long-term debt........................ 321,446 -- -- 89,389 58,950
Total noncurrent liabilities.......... 441,329 74,511 58,831 252,782 220,604
Total shareholders' equity............ 217,185 202,639 179,728 177,483 163,546
---------------
(1) On September 21, 1999, the Company sold its rolling and fabrication
businesses to Pechiney for $234.3 million and recorded pre-tax gains of
$41.1 million in 1999 and $5.2 million in 2000. Accordingly, the results of
operations for 1999, 2000 and 2001 do not include results from the rolling
and fabrication businesses after such date. Similarly, balance sheet data as
of and following December 31, 1999 does not include the assets and
liabilities related to the rolling and fabrication businesses.
(2) On April 1, 2000, the Company purchased an additional 23% interest in the
Mt. Holly facility from Xstrata, an affiliate of Glencore, increasing the
Company's ownership interest to 49.7%. Accordingly, the results of
operations following that date reflect the increased production which
resulted from that purchase. Similarly, balance sheet data as of and
following December 31, 2000 includes the assets and liabilities related to
the additional 23% interest in the Mt. Holly facility.
(3) On April 1, 2001, the Company purchased the Hawesville facility from
Southwire Company. Simultaneously, the Company effectively sold a 20%
interest in the Hawesville facility to Glencore. Accordingly, the results of
operations following that date reflect the increased production which
resulted from Century's 80% interest. Similarly, balance sheet data as of
and following December 31, 2001 includes assets and liabilities related to
the Company's 80% interest in the Hawesville facility.
(4) On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and related amendments. As a
result, to the extent that the Company's derivatives are designated as
effective cash flow hedges, unrealized gains (losses) will be reported as
accumulated other comprehensive income, rather than reported in the
Statement of Operations as was done in 2000. Beginning in 2001, realized
gains (losses) resulting from hedging activities are reported as adjustments
to net sales and cost of goods sold. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- New Accounting
Standards."
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion reflects the Company's historical results of
operations, which (1) includes the Company's rolling and fabricating businesses
until they were sold in September 1999, (2) does not include results from the
Company's additional interest in the Mt. Holly facility until it was acquired in
April 2000 and (3) does not include results from the Company's 80% interest in
the Hawesville facility until it was acquired in April 2001. Accordingly, the
following discussion of the Company's results of operations is not indicative of
Century's current business. The reader should read the following discussion in
conjunction with the consolidated financial statements included elsewhere in
this filing.
OVERVIEW
The Company is a producer of primary aluminum, and the Company's net sales
are derived from the sale of primary aluminum. On September 21, 1999, the
Company sold its rolling and fabrication businesses to Pechiney. Effective April
1, 2000, the Company increased its ownership of the Mt. Holly facility to 49.67%
by acquiring an additional 23% interest for a cash purchase price of $94.7
million. The Mt. Holly facility has an annual production capacity of 480 million
pounds of primary aluminum, and Century's interest represents 238 million pounds
of that capacity.
On April 1, 2001, the Company acquired from Southwire, a privately-held
wire and cable manufacturing company, all of the outstanding stock of Metalsco,
formerly a wholly owned subsidiary of Southwire. Metalsco owns NSA, which owns
and operates the Hawesville facility. The Hawesville facility has the capacity
to produce 523 million pounds of primary aluminum per year. The Company also
acquired from Southwire, certain land, facilities and rights related to NSA's
aluminum reduction operations which were not held by NSA. The cash purchase
price for the Hawesville acquisition was $466.8 million. The Company also
assumed industrial revenue bonds related to the Hawesville facility in the
principal amount of $7.8 million and Century may be required to make additional
post closing payments to Southwire of up to $7.0 million. In connection with the
acquisition, Glencore effectively purchased from Century a 20% interest in the
Hawesville facility for $99.0 million and assumed responsibility for payment of
20% of the principal amount of the industrial revenue bonds and payment of a pro
rata portion of any post-closing payments made to Southwire. Glencore also
purchased $25.0 million of convertible preferred stock of the Company with an 8%
cumulative dividend preference. In connection with its financing of the
transaction, the Company issued to certain institutional investors $325.0
million of its senior secured first mortgage notes (the "Notes") due 2008 in a
private offering exempt from registration under the Securities Act of 1933. In
November 2001, the Company exchanged the Notes for a like principal amount of
11 3/4% senior secured first mortgage notes due 2008 (the "Exchange Notes"),
which are registered under the Securities Act of 1933.
The aluminum industry is cyclical and the market price of primary aluminum
(which trades as a commodity) is determined by worldwide supply and demand. The
Company's results of operations depend to a large degree on the market price of
primary aluminum. Any adverse changes in the conditions that affect the market
price of primary aluminum could have a material adverse effect on the Company's
results of operations.
The principal elements comprising the Company's cost of goods sold are raw
materials, power and labor. The principal raw materials used by the Company in
its production process are alumina, coal tar, pitch, petroleum coke and aluminum
fluoride. Pursuant to a supply contract with Alcoa which expired as of December
31, 2001, the Company paid a fixed price for the alumina used at the Ravenswood
facility and 54% of the Company's requirements at the Mt. Holly facility. All of
the Company's remaining alumina requirements are purchased under variable-price
contracts with the price of alumina purchased linked to the LME price for
primary aluminum. In connection with its acquisition of Xstrata's 23% interest
in the Mt. Holly facility, the Company assumed Xstrata's long-term
variable-price supply contract with Glencore which provides the additional
alumina required as a result of the Company's increased interest in the Mt.
Holly facility. The Company purchases the alumina it uses at the Hawesville
facility from Kaiser under a variable-price supply contract which runs through
2005. The Company has received assurances from Kaiser management that Kaiser
will continue to perform under this alumina supply agreement, and the Company is
19
seeking to have the contract assumed through the bankruptcy process, but there
can be no assurance the Company will be successful. Beginning January 1, 2002,
the Company replaced its fixed-price supply contract with Alcoa with a five-year
variable-price supply contract with Glencore which will supply the alumina used
at the Ravenswood facility and for 54% of the Company's requirements at the Mt.
Holly facility. As a result, beginning January 1, 2002 all of the Company's
alumina requirements will be purchased under variable-price contracts linked to
market prices for primary aluminum.
The Company uses significant amounts of electricity in the aluminum
production process. Under the terms of the Company's supply contract with Ohio
Power, the Company pays a fixed price for the power used at the Ravenswood
facility. That agreement expires on July 31, 2003. American Electric Power
Company (the parent of Ohio Power Company) has advised the Company that the
Company is eligible to enter into a new fixed-price power supply agreement with
Ohio Power upon the termination of its existing agreement. The new agreement,
the terms of which are established by a tariff approved by the Public Utilities
Commission of Ohio, would expire not later than December 31, 2005. The tariff
was created pursuant to a requirement of the State of Ohio's electric power
deregulation act and will govern electrical power service during a transitional
period in which competitive power markets are expected to be developed. Under
the terms of the supply contracts with South Carolina Public Service Authority
which extend to 2005, the Company pays prices set by Authority Rate Schedules
and Clauses (including a fuel adjustment clause) for power used at the Mt. Holly
facility. The Hawesville facility currently purchases its power requirements
from Kenergy, under an agreement which expires at the end of 2010, mostly at
fixed prices. The Company's results of operations in 2001 were adversely
impacted by $5.4 million as the result of increases in natural gas and purchased
off-system power costs during the first half of 2001 and increased coal costs
during the second half of 2001 which triggered fuel cost adjustments in the Mt.
Holly facility power supply contract.
The Company's labor costs are subject to the terms of labor contracts which
generally have provisions for annual fixed increases in hourly wages and
benefits adjustments. On June 1, 1999, the Company entered into a new four-year
labor contract with its hourly workers at the Ravenswood facility. On March, 8,
2002, the labor agreement was extended through May 31, 2006. In connection with
the Hawesville acquisition, the Company negotiated a collective bargaining
agreement with the USWA which covers all of the represented hourly employees at
the Hawesville facility. Under this agreement, the Company established the terms
of employment for USWA employees and settled all claims relating to a work
stoppage which occurred during Southwire's ownership of the facility. The
agreement was ratified by the USWA local on September 28, 2000, became effective
upon closing of the Hawesville acquisition and has a five-year term. The
agreement provides for fixed increases in hourly wages and certain benefits
adjustments in its first, third and fifth years. The work rules under the new
collective bargaining agreement are substantially similar to those previously in
place at the Hawesville facility.
20
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the percentage
relationship to net sales of certain items included in the Company's Statements
of Operations. The following table includes the results from the Company's
rolling and fabrication businesses until its sale in September 1999, the results
from the Company's additional 23% interest in Mt. Holly facility since its
acquisition in April 2000, and the results from the Company's 80% interest in
the Hawesville facility since its acquisition on April 1, 2001.
PERCENTAGE OF NET SALES
------------------------
2001 2000 1999
------ ------ ------
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 96.8 92.4 101.2
----- ----- -----
Gross profit (loss).................................... 3.2 7.6 (1.2)
Selling, general and administrative expenses................ 2.9 3.3 3.3
----- ----- -----
Operating income (loss)................................ 0.3 4.3 (4.5)
Gain on sale of fabricating businesses...................... -- 1.2 7.2
Interest expense............................................ (4.8) (0.1) (0.9)
Interest income............................................. 0.1 0.6 0.3
Other income (expense)...................................... 0.4 1.5 (0.1)
Net gain (loss) on forward contracts........................ -- 1.0 (1.0)
----- ----- -----
Income (loss) from continuing operations before income
taxes..................................................... (4.0) 8.5 1.0
Income tax benefit (expense)................................ 1.5 (2.6) (0.1)
----- ----- -----
Income (loss) from continuing operations before
extraordinary item and minority interest.................. (2.5) 5.9 0.9
Minority Interest -- net.................................... 0.4 -- --
----- ----- -----
Net income (loss) before extraordinary item................. (2.1) 5.9 0.9
Extraordinary item -- write-off of deferred bank fees....... -- -- (0.2)
----- ----- -----
Net income (loss)........................................... (2.1)% 5.9% 0.7%
===== ===== =====
21
The following table sets forth, for the periods indicated, the pounds and
the average sales price per pound for certain of the Company's products:
PRIMARY ALUMINUM SHEET AND PLATE PRODUCTS
------------------ --------------------------------------
DIRECT(1)(2) DIRECT(1) TOLL
------------------ ------------------ -----------------
POUNDS $/POUNDS POUNDS $/POUNDS POUNDS $/POUNDS
------- -------- ------- -------- ------ --------
(POUNDS IN THOUSANDS)
2001
First Quarter.............. 149,274 $0.74 -- -- -- --
Second Quarter(5).......... 255,145 $0.74 -- -- -- --
Third Quarter.............. 259,408 $0.71 -- -- -- --
Fourth Quarter............. 254,616 $0.68 -- -- -- --
------- ----- ------- ----- ----- -----
Total.............. 918,443 $0.71 -- -- -- --
2000
First Quarter.............. 128,082 $0.75 -- -- -- --
Second Quarter(4).......... 149,530 $0.73 -- -- -- --
Third Quarter.............. 151,219 $0.73 -- -- -- --
Fourth Quarter............. 152,787 $0.73 -- -- -- --
------- ----- ------- ----- ----- -----
Total.............. 581,618 $0.74 -- -- -- --
1999
First Quarter.............. 122,250 $0.63 113,751 $1.18 4,405 $0.25
Second Quarter............. 131,018 $0.63 113,579 $1.17 2,357 $0.23
Third Quarter(3)........... 116,583 $0.66 100,339 $1.16 1,818 $0.23
Fourth Quarter............. 115,991 $0.70 -- $ -- -- $ --
------- ----- ------- ----- ----- -----
Total.............. 485,842 $0.65 327,669 $1.17 8,580 $0.24
---------------
(1) Does not include materials and products processed by the Company for a fee
("tolling") and forward sales contracts without physical delivery.
(2) For the year 1999, the primary aluminum segment includes intersegment sales
to the sheet and plate products segment.
(3) The table includes the results from the Company's rolling and fabrication
businesses until its sale in September 1999. The Company sold its
fabricating businesses to Pechiney in September 1999.
(4) The table includes results from the Company's additional 23% interest in Mt.
Holly facility since its acquisition in April 2000.
(5) The table includes the results from the Company's 80% interest in the
Hawesville facility since its acquisition on April 1, 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
The following discussion reflects Century's historical results of
operations, which do not include results from the Company's additional interest
in the Mt. Holly Facility until it was acquired in April 2000 and do not include
results for the Company's 80% interest in the Hawesville Facility until it was
acquired in April 2001.
Net sales. Net sales for the year ended December 31, 2001 increased 52.8%
to $654.9 million from $428.6 million for the year ended December 31, 2000. The
increase was primarily the result of increased volumes from the Hawesville
facility beginning April 1, 2001 and the Company's additional 23% interest in
the Mt. Holly facility beginning April 1, 2000 and was partially offset by
declining market prices for primary aluminum.
22
Gross profit. Gross profit for year ended December 31, 2001 decreased
$11.8 million to $20.7 million from $32.5 million for the same period in 2000.
The decrease was primarily the result of (a) declining market prices for primary
aluminum, (b) the electrical power cost increase of $5.4 million at the Mt.
Holly facility during the year ended December 31, 2001 (c) net LIFO and lower of
cost or market inventory adjustments of $5.2 million and $1.6 million during the
years ended December 31, 2001 and 2000, respectively. These items were partially
offset by gross margins on sales volume from the Company's additional interest
in the Mt. Holly facility beginning in April 2000 and the Hawesville facility
acquisition beginning in April 2001.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 2001 increased to $18.6
million from $13.9 million for the year ended December 31, 2000. The increases
were a direct result of a charge for bad debts of $4.4 million during the year
ended December 31, 2001 and the inclusion of the Company's pro rata share of
selling, general and administrative expenses from the Hawesville facility
following the Hawesville acquisition in April 2001.
Operating income or loss. Operating income for the year ended December 31,
2001 was $2.1 million. This compares with operating income of $18.5 million for
the year ended December 31, 2000. Changes in operating income are primarily a
result of changes in gross profit and increases in selling, general and
administrative expenses for the reasons discussed above.
Gain On Sale of Fabricating Businesses. For the year ended December 31,
2000, the Company recorded a gain on the sale of its fabricating businesses of
$5.2 million. This resulted from the settlement of post-closing adjustments to
the transaction as originally recorded.
Interest Expense. Interest expense during the year ended December 31, 2001
was $31.6 million. This compares with interest expense of $0.4 million during
2000. The change in interest was a result of the borrowings required to fund the
Hawesville acquisition in April 2001.
Interest Income. Interest income during the year ended December 31, 2001
was $0.9 million. This compares with interest income of $2.7 million during
2000. The change in interest was a result of using available cash to fund the
acquisition of the Hawesville facility in April 2001.
Other Income/Expense. Other income for the year ended December 31, 2001
was $2.6 million. This compares with other income of $6.5 million for the same
period in 2000. The change in other income resulted principally from the receipt
of $3.4 million and $6.1 million during the years ended December 31, 2001 and
2000, respectively, in settlement of the Company's business interruption and
property damage claim with its insurance carrier. The claim was a result of the
illegal work stoppage at the Ravenswood Facility in August 1999. The insurance
settlement was partially offset by a loss on disposal of assets of $0.9 million
during the year ended December 31, 2001.
Net Gains/Losses on Forward Contracts. For the year ended December 31,
2001 the Company recorded a loss on forward contracts of $0.2 million. For the
year ended December 31, 2000 the Company recorded a gain of $4.2 million. The
Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138, effective January 1, 2001. See Note 1
to the Consolidated Financial Statements appearing in Part II, Item 8. The
Company's forward financial sales and purchase contracts, which were previously
recorded at fair value through the Statement of Operations, have been designated
as cash flow hedges as of January 1, 2001. To the extent cash flow hedges are
effective, unrealized gains and losses on forward financial sales and purchase
contracts are no longer reported in the Statement of Operations, but rather are
reported in accumulated other comprehensive income on a net of tax basis and
reclassified into earnings when realized.
Tax Provision/Benefit. Income tax benefit for the year ended December 31,
2001 was $10.0 million. This compares with income tax expense of $11.3 million
for the same period in 2000. The change in income taxes was a result of the
Company's pre-tax loss in 2001. The change in the 2001 effective tax rate from
the year ended December 31, 2000 was a result of the reduction in 2000 of
estimated income taxes payable relating to the reversal of prior period
accruals.
23
Net Income or Loss before Minority Interest. The Company had a net loss
before minority interest of $16.1 million during the year ended December 31,
2001 compared to net income of $25.3 million during the comparable 2000 period.
Net income before minority interest decreased for the reasons discussed above.
Minority Interest. Minority Interest reflects Glencore's interest in the
net operating results of Century Aluminum of Kentucky, LLC (the "LLC"), the
limited liability company which holds the power contract for the Hawesville
facility, which consists of amortization of the power contract.
Net Income. The Company had a net loss of $13.7 million during the year
ended December 31, 2001 compared to a net income of $25.3 million during the
comparable 2000 period. Net income decreased for the reasons discussed above.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net Sales. Consolidated net sales decreased 24.3% to $428.6 million in
2000 from $566.3 million in 1999. The decrease was primarily the result of the
sale of the Company's rolling and fabrication businesses which generated $248.9
million in net sales (after adjusting for $136.8 million in intercompany
transfers of primary aluminum) prior to its disposition in September 1999. The
$248.9 million in net sales relating to the rolling and fabrication businesses
includes $2.0 million in tolling fees. No tolling fees were earned in 2000 due
to the sale of the rolling and fabrication businesses in 1999. Excluding the
effects of the sale of the rolling and fabrication businesses, net sales
increased by $111.2 million, resulting from a 95.8 million pound increase in
primary aluminum shipments from 485.8 million pounds in 1999 to 581.6 million
pounds in 2000 and an increase in the average unit selling prices for primary
aluminum to $0.74 per pound in 2000 from $0.65 per pound in 1999. Shipments in
2000 included 84 million pounds from the acquisition of an additional interest
in Mt. Holly, which were sold at an average price of $0.73 per pound. Shipments
in 1999 were impacted by the loss of approximately 15 million pounds resulting
from an illegal work stoppage at the Ravenswood facility in August 1999. The
increase in average realized prices was primarily the result of an increase in
the average LME price for the period in which the Company's sales were priced.
Gross Profit or Loss. Gross profit for the year ended December 31, 2000
was $32.5 million compared to a loss of $6.6 million for the year ended December
31, 1999. Gross profit of the primary aluminum segment was $32.5 million in 2000
compared to a loss of $17.2 million in 1999. Gross profit of the primary
aluminum segment in 2000 increased by $40.7 million as a result of higher
realized prices in 2000 and $8.0 million as a result of increased primary
aluminum shipments. Gross profit of the primary aluminum segment was impacted by
a $1.6 million charge to adjust inventory to its estimated realizable value in
2000, a $1.8 million credit as a result of a one time alumina sale in 2000 and a
$4.6 million charge to value primary aluminum inventories on a stand alone LIFO
basis after the sale of the rolling and fabrication businesses that were sold in
September 1999. Gross profit of the sheet and plate segment, which consisted of
the rolling and fabrication businesses that were sold in September 1999, was
$10.7 million in 1999.
Selling, General and Administrative Expenses. Consolidated selling,
general and administrative expenses decreased 26.5% to $13.9 million in 2000
from $18.9 million in 1999. The decrease was primarily due to the sale of the
Company's rolling and fabrication businesses in September 1999.
Gain on Sale of Rolling and Fabrication Businesses. For the year ended
December 31, 2000, the Company recorded a gain on the sale of its fabricating
businesses of $5.2 million. This resulted from the settlement of post-closing
adjustments to the transaction as originally recorded. For the year ended
December 31, 1999, the Company recorded a gain on the sale of its fabricating
businesses of $41.1 million.
Interest Expense. Interest expense of $0.4 million for the year ended
December 31, 2000. This compares with interest expense of $5.2 million during
1999. The change in interest was due to the lack of borrowing in 2000.
Interest Income. Interest income for the year ended December 31, 2000 was
$2.6 million. This compares with interest income of $1.7 million during 1999.
The change in interest was due to the lack of borrowing and increased earnings
on invested cash in 2000.
24
Other Income or Expense. Other income was $6.5 million in 2000 compared to
other expense of $0.8 million in 1999. The increase in other income was
primarily due to the receipt of approximately $6.1 million in partial settlement
of the Company's claim with its insurance providers relative to property damage
and business interruption losses resulting from the illegal work stoppage at the
Ravenswood facility in August 1999.
Net Gains or Losses on Forward Contracts. Net gains on forward contracts
were $4.2 million in 2000 compared to a net loss on forward contracts of $5.4
million in 1999. The increase resulted from lower market prices for primary
aluminum as of December 31, 2000 with respect to the value of the Company's
forward sales contracts on that date.
Tax Provision. Income tax expense for the year ended December 31, 2000 was
$11.3 million compared to $0.6 million for the same period in 1999. The increase
was primarily due to an increase in pre-tax income before extraordinary items of
$30.7 million from $5.9 million in 1999 to $36.6 million in 2000. Income tax
expense for the years ended December 31, 2000 and 1999, respectively, included a
$2.4 million and $1.5 million reduction in estimated income taxes payable
relating to the reversal of prior period accruals. These credits increased the
effective tax rate from 11% in 1999 to 31% in 2000.
Extraordinary Item. The extraordinary item in 1999 was due to a write-off
of deferred bank fees, net of income tax benefit of $0.8 million.
Net Income. Net income increased to $25.3 million in 2000 from $3.9
million in 1999. The increase was due to higher unit selling prices for primary
aluminum, increased primary aluminum shipments, the acquisition of the
additional interest in the Mt. Holly facility and proceeds received on the
Company's insurance claim related to the illegal work stoppage at the Ravenswood
facility.
LIQUIDITY AND CAPITAL RESOURCES
With the completion of the Hawesville acquisition and the sale of the
Notes, the Company's principal sources of liquidity are cash flow from
operations and borrowings under the revolving credit facility. The Company's
principal uses of cash are payments of interest on the Company's outstanding
debt and dividends on preferred and common stock, the funding of capital
expenditures and investments in related businesses, working capital and other
general corporate requirements.
DEBT SERVICE
As of December 31, 2001, the Company had approximately $329.2 million of
indebtedness outstanding, including $321.4 million of principal amount of the
Notes, net of unamortized issuance discount, and $7.8 million in industrial
revenue bonds which were assumed in connection with the Hawesville acquisition.
Notes. Interest payments on the 11 3/4% Senior Secured First Mortgage
Notes are payable semiannually in arrears beginning on October 15, 2001. Payment
obligations under the Notes are unconditionally guaranteed by the Company's
domestic subsidiaries (other than the Century Aluminum of Kentucky, LLC ("LLC"))
and secured by mortgages and security interests granted by two of the Company's
subsidiaries in all of their respective interests in the real property, plant
and equipment comprising the Hawesville and Ravenswood facilities. The notes
will mature in 2008. The indenture governing the Notes contains customary
covenants, including limiting our ability to pay dividends, incur debt, make
investments, sell assets or stock of certain subsidiaries, and purchase or
redeem capital stock. If the Company does not generate sufficient cumulative
earnings, Century would need to reduce or suspend common and/or preferred
dividends on or before January 2003 to comply with its note covenants. Pursuant
to the terms of the indenture, because the Company did not consummate a
registered exchange offer for the outstanding notes on or before September 30,
2001, the Company was required to pay additional interest on the outstanding
notes at a rate of 0.5% over the stated rate from September 30, 2001 until the
exchange offer was consummated on November 12, 2001.
Revolving Credit Facility. In connection with the Hawesville acquisition,
the Company replaced its former $67.1 million revolving credit facility with a
new $100.0 million revolving credit facility. The
25
Company's obligations under the Revolving Credit Facility are unconditionally
guaranteed by its domestic subsidiaries (other than the LLC) and secured by a
first priority security interest in all accounts receivable and inventory
belonging to the Company and its subsidiary borrowers. The availability of funds
under the revolving credit facility is subject to a $30.0 million reserve and
limited by a specified borrowing base consisting of certain eligible accounts
receivable and inventory. Borrowings under the revolving credit facility are, at
the Company's option, at the LIBOR rate or the Fleet National Bank base rate
plus, in each case, an applicable interest margin. The applicable interest
margin ranges from 2.25% to 3.0% over the LIBOR rate and 0.75% to 1.5% over the
base rate and is determined by certain financial measurements of the Company.
The maturity date of the facility is April 2, 2006. Interest periods for LIBOR
rate borrowings are one, two, three or six months, at the Company's option. The
Company expects the borrowing base, less the reserve, will permit the Company to
borrow approximately $55.0 to $65.0 million under the revolving credit facility.
The Company is subject to customary covenants, including restrictions on capital
expenditures, additional indebtedness, liens, guarantees, mergers and
acquisitions, dividends, distributions, capital redemptions and investments.
Industrial Revenue Bonds. As part of the purchase price for the Hawesville
acquisition, the Company assumed industrial revenue bonds in the aggregate
principal amount of $7.8 million which were issued in connection with the
financing of certain solid waste disposal facilities constructed at the
Hawesville Facility. Pursuant to the Company's agreement with Glencore, Glencore
will pay a pro rata portion of the debt service costs of the industrial revenue
bonds. The industrial revenue bonds mature on April 1, 2028, are secured by a
Glencore letter of credit and bear interest at a variable rate not to exceed 12%
per annum determined weekly based upon prevailing rates for similar bonds in the
industrial revenue bond market. Interest on the Industrial Revenue Bonds is paid
quarterly. At December 31, 2001, the interest rate on the industrial revenue
bonds was 2.05%. The bonds are classified as current liabilities because they
are remarketed weekly and, under the indenture governing the bonds, repayment
upon demand could be required if there is a failed remarketing.
CONVERTIBLE PREFERRED STOCK
In connection with the Hawesville acquisition, the Company issued $25.0
million of Century Aluminum Company convertible preferred stock to Glencore. The
Company is required to pay dividends on the preferred stock at a rate of 8% per
year, which is cumulative. The notes and the revolving credit facility impose
restrictions on the Company's ability to pay cash dividends on the convertible
preferred stock.
WORKING CAPITAL
Working capital was $66.4 million at December 31, 2001. The Company
believes that its working capital will be consistent with past experience and
that borrowing availability under the revolving credit facility should be
sufficient to meet working capital needs.
CAPITAL EXPENDITURES
Capital expenditures for 2001 were approximately $14.5 million and were
principally related to upgrading production equipment, maintaining facilities
and complying with environmental requirements. The revolving credit facility
restricts the Company's ability to make capital expenditures; however, the
Company believes that the amount permitted will be adequate to maintain its
properties and business and comply with environmental requirements.
ACQUISITIONS, LIQUIDITY AND FINANCING
The Company actively pursues opportunities to acquire primary aluminum
reduction facilities, which offer favorable cost structures and diversify the
Company's geographic presence, and upstream integration opportunities into
bauxite mining and alumina refining. In connection with possible future
acquisitions, the Company may need additional financing, which may be provided
in the form of debt or equity. The Company cannot be certain that any such
financing will be available. The Company anticipates that operating cash flow,
together with borrowings under the revolving credit facility, will be sufficient
to meet its future debt service
26
obligations as they become due, as well as working capital and capital
expenditures requirements. The Company's ability to meet its liquidity needs,
including any and all of its debt service obligations, will depend upon its
future operating performance, which will be affected by general economic,
financial, competitive, regulatory, business and other factors, many of which
are beyond the Company's control. The Company will continue from time to time to
explore additional financing methods and other means to lower its cost of
capital, including stock issuances or debt financing and the application of the
proceeds to the repayment of bank debt or other indebtedness.
HISTORICAL
The Company's statements of cash flows for the years ended December 31,
2001, 2000 and 1999 are summarized below:
2001 2000 1999
--------- --------- --------
(DOLLARS IN THOUSANDS)
Net cash provided by (used in) operating
activities....................................... $ 38,623 $ 58,103 $(44,190)
Net cash (used in) provided by investing
activities....................................... (382,245) (106,158) 222,886
Net cash (used in) provided by financing
activities....................................... 324,048 (4,170) (93,521)
--------- --------- --------
(Decrease) increase in cash........................ $ (19,574) $ (52,225) $ 85,175
========= ========= ========
Net cash from operating activities of $38.6 million in 2001 was $19.5
million less than the $58.1 million from operating activities experienced in
2000. Net cash from operating activities of $58.1 million in 2000 was $102.3
million more than the $44.2 million use of cash experienced in 1999. The $19.5
million decline in net cash from operating activities in 2001 is due primarily
to a $31.6 million increase in interest expense resulting from the Hawesville
acquisition which was partially offset by a $13.6 million increase in operating
income before depreciation and amortization. The improvement in operating income
before depreciation and amortization is comprised of increased volume and lower
average unit production costs resulting from the Hawesville acquisition which
were significantly reduced by declining metal prices. The increase in 2000
compared to 1999 was due to an increase in net income, adjusted to exclude the
effect of depreciation and amortization and any gains from dispositions, of
$53.0 million related primarily to improved pricing for aluminum, a reduction in
required pension contributions of approximately $17.5 million and a $43.0
million change in cash flow relating to working capital. These increases in cash
flow were partially offset by a decrease in deferred tax expense of $9.6 million
related primarily to the sale of the rolling and fabrication businesses during
1999. In 1999, working capital was increased by $32.4 million primarily due to
an increase in receivables after the disposition of the rolling and fabrication
businesses. In 2000, the Company reduced working capital by $10.6 million
primarily through an increased focus on the collection of receivables.
The Company's net cash used for investing activities was $382.2 million
during 2001. The cash was used primarily for the Hawesville acquisition and was
partially offset by the proceeds from the sale to Glencore of the minority
interest in the Hawesville Facility. The Company's net cash used in investing
activities was $106.2 million during 2000. The cash was used primarily for the
acquisition of an additional interest in the Mt. Holly Facility in April 2000.
The net cash provided by investing activities was $222.9 million in 1999. This
was provided primarily from the receipt of cash from the sale of the rolling and
fabrication businesses in September 1999.
Net cash from financing activities was $324 million for 2001. Net cash used
in financing activities was $4.2 million for 2000 and $93.5 million for 1999.
During 2001, the cash from financing activities was primarily from borrowings
and the issuance of preferred stock related to the Hawesville acquisition and
was partially offset by the payment of common and preferred stock dividends. The
$4.2 million use of cash in 2000 relates solely to the payment of dividends
whereas in 1999 the Company also utilized a portion of the proceeds from the
sale of its rolling and fabrication businesses to retire all of the outstanding
bank debt.
On March 31, 1999, the Company entered into an agreement with Fleet
National Bank, formerly BankBoston, N.A. and the CIT Group/Business Credit, Inc.
("Bank Agreement"), to provide a credit facility in the amount of up to $180.0
million to refinance indebtedness, finance certain capital expenditures and for
27
other general corporate purposes. The borrowing base for purposes of determining
availability was based upon certain eligible inventory and receivables. The
credit facility consisted of a revolving credit facility of up to $160.0 million
and a term loan of $20.0 million. The term loan was never drawn by the Company.
The revolving credit facility was secured by the inventory and receivables of
Century Aluminum of West Virginia, Inc. and Berkeley Aluminum, Inc. In
connection with the sale of the rolling and fabrication businesses, the Company
repaid all of its indebtedness under the credit facility and agreed with its
lenders to reduce the revolving credit facility from $160.0 million to $75.0
million, which was further reduced to $67.1 million in April 2000. In April
2001, this credit facility was replaced with a new $100.0 million revolving
credit facility. See Note 5 to the Consolidated Financial Statements appearing
in Part II, Item 8.
ENVIRONMENTAL EXPENDITURES AND OTHER CONTINGENCIES
The Company has incurred and in the future will continue to incur capital
expenditures and operating expenses for matters relating to environmental
control, remediation, monitoring and compliance. The aggregate environmental
related accrued liabilities were $1.8 million and $0.9 million at December 31,
2001 and December 31, 2000, respectively. The Company believes that compliance
with current environmental laws and regulations is not likely to have a material
adverse effect on the Company's financial condition, results of operations or
liquidity; however, environmental laws and regulations may change, and the
Company may become subject to more stringent environmental laws and regulations
in the future. There can be no assurance that compliance with more stringent
environmental laws and regulations that may be enacted in the future, or future
remediation costs, would not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
The Company has planned environmental capital expenditures of approximately
$2.7 million for 2002, $0.7 million for 2003 and $0.3 million for 2004. In
addition, the Company expects to incur operating expenses relating to
environmental matters of approximately $6.1 million, $5.9 million, and $6.5
million in each of 2002, 2003 and 2004. As part of the Company's general capital
expenditure plan, it also expects to incur capital expenditures for other
capital projects that may, in addition to improving operations, reduce certain
environmental impacts. See Part I, Item 1 "Environmental Matters".
The Company is a defendant in several actions relating to various aspects
of its business. While it is impossible to predict the ultimate disposition of
any litigation, the Company does not believe that any of these lawsuits, either
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, results of operations or liquidity. See Item 3
"Legal Proceedings".
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
SFAS No. 138, which amended certain provisions of SFAS No. 133, including an
amendment to expand the normal purchase and sale exemption for supply contracts.
The Company was required to adopt SFAS No. 133, as amended by SFAS No. 138, on
January 1, 2001.
The Company's primary aluminum financial instruments, which were previously
recorded at fair value through the Statement of Operations, were designated as
cash flow hedges as of January 1, 2001 and accordingly, to the extent the
Company's cash flow hedges are effective, unrealized gains and losses are
reflected as accumulated other comprehensive income net of tax while realized
gains and losses are recorded as revenue or expense. The Company's natural gas
financial instruments, which are designated as cash flow hedges, were recorded
at fair value on the balance sheet as of December 31, 2001 and 2000. No
transition adjustment was required upon adoption of SFAS No. 133. As of December
31, 2001, the Company reported a balance in accumulated other comprehensive
income of $6.8 million.
The Financial Accounting Standards Board (the "FASB") continues to identify
and provide guidance on various implementation issues related to SFAS No's. 133
and 138 that are in varying stages of review and clearance by the FASB. The
Company has adopted all FASB guidance that was required to be implemented by
December 31, 2001. The Company is currently evaluating the impact of pending
FASB guidance and has
28
not determined if the ultimate resolution of those issues would have a material
impact on its financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 requires the purchase method of accounting for business combinations
initiated after September 30, 2001 and eliminates the pooling-of-interests
method. The Company is currently evaluating the cumulative effect and ongoing
impact of SFAS No. 141 on its financial position and results of operations.
There have been no business acquisitions since the effective date of SFAS No.
141.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" which became effective January 1, 2002. SFAS No. 142 requires, among
other things, the discontinuance of goodwill amortization. In addition, the
standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS No. 142
also requires the Company to complete a transitional goodwill impairment test
six months from the date of adoption. The Company is currently evaluating the
cumulative effect and ongoing impact of SFAS No. 142 on its financial position
and results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard is required to be adopted by the
Company beginning January 1, 2003. The Company is currently assessing, but has
not yet determined, the impact of SFAS No. 143 on its financial position and
results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long Lived Assets." This statement addresses financial accounting
and reporting for the impairment and disposal of long-lived assets. The standard
became effective January 1, 2002. The Company is developing a plan to apply the
provisions of this statement to its operations on an ongoing basis.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICES
The Company manages its exposure to fluctuations in the price of primary
aluminum by selling aluminum at fixed prices for future delivery and through
financial instruments as well as by purchasing alumina under supply contracts
with prices tied to the same indices as the Company's aluminum sales contracts.
The Company's risk management activities do not include trading or speculative
transactions. Although the Company has not materially participated in the
purchase of call or put options, in cases where Century sells forward primary
aluminum, it may purchase call options to benefit from price increases which are
significantly above forward sales prices. In addition, it may purchase put
options to protect itself from price decreases.
In connection with the sale of its aluminum fabricating businesses to
Pechiney in September 1999, the Company entered into the Pechiney Metal
Agreement, pursuant to which Pechiney purchases, on a monthly basis, at least
23.0 million pounds and no more than 27.0 million pounds of molten aluminum
produced at the Ravenswood Facility at a price determined by a market-based
formula. Subsequent to the Company's purchase of an additional 23% interest in
the Mt. Holly Facility from Xstrata, and effective April 1, 2000, the Company
entered into the Glencore Metal Agreement pursuant to which it sells to Glencore
110.0 million pounds of primary aluminum products per year. In connection with
the Hawesville acquisition, the Company entered into a 10-year contract with
Southwire to supply 240 million pounds of high-purity molten aluminum per year
to Southwire's wire and cable manufacturing facility located adjacent to the
Hawesville facility at a price determined by reference to the U.S. Midwest
Market Price. Under this contract, Southwire will also purchase 60 million
pounds of standard-grade molten aluminum each year for the first five years of
the contract, with an option to purchase an equal amount in each of the
remaining five years. The Company and Glencore will each be responsible for
providing a pro rata portion of the aluminum supplied to Southwire
29
under the Southwire Metal Agreement. See Notes 1 and 2 to the Consolidated
Financial Statements appearing in Part II, Item 8.
Apart from the Pechiney Metal Agreement, Glencore Metal Agreement and
Southwire Metal Agreement the Company had forward delivery contracts to sell
377.1 and 50.3 million pounds of primary aluminum at December 31, 2001 and
December 31, 2000, respectively. Of these forward delivery contracts, 25.5
million pounds and 14.7 million pounds at December 31, 2001 and December 31,
2000, respectively, were with the Glencore Group.
The Company was party to a long-term supply agreement to purchase 936.0
million pounds of alumina annually through the end of 2001. Beginning January 2,
2002, that agreement was replaced by new long-term supply agreements with
Glencore that extend through 2006. These agreements provide for a fixed quantity
of alumina at prices determined by a market-based formula. In addition, as part
of its acquisition of an additional 23% interest in the Mt. Holly Facility, the
Company assumed a supply agreement with Glencore for the alumina raw material
requirements relative to the additional interest. The unit cost is also
determined by a market-based formula. This alumina supply agreement terminates
in 2008. As part of its Hawesville acquisition, the Company assumed an alumina
supply agreement with Kaiser. That agreement will terminate in 2005 and is a
variable priced market based contract. See the Kaiser Bankruptcy information at
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
At December 31, 2001, the Company had entered into 248.8 million pounds of
fixed priced forward primary aluminum financial sales contracts primarily with
the Glencore Group to mitigate the risk of commodity price fluctuations inherent
in its business. These contracts will be settled in cash at various dates during
2002 and 2003. Additionally, in order to mitigate the volatility of the natural
gas markets, the Company enters into fixed price forward financial purchase
contracts, which settle in cash in the period corresponding to the intended
usage of natural gas. At December 31, 2001, the Company had financial
instruments for 3.1 million DTH (one decatherm, or DTH, is equivalent to one
million British Thermal Units or DTUs). These financial instruments are
scheduled for settlement at various dates in 2002 through 2005.
On a hypothetical basis a $0.01 per pound increase or decrease in the
market price of primary aluminum is estimated to have an unfavorable or
favorable impact of $1.6 million after tax, respectively, on accumulated other
comprehensive income for the year ended December 31, 2001 as a result of the
forward primary aluminum financial sale contracts entered into by the Company at
December 31, 2001.
On a hypothetical basis, a $0.50 per DTH decrease or increase in the market
price of natural gas is estimated to have an unfavorable or favorable impact of
$1.0 million after tax, respectively, on accumulated other comprehensive income
for the year ended December 31, 2001 as a result of the forward natural gas
financial purchase contracts entered into by the Company at December 31, 2001.
Effective January 1, 2001, to the extent the Company's cash flow hedges are
effective, unrealized gains and losses on marking forward financial sales
contracts to market will be reported in accumulated other comprehensive income
until settled, rather than in the Statement of Operations.
Century monitors its overall position, and its metals and natural gas risk
management activities are subject to the management, control and direction of
senior management. These activities are regularly reported to the Board of
Directors of Century.
This quantification of the Company's exposure to the commodity price of
aluminum is necessarily limited, as it does not take into consideration the
Company's inventory or forward delivery contracts, or the offsetting impact upon
the sales price of primary aluminum products. Because all of the Company's
alumina contracts are indexed to the LME price for aluminum, beginning in 2002,
they act as a natural hedge for approximately 25% of the Company's production.
Entering the year 2002, approximately 48% and 55% of the Company's production
for the years 2002 and 2003, respectively, was either hedged by the alumina
contracts or by fixed price forward delivery and financial sales contracts.
30
INTEREST RATES
Interest Rate Risk. The Company's primary debt obligations are the
outstanding Notes, borrowings under its revolving credit facility and the
industrial revenue bonds the Company assumed in connection with the Hawesville
acquisition. Because the Notes bear a fixed rate of interest, changes in
interest rates do not subject the Company to changes in future interest expense
with respect to the outstanding notes. Borrowings under the Company's revolving
credit facility, if any, are at variable rates at a margin over LIBOR or the
Fleet National Bank base rate, as defined in the revolving credit facility. The
industrial revenue bonds bear interest at variable rates determined by reference
to the interest rate of similar instruments in the industrial revenue bond
market. At December 31, 2001, the Company had $7.8 million of variable rate
borrowings. A hypothetical 1% increase in the interest rate would increase the
Company's annual interest expense by $0.1 million, assuming no debt reduction.
The Company's primary financial instruments are cash and short-term
investments, including cash in bank accounts and other highly rated liquid money
market investments and government securities.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Independent Auditors' Report................................ 33
Consolidated Balance Sheets at December 31, 2001 and 2000... 34
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999.......................... 35
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 2001, 2000 and 1999.............. 36
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999.......................... 37
Notes to the Consolidated Financial Statements.............. 38-66
32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Century Aluminum Company:
We have audited the accompanying consolidated balance sheets of Century
Aluminum Company and subsidiaries (the "Company") as of December 31, 2001 and
2000, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Century Aluminum Company and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 4, 2002
33
CENTURY ALUMINUM COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 13,388 $ 32,962
Accounts receivable, trade -- net........................... 48,710 31,119
Due from affiliates......................................... 19,767 15,672
Inventories................................................. 75,217 44,081
Prepaid and other assets.................................... 3,573 9,487
-------- --------
Total current assets................................... 160,655 133,321
Property, Plant and Equipment -- Net........................ 426,006 184,526
Intangible Asset -- Net..................................... 146,002 --
Due from Affiliates -- Less current portion................. 8,364 --
Other Assets................................................ 35,679 15,923
-------- --------
TOTAL............................................. $776,706 $333,770
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade..................................... $ 42,394 $ 30,072
Due to affiliates........................................... 2,201 3,985
Industrial revenue bonds.................................... 7,815 --
Accrued and other current liabilities....................... 34,065 17,739
Accrued employee benefits costs -- current portion.......... 7,800 4,824
-------- --------
Total current liabilities.............................. 94,275 56,620
-------- --------
Long Term Debt -- Net....................................... 321,446 --
Accrued Pension Benefits Costs -- Less current portion...... 4,017 3,656
Accrued Postretirement Benefits Costs -- Less current
portion................................................... 65,627 42,170
Other Liabilities........................................... 10,697 6,560
Deferred Taxes.............................................. 39,542 22,125
-------- --------
Total noncurrent liabilities...................... 441,329 74,511
-------- --------
Minority Interest........................................... 23,917 --
CONTINGENCIES AND COMMITMENTS (NOTE 12)
SHAREHOLDERS' EQUITY:
Convertible preferred stock................................. 25,000 --
Common stock (one cent par value, 50,000,000 shares
authorized; 20,513,287 and 20,339,203 shares issued and
outstanding at December 31, 2001 and 2000,
respectively)............................................. 205 203
Additional paid-in capital.................................. 168,414 166,184
Accumulated other comprehensive income...................... 6,752 --
Retained earnings........................................... 16,814 36,252
-------- --------
Total shareholders' equity............................. 217,185 202,639
-------- --------
TOTAL............................................. $776,706 $333,770
======== ========
See notes to consolidated financial statements.
34
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NET SALES:
Third-party customers....................................... $543,453 $299,277 $497,475
Related parties............................................. 111,469 129,320 68,801
-------- -------- --------
654,922 428,597 566,276
Cost of Goods Sold.......................................... 634,214 396,139 572,921
-------- -------- --------
Gross Profit (Loss)......................................... 20,708 32,458 (6,645)
Selling, General and Administrative Expenses................ 18,598 13,931 18,884
-------- -------- --------
Operating Income (Loss)..................................... 2,110 18,527 (25,529)
Gain On Sale Of Fabricating Businesses...................... -- 5,156 41,130
Interest Expense............................................ (31,565) (408) (5,205)
Interest Income............................................. 891 2,675 1,670
Other Income (Expense) -- Net............................... 2,592 6,461 (789)
Net Gain (Loss) On Forward Contracts........................ (203) 4,195 (5,368)
-------- -------- --------
Income (Loss) Before Income Taxes, Extraordinary Item and
Minority Interest......................................... (26,175) 36,606 5,909
Income Tax Benefit (Expense)................................ 10,031 (11,301) (628)
-------- -------- --------
Income (Loss) Before Extraordinary Item and Minority
Interest.................................................. (16,144) 25,305 5,281
Minority Interest -- Net of Income Taxes.................... 2,442 -- --
-------- -------- --------
Net Income (Loss) Before Extraordinary Item................. (13,702) 25,305 5,281
Extraordinary Item -- Write Off Of Deferred Bank Fees, Net
Of Income Tax Benefit Of $766............................. -- -- (1,362)
-------- -------- --------
Net Income (Loss)........................................... (13,702) 25,305 3,919
Preferred Dividends......................................... (1,500) -- --
-------- -------- --------
Net Income (Loss) Available to Common Shareholders.......... $(15,202) $ 25,305 $ 3,919
======== ======== ========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income (Loss) before extraordinary item................... $ (0.74) $ 1.25 $ 0.26
Extraordinary item........................................ -- -- (0.07)
-------- -------- --------
Net Income (Loss)......................................... $ (0.74) $ 1.25 $ 0.19
======== ======== ========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income (Loss) before extraordinary item................... $ (0.74) $ 1.24 $ 0.26
Extraordinary item........................................ -- -- (0.07)
-------- -------- --------
Net Income (Loss)......................................... $ (0.74) $ 1.24 $ 0.19
======== ======== ========
DIVIDENDS PER COMMON SHARE.................................. $ 0.20 $ 0.20 $ 0.20
======== ======== ========
See notes to consolidated financial statements.
35
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
CONVERTIBLE ADDITIONAL OTHER TOTAL
COMPREHENSIVE PREFERRED COMMON PAID-IN COMPREHENSIVE RETAINED SHAREHOLDERS'
INCOME STOCK STOCK CAPITAL INCOME EARNINGS EQUITY
------------- ----------- ------ ---------- ------------- -------- -------------
(DOLLARS IN THOUSANDS)
Balance, December 31, 1998.... $200 $161,953 $ 15,330 $177,483
Net Income.................. 3,919 3,919
Issuance of Common Stock.... 2 2,456 2,458
Dividends................... (4,132) (4,132)
---- -------- -------- --------
Balance, December 31, 1999.... 202 164,409 15,117 179,728
Net Income.................. 25,305 25,305
Issuance of Common Stock.... 1 1,775 1,776
Dividends................... (4,170) (4,170)
---- -------- -------- --------
Balance, December 31, 2000.... 203 166,184 36,252 202,639
Comprehensive Income -- 2001
Net Income (Loss) -- 2001... $(13,702) (13,702) (13,702)
--------
Other Comprehensive Income:
Net unrealized gain on
financial instruments,
net of $7,945 in tax.... 14,498
Net amount reclassified to
income, net of $4,244 in
tax..................... (7,746)
--------
Other comprehensive
income.................. 6,752 $6,752 6,752
--------
Total comprehensive income
(loss)...................... $ (6,950)
========
Dividends --
Common, $0.20 per share..... (4,236) (4,236)
Preferred, $3 per share..... (1,500) (1,500)
Issuance of Preferred Stock... $25,000 25,000
Issuance of Common Stock --
Compensation plans.......... 2 2,230 2,232
------- ---- -------- ------ -------- --------
Balance, December 31, 2001.... $25,000 $205 $168,414 $6,752 $ 16,814 $217,185
======= ==== ======== ====== ======== ========
See notes to consolidated financial statements.
36
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (13,702) $ 25,305 $ 3,919
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization.......................... 44,433 14,395 18,749
Deferred income taxes.................................. (10,148) 12,448 22,022
Pension and other post retirement benefits............. 7,679 797 (16,656)
Workers' compensation.................................. 1,311 (1,604) (150)
Inventory market adjustment............................ 5,166 1,631 1,389
(Gain) loss on disposal of assets...................... 919 (337) --
Gain on sale of fabricating businesses................. -- (5,156) (41,130)
Minority interest...................................... (3,939) -- --
Change in operating assets and liabilities:
Accounts receivable, trade -- net.................... 7,355 7,380 (42,803)
Due from affiliates.................................. 5,190 4,790 (467)
Inventories.......................................... 763 3,086 26,843
Prepaids and other assets............................ 4,697 (5,391) (9,224)
Accounts payable, trade.............................. (13,487) (712) 8,519
Due to affiliates.................................... (1,964) 409 (1,518)
Accrued and other current liabilities................ 7,528 1,621 (15,944)
Other -- net......................................... (3,178) (559) 2,261
--------- --------- ---------
Net cash provided by (used in) operating activities.... 38,623 58,103 (44,190)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................. (14,456) (17,631) (22,983)
Proceeds from sale of property, plant and equipment....... 54 565 --
Purchase price adjustment related to business
acquisitions........................................... -- -- 296
Proceeds from sale of fabricating businesses.............. -- -- 245,400
Business acquisitions..................................... (466,814) (94,734) --
Divestitures.............................................. 98,971 -- --
Restricted cash deposits.................................. -- 5,642 173
--------- --------- ---------
Net cash (used in) provided by investing activities.... (382,245) (106,158) 222,886
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings................................................ 321,352 -- 340,708
Financing fees............................................ (16,568) -- --
Repayment of borrowings................................... -- -- (430,097)
Issuance of preferred stock............................... 25,000 -- --
Dividends................................................. (5,736) (4,170) (4,132)
--------- --------- ---------
Net cash (used in) provided by financing activities.... 324,048 (4,170) (93,521)
--------- --------- ---------
INCREASE (DECREASE) IN CASH................................. (19,574) (52,225) 85,175
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 32,962 85,187 12
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 13,388 $ 32,962 $ 85,187
========= ========= =========
See notes to consolidated financial statements.
37
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation -- Century Aluminum Company
("Century" or the "Company") is a holding company, whose principal subsidiaries
are Century Aluminum of West Virginia, Inc. ("Century of West Virginia") and
Century Kentucky, Inc. ("Century Kentucky"). Century of West Virginia operates a
primary aluminum reduction facility in Ravenswood, West Virginia (the
"Ravenswood facility"), and, through its wholly owned subsidiary Berkeley
Aluminum, Inc. ("Berkeley"), holds a 49.67% interest in a partnership which
operates a primary aluminum reduction facility in Mt. Holly, South Carolina (the
"Mt. Holly facility") and a 49.67% undivided interest in the property, plant,
and equipment comprising the Mt. Holly facility. The remaining interest in the
partnership and the remaining undivided interest in the Mt. Holly facility are
owned by Alumax of South Carolina, Inc., a subsidiary of Alcoa ("ASC"). ASC
manages and operates the Mt. Holly facility pursuant to an Owners Agreement,
prohibiting the disposal of the interest held by any of the owners without the
consent of the other owners and providing for certain rights of first refusal.
Pursuant to the Owners Agreement, each owner furnishes its own alumina, or
alumina owned by an affiliate, for conversion to aluminum and is responsible for
its pro rata share of the operating and conversion costs. During 2001, Century
completed the acquisition of NSA Ltd. ("NSA"). NSA owns and operates an aluminum
reduction operation in Hawesville, Kentucky (the "Hawesville facility"). Century
Kentucky effectively owns an 80% interest in the Hawesville facility through
NSA.
Prior to April 1996, the Company was an indirect, wholly owned subsidiary
of Glencore International AG ("Glencore" and, together with its subsidiaries,
the "Glencore Group"). In April 1996, the Company completed an initial public
offering of its common stock. At December 31, 2001, the Glencore Group owned
38.6% of Century's common shares outstanding. During 2001, in connection with
the Company's financing of the Hawesville acquisition, Glencore purchased
500,000 shares of the Company's convertible preferred stock for $25,000. Based
upon its common and preferred stock ownership, the Glencore Group beneficially
owns 42.5% of Century's common stock. Century and the Glencore Group enter into
various transactions such as the purchase and sale of primary aluminum, alumina
and metals risk management.
On September 21, 1999, the Company completed the sale to Pechiney Rolled
Products, LLC, a Delaware limited liability company ("Pechiney"), of certain
assets and the assumption of certain liabilities of Century of West Virginia's
rolled products unit at Ravenswood, West Virginia (the "Rolling Business") and
all of the issued and outstanding shares of common stock of Century Cast Plate,
Inc. (together the "fabricating businesses"). The parties consummated the sale
pursuant to the Stock and Asset Purchase Agreement dated July 26, 1999 (the
"Purchase Agreement") by and among Century, Century of West Virginia and
Pechiney. The aggregate purchase price for the fabricating businesses was
$234,000. The purchase price was determined by arms-length negotiations between
the parties. Century used a portion of the purchase price to repay all of its
outstanding bank indebtedness.
Effective April 1, 2000, the Company by arms-length negotiations between
the parties purchased an additional 23% interest in the Mt. Holly facility for
cash consideration of $94,734. This purchase increased Century's ownership to
49.67%.
Effective April 1, 2001, Century completed the acquisition of NSA from
Southwire Company, a privately-held wire and cable manufacturing company. NSA
owns and operates the Hawesville facility. The purchase price was $466,800, plus
the assumption of $7,815 in industrial revenue bonds, and is subject to
adjustments for contingent considerations, see Footnote 12. Simultaneous with
the closing, a subsidiary of Glencore effectively purchased a 20% interest in
the Hawesville facility for $99,000 plus the assumption of a proportionate share
of the Hawesville facility's industrial revenue bonds and post closing payments.
The Glencore 20% interest consists of (1) title to the recently added fifth
potline at the Hawesville facility, (2) a 20% undivided interest in all other
assets of and rights relating to the Hawesville facility, other than the
38
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
original four potlines and (3) a 20% ownership in a limited liability company
(the "LLC") which is responsible for operating the Hawesville facility and which
holds certain intangible and other assets of the Hawesville facility (including
the alumina, power supply and union contracts). In connection with the Company's
financing of the Hawesville acquisition, Glencore purchased 500,000 shares of
the Company's convertible preferred stock for $25,000. Each share of convertible
preferred stock entitles the holder to cumulative cash dividends of 8% per annum
and may be converted, at the holder's option, into the Company's common stock at
$17.92 per share. See Note 8 to the Consolidated Financial Statements.
The Company's historical results of operations included in the accompanying
consolidated financial statements may not be indicative of the results of
operations to be expected in the future.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Century Aluminum Company and its subsidiaries, after
elimination of all significant intercompany transactions and accounts.
Berkeley's interest in the Mt. Holly partnership is accounted for under the
equity method. There are no material undistributed earnings in the Mt. Holly
partnership.
With respect to NSA, the Company has recorded the property, plant and
equipment that it owns directly (potlines one through four) on a 100% basis and
has recorded its 80% undivided interest in the remaining property, plant and
equipment (excluding the fifth potline which is owned directly by Glencore) on a
proportionate basis. In each case its interest in the property, plant and
equipment including the related depreciation, is recorded in accordance with
Emerging Issues Task Force Issue No. 00-01, "Investor Balance Sheet and Income
Statement Display under the Equity Method for Investments in Certain
Partnerships and Other Ventures." The Company has consolidated the assets and
liabilities and related results of operations of the LLC and has reflected
Glencore's 20% interest in the LLC as a minority interest.
Revenue -- Revenue is recognized when title, risk of loss and ownership
passes to customers in accordance with contract terms. In some instances, the
Company invoices customers prior to physical shipment of goods. In such
instances, revenue is recognized only when the customer has specifically
requested such treatment and has made a fixed commitment to purchase the
product. The goods must be complete, ready for shipment and physically separated
from other inventory with risk of ownership passing to the customer. The Company
must retain no performance obligations and a delivery schedule must be obtained.
Included in net sales during 1999 are tolling fees that the Company earned
from smelting, casting and fabricating material supplied by third-party
customers. These fees are not related to primary aluminum shipments and, as
such, are not present in 2000 and 2001 and will not be present in future years
due to the sale of the fabricating businesses to Pechiney. Net sales include
tolling fees of $2,045 for the year ended December 31, 1999. Sales returns and
allowances are treated as a reduction of sales and are provided for based on
historical experience and current estimates.
Cash and Cash Equivalents -- Cash equivalents are comprised of cash and
short-term investments having maturities of less than 90 days at the time of
purchase. The carrying amount of cash equivalents approximates fair value.
Accounts Receivable -- The accounts receivable, trade are net of an
allowance for uncollectible accounts of $4,345 and $285 at December 31, 2001 and
2000, respectively.
Inventories -- Alumina and aluminum inventories are stated at the lower of
cost (using the last-in, first-out ("LIFO") method) or market. The remaining
inventories (operating and other supplies) are valued at the lower of average
cost or market.
Property, Plant and Equipment -- Property, plant and equipment is stated at
cost. Additions, renewals and improvements are capitalized. Asset and
accumulated depreciation accounts are relieved for dispositions with resulting
gains or losses included in earnings. Maintenance and repairs are expensed as
incurred.
39
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation of plant and equipment is provided for by the straight-line method
over the following estimated useful lives:
Buildings and improvements.................................. 14 to 40 years
Machinery and equipment..................................... 5 to 22 years
The Company periodically evaluates the carrying value of long-lived assets
to be held and used when events and circumstances warrant such a review. The
carrying value of a separately identifiable, long-lived asset is considered
impaired when the anticipated undiscounted cash flow from such asset is less
than its carrying value. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the fair value of the long-lived asset. Fair
value is determined primarily using the anticipated cash flows discounted at a
rate commensurate with the risk involved.
Intangible Asset -- The intangible asset consists of the power contract
acquired in connection with the Hawesville acquisition. The contract value is
being amortized over its term (ten years) using a method that results in annual
amortization equal to the percentage of a given year's expected annual benefit
to the total as applied to the total recorded value of the power contract. For
the year ended December 31, 2001, amortization expense totaled $19,694 and
accumulated amortization totaled $19,694.
Other Assets -- At December 31, 2001 and 2000, other assets consist
primarily of the Company's investment in the Mt. Holly partnership, deferred
financing costs, and deferred pension assets. Deferred financing costs are
amortized on a straight-line basis over the life of the related financing.
The Company accounts for its 49.67% interest in the Mt. Holly partnership
using the equity method of accounting. Additionally, the Company's 49.67%
undivided interest in certain property, plant and equipment of the Mt. Holly
facility is held outside of the partnership, and while the partnership is
accounted for using the equity method, the undivided interest in these assets of
the facility is accounted for in accordance with the Emerging Issues Task Force
Issue No. 00-01, "Investor Balance Sheet and Income Statement Display under the
Equity Method for Investments in Certain Partnerships and Other Ventures."
Accordingly, the undivided interest in these assets of the facility and the
related depreciation is being accounted for on a proportionate gross basis.
Income Taxes -- The Company accounts for income taxes using the liability
method, whereby deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In evaluating
the Company's ability to realize deferred tax assets, the Company uses judgment
in considering the relative impact of negative and positive evidence. The weight
given to the potential effect of negative and positive evidence is commensurate
with the extent to which it can be objectively verified. Based on the weight of
evidence, both negative and positive, including the lack of historical earnings,
if it is more likely than not that some portion or all of a deferred tax asset
will not be realized, a valuation allowance is established.
Postemployment Benefits -- The Company provides certain postemployment
benefits to former and inactive employees and their dependents during the period
following employment, but before retirement. These benefits include salary
continuance, supplemental unemployment and disability healthcare. Postemployment
benefits are accounted for in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits."
The statement requires recognition of the estimated future cost of providing
postemployment benefits on an accrual basis over the active service life of the
employee.
Forward Delivery Contracts and Financial Instruments -- The Company
routinely enters into fixed and market priced contracts for the sale of primary
aluminum and the purchase of raw materials in future periods. The Company also
enters into fixed price financial sales contracts to be settled in cash to
manage the Company's exposure to changing primary aluminum prices. These
financial sales contracts have been
40
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
designated as cash flow hedges as of January 1, 2001. To the extent such cash
flow hedges are effective, unrealized gains and losses on the financial sales
contracts are deferred in the balance sheet as accumulated other comprehensive
income until the hedged transaction occurs when the realized gain or loss is
recognized as revenue in the Statement of Operations. Prior to January 1, 2001,
a change in market value of a financial sales contract had been recognized as a
gain or loss in the period of change and recognized in the Statements of
Operations as a gain or loss on forward contracts.
The Company has also entered into financial purchase contracts for natural
gas to be settled in cash to manage the Company's exposure to changing natural
gas prices. These financial purchase contracts have been designated as cash flow
hedges as of January 1, 2001. To the extent such cash flow hedges are effective,
unrealized gains and losses on the natural gas financial purchase contracts are
deferred in the balance sheet as accumulated other comprehensive income until
the hedged transaction occurs. Once the hedged transaction occurs, the realized
gain or loss is recognized in cost of goods sold in the Statement of Operations.
If future natural gas needs are revised lower than initially anticipated, the
futures contracts associated with the reduction no longer qualify for deferral
and are marked to market. Mark-to-market gains and losses are recorded in net
gain (loss) on forward contracts in the period delivery is no longer deemed
probable.
The effectiveness of the Company's hedges is measured by an historical and
probable future high correlation of changes in the fair value of the hedging
instruments with changes in value of the hedged item. If high correlation ceases
to exist, then gains or losses will be recorded in net gain (loss) on forward
contracts. To date, high correlation has always been achieved. As of December
31, 2001, the Company had a net deferred gain of $10,453 on its hedges.
Financial Instruments -- The Company's financial instruments (principally
receivables, payables, debt and forward financial contracts) are carried at
amounts that approximate fair value.
Concentration of Credit Risk -- Financial instruments, in addition to
forward financial contracts, which potentially expose the Company to
concentrations of credit risk, consist principally of cash investments and trade
receivables. The Company places its cash investments with highly rated financial
institutions. At times, such investments may be in excess of the FDIC insurance
limit. With the sale of the fabricating businesses to Pechiney, the Company
significantly reduced its customer base and thereby increased its concentrations
of credit risk with respect to trade receivables. The Company routinely assesses
the financial strength of its customers, but generally does not require
collateral to support trade receivables.
Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Stock-Based Compensation -- The Company has elected not to adopt the
recognition provisions for employee stock-based compensation as permitted in
SFAS No. 123, "Accounting for Stock-Based Compensation". As such, the Company
accounts for stock based compensation in accordance with APB No. 25 "Accounting
for Stock Issued to Employees."
New Accounting Standards -- Effective January 1, 2001, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 133, as amended by SFAS
No. 138, which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. If the derivative is designated as a cash flow hedge, the
effective portions of the changes in the fair value of the derivative are
recorded in accumulated other comprehensive income and are recognized in the
income statement when the hedged item affects earnings. Ineffective portions of
the changes in the fair value of the cash flow hedges are recognized in
earnings.
41
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effectiveness of hedges is measured by an historical and probable future high
correlation of changes in the fair value of the hedging instrument with the
changes in the fair value of the hedged item. If the correlation ceases to
exist, hedge accounting will be terminated and gains and losses on forward
financial sales contracts will be recorded as net gains (losses) on forward
contracts in the Statement of Operations.
As of January 1, 2001, the Company's financial sales and purchase
instruments were designated as cash flow hedges. There was no transition
adjustment upon adoption. As of December 31, 2001, assets included $15,211, and
accrued and other liabilities included $4,758, representing the fair value of
the Company's financial sales and purchase instruments. Based on the fair value
of the Company's financial sales and purchase instruments as of December 31,
2001, accumulated other comprehensive income of $2,048 is expected to be
reclassified to earnings over the next twelve month period.
The Financial Accounting Standards Board (the "FASB") continues to identify
and provide guidance on various implementation issues related to SFAS No's. 133
and 138 that are in varying stages of review and clearance by the FASB. The
Company has adopted all FASB guidance that was required to be implemented by
December 31, 2001. The Company is currently evaluating the impact of pending
FASB guidance and has not determined if the ultimate resolution of those issues
would have a material impact on its financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company is evaluating the cumulative effect and ongoing impact of SFAS No.
141 on its financial position and results of operations. There have been no
business acquisitions since the effective date of SFAS No. 141.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which became effective January 1, 2002. SFAS No. 142 requires, among
other things, the discontinuance of goodwill amortization. In addition, SFAS No.
142 includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS No. 142 also requires the Company
to complete a transitional goodwill impairment test six months from the date of
adoption. The Company is evaluating the cumulative effect and ongoing impact of
SFAS No. 142 on its financial position and results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard is required to be adopted by the
Company beginning January 1, 2003. The Company is currently assessing, but has
not yet determined, the impact of SFAS No. 143 on its financial position and
results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long Lived Assets." This statement addresses financial accounting
and reporting for the impairment and disposal of long-lived assets. The standard
became effective January 1, 2002. The Company is developing a plan to apply the
provisions of this statement to its operations on an ongoing basis.
2. ACQUISITIONS AND DISPOSITIONS
Effective April 1, 2001, the Company completed the acquisition of NSA, an
entity that operates a 523 million pounds per year aluminum reduction operation
in Hawesville, Kentucky. The purchase price was $466,800 plus the assumption of
$7,815 in industrial revenue bonds ("IRBs") and is subject to adjustments for
contingent considerations, see Footnote 12. See Note 1 to the Consolidated
Financial Statements for additional details relating to the Hawesville
acquisition. The Company financed the Hawesville acquisition
42
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with: (i) proceeds from the sale of its Exchange Notes, see Note 5, (ii)
proceeds from the sale of its Preferred Stock to Glencore, (iii) proceeds from
the sale to Glencore of a 20% interest in the Hawesville Facility, and (iv)
available cash. The Glencore 20% interest consists of (1) title to the recently
added fifth potline at the Hawesville Facility, (2) a 20% undivided interest in
all other assets of and rights relating to the Hawesville Facility, other than
the original four potlines and (3) a 20% ownership in the LLC which holds
certain intangible and other assets of the Hawesville Facility (the alumina,
power supply, union contracts and obligations under the IRBs). Pursuant to the
Owners' Agreement governing the Hawesville facility, Glencore is responsible for
reimbursing the LLC for its 20% share of operating costs, has a first right of
refusal if the Company seeks to sell its 80% interest in the Hawesville facility
and has certain rights regarding approval of significant matters affecting the
Hawesville facility. The Company accounted for the Hawesville acquisition using
the purchase method of accounting. See Note 5 to the Consolidated Financial
Statements for additional information about the financing of the Hawesville
acquisition.
Effective April 1, 2000, Century, through its wholly owned indirect
subsidiary Berkeley, increased its 26.67% undivided interest in the property,
plant and equipment comprising the Mt. Holly Facility to 49.67% by purchasing a
23% undivided interest from a subsidiary of Xstrata AG, ("Xstrata") a publicly
traded Swiss company. As part of the purchase, Berkeley also acquired Xstrata's
23% interest in the general partnership which operates and maintains the Mt.
Holly facility (the "Operating Partnership", and together with the Mt. Holly
facility, the "Mt. Holly Assets"). Prior to Berkeley's purchase from Xstrata, it
held a 26.67% interest in the Operating Partnership. Glencore is a major
shareholder of Xstrata. The purchase was completed pursuant to an asset purchase
agreement dated as of March 31, 2000 (the "Mt. Holly Purchase Agreement") by and
between Berkeley and Xstrata. The aggregate purchase price for Xstrata's
interest in Mt. Holly Assets was $94,734. Under the terms of the Mt. Holly
Purchase Agreement, Berkeley also agreed to assume certain of Xstrata's
obligations and liabilities relating to the Mt. Holly Assets. Concurrent with
the acquisition, the Company entered into a ten year contract to sell to
Glencore approximately 110 million pounds of primary aluminum produced at the
Mt. Holly facility. During 2001, the price was variable and determined by
reference to the LME market price for primary aluminum, while the remaining
eight years of the contract will be at a fixed price. The terms of the Mt. Holly
Purchase Agreement were determined through arms-length negotiations between the
parties. The Company used available cash to complete the purchase and the
acquisition was accounted for using the purchase method.
The following schedule represents the unaudited pro forma results of
operations for the years ended December 31, 2001 and 2000 assuming the
acquisitions occurred on January 1, 2000. The unaudited pro forma amounts may
not be indicative of the results that actually would have occurred if the
transactions described above had been completed and in effect for the periods
indicated or the results that may be obtained in the future.
2001 2000
-------- --------
(UNAUDITED)
Net Sales................................................... $740,846 $773,981
Net income (loss)........................................... (14,427) 22,056
Net income (loss) available to common shareholders.......... (16,427) 20,056
Earnings (loss) per common share (Basic).................... $ (0.80) $ 0.99
Earnings (loss) per common share (Diluted).................. $ (0.80) $ 0.98
43
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories, at December 31, consist of the following:
2001 2000
------- -------
Raw materials............................................... $36,686 $27,784
Work-in-process............................................. 11,911 3,286
Finished goods.............................................. 11,219 3,859
Operating and other supplies................................ 15,401 9,152
------- -------
$75,217 $44,081
======= =======
At December 31, 2001 and December 31, 2000, approximately 79% of
inventories were valued at the lower of last-in, first-out ("LIFO") cost or
market. The excess of first-in, first-out ("FIFO") cost over LIFO cost (or
market, if lower) of inventory was approximately $3,374 at December 31, 2001 and
approximately $490 at December 31, 2000. Inventory at December 31, 2001 and 2000
has been adjusted to estimated net realizable value or market. Results of
operations include net charges of $5,166 and $1,631 for inventory adjustments
for the periods ended December 31, 2001 and December 31, 2000, respectively.
Cost of goods sold has been reduced by $1,759 for alumina sales to Glencore
during 2000.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at December 31, consist of the following:
2001 2000
--------- ---------
Land and improvements....................................... $ 12,786 $ 11,935
Buildings and improvements.................................. 37,979 28,180
Machinery and equipment..................................... 503,566 236,146
Construction in progress.................................... 8,006 20,942
--------- ---------
562,337 297,203
Less accumulated depreciation............................... (136,331) (112,677)
--------- ---------
$ 426,006 $ 184,526
========= =========
For the years ended December 31, 2001 and 2000, the Company recorded
depreciation expense of $24,739 and $14,395, respectively.
At December 31, 2001 and 2000, the cost of property, plant and equipment
includes $136,877 and $136,349, respectively, and accumulated depreciation
includes $35,397 and $28,376, respectively, representing the Company's undivided
interest in the property, plant and equipment comprising the Mt. Holly facility.
At December 31, 2001, the cost of property, plant and equipment includes
$256,915 and accumulated depreciation includes $12,629, representing the
Company's interest in the property, plant and equipment comprising the
Hawesville facility.
The Company has various operating lease commitments through 2005 relating
to machinery and equipment. Expenses under all operating leases were $297, $310
and $1,077 for the years ended December 31, 2001, 2000 and 1999, respectively.
There were no noncancelable operating leases as of December 31, 2001.
5. DEBT
Effective April 1, 2001, the Company entered into a $100,000 senior secured
revolving credit facility (the "Revolving Credit Facility") with a syndicate of
banks. The Revolving Credit Facility may be used for
44
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
working capital needs, capital expenditures and other general corporate
purposes. Borrowings under the Revolving Credit Facility are subject to a
$30,000 reserve and limited to a borrowing base based upon certain eligible
inventory and receivables. The Company is subject to customary covenants,
including restrictions on capital expenditures, additional indebtedness, liens,
guarantees, mergers and acquisitions, dividends, distributions, capital
redemptions and investments. The Company's obligations under the Revolving
Credit Facility are unconditionally guaranteed by its domestic subsidiaries
(other than the LLC) and secured by a first priority security interest in all
accounts receivable and inventory belonging to the Company and its subsidiary
borrowers. Amounts outstanding under the Revolving Credit Facility bear
interest, at the Company's option, at either a floating LIBOR rate or Fleet
National Bank's base rate, in each case plus an applicable interest margin. The
applicable interest margin ranges from 2.25% to 3.0% over the LIBOR rate and
0.75% to 1.5% over the base rate and is determined by certain financial
measurements of the Company. The Revolving Credit Facility will mature on April
2, 2006. There were no outstanding borrowings under the Revolving Credit
Facility as of December 31, 2001.
Effective April 1, 2001, in connection with its acquisition of the
Hawesville facility, the Company issued and sold $325,000 of its 11 3/4% senior
secured first mortgage notes due 2008 (the "Notes") to certain institutional
investors in a private placement under Rule 144A of the Securities Act of 1933.
Payment obligations under the Notes are unconditionally guaranteed by all of the
Company's material wholly owned direct and indirect subsidiaries (the "Guarantor
Subsidiaries") and secured by mortgages and security interests granted by two of
the Company's subsidiaries in all of their respective interests in the real
property, plant and equipment comprising the Hawesville and Ravenswood
facilities. At December 31, 2001, the Company had unamortized bond discounts on
the Notes of $3,554. The indenture governing the notes contains customary
covenants including limiting the Company's ability to pay dividends, incur debt,
make investments, sell assets or stock of certain subsidiaries, and purchase or
redeem capital stock. If the Company does not generate sufficient cumulative
earnings, as defined in the Company's loan agreements, it would be required to
suspend dividend distributions on or before 2003. As of December 31, 2001, $8.2
million of retained earnings was available for payment of dividends. The Note
guarantees will rank equally in right of payment to the other senior
indebtedness of the guarantors and senior in right of payment to all
subordinated indebtedness of the guarantors.
In November 2001, the Company exchanged the Notes for a like principal
amount of 11 3/4% senior secured first mortgage notes due 2008 (the "Exchange
Notes"), which are registered under the Securities Act of 1933. The terms of the
Exchange Notes are substantially similar to the Notes, except the Exchange Notes
do not have the transfer restrictions and registration rights relating to the
Notes. The Exchange Notes will not be listed on any securities exchange or
included in any automated quotation system.
Effective April 1, 2001, in connection with its acquisition of the
Hawesville facility, the Company assumed IRBs in the aggregate principal amount
of $7,815. Glencore has assumed a pro rata portion of that debt and will pay a
pro rata portion of service costs of the IRBs through its investment in the
Hawesville facility. The IRBs mature on April 1, 2028, are secured by a Glencore
letter of credit and bear interest at a variable rate not to exceed 12% per
annum determined weekly based on prevailing rates for similar bonds in the bond
market. The interest rate on the IRBs at December 31, 2001 was 2.05%. Interest
is paid quarterly. The IRBs are classified as current liabilities because they
are remarketed weekly and could be required to be repaid upon demand if there is
a failed remarketing, as provided in the indenture governing the IRBs.
During the year ended December 31, 1999, the Company recorded an
extraordinary item of $1,362 related to the write-off of deferred bank fees.
45
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS AT DECEMBER 31
2001 2000
------- -------
Accrued and Other Current Liabilities
Income taxes................................................ $ 7,245 $ 6,621
Accrued bond interest....................................... 8,168 --
Salaries, wages and benefits................................ 8,977 4,453
Stock compensation.......................................... 539 1,947
Other....................................................... 9,136 4,718
------- -------
$34,065 $17,739
======= =======
Accrued Employee Benefit Costs -- Current Portion
Postretirement benefits..................................... $ 2,871 $ 2,100
Employee benefits cost...................................... 4,929 2,724
------- -------
$ 7,800 $ 4,824
======= =======
Other Liabilities
Workers' compensation....................................... $ 7,162 $ 6,191
Other....................................................... 3,535 369
------- -------
$10,697 $ 6,560
======= =======
Century of West Virginia and Century of Kentucky are self-insured for
workers' compensation, except that Century of West Virginia has certain
catastrophic coverage that is provided under State of West Virginia insurance
programs. The liability for self-insured workers' compensation claims has been
discounted at 6% at December 31, 2001 and 2000. The components of the liability
for workers' compensation at December 31 are as follows:
2001 2000
------- -------
Undiscounted liability...................................... $13,398 $11,466
Less discount............................................... 3,871 3,249
------- -------
$ 9,527 $ 8,217
======= =======
7. PENSION AND OTHER POSTRETIREMENT BENEFITS
PENSION BENEFITS
The Company maintains noncontributory defined benefit pension plans for its
Ravenswood facility and substantially all of the Company's salaried employees.
For salaried employees, plan benefits are based primarily on years of service
and average compensation during the later years of employment. For hourly
employees at the Ravenswood facility, plan benefits are based primarily on a
formula that provides a specific benefit for each year of service. The Company's
funding policy is to contribute annually an amount based upon actuarial and
economic assumptions designed to achieve adequate funding of the projected
benefit obligations and to meet the minimum funding requirements of ERISA. Plan
assets consist principally of U.S. equity securities, growth funds and fixed
income accounts. As explained in Note 12, the Company agreed to make additional
contributions to the hourly plan for the Ravenswood facility in connection with
the initial public offering of the Company's common stock. In addition, the
Company provides supplemental executive retirement benefits ("SERB") for its
executive officers.
46
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The hourly employees at the Hawesville facility are part of a USWA
sponsored multi-employer plan. The Company's contributions to the plan are
determined at a fixed rate per hour worked. During the year ended December 31,
2001, the Company contributed $771 to the plan, and had no outstanding liability
at year end.
OTHER POSTRETIREMENT BENEFITS (OPEB)
In addition to providing pension benefits, the Company provides certain
healthcare and life insurance benefits for substantially all retired employees.
The Company accounts for these plans in accordance with SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS
No. 106 requires the Company to accrue the estimated cost of providing
postretirement benefits during the working careers of those employees who could
become eligible for such benefits when they retire. The Company funds these
benefits as the retirees submit claims.
The change in benefit obligations and change in plan assets as of December
31 are as follows:
2001 2000
------------------ ------------------
PENSION OPEB PENSION OPEB
------- -------- ------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year...... $42,100 $ 52,645 $36,483 $ 41,146
Service cost................................. 2,501 2,879 1,212 1,697
Interest cost................................ 3,149 5,237 2,719 3,658
Acquisition of businesses.................... -- 18,562 -- --
Plan changes................................. 3,767 -- 2,015 (1,978)
(Gains) losses............................... (1,194) 7,250 1,956 10,665
Benefits paid................................ (2,679) (2,798) (2,285) (2,543)
------- -------- ------- --------
Benefit obligation at end of year............ $47,644 $ 83,775 $42,100 $ 52,645
======= ======== ======= ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year....................................... $39,822 $ -- $40,724 $ --
Actual return on plan assets................. (1,519) -- (1,005) --
Employer contributions....................... 4,254 2,798 2,388 2,543
Benefits paid................................ (2,679) (2,798) (2,285) (2,543)
------- -------- ------- --------
Fair value of assets at end of year.......... $39,878 $ -- $39,822 $ --
======= ======== ======= ========
FUNDED STATUS OF PLANS
Funded status................................ $ 7,766 $ 83,775 $ 2,278 $ 52,645
Unrecognized actuarial gain (loss)........... (2,644) (17,014) 1,409 (10,450)
Unrecognized transition obligation........... (581) -- (755) --
Unrecognized prior service cost.............. (7,601) 1,737 (4,951) 2,075
------- -------- ------- --------
Net liability (asset) recognized............. $(3,060) $ 68,498 $(2,019) $ 44,270
======= ======== ======= ========
The hourly pension plan for the employees of the Ravenswood facility had an
aggregate benefit obligation of $30,867 and $31,366 and an aggregate fair value
of plan assets of $33,495 and $34,430 at December 31, 2001 and 2000,
respectively. The salaried pension plan and SERB had an aggregate benefit
obligation of $16,777 and $10,734 and an aggregate fair value of plan assets of
$6,383 and $5,392 at December 31, 2001 and 2000, respectively. There are no plan
assets in the SERB due to the nature of the plan.
47
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic benefit costs were comprised of the following elements:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999
---------------- ---------------- ------------------
PENSION OPEB PENSION OPEB PENSION OPEB
------- ------ ------- ------ -------- -------
Service cost................. $ 2,501 $2,879 $ 1,212 $1,697 $ 2,625 $ 2,956
Interest cost................ 3,149 5,237 2,719 3,658 8,005 8,160
Expected return on plan
assets..................... (3,663) -- (3,601) -- (10,323) --
Net amortization and
deferral................... 1,226 339 416 207 1,010 732
------- ------ ------- ------ -------- -------
Net periodic cost............ $ 3,213 $8,455 $ 746 $5,562 $ 1,317 $11,848
======= ====== ======= ====== ======== =======
The following assumptions were used in the actuarial computations at
December 31:
2001 2000 1999
---- ---- ----
Discount rate............................................... 7.25% 7.25% 7.50%
Rate of increase in future compensation levels
Hourly pension plan....................................... 4.00% 4.00% 4.00%
Salaried pension plan..................................... 4.00% 4.00% 4.00%
Long term rate of return on pension plan assets............. 9.00% 9.00% 9.00%
For measurement purposes, a 6.00% annual rate increase in the per capita
cost of covered health care benefits was assumed for each year. The rates were
assumed to remain at 6.00% for 2002 and thereafter.
A one-percentage-point increase in the assumed rate of inflation in future
medical costs would increase the postretirement benefit obligation at December
31, 2001 by $13.1 million and would increase aggregate 2001 service and interest
cost by $1.7 million. A one-percentage-point decrease in the assumed rate of
inflation in future medical costs would decrease the postretirement benefit
obligation at December 31, 2001 by $10.4 million and would decrease aggregate
2001 service and interest cost by $1.3 million.
The Company sponsors a tax-deferred savings plan under which eligible
employees may elect to contribute specified percentages of their compensation
with the Company providing matching contributions of 60% of the first 6% of a
participant's annual compensation contributed to the savings plan. One half of
the Company's contribution is invested in the common stock of Century and one
half of the Company's contribution is in cash. Company contributions to the
savings plan were $484, $241 and $585 for the years ended December 31, 2001,
2000 and 1999, respectively. Shares of common stock of the Company may be sold
at any time. Employees are considered fully vested in the plan upon completion
of two years of service. A year of service is defined as a plan year in which
the employee works at least 1,000 hours.
8. SHAREHOLDERS' EQUITY
Preferred Stock -- Under the Company's Restated Certificate of
Incorporation, the Board of Directors is authorized to issue up to 5,000,000
shares of preferred stock, with a par value of one cent per share, in one or
more series. The authorized but unissued preferred shares may be issued with
such dividend rates, conversion privileges, voting rights, redemption prices and
liquidation preferences as the Board of Directors may determine, without action
by shareholders.
On April 2, 2001, the Company issued to Glencore 500,000 shares of its 8.0%
cumulative convertible preferred stock (the "Preferred Stock") for a cash
purchase price of $25,000. The Preferred Stock has a par value per share of
$0.01, a liquidation preference of $50 per share and ranks junior to the
Exchange Notes, the
48
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IRBs, borrowings under the Revolving Credit Facility and all of the Company's
other existing and future debt obligations. Following is a summary of the
principal terms of the Preferred Stock:
- Dividends. The holders of the Preferred Stock are entitled to receive
fully cumulative cash dividends at the rate of 8% per annum per share
accruing daily and payable when declared quarterly in arrears.
- Optional Conversion. Each share of Preferred Stock may be converted at
any time, at the option of the holder, into shares of the Company's
common stock, at a price of $17.92, subject to adjustment for stock
dividends, stock splits and other specified corporate actions.
- Voting Rights. The holders of Preferred Stock have limited voting rights
to approve: (1) any action by the Company which would adversely affect or
alter the preferences and special rights of the Preferred Stock, (2) the
authorization of any class of stock ranking senior to, prior to or
ranking equally with the Preferred Stock, and (3) any reorganization or
reclassification of the Company's capital stock or merger or
consolidation of the Company.
- Optional Redemption. After the third anniversary of the issue date, the
Company may redeem the Preferred Stock, at its option, for cash at a
price of $52 per share, plus accrued and unpaid dividends to the date of
redemption, declining ratably to $50 per share at the end of the eighth
year.
- Transferability. The Preferred Stock is freely transferable in a private
offering or any other transaction which is exempt from, or not subject
to, the registration requirements of the Securities Act of 1933 and any
applicable state securities laws.
9. STOCK BASED COMPENSATION
1996 Stock Incentive Plan -- The Company adopted the 1996 Stock Incentive
Plan (the "Stock Incentive Plan") for the purpose of awarding performance share
units and granting qualified incentive stock options and nonqualified stock
options to salaried officers and other key employees of the Company. The Stock
Incentive Plan has a term of ten years from its effective date. The number of
shares available under the Stock Incentive Plan is 2,000,000. Granted stock
options vest one-third on the grant date and an additional one-third on each of
the first and second anniversary dates, and have a term of ten years.
The Company awarded 460,000 service based performance share units at the
time of the initial public offering and 60,500 units during 2000, for no
consideration. In addition, 20,182 performance based shares were awarded in
2001. The service based performance share units represent the right to receive
common stock, on a one-for-one basis on their vesting dates. The value of the
service based performance share units is $13 per share for the initial award,
$13.92 per share, and $12.86 per share for the units awarded in 2001 and 2000,
respectively. The value of the 460,000 units granted in 1996 was charged to
compensation expense over their five year vesting period, which was one-third at
the end of each of the third, fourth and fifth anniversary dates. The value of
the 60,500 units granted in 2000 is being charged to compensation expense over
their three year vesting period which is one-third at January 1, 2001, 2002 and
2003, respectively. The value of the 20,182 units granted in 2001 was charged to
compensation expense in 2001. During 2001, the final one-third (156,836) of the
service based performance shares became vested and were converted to Common
Stock.
The Stock Incentive Plan, as presently administered, provides for
additional grants upon the passage of time or the attainment of certain
established performance goals. As of December 31, 2001, approximately 273,000
performance share units have been authorized and will vest upon the attainment
of the performance goals.
The Company recognized $519, $988 and $1,623 of expense related to the
Stock Incentive Plan in 2001, 2000 and 1999, respectively. The service based
performance share units do not affect the issued and outstanding shares of
common stock until conversion at the end of the vesting periods. However, the
service based performance share units are considered common stock equivalents
and therefore are included, using the
49
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
treasury stock method, in average common shares outstanding for diluted earnings
per share computations. Goal based performance share units are not considered
common stock equivalents until it becomes probable that performance goals will
be obtained.
The Company applies APB Opinion 25 and related interpretations in
accounting for the 1996 Stock Incentive Plan. Accordingly, no compensation cost
has been recognized for the stock option portions of the plan. Had compensation
cost for the Stock Incentive Plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the method of SFAS No.
123, the Company's net income and earnings per share would have changed to the
pro forma amounts indicated below:
2001 2000 1999
-------- ------- ------
Net Income (loss).......................... As Reported $(15,202) $25,305 $3,919
Pro Forma $(15,291) $25,115 $4,074
Basic earnings (loss) per share............ As Reported $ (0.74) $ 1.25 $ 0.19
Pro Forma $ (0.75) $ 1.24 $ 0.20
Diluted earnings (loss) per share.......... As Reported $ (0.74) $ 1.24 $ 0.19
Pro Forma $ (0.75) $ 1.23 $ 0.20
Non-Employee Directors Stock Option Plan -- The Company adopted a
non-employee directors stock option plan for the purpose of granting
non-qualified stock options to non-employee directors. The number of shares
available under this plan is 200,000, of which options for 115,000 shares have
been awarded. The initial options vest one-third on the grant date and an
additional one-third on each of the first and second anniversary dates.
Subsequent options vest one-fourth each calendar quarter. Each option granted
under this plan will be exercisable for a period of ten years from the date of
grant.
A summary of the status of the Company's Stock Incentive Plan and the
Non-Employee Directors Stock Option Plan as of December 31, 2001, 2000 and 1999
and changes during the year ended on those dates is presented below:
2001 2000 1999
------------------ ------------------ -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------- ------- -------- ------- -------- -------- --------
Outstanding at beginning of
year..................... 603,600 $12.77 530,200 $13.19 609,900 $13.15
Granted.................... 34,500 13.60 73,400 10.45 23,500 9.26
Exercised.................. (35,333) 12.55 -- -- (333) 8.63
Forfeited.................. (7,500) 13.78 -- -- (102,867) 12.58
------- ------ ------- ------ -------- ------
Outstanding at end of
year..................... 595,267 $12.82 603,600 $12.77 530,200 $13.19
======= ====== ======= ====== ======== ======
The following table summarizes information about stock options outstanding
at December 31, 2001:
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING ----------------------------
----------------------------------------------------------------- NUMBER
NUMBER WEIGHTED-AVG. EXERCISABLE
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVG. AT WEIGHTED-AVG.
EXERCISE PRICES AT 12/31/01 CONTRACTUAL LIFE EXERCISE PRICE 12/31/01 EXERCISE PRICE
---------------- ----------- ---------------- -------------- ----------- --------------
$14.50 to $16.72 62,000 6.4 years $15.66 51,000 $15.73
$11.50 to $14.49 474,300 4.6 years $13.02 457,968 $13.01
$ 7.03 to $11.49 58,967 8.6 years $ 8.21 31,501 $ 8.48
50
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides summarized information for securities
authorized for issuance under equity compensation plans.
NUMBER OF SHARES
REMAINING AVAILABLE FOR
NUMBER OF SHARES WEIGHTED FUTURE ISSUANCE UNDER
TO BE ISSUED UPON AVERAGE EQUITY COMPENSATION
EXERCISE OF EXERCISE RESTRICTED SHARES -- PLANS, EXCLUDING
PLAN CATEGORY OUTSTANDING OPTIONS PRICE PERFORMANCE SHARES OUTSTANDING OPTIONS
------------- ------------------- -------- -------------------- -----------------------
Equity compensation
plans approved by
security holders...... 595,267 $12.82 272,840 780,338
Equity compensation
plans not approved by
security holders...... -- -- -- --
------- ------ ------- -------
Total................... 595,267 $12.82 272,840 780,338
======= ====== ======= =======
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2001, 2000 and 1999:
2001 2000 1999
----- ----- -----
Weighted average fair value per option granted during the
year...................................................... $4.04 $4.05 $2.77
Dividends per quarter....................................... $0.05 $0.05 $0.05
Risk-free interest rate..................................... 4.55% 6.47% 5.54%
Expected volatility......................................... 30% 30% 30%
Expected lives (in years)................................... 5 5 5
10. EARNINGS (LOSS) PER SHARE
Basic earnings per common share (EPS) amounts are computed by dividing
earnings after the deduction of preferred stock dividends by the average number
of common shares outstanding. Diluted EPS amounts assume the issuance of common
stock for all potentially dilutive equivalents outstanding. Basic and diluted
earnings (loss) per share for income (loss) available to common shareholders for
the years ended December 31, 2001, are as follows (shares in thousands):
2001 2000 1999
-------- ------- ------
BASIC EARNINGS (LOSS) PER SHARE:
Numerator:
Net income (loss) available to common shareholders.... $(15,202) $25,305 $3,919
Denominator:
Average common shares outstanding..................... 20,473 20,308 20,202
-------- ------- ------
Basic earnings (loss) per share......................... $ (0.74) $ 1.25 $ 0.19
======== ======= ======
51
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001 2000 1999
-------- ------- ------
DILUTED EARNINGS (LOSS) PER SHARE:
Numerator:
Net income (loss) available to common shareholders.... $(15,202) $25,305 $3,919
Denominator:
Average common shares outstanding..................... 20,473 20,308 20,202
Effect of dilutive securities:
Stock options and performance awards.................. -- 170 155
-------- ------- ------
Common shares outstanding, assuming dilution............ 20,473 20,478 20,357
-------- ------- ------
Diluted earnings (loss) per share....................... $ (0.74) $ 1.24 $ 0.19
======== ======= ======
There were 595 thousand and 536 thousand shares of common stock issuable
under the Company's stock option plan that were excluded in 2001 and 2000,
respectively, from the computation of dilutive EPS because of their antidilutive
effect. In addition, convertible preferred stock, convertible at the holder's
option into Company common stock at $17.92 per share was not included in the
computation of dilutive EPS because of their antidilutive effect.
11. INCOME TAXES
Significant components of the income tax expense from continuing operations
consist of the following:
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
------- -------- --------
Federal:
Current benefit (expense)........................... $ (107) $ 656 $ 18,850
Deferred (expense) benefit.......................... 8,840 (10,101) (19,183)
State:
Current benefit (expense)........................... (10) 491 2,544
Deferred (expense) benefit.......................... 1,308 (2,347) (2,839)
------- -------- --------
Total income tax benefit (expense).................. $10,031 $(11,301) $ (628)
======= ======== ========
Income tax expense for the years ended December 31, 2001, 2000 and 1999
include reductions in estimated income taxes payable of $0, $2,400 and $1,500,
respectively.
A reconciliation of the statutory U.S. Federal income tax rate to the
effective income tax rate on income (loss) from continuing operations is as
follows:
2001 2000 1999
---- ---- ----
Federal statutory rate...................................... 35% 35% 35%
Effect of:
Permanent differences..................................... -- 1 (2)
State taxes, net of Federal benefit....................... 3 3 3
Other..................................................... -- (8) (25)
-- -- ---
38% 31% 11%
== == ===
Permanent differences primarily relate to the Company's meal and
entertainment disallowance and other nondeductible expenses.
52
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
2001 2000
-------- --------
FEDERAL
Deferred federal tax assets:
Accrued postretirement benefit cost....................... $ 8,273 $ 1,035
Accrued liabilities....................................... 4,133 5,196
Federal NOL carried forward............................... 26,796 --
Inventory writedown....................................... 3,832 --
General business credit................................... 165 165
-------- --------
Deferred federal tax assets............................ 43,199 6,396
Deferred federal tax liabilities:
Tax over financial statement depreciation................. (69,572) (23,018)
Equity contra -- other comprehensive income............... (3,412) --
Inventory basis........................................... (4,866) --
-------- --------
Net deferred federal tax liability..................... (34,651) (16,622)
-------- --------
STATE
Deferred state tax assets:
Accrued postretirement benefit cost....................... 1,182 148
Accrued liabilities....................................... 290 680
Inventory writedown....................................... 547 --
State NOL carried forward................................. 2,133 1,222
-------- --------
Deferred state tax assets.............................. 4,152 2,050
Deferred state tax liabilities:
Tax over financial statement depreciation................. (9,938) (3,288)
Equity contra -- other comprehensive income............... (289) --
Inventory basis........................................... (695) --
-------- --------
Net deferred state tax (liability) asset............... (6,770) (1,238)
-------- --------
Net deferred tax liability.................................. $(41,421) $(17,860)
======== ========
Of the $41,421 net deferred tax liability at December 31, 2001, $1,879 is
included in current liabilities. Of the $17,860 net deferred tax liability at
December 31, 2000, $4,265 is included in current assets. At December 31, 2001,
the Company has a $77.0 million federal net operating loss carryforward that
expires in 2022. Additionally, the Company has various state net operating loss
carryforwards totaling $42.0 million which begin to expire in 2010.
12. CONTINGENCIES AND COMMITMENTS
ENVIRONMENTAL CONTINGENCIES
The Company spends significant amounts to comply with environmental laws
and to assure compliance with known and anticipated requirements. The Company
believes it does not have environmental liabilities that are likely to have a
material adverse effect on the Company. However, there can be no assurance that
53
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future requirements at currently or formerly owned properties will not result in
liabilities which may have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
Century of West Virginia is performing certain remedial measures at its
Ravenswood Facility pursuant to a RCRA 3008(h) order issued by the Environmental
Protection Agency ("EPA") in 1994 (the "3008(h) Order"). Century of West
Virginia also conducted a RCRA facility investigation ("RFI") evaluating other
areas at Ravenswood that may have contamination requiring remediation. The RFI
was submitted to the EPA in December 1999. Century of West Virginia, in
consultation with the EPA, is carrying out interim remediation measures at two
sites identified in the RFI. The Company expects that it will complete work on
these two sites by the end of 2002 and that the EPA will not require further
work as a result of the RFI. The Company believes a significant portion of the
contamination on the two identified sites is attributable to the operations of a
prior owner and will be the financial responsibility of that owner, as discussed
below.
Kaiser owned and operated the Ravenswood Facility for approximately 30
years before the Company purchased it. Many of the conditions that Century of
West Virginia is remedying exist because of activities that occurred during
Kaiser's ownership and operation. Under the terms of the Company's agreement to
purchase the Ravenswood Facility ("Kaiser Purchase Agreement"), Kaiser retained
the responsibility to pay the costs of cleanup of those conditions. In addition,
Kaiser retained title to certain land within the Ravenswood premises and is
responsible for those areas. On February 12, 2002, Kaiser and certain wholly
owned subsidiaries filed voluntary petitions under Chapter 11 of the Federal
Bankruptcy Code ("Kaiser Bankruptcy"). While the Company believes the Kaiser
Bankruptcy will not relieve Kaiser of its obligations to do remediation work
under government orders, the ultimate outcome of the Kaiser Bankruptcy is
uncertain. Nevertheless, the Company does not expect the Kaiser Bankruptcy to
have a material adverse effect on the Company's financial condition, results of
operations or liquidity.
Under the terms of the Company's agreement to sell its fabricating
businesses to Pechiney (the "Pechiney Agreement"), the Company and Century of
West Virginia provided Pechiney with certain indemnifications. Those include the
assignment of certain of Century of West Virginia's indemnification rights under
the Kaiser Purchase Agreement (with respect to the real property transferred to
Pechiney) and the Company's indemnification rights under its stock purchase
agreement with Alcoa relating to the Company's purchase of Century Cast Plate,
Inc. The Pechiney Agreement provides further indemnifications, which are
limited, in general, to pre-closing conditions that were not disclosed to
Pechiney and to off-site migration of hazardous substances from pre-closing acts
or omissions of Century of West Virginia. Environmental indemnifications under
the Pechiney Agreement expire September 20, 2005 and are payable only to the
extent they exceed $2,000.
The Hawesville Facility has been listed on the National Priorities List
under the federal Comprehensive Environmental Response, Compensation and
Liability Act. On July 6, 2000, the EPA issued a final Record of Decision
("ROD") which details response actions to be implemented at several locations at
the Hawesville site to address actual or threatened releases of hazardous
substances. Those actions include:
- removal and off-site disposal at approved landfills of certain soils
contaminated by polychlorinated biphenyls ("PCBs");
- management and containment of soils and sediments with low PCB
contamination in certain areas on-site; and
- the continued extraction and treatment of cyanide contaminated ground
water using the existing ground water treatment system.
The total costs for the remedial actions to be undertaken and paid for by
Southwire relative to this site are estimated under the ROD to be $12,600 and
the forecast of annual operating and maintenance costs is $1,200. Under the
Company's agreement with Southwire to purchase NSA, Southwire indemnified the
Company
54
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
against all on-site environmental liabilities known to exist prior to the
closing of the acquisition, including all remediation, operation and maintenance
obligations under the ROD. On behalf of Southwire, Century will operate and
maintain the ground water treatment system required under the ROD. Southwire
will reimburse Century for any such expense that exceeds $400 annually. Under
the terms of the Company's agreements with Glencore relating to the Company's
ownership and operation of the Hawesville Facility, Glencore will share pro rata
in any environmental costs (net of any amounts available under the indemnity
provisions in the Company's stock purchase agreement with Southwire) associated
with the Hawesville Facility.
If on-site environmental liabilities relating to NSA's pre-closing
activities that were not known to exist as of the date of the closing of the
acquisition become known within six years after the closing, the Company and
Glencore, based on each company's respective percentage interests in the
Hawesville Facility, will share the costs of remedial action with Southwire on a
sliding scale depending on the year the claim is brought. Any on-site
environmental liabilities arising from pre-closing activities which do not
become known until on or after the sixth anniversary of the closing of the
Hawesville acquisition will be the responsibility of Glencore and the Company.
In addition, the Company and Glencore will be responsible for a pro rata portion
of any post-closing environmental costs which result from a change in
environmental laws after the closing or from their own activities, including a
change in the use of the facility.
The Company acquired NSA by purchasing all of the outstanding equity
securities of its parent company, Metalsco, which was a wholly owned subsidiary
of Southwire. Metalsco previously owned certain assets which are unrelated to
NSA, including the stock of Gaston Copper Recycling Corporation ("Gaston"), a
secondary metals reduction facility in South Carolina. Gaston has numerous
liabilities related to environmental conditions at its reduction facility.
Gaston and all other non-NSA assets owned at any time by Metalsco were
identified in the Company's agreement with Southwire as unwanted property and
were distributed to Southwire prior to the closing of the Hawesville
acquisition. Southwire indemnified the Company for all liabilities related to
the unwanted property. Southwire also retained ownership of certain land
adjacent to the Hawesville Facility containing NSA's former potliner disposal
areas, which are the sources of cyanide contamination in the facility's
groundwater. Southwire retained full responsibility for this land, which was
never owned by Metalsco and is located on the north boundary of the Hawesville
site. In addition, Southwire indemnified the Company against all risks
associated with off-site hazardous material disposals by NSA which pre-date the
closing of the acquisition.
Under the terms of the Company's agreement to purchase NSA, Southwire
secured its indemnity obligations for environmental liabilities for seven years
after the closing by posting a $15,000 letter of credit issued in the Company's
favor, with an additional $15,000 to be posted if Southwire's net worth drops
below a pre-determined level during that period. The Company's indemnity rights
under the agreement are shared pro rata with Glencore. The amount of security
Southwire provides may increase (but not above $15,000 or $30,000, as
applicable) or decrease (but not below $3,000) if certain specified conditions
are met. The Company cannot be certain that Southwire will be able to meet its
indemnity obligations. In that event, under certain environmental laws which
impose liability regardless of fault, the Company may be liable for any
outstanding remedial measures required under the ROD and for certain liabilities
related to the unwanted properties. If Southwire fails to meet its indemnity
obligations or if the Company's shared or assumed liability is significantly
greater than anticipated, the Company's financial condition, results of
operations and liquidity could be materially adversely affected.
The Company, together with all other past and present owners of an alumina
facility at St. Croix, Virgin Islands, has entered into an Administrative Order
on Consent with the Environmental Protection Agency (the "Order") pursuant to
which the signatories have agreed to carry out a Hydrocarbon Recovery Plan to
remove and manage oil floating on top of groundwater underlying the facility.
Recovered hydrocarbons and groundwater will be delivered to the adjacent
petroleum refinery where they will be received and managed. The owner of the
petroleum refinery will compensate the other signatories by paying them the fair
market
55
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value for the petroleum recovered. Lockheed Martin Corporation ("Lockheed"),
which sold the facility to one of the Company's affiliates, Virgin Islands
Alumina Corporation ("Vialco"), in 1989, has tendered indemnity and defense of
this matter to Vialco pursuant to terms of the Lockheed-Vialco Asset Purchase
Agreement. The Company also gave certain environmental indemnity rights to St.
Croix Alumina, LLC ("St. Croix"), an indirect affiliate of Alcoa, Inc., when it
sold the facility to St. Croix. Those rights extend only to environmental
conditions arising from Vialco's operation of the facility and then only after
St. Croix has spent $300 on such conditions. Vialco's indemnification obligation
to St. Croix expired on July 24, 2001. Management does not believe Vialco's
liability under this Order or its indemnification obligation to St. Croix, if
any, will have a material adverse effect on the Company's financial condition,
results of operations, or liquidity.
It is the Company's policy to accrue for costs associated with
environmental assessments and remedial efforts when it becomes probable that a
liability has been incurred and the costs can be reasonably estimated. The
aggregate environmental related accrued liabilities were $1,800 and $900 at
December 31, 2001 and December 31, 2000, respectively. All accruals have been
recorded without giving effect to any possible recoveries. With respect to
ongoing environmental compliance costs, including maintenance and monitoring,
such costs are expensed as incurred.
Because of the issues and uncertainties described above, and the Company's
inability to predict the requirements of the future environmental laws, there
can be no assurance that future capital expenditures and costs for environmental
compliance will not have a material adverse effect on the Company's future
financial condition, results of operations, or liquidity. Based upon all
available information, management does not believe that the outcome of these
environmental matters, or environmental matters concerning Mt. Holly, will have
a material adverse effect on the Company's financial condition, results of
operations, or liquidity.
LEGAL CONTINGENCIES
Century of West Virginia was a named defendant (along with many other
companies) in approximately 2,362 civil actions brought by employees of third
party contractors who allege asbestos-related diseases arising out of exposure
at facilities where they worked, including Ravenswood. All of those actions
relating to the Ravenswood Facility have been settled as to the Company and as
to Kaiser. Only 14 plaintiffs were able to show they had been on the Ravenswood
premises during the period the Company owned the plant, and the Company has
agreed to settle all of those claims for non-material amounts. The Company is
awaiting receipt of final documentation of those settlements and entry of
dismissal orders. The Company does not expect the Kaiser Bankruptcy will have
any effect on the settlements it has reached on asbestos claims.
The Company has pending against it or may be subject to various other
lawsuits, claims and proceedings related primarily to employment, commercial,
environmental and safety and health matters. Although it is not presently
possible to determine the outcome of these matters, management believes their
ultimate disposition will not have a material adverse effect on the Company's
financial condition, results of operations, or liquidity.
In August 1999, an illegal, one-day work stoppage temporarily shut down one
of the Company's four production lines at the Ravenswood Facility. The cost of
this work stoppage is estimated to be approximately $10,000 including equipment
damaged as a result of the production line shutdown. During 2000, the Company
filed a claim with its insurance carrier for business interruption and equipment
damage relative to the work stoppage and received partial settlement of
approximately $6,100. During 2001, the Company received an additional $3,365 as
final settlement of the claim.
POWER COMMITMENTS
The Company purchases all of the electricity requirements for the
Ravenswood Facility from Ohio Power Company pursuant to a fixed price power
supply agreement. That agreement expires on July 31, 2003.
56
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
American Electric Power Company (the parent of Ohio Power Company) has advised
the Company that the Company is eligible to enter into a new fixed-price power
supply agreement with Ohio Power upon the termination of its existing agreement.
The new agreement, the terms of which are established by a tariff approved by
the Public Utilities Commission of Ohio, would expire not later than December
31, 2005. The tariff was created pursuant to a requirement of the State of
Ohio's electric power deregulation act and will govern electrical power service
during a transitional period in which competitive power markets are expected to
be developed.
Power for the Mt. Holly Facility is provided under a contract with the
South Carolina Public Service Authority that expires on December 31, 2005. That
contract provides pricing fixed by Authority Rate Schedules and Clauses
(including a fuel cost adjustment clause). The Hawesville Facility currently
purchases all of its power from Kenergy Corp., a local retail electric
cooperative, under a series of power supply contracts. Kenergy acquires the
power it provides to the Hawesville Facility under fixed-price contracts with a
subsidiary of LG&E Energy Corp., with delivery guaranteed by LG&E. Approximately
72% of the power is purchased from Kenergy at fixed prices under a contract
which runs through 2010. The remaining 28% is purchased under other fixed price
contracts with Kenergy which become unpriced at various times from 2003 to 2005.
The Company is also subject to losses associated with equipment shutdowns,
caused by the loss or interruption of electrical power, as well as by labor
shortages and catastrophic events. Power interruptions may have a material
adverse effect on the Company's business because it uses large amounts of
electricity in the primary aluminum production process. Any loss of power which
causes an equipment shutdown can result in the hardening or "freezing" of molten
aluminum in the pots where it is produced. If this occurs, significant losses
can occur if the pots are damaged and require repair or replacement, a process
that could limit or shut down our production operations for a significant period
of time. Certain shutdowns not covered by insurance could be a default under the
revolving credit facility. No assurance can be given that a material shutdown
will not occur in the future or that such a shutdown would not have a material
adverse effect on the Company.
Although the Company maintains property damage insurance to provide for the
repair or replacement of damaged equipment or property, as well as business
interruption insurance to mitigate losses resulting from any equipment failure
or production shutdown caused by a catastrophic event, the Company may still be
required to pay significant amounts under the deductible provisions of those
insurance policies. In addition, coverage may not be sufficient to cover all
losses which result from a catastrophic event. Furthermore, Century maintains
insurance to cover losses resulting from damage to our power suppliers'
facilities, or transmission lines that would cause an interruption of the power
supply to our facilities. This insurance contains large deductibles and
self-insured amounts and does not cover losses resulting from a power loss due
solely to lack of sufficient electrical power resulting from unusually high
usage in the regions. The market for property and business interruption
insurance has tightened considerably since September 11, 2001. As a result,
Century expects to pay significantly higher premiums for these policies upon
renewal in April, 2002. In addition, these renewal policies are likely to
contain higher deductibles and self retention amounts than the expiring
policies.
LABOR COMMITMENTS
Century of West Virginia's hourly employees, which comprise 39% of the
Company's workforce are represented by the USWA and are currently working under
a four-year labor agreement that would have expired on May 31, 2003. On March 8,
2002, the labor agreement was extended through May 31, 2006.
The Hawesville LLC's hourly employees, which comprise 41% of the Company's
workforce, are represented by the USWA and are currently working under a
five-year labor agreement effective April 1, 2001.
57
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER COMMITMENTS
On January 23, 1996, the Company and the Pension Benefit Guaranty
Corporation ("PBGC") entered into an agreement (the "PBGC Agreement") which
provided that the Company make scheduled cash contributions to its pension plan
for hourly employees in 1996, 1997, 1998, and 1999. The Company made its
scheduled contributions for each of the years. As part of the agreement, the
Company had granted the PBGC a first priority security interest in (i) the
property, plant, and equipment at its Century of West Virginia facility and (ii)
all of the outstanding shares of Berkeley. On February 2, 2001 the agreement
with the PBGC, dated January 23, 1996, was terminated and the PBGC agreed to
release its first priority security interest.
The Company may be required to make post-closing payments to Southwire up
to an aggregate maximum of $7,000 if the price of primary aluminum on the London
Metals Exchange ("LME") exceeds specified levels during the seven years
following closing of the Hawesville acquisition. Glencore will be responsible
for its pro-rata portion of any post-closing payments made to Southwire.
13. FORWARD DELIVERY CONTRACTS AND FINANCIAL INSTRUMENTS
As a producer of primary aluminum products, the Company is exposed to
fluctuating raw material and primary aluminum prices. The Company routinely
enters into fixed and market priced contracts for the sale of primary aluminum
and the purchase of raw materials in future periods.
In connection with the sale of its aluminum fabricating businesses to
Pechiney in September 1999, the Company entered into a Molten Aluminum Purchase
Agreement (the "Pechiney Metal Agreement") with Pechiney that expires July 31,
2003 with provisions for extension. Pursuant to the Pechiney Metal Agreement,
Pechiney purchases, on a monthly basis, at least 23.0 million pounds and no more
than 27.0 million pounds of molten aluminum at a price determined by a
market-based formula.
Concurrent with the Company's purchase of an additional 23% interest in the
Mt. Holly facility from Xstrata, effective April 1, 2000, the Company entered
into a ten-year agreement with Glencore (the "Glencore Metal Agreement") to sell
approximately 110 million pounds of primary aluminum products per year. Selling
prices of the Glencore Metal Agreement through December 31, 2001 are determined
by a market-based formula while the remaining eight years are at a fixed price
as defined in the agreement.
In connection with the Hawesville acquisition in April 2001, the Company
entered into a 10-year contract with Southwire (the "Southwire Metal Agreement")
to supply 240 million pounds of high-purity molten aluminum annually to
Southwire's wire and cable manufacturing facility located adjacent to the
Hawesville facility. Under this contract, Southwire will also purchase 60
million pounds of standard grade molten aluminum each year for the first five
years of the contract, with an option to purchase an equal amount in each of the
remaining five years. Assuming the option is exercised, this represents
approximately 57% of the production capacity of the Hawesville facility through
the duration of the contract. The Company and Glencore will each be responsible
for providing a pro rata portion of the aluminum supplied to Southwire under
this contract. The price for the molten aluminum to be delivered to Southwire
from the Hawesville Facility is variable and will be determined by reference to
the U.S. Midwest Market Price. This agreement expires on December 31, 2010, and
will automatically renew for additional five-year terms, unless either party
provides 12 months notice that it has elected not to renew.
Apart from the Pechiney Metal Agreement, Glencore Metal Agreement and
Southwire Metal Agreement, the Company had forward delivery contracts to sell
377.1 million pounds and 50.3 million pounds of primary aluminum at December 31,
2001 and December 31, 2000, respectively. Of these forward delivery contracts,
25.5 million pounds and 14.7 million pounds at December 31, 2001 and December
31, 2000, respectively, were with the Glencore Group.
58
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company was party to a long-term supply agreement to purchase 936
million pounds of alumina annually through the end of 2001. Beginning on January
1, 2002, that agreement was replaced by new long-term alumina supply agreements
with Glencore which terminate on December 31, 2006. These new agreements provide
that Glencore will supply a fixed quantity of alumina at prices determined by a
market-based formula. In addition, as part of its acquisition of an additional
23% interest in the Mt. Holly facility, the Company assumed an alumina supply
agreement with Glencore for its alumina requirements relative to the additional
interest. This agreement terminates in 2008 and is priced with a market-based
formula. As part of its acquisition of NSA, the Company assumed an alumina
supply agreement with Kaiser. That agreement expires in 2005 and is a
variable-priced market based contract. The Company has received assurances from
Kaiser management that Kaiser will continue to perform under this alumina supply
agreement, and the Company is seeking to have the contract assumed through the
bankruptcy process, but there can be no assurance the Company will be
successful.
To mitigate the volatility in its market priced forward delivery contracts,
the Company enters into fixed price financial sales contracts, which settle in
cash in the period corresponding to the intended delivery dates of the forward
delivery contracts. At December 31, 2001 and December 31, 2000, the Company had
financial instruments, primarily with the Glencore Group, for 248.8 million
pounds and 453.5 million pounds, respectively. These financial instruments are
scheduled for settlement at various dates in 2002 through 2003. The Company had
no fixed price financial or delivery purchase contracts for aluminum at December
31, 2001. Additionally, to mitigate the volatility of the natural gas markets,
the Company enters into fixed price financial purchase contracts, which settle
in cash in the period corresponding to the intended usage of natural gas. At
December 31, 2001, the Company had financial instruments for 3.1 million DTHs
(one decatherm is equivalent to one million British Thermal Units). These
financial instruments are scheduled for settlement at various dates in 2002
through 2005. Based on the fair value of the Company's financial instruments as
of December 31, 2001, accumulated other comprehensive income of $2,048 is
expected to be reclassified to earnings over the next twelve month period.
The forward financial sales and purchase contracts are subject to the risk
of non-performance by the counterparties. However, the Company only enters into
forward financial contracts with counterparties it determines to be
creditworthy. If any counterparty failed to perform according to the terms of
the contract, the accounting impact would be limited to the difference between
the nominal value of the contract and the market value on the date of
settlement.
14. RELATED PARTY TRANSACTIONS
The significant related party transactions occurring during the years ended
December 31, 2001, 2000 and 1999, and not discussed elsewhere in the notes to
the consolidated financial statements, are described below.
RELATED PARTY TRANSACTIONS -- CENTURY
During the years 1999, 2000 and 2001 and at December 31, 2001, the Chairman
of the Board of Directors of Century was a member of the Board of Directors of
Glencore International AG. In addition, during the years ended and at December
31, 2001, 2000 and 1999, one of Century's Board members was the Chairman of the
Board of Directors of Glencore International AG.
RELATED PARTY TRANSACTIONS -- CENTURY OF WEST VIRGINIA
During the years ended December 31, 2001, 2000 and 1999, Century of West
Virginia purchased and sold alumina, primary and scrap aluminum in transactions
with Glencore at prices which management believes approximated market.
59
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RELATED PARTY TRANSACTIONS -- BERKELEY
A substantial portion of Berkeley's sales during the years ended December
31, 2001, 2000 and 1999 were to Glencore.
SUMMARY
A summary of the aforementioned related party transactions for the years
ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
-------- -------- -------
Net sales............................................. $111,469 $129,320 $68,801
Purchases............................................. 19,964 16,993 63,256
Management fees....................................... 416 -- --
Net gain (loss) on forward contracts.................. (1) 2,261 (5,368)
See Note 13 for a discussion of the Company's fixed-price commitments and
forward financial contracts with related parties.
15. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
--------------------------
2001 2000 1999
------- ------- ------
Cash paid for:
Interest............................................... $21,114 $ 371 $6,305
Income taxes........................................... 934 771 2,021
Cash received from:
Interest............................................... 891 2,675 1,670
Income tax refunds..................................... 66 13,322 174
NON-CASH INVESTING ACTIVITIES
During the years ended December 31, 2001 and 1999, $250 and $1,845,
respectively, of interest cost incurred in the construction of equipment was
capitalized. No interest was capitalized during the year ended December 31,
2000.
16. BUSINESS SEGMENTS
Prior to September 21, 1999, the Company operated in two reportable
business segments; primary aluminum and sheet and plate products. The primary
aluminum segment produces molten metal, rolling ingot, t-ingot, extrusion billet
and foundry ingot. The sheet and plate segment produced a wide range of products
such as brazing sheet for sale to automobile manufacturers, heat treated and
non-heat treated plate for sale to aerospace and defense manufacturers, heavy
gauge, wide-leveled coil for sale to heavy truck, truck trailer, marine and rail
car manufacturers and sheet and coil for sale to building products
manufacturers.
The accounting policies of the segments were the same as those described in
Note 1 "Summary of Significant Accounting Policies" except that intersegment
revenues were accounted for based upon a market-based standard established by
the Company. The Company evaluated segment performance based upon gross profit.
60
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective with the sale of the sheet and plate segment to Pechiney on
September 21, 1999, the Company now operates in one business segment: primary
aluminum.
CORPORATE,
SHEET AND UNALLOCATED
PRIMARY PLATE & ELIMINATIONS TOTAL
-------- --------- -------------- --------
2001
Net Sales
Third-party and intersegment
customers.......................... $543,453 $ -- $ -- $543,453
Related party customers............... 111,469 -- -- 111,469
Depreciation and amortization........... 44,247 -- 187 44,433
Segment gross profit(5)................. 20,708 -- -- 20,708
Segment assets(1)....................... 757,774 -- 18,932 776,706
Expenditures for segment assets......... 14,456 -- -- 14,456
2000
Net Sales
Third-party and intersegment
customers.......................... $299,277 $ -- $ -- $299,277
Related party customers............... 129,320 -- -- 129,320
Depreciation and amortization........... 14,208 -- 187 14,395
Segment gross profit(4)................. 32,458 -- -- 32,458
Segment assets(1)....................... 327,131 -- 6,639 333,770
Expenditures for segment assets......... 17,631 -- -- 17,631
1999
Net Sales
Third-party and intersegment
customers.......................... $248,569 $385,754 $(136,848) $497,475
Related party customers............... 68,801 -- -- 68,801
Depreciation and amortization........... 9,985 8,577 187 18,749
Segment gross profit (loss)(2)(3)....... (17,418) 10,773 -- (6,645)
Segment assets(1)....................... 303,992 -- 6,810 310,802
Expenditures for segment assets......... 14,737 8,246 -- 22,983
---------------
(1) Segment assets include accounts receivable, due from affiliates, inventory,
intangible assets, and property, plant and equipment-net, the remaining
assets are unallocated corporate assets, deferred tax assets and
intersegment eliminations.
(2) The primary segment includes a charge of $4,623 for inventory adjustments.
(3) The sheet and plate segment includes a charge of $7,649 for inventory
adjustments.
(4) Includes a charge of $1,631 for inventory adjustments.
(5) Includes a charge of $5,166 for inventory adjustments.
61
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in the consolidated financial statements are the following amounts
related to geographic locations:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Net Sales
United States...................................... $654,922 $428,597 $501,655
Canada............................................. -- -- 38,572
Europe............................................. -- -- 15,840
Other.............................................. -- -- 10,209
At December 31, 2001 and 2000, all of the Company's long-lived assets were
located in the United States.
Revenues from Glencore represented 17.0%, 30.2% and 12.1% of the Company's
consolidated revenues in 2001, 2000 and 1999, respectively. Revenues from
Pechiney represented 31.1%, 55.1% and 10.4% of the Company's consolidated sales
in 2001, 2000 and 1999, respectively. Revenues from Southwire represented 18.9%
of the Company's consolidated sales in 2001.
17. QUARTERLY INFORMATION (UNAUDITED)
The following information includes the results from the Company's
additional 23% interest in Mt. Holly facility since its acquisition in April
2000, and the results from the Company's 80% interest in the Hawesville facility
since its acquisition on April 1, 2001.
Financial results by quarter for the years ended December 31, 2001 and 2000
are as follows:
GROSS NET INCOME
PROFIT NET INCOME (LOSS) PER
NET SALES (LOSS) (LOSS) SHARE
--------- ------- ---------- ----------
2001:
1st Quarter(1)........................... $110,690 $ 8,420 $ 3,151 $ 0.15
2nd Quarter(1)........................... 188,919 13,765 843 0.04
3rd Quarter(1)(2)........................ 183,371 3,270 (4,342) (0.21)
4th Quarter(3)........................... 171,942 (4,747) (14,854) (0.72)
2000:
1st Quarter(4)........................... $ 96,449 $ 8,167 $ 5,627 $ 0.28
2nd Quarter(5)........................... 109,065 7,873 6,897 0.34
3rd Quarter.............................. 111,103 8,077 4,349 0.21
4th Quarter(6)........................... 111,980 8,341 8,432 0.41
---------------
(1) Gross profit in the first, second, and third quarters of 2001 include
reclassifications of selling, general, and administrative expenses,
principally from Hawesville, of $42, $2,522, and $1,642, respectively, to
cost of goods sold for reporting consistency purposes.
(2) The third quarter 2001 includes a non cash charge of $3,175 for inventory
adjustments and proceeds of $3,365 on final settlements of insurance claims.
(3) The fourth quarter 2001 gross profit includes charges of $1,991 for
inventory adjustments. Selling, general and administrative expense includes
a $4,000 charge for bad debts and other expense includes a charge for loss
on disposal of assets of $919.
(4) The first quarter 2000 gross profit includes charges of $1,631 for inventory
adjustments.
62
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(footnotes continued from previous page)
(5) The second quarter 2000 income includes an additional pre-tax gain on the
sale of the fabricating businesses of $5,156 and proceeds of $3,000 in
partial settlement of the Company's claim with its insurance carrier.
(6) The fourth quarter 2000 income includes proceeds of $3,065 in partial
settlement of the Company's claim with its insurance carrier.
18. CONSOLIDATING CONDENSED FINANCIAL INFORMATION
The Company's 11 3/4% Senior Secured First Mortgage Notes due 2008 are
jointly and severally and fully and unconditionally guaranteed by all of the
Company's material wholly owned direct and indirect subsidiaries (the "Guarantor
Subsidiaries"). Condensed consolidating financial information was not provided
for the periods prior to the acquisition because: (i) Century Aluminum Company
has no independent assets or operations, (ii) the guarantees are full and
unconditional and joint and several, and (iii) for those periods, any
subsidiaries of the Company other than the subsidiary guarantors were minor. As
of December 31, 2001, as a result of the acquisition of the Hawesville facility,
Century indirectly holds an 80% equity interest in Century Aluminum of Kentucky,
LLC ("LLC") and as such consolidates 100% of the assets, liabilities and
operations of the LLC into its financial statements, showing the interest of the
20% owners as "Minority Interests". LLC (the "Non-Guarantor Subsidiary") has not
guaranteed the Exchange Notes, and the Company has not caused its indirect
equity interests in the LLC to be pledged as collateral for the Exchange Notes.
Our interest in the Mt. Holly facility's property, plant and equipment has not
been pledged as collateral. Other subsidiaries of the Company which are
immaterial will not guarantee the Notes (collectively, the "Non-Guarantor
Subsidiaries"). During 2001, the Company adopted a policy for financial
reporting purposes of allocating expenses to subsidiaries. For the year ended
December 31, 2001, the Company allocated total corporate expenses of $8.5
million to its subsidiaries. Additionally, the Company charges interest on
certain intercompany balances.
Because the LLC is not a minor subsidiary, the Company is providing
condensed consolidating financial information for the periods following the
Company's acquisition of the Hawesville facility. See Note 5 to the Consolidated
Financial Statements for information about the terms of the Exchange Notes.
These terms contain customary covenants limiting the ability of both the Company
and the Guarantor Subsidiaries, to pay dividends, incur additional debt, make
investments, sell assets or stock of certain subsidiaries and purchase or redeem
capital stock.
The following summarized condensed consolidating financial information as
of and for the year ended December 31, 2001 presents separate results for
Century Aluminum Company, the Guarantor Subsidiaries and the Non-Guarantor
Subsidiary.
This summarized condensed consolidating financial information may not
necessarily be indicative of the results of operations or financial position had
the Company, the Guarantor Subsidiaries or the Non-Guarantor Subsidiaries
operated as independent entities.
63
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2001
COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR THE AND
SUBSIDIARIES SUBSIDIARY COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ----------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........ $ 1,020 $ -- $ 12,368 $ -- $ 13,388
Accounts receivable,
trade -- net.................. 48,365 -- 345 -- 48,710
Due from affiliates.............. 50,722 838 366,855 (398,648) 19,767
Inventories...................... 46,649 28,568 -- -- 75,217
Prepaid and other assets......... 7,395 98 1,329 (5,249) 3,573
-------- -------- -------- --------- --------
Total current assets..... 154,151 29,504 380,897 (403,897) 160,655
Investment in Subsidiaries......... 95,670 -- 208,419 (304,089) --
Property, Plant and
Equipment -- net................. 424,653 878 475 -- 426,006
Intangible Asset -- net............ -- 146,002 -- -- 146,002
Due from affiliates -- Less current
portion.......................... 8,364 -- -- -- 8,364
Other Assets....................... 20,467 1,674 16,784 (3,246) 35,679
-------- -------- -------- --------- --------
Total.................... $703,305 $178,058 $606,575 $(711,232) $776,706
======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade.......... $ 19,922 $ 22,472 $ -- $ -- $ 42,394
Due to affiliates................ 351,690 1,998 47,089 (398,576) 2,201
Industrial Revenue Bonds......... -- 7,815 -- -- 7,815
Accrued and other current
liabilities................... 16,437 5,269 17,680 (5,321) 34,065
Accrued employee benefits
costs -- current portion...... 7,653 147 -- -- 7,800
-------- -------- -------- --------- --------
Total current
liabilities............ 395,702 37,701 64,769 (403,897) 94,275
Long Term Debt -- net.............. -- -- 321,446 -- 321,446
Accrued Pension Benefit
Costs -- Less current portion.... 1,555 -- 2,462 -- 4,017
Accrued Postretirement Benefit
Costs -- Less current portion.... 45,008 20,619 -- -- 65,627
Other Liabilities.................. 9,833 151 713 -- 10,697
Deferred Taxes..................... 42,788 -- -- (3,246) 39,542
-- -- -- -- --
-------- -------- -------- --------- --------
Total noncurrent
liabilities............ 99,184 20,770 324,621 (3,246) 441,329
MINORITY INTEREST.................. -- -- -- 23,917 23,917
SHAREHOLDERS' EQUITY:
Convertible Preferred Stock...... -- -- 25,000 -- 25,000
Common stock..................... 59 -- 205 (59) 205
Additional paid-in capital....... 226,996 139,281 168,414 (366,277) 168,414
Accumulated Other Comprehensive
Income........................ 6,752 -- 6,752 (6,752) 6,752
Retained earnings (deficit)...... (25,388) (19,694) 16,814 45,082 16,814
-------- -------- -------- --------- --------
Total shareholders'
equity................. 208,419 119,587 217,185 (328,006) 217,185
-------- -------- -------- --------- --------
Total.................... $703,305 $178,058 $606,575 $(711,232) $776,706
======== ======== ======== ========= ========
64
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR AND
SUBSIDIARIES SUBSIDIARY THE COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ----------------- ------------
Net sales:
Third-party customers...... $543,453 $ -- $ -- $ -- $543,453
Related parties............ 111,469 -- -- -- 111,469
-------- --------- -------- --------- --------
654,922 -- -- -- 654,922
-------- --------- -------- --------- --------
Cost of goods sold........... 614,052 252,615 -- (232,453) 634,214
Reimbursement from owners.... -- (233,521) -- 233,521 --
-------- --------- -------- --------- --------
Gross profit (loss).......... 40,870 (19,094) -- (1,068) 20,708
Selling, general and admin
expenses................... 18,787 742 -- (931) 18,598
-------- --------- -------- --------- --------
Operating income (loss)...... 22,083 (19,836) -- (137) 2,110
-------- --------- -------- --------- --------
Interest income (expense),
net........................ (30,512) (162) -- -- (30,674)
Other income (expense),
net........................ 1,948 304 -- 137 2,389
-------- --------- -------- --------- --------
Income (loss) before taxes... (6,481) (19,694) -- -- (26,175)
Income tax (expense)
benefit.................... 2,547 -- -- 7,484 10,031
-------- --------- -------- --------- --------
Net income (loss) before
minority interest.......... (3,934) (19,694) -- 7,484 (16,144)
Minority interest, net of
tax........................ 2,442 2,442
Equity earnings (loss) of
subsidiaries............... (9,768) -- (13,702) 23,470 --
-------- --------- -------- --------- --------
Net income (loss)............ $(13,702) $ (19,694) $(13,702) $ 33,396 $(13,702)
======== ========= ======== ========= ========
65
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
COMBINED RECLASSIFICATIONS
GUARANTOR NON-GUARANTOR AND
SUBSIDIARIES SUBSIDIARY THE COMPANY ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ----------------- ------------
Net cash provided by (used
in) operating activities... $ 40,526 $(3,817) $ 16,073 $(14,159) $ 38,623
--------- ------- --------- -------- ---------
Investing activities:
Purchase of property, plant
and equipment........... (14,082) (374) -- -- (14,456)
Proceeds from sale of
property, plant and
equipment............... 54 -- -- -- 54
Divestitures............... 98,971 -- -- -- 98,971
Business acquisition....... (466,814) -- -- -- (466,814)
--------- ------- --------- -------- ---------
Net cash used in investing
activities................. (381,871) (374) -- -- (382,245)
--------- ------- --------- -------- ---------
Financing activities:
Borrowings, third party.... -- -- 321,352 -- 321,352
Financing fees............. -- -- (16,568) -- (16,568)
Dividends.................. -- -- (5,736) -- (5,736)
Intercompany
transactions............ 309,403 4,191 (327,753) 14,159 --
Issuance of preferred
stock................... -- -- 25,000 -- 25,000
--------- ------- --------- -------- ---------
Net cash provided by (used
in) financing activities... 309,403 4,191 (3,705) 14,159 324,048
--------- ------- --------- -------- ---------
Net increase (decrease) in
cash....................... (31,942) -- 12,368 -- (19,574)
Beginning cash............... 32,962 -- -- -- 32,962
--------- ------- --------- -------- ---------
Ending cash.................. $ 1,020 $ -- $ 12,368 $ -- $ 13,388
========= ======= ========= ======== =========
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NA.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This Item will be included in an amendment to this report on Form 10-K to
be filed within 120 days after the close of the fiscal year covered by this
report on Form 10-K. The information regarding Executive Officers of the
Registrant is included in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
This Item will be included in an amendment to this report on Form 10-K to
be filed within 120 days after the close of the fiscal year covered by this
report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This Item will be included in an amendment to this report on Form 10-K to
be filed within 120 days after the close of the fiscal year covered by this
report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This Item will be included in an amendment to this report on Form 10-K to
be filed within 120 days after the close of the fiscal year covered by this
report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) LIST OF FINANCIAL STATEMENTS
The following Consolidated Financial Statements of Century Aluminum Company
and the Independent Auditors' Report are included in Part II, Item 8 of this
Form 10-K.
Independent Auditors' Report.
Consolidated Balance Sheets at December 31, 2001 and 2000.
Consolidated Statements of Operations for the years ended December 31, 2001,
2000 and 1999.
Consolidated Statements of Shareholders' Equity for the years ended December
31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999.
Notes to the Consolidated Financial Statements.
(A)(2) LIST OF FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report.
Schedule II -- Valuation and Qualifying Accounts for the years ended December
31, 2001, 2000 and 1999.
67
(A)(3) LIST OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
2.1 Stock and Asset Purchase Agreement dated July 26, 1999 by
and among Century Aluminum Company, Century Aluminum of West
Virginia, Inc. and Pechiney Rolled Products LLC(f)
2.2 Management Services Agreement dated as of September 21, 1999
by and between Century Aluminum Company and Pechiney Rolled
Products LLC(f)
2.3 Molten Aluminum Purchase Agreement dated as of September 21,
1999 by and between Century Aluminum of West Virginia, Inc.
and Pechiney Rolled Products LLC(f)
2.4 Amended and Restated Shared Facilities and Services
Agreement dated as of September 21, 1999 by and between
Century Aluminum of West Virginia, Inc. and Pechiney Rolled
Products LLC(f)
2.5 Stock Purchase Agreement, dated August 31, 2001, among
Century Aluminum Company and Southwire Company(h)
2.6 Asset Purchase Agreement, dated as of April 2, 2001, among
Century Aluminum Company, Century Kentucky, Inc., NSA, Ltd.
and Glencore AG(h)
3.1 Restated Certificate of Incorporation of Registrant.(a)
3.2 Amended and Restated Bylaws of Registrant, dated March 5,
1999.(e)
3.3 Certificate of Designation for the Company's 8% Cumulative
Convertible Preferred Stock, par value $.01 per share, dated
March 28, 2001(h)(i)
4.1 Form of Stock Certificate.(a)
4.2 Purchase Agreement, dated March 28, 2001, among Century
Aluminum Company, Century Aluminum of West Virginia, Inc.,
Berkeley Aluminum, Inc., Century Kentucky, Inc. and Virgin
Islands Alumina Corporation LLC and Credit Suisse First
Boston Corporation and Fleet Securities, Inc., as Initial
Purchasers.(h)
4.3 Indenture, dated April 2, 2001, among Century, the
Guarantors party thereto and Wilmington Trust Company, as
trustee.(h)
4.4 Registration Rights Agreement, dated April 2, 2001, among
Century Aluminum Company, the Guarantors party thereto and
Credit Suisse First Boston Corporation and Fleet Securities,
Inc., as Initial Purchasers.(h)
4.5 Mortgage, Assignment of Leases and Rents, Security Agreement
and Financing Statement, dated as of April 2, 2001, from
NSA, Ltd. for the benefit of Wilmington Trust Company, as
collateral agent.(h)
4.6 Deed of Trust, Assignment of Leases and Rents, Security
Agreement, Financing Statement and Fixture Filing, dated as
of April 2, 2001, from Century Aluminum of West Virginia,
Inc. for the benefit of Wilmington Trust Company, as
collateral agent.(h)
4.7 Pledge and Security Agreement, dated as of April 2, 2001, by
Century Aluminum Company as Pledgor and the other Pledgors
party thereto in favor of Wilmington Trust Company, as
collateral agent.(h)
4.8 Convertible Preferred Stock Purchase Agreement, dated as of
April 2, 2001, between Century Aluminum Company and Glencore
AG.(h)
4.9 Form of Convertible Preferred Stock Certificate.(h)
10.1 Agreement between Ravenswood Aluminum Corporation and United
Steelworkers of America AFL-CIO, Local 5668, dated November
30, 1994.(a)
10.2 Agreement between Ravenswood Aluminum Corporation and United
Steelworkers of America AFL-CIO, Local 5668, dated June 12,
1992.(a)
10.3 Employment Agreement between Century Aluminum Company and
Craig A. Davis.(b)(e)
10.4 Employment Agreement between Century Aluminum Company and
Gerald A. Meyers.(b)(e)
10.5 Employment Agreement between Century Aluminum Company and
Gerald J. Kitchen.(b)(e)
10.6 Employment Agreement between Century Aluminum Company and
David W. Beckley.(b)(e)
68
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.7 Form of Severance Agreement between Century Aluminum Company
and Craig A. Davis.(a)(b)
10.8 Amendment to Severance Protection Agreement between Century
Aluminum Company and Craig A. Davis(e)
10.9 Form of Severance Agreement between Century Aluminum Company
and Gerald A. Meyers.(a)(b)
10.10 Amendment to Severance Protection Agreement between Century
Aluminum Company and Gerald A. Meyers(e)
10.11 Form of Severance Agreement between Century Aluminum Company
and Gerald J. Kitchen.(a)(b)
10.12 Amendment to Severance Protection Agreement between Century
Aluminum Company and Gerald J. Kitchen(e)
10.13 Form of Severance Agreement between Century Aluminum Company
and David W. Beckley.(a)(b)
10.14 Amendment to Severance Protection Agreement between Century
Aluminum Company and David W. Beckley(e)
10.15 1996 Stock Incentive Plan as amended through June 8,
1999.(b)(e)
10.16 Non-Employee Directors Stock Option Plan.(a)(b)
10.17 Amended and Restated Asset Purchase Agreement between Kaiser
Aluminum & Chemical Corporation and Ravenswood Acquisition
Corporation, dated as of December 13, 1988.(a)
10.18 Acquisition Agreement between Virgin Islands Alumina
Corporation and St. Croix Alumina, L.L.C., dated July 19,
1995.(a)
10.19 Ravenswood Environmental Services Agreement between Kaiser
Aluminum & Chemical Corporation and Ravenswood Aluminum
Corporation, dated as of February 7, 1989.(a)
10.20 Asset Purchase Agreement Between Xstrata Aluminum
Corporation and Berkeley Aluminum, Inc. dated as of March
31, 2000(g)
10.21 Form of Tax Sharing Agreement.(a)
10.22 Form of Disaffiliation Agreement.(a)
10.23 Amended and Restated Owners Agreement between Alumax of
South Carolina, Inc., Berkeley Aluminum, Inc. and Glencore
Primary Aluminum Company LLC, dated as of January 26,
1996.(a)
10.24 Limited Term Firm Power Supply Agreement between Ravenswood
Aluminum Corporation and Ohio Power Company dated as of June
28, 1996.(c)
10.25 Amendment No. 1 to the Limited Term Firm Power Supply
Agreement between Ravenswood Aluminum Corporation and Ohio
Power Company dated as of June 28, 1996.(c)
10.26 Century Aluminum Company 1996 Stock Incentive Plan
Implementation Guidelines.(b)(d)
10.27 Century Aluminum Company Incentive Compensation Plan.(b)(d)
10.28 Revolving Credit Agreement, dated as of April 2, 2001, among
Century Aluminum Company, Century Aluminum of West Virginia,
Inc., Berkeley Aluminum, Inc., Century Kentucky, Inc.,
Metalsco, Ltd. And NSA, Ltd., as borrowers, the lending
institutions listed on Schedule 1 thereto as Lenders, Fleet
Capital Corporation as Agent, Fleet Securities Inc. as
Arranger, and Credit Suisse First Boston, Inc. as
Syndication Agent.(j)
10.29 Collective Bargaining Agreement, effective April 2, 2001,
between Century Aluminum of Kentucky, LLC and the United
Steelworkers of America, AFL-CIO-CLC.(j)
10.30 Owners Agreement, dated as of April 2, 2001, between NSA,
Ltd., Glencore Acquisition I LLC and Century Aluminum of
Kentucky, LLC.(j)
10.31 Shared Services Agreement, dated April 2, 2001, by and
between Century Aluminum Company, NSA, Ltd., Glencore
Acquisition I LLC and Southwire Company. 10.5 1996 Stock
Incentive Plan, as amended through June 28, 2001.(j)
69
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
21.1 List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
---------------
(a) Incorporated by reference to the Registrant's Form S-1 Registration
Statement, as amended, Registration No. 33-95486.
(b) Management contract or compensatory plan.
(c) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996.
(d) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.
(e) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
(f) Incorporated by reference to the Registrant's Report on Form 8-K dated
October 6, 1999.
(g) Incorporated by reference to the Registrant's Report on Form 8-K dated
April 20, 2000.
(h) Incorporated by reference to the Registrant's Report on Form 8-K dated
April 17, 2001.
(i) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001.
(j) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001.
(B) REPORTS ON FORM 8-K: NONE
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized.
CENTURY ALUMINUM COMPANY
By: /s/ GERALD J. KITCHEN
------------------------------------
Gerald J. Kitchen
Executive Vice President, General
Counsel
and Chief Administrative Officer
Dated: March 27 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CRAIG A. DAVIS Chairman and Chief Executive March 27, 2002
--------------------------------------------------- Officer
Craig A. Davis
/s/ WILLIAM HAMPSHIRE Vice-Chairman March 27 2002
---------------------------------------------------
William R. Hampshire
/s/ GERALD A. MEYERS President, Chief Operating March 27 2002
--------------------------------------------------- Officer and Director
Gerald A. Meyers
/s/ DAVID W. BECKLEY Executive Vice President and March 27 2002
--------------------------------------------------- Chief Financial Officer
David W. Beckley (Principal Financial Officer and
Principal Accounting Officer)
/s/ ROMAN A. BNINSKI Director March 27 2002
---------------------------------------------------
Roman A. Bninski
/s/ JOHN C. FONTAINE Director March 27 2002
---------------------------------------------------
John C. Fontaine
/s/ WILLY R. STROTHOTTE Director March 27 2002
---------------------------------------------------
Willy R. Strothotte
/s/ JOHN P. O'BRIEN Director March 27 2002
---------------------------------------------------
John P. O'Brien
/s/ STUART M. SCHREIBER Director March 27 2002
---------------------------------------------------
Stuart M. Schreiber
71
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Century Aluminum Company:
We have audited the consolidated financial statements of Century Aluminum
Company and subsidiaries (the "Company") as of December 31, 2001 and 2000, and
for each of the three years in the period ended December 31, 2001, and have
issued our report thereon dated February 4, 2002 included elsewhere in this Form
10-K. Our audits also included the financial statement schedule listed in Item
14 of this Form 10-K. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 4, 2002
72
CENTURY ALUMINUM COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND END OF
OF PERIOD EXPENSE DEDUCTIONS(1) PERIOD
---------- ---------- ------------- ----------
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1999:
Allowance for doubtful trade accounts
receivable................................. $2,390 $ 109 $2,470 $ 29
YEAR ENDED DECEMBER 31, 2000:
Allowance for doubtful trade accounts
receivable................................. $ 29 $ 256 $ -- $ 285
YEAR ENDED DECEMBER 31, 2001:
Allowance for doubtful trade accounts
receivable................................. $ 285 $4,431 $ 371 $4,345
---------------
(1) On September 21, 1999, the Company and Century of West Virginia completed
the sale of the fabricating businesses to Pechiney. As such, Pechiney
assumed the risk of any bad debts included in the accounts receivable of the
fabricating businesses.
73