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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
BUILDING A, SUITE 200
MONTEREY, CALIFORNIA 93940
(ADDRESS OF REGISTRANT'S PRINCIPAL OFFICES) (ZIP CODE)
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
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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 month's (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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of February 28, 2003, 21,070,210 shares of common stock of the
registrant were issued and outstanding. Based upon the NASDAQ closing price on
June 28, 2002, the aggregate market value of the common stock held by
non-affiliates of the registrant was $181,041,837.
DOCUMENTS INCORPORATED BY REFERENCE:
All or a portion of Items 10 through 13 in Part III of this Form 10-K
are incorporated by reference to the Registrant's definitive proxy statement on
Schedule 14A, which will be filed within 120 days after the close of the fiscal
year covered by this report on Form 10-K, or if the Registrant's Schedule 14A is
not filed within such period, will be included in an amendment to this Report on
Form 10-K which will be filed within such 120 day period.
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PART I.
FORWARD-LOOKING STATEMENTS
This Annual Report on 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;
- the cyclical nature of the aluminum industry and the end use
markets it serves;
- general economic and business conditions;
- efficient 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, loss
of power or for other reasons;
- the Company's dependence on a few major customers and
suppliers;
- 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 Inc. (together with its affiliates, "Alcoa"), having
produced over 1.0 billion pounds of primary aluminum in 2002 with net sales of
$711.3 million.
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."
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
49.67%. The facility is operated by Alcoa, the Company's co-owner in the Mt.
Holly facility. The Mt. Holly facility has an annual production capacity of 489
million pounds of primary aluminum, and Century's interest represents 243
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 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 538 million pounds of primary aluminum.
In connection with the acquisition, the Company sold a 20% interest in the
Hawesville facility to an affiliate of Glencore International AG, Century's
largest shareholder, ("Glencore" and,
2
together with its subsidiaries, the "Glencore Group"). Century's 80% interest in
the Hawesville facility increased the Company's overall production capacity by
430 million pounds. In January 2003, the Company announced plans to purchase the
20% interest in the Hawesville facility owned by Glencore ("Glencore's
Hawesville interest"), see Note 2 to the Consolidated Financial Statements. This
acquisition will increase the Company's overall annual production capacity by
108 million pounds.
The Company's strategic objectives are to grow its primary aluminum
business by pursuing 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. 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, 2002, the Glencore Group owned
37.6% of Century's common shares outstanding and 100% of Century's outstanding
convertible preferred stock. Based upon its common and preferred stock
ownership, the Glencore Group beneficially owns 41.5% 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.
The following table shows primary aluminum shipments from the
Ravenswood facility during each of the periods indicated:
Ravenswood Facility Primary Aluminum Shipments
(In Millions of Pounds)
Year Ended December, 31
-----------------------
2000 2001 2002
---- ---- ----
Molten aluminum......................................... 335.8 291.3 309.1
Commodity-ingot primary aluminum........................ 41.6 73.6 72.5
----- ----- -----
Total.......................................... 377.4 364.9 381.6
===== ===== =====
Since January 1, 2002, the alumina used at the Ravenswood facility has
been supplied by Glencore under a 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 has entered into a new fixed-price power supply contract with Ohio
Power, terminating not later than December 31, 2005, effective at the expiration
of the current contract.
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 489 million pounds and
casting equipment used to cast molten aluminum into standard-grade ingot,
extrusion billet and other premium primary aluminum products. Premium primary
aluminum products are sold at higher prices than commodity-priced primary
aluminum. The Company's 49.67% interest represents 243 million pounds of that
production capacity. 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.
3
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
49.67% 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 AG. Under the current Mt.
Holly ownership structure, the Company holds, through Berkeley, an undivided
49.67% 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.
The following table shows primary aluminum shipments from the Mt. Holly
facility during each of the periods indicated:
Mt. Holly Facility Primary Aluminum Shipments
(In Millions of Pounds)
Year Ended December, 31
----------------------------
2000(1) 2001 2002
------- ---- ----
Commodity-ingot primary aluminum................................... 107.4 104.1 113.4
Rolling ingot, foundry alloys and extrusion billets................ 96.8 130.6 122.7
----- ----- -----
Total..................................................... 204.2 234.7 236.1
===== ===== =====
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(1) The Company acquired an additional 23.0% interest in the Mt. Holly
facility in April 2000.
Since January 1, 2002, Glencore has supplied 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 which expires December 31, 2007
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 Clause.
Hawesville Facility
The Hawesville facility, which began operations in 1970, is
strategically located adjacent to the Ohio River near Hawesville, Kentucky. The
current capacity of the facility is 538 million pounds. Alumina used in the
production process is shipped by river barge and unloaded at the facility's dock
on the Ohio River.
Under the Hawesville Owners' Agreement between Century and Glencore,
Century is entitled to an 80% pro rata portion of the annual production capacity
of the Hawesville facility which equals approximately 430 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. In January 2003, the Company announced plans to purchase Glencore's
Hawesville interest, see Note 2 to the Consolidated Financial Statements.
4
This acquisition will increase the Company's overall production capacity by 108
million pounds.
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
(In Millions of Pounds)
Year Ended December, 31
-------------------------------
2000 2001(1) 2002(2)
---- ------- -------
Molten aluminum................................................... 280.7 295.9 303.2
Ingot, pig and sow................................................ 206.6 166.3 114.7
Foundry alloys.................................................... 54.1 69.9 116.2
----- ----- -----
Total.................................................... 541.4 532.1 534.1
===== ===== =====
- -------------------
(1) 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.
(2) Shipments for the year ended December 31, 2002 include 102.5 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 the discussion of the Kaiser bankruptcy in 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. Approximately 14% of
the Hawesville facility's power requirements were unpriced in calendar year 2003
through 2005. The unpriced portion of the contract increases to approximately
26% in 2006. On June 26, 2002, the Company entered into a fixed price power
supply agreement for the 14% of the power that was unpriced for calendar year
2003.
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 ranged from $0.02 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 1990's, 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, exports from Eastern Bloc countries increased
substantially. As a result, worldwide inventory levels rose dramatically through
1993, creating downward pressure on prices which lead 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 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
5
idling of certain production facilities due to electricity shortages, 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 weakness in global economies
and the related decline in global demand for primary aluminum. During 2002, the
global demand increased somewhat, however supply growth matched the increase.
The market price for primary aluminum declined further during 2002. The average
LME cash price was $0.70, $0.66 and $0.61 per pound for the years ended December
31, 2000, 2001 and 2002, respectively.
SALES AND DISTRIBUTION
The majority of the products produced at the Company's facilities are
sold to a limited number of customers. The Company derived a combined total of
approximately 68% of its 2002 consolidated sales from Pechiney, Southwire and
Glencore, Century's three largest customers. Out of total revenues of $711.3
million for 2002, sales to Pechiney represented $220.7 million, or 31% of
Century's total revenues, sales to Southwire represented $157.6 million, or 22%
of total revenues and sales to Glencore represented $107.6 million or 15% of
total revenues. The remaining $225.4 million, or 32% of Century's total
revenues, represented sales to approximately 50 customers.
Ravenswood Facility
Sales of primary aluminum to Pechiney represented $200.8 million or
79.9% of Century's revenues from the Ravenswood facility in 2002. Sales to
parties other than Pechiney represented $50.6 million or 20.1% of Ravenswood's
revenues in 2002. Century has a contract with Pechiney (the "Pechiney Metal
Agreement") under which Pechiney purchases 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. As noted above, the Company has entered into an electrical power supply
agreement with Ohio Power for power from July 31, 2003, terminating not later
than December 31, 2005. After July 31, 2003, Pechiney will have the right, upon
12 month's notice, to reduce its purchase obligations under the contract by 50%.
Mt. Holly Facility
Sales of primary aluminum to Glencore represented $84.7 million or
49.2% of Century's revenues from the Mt. Holly facility in 2002. Sales to third
parties other than Glencore represented $87.3 million or 50.8% of revenues from
the Mt. Holly facility in 2002. 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 (the "Glencore Metal Agreement").
The price for metal delivered under the Glencore Metal Agreement was variable
during 2001, with the remaining eight years of the contract scheduled to be at a
fixed price. In January 2003, the Company agreed to terminate the Glencore Metal
Agreement for delivery of metal for the years 2005 through 2009. The Company
will enter into a new 110 million pound per year contract with Glencore which
will include delivery of metal from the Mt. Holly facility for the years 2005
through 2009 at prices based on the then-current market. The price will remain
fixed for the years 2003 and 2004. In consideration for the above, the Company
will receive $35 million. Sales to Glencore under these contracts represent 45%
of the Company's production capacity at the Mt. Holly facility. The Company
intends to use the proceeds from the contract termination as a portion of the
consideration for its purchase of Glencore's Hawesville interest.
Hawesville Facility
Sales of primary aluminum to Southwire accounted for $157.6 million or
54.7% of Century's revenues from the Hawesville facility in 2002. Sales to third
parties accounted for the remaining $130.3 million or 45.3% of the Company's
revenues from the Hawesville facility during 2002. 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 (the "Southwire Metal Agreement"). 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 the
Southwire Metal 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, unless either party provides 12 month's prior notice that it
has elected not to renew. Sales of primary aluminum to Southwire will represent
up to 56% 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 under the Southwire Metal Agreement and each party is entitled to its
pro rata portion of the remaining production. In January 2003, the Company
announced plans to purchase Glencore's Hawesville interest, see Note 2 to the
Consolidated Financial Statements. In connection with this acquisition, the
Company will assume Glencore's responsibility for aluminum supplied to Southwire
under the Southwire Metal Agreement.
6
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.
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 of 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 relative to other market indices.
In connection with the sale of the Company's rolling and fabrication
businesses in September 1999, the Company entered into the Pechiney Metal
agreement under which Pechiney agreed to 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 in 2000, the Company
entered into the Glencore Metal Agreement 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 January 2003, the
Company agreed to terminate the Glencore Metal Agreement for delivery of metal
for the years 2005 through 2009. The Company will enter into a new 110 million
pound per year contract with Glencore which will include delivery of metal from
the Mt. Holly facility for the years 2005 through 2009 at prices based on the
then current market. The price will remain fixed for the years 2003 and 2004. In
connection with the Hawesville acquisition in 2001, the Company entered into the
Southwire Metal Agreement 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 the Southwire Metal Agreement, 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. Upon completion of the acquisition of Glencore's
Hawesville interest, the Company will assume Glencore's pro rata share of the
Southwire Metal Agreement. In addition to the Pechiney Metal Agreement, the
Glencore Metal Agreement and the Southwire Metal Agreement, the Company had
fixed-price commitments to sell 42.9 million pounds and 115.7 million pounds of
primary aluminum at December 31, 2002 and 2001, respectively.
Risk Management
The Company manages its exposure to fluctuations in the price of
primary aluminum by selling aluminum at fixed prices for future delivery,
through financial instruments, and 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, 2002, the Company had financial
instruments, primarily with the Glencore Group, for 181.0 million pounds of
primary aluminum. These financial instruments are scheduled for settlement at
various dates through 2003. Based on market prices at December 31, 2002, the
fair value of the outstanding financial sales contracts was $12.9 million on
that date. The Company had no fixed price financial purchase contracts to
purchase aluminum at December 31, 2002. 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, 2002, the Company had financial
instruments for 1.5 million DTHs of natural gas (one decatherm is equivalent to
one million British Thermal Units). These financial instruments are scheduled
for settlement at various dates in 2003 through 2005. Based on market prices at
December 31, 2002, the fair value of the outstanding forward natural gas
purchase contracts was a liability of $0.6 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 $1.2 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, 2002. 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 $0.5 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, 2002.
7
Effective January 1, 2001, the Company designated its 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. The ineffective portion of cash flow hedges are reported in the
Statement of Operations.
The Company's 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, Russian
Aluminum, 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.
ENVIRONMENTAL MATTERS
Century believes that it does not have environmental liabilities which
are likely to have a material adverse effect on the Company. However, there can
be no assurance 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 Company has planned capital expenditures related to environmental
matters, at all of its facilities, of $0.1 million in 2003, $0.5 million in 2004
and $1.5 million in 2005. In addition, the Company expects to incur operating
expenses relating to environmental matters of approximately $5.5 million, $5.6
million, and $6.1 million in 2003, 2004 and 2005, respectively. The Company does
not believe the foregoing estimates of environmental capital expenditures and
operating expenses will materially increase upon the Company's acquisition of
Glencore's Hawesville interest. 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 the Company'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 aggregate environmental related accrued liabilities were $1.4 million and
$1.8 million at December 31, 2002 and 2001, respectively. All accrued amounts
have been recorded without giving effect to any possible future recoveries. With
respect to ongoing environmental compliance costs, including maintenance and
monitoring, the Company expenses the costs when incurred.
Ravenswood Facility
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") under the 3008(h)
Order 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, has completed interim remediation
measures at two sites identified in the RFI and the Company expects that neither
the EPA, nor the State of West Virginia, will require further remediation under
the 3008(h) Order. The Company believes a significant portion of the
contamination on the two identified sites is attributable to the operations of
Kaiser Aluminum and Chemical ("Kaiser"), the 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 prior to its acquisition by Century of West Virginia. 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 purchase agreement for 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.
8
Under the terms of the 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 $2.0 million. The Company does not believe that there are any undisclosed
pre-closing conditions or known off-site migration of hazardous substances, and
does not believe that it will be required to make any potential future payments
under this indemnification. However, the potential future payments under this
indemnification would be limited to $25.0 million for on-site liabilities and
there is no limit on potential future payments for any off-site liabilities.
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
On July 6, 2000, while the Hawesville aluminum reduction facility was
owned by the Southwire Company, the EPA issued a final Record of Decision
("ROD") which detailed response actions to be implemented at several locations
at the Hawesville site to address actual or threatened releases of hazardous
substances. The ROD was issued under the federal Comprehensive Environmental
Response, Compensation and Liability Act. 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.
Under the Company's agreement with Southwire to purchase 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. The total
costs for the remedial actions to be undertaken and paid for by Southwire
relative to these liabilities are estimated under the ROD to be $12.6 million
and the forecast of annual operating and maintenance costs is $1.2 million.
Century will operate and maintain the ground water treatment system required
under the ROD on behalf of Southwire and Southwire will reimburse Century for
any 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 pre-closing activities
at Hawesville that were not known to exist as of the date of the closing of the
acquisition become known before March 31, 2007, 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 March 31, 2007, will be the responsibility of the Company and
Glencore. 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. Upon completion of the acquisition of
Glencore's Hawesville interest, the Company will assume Glencore's
responsibilities for environmental liabilities with respect to the Hawesville
facility.
The Company acquired the Hawesville facility by purchasing all of the
outstanding equity securities of Metalsco Ltd., which was a wholly owned
subsidiary of Southwire. Metalsco previously owned certain assets which are
unrelated to the Hawesville plant's operations, 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-Hawesville 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 Hawesville'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
9
Hawesville site. In addition, Southwire indemnified the Company against all
risks associated with off-site hazardous material disposals by the Hawesville
plant which pre-date the closing of the acquisition.
Southwire has secured its indemnity obligations to the Company for
environmental liabilities until April 1, 2008, 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
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 an alumina facility at St. Croix, Virgin Islands, 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
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. Management does not
believe Vialco's liability under the Order or its indemnity to Lockheed will
have a material adverse effect on the Company's financial condition, results of
operations, or liquidity. The Company's best estimate of the future potential
payments under this indemnification is approximately $0.5 million. However,
under the indemnification, there is no limit to the potential future payments.
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.
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 been completed and testing is ongoing. Evaluation of results will continue
through December 2003.
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.
10
EMPLOYEES AND LABOR RELATIONS
The Company employs a work force of approximately 1,470 persons,
consisting of approximately 1,170 hourly employees and approximately 300
salaried employees. The Company has approximately 560 hourly employees and 116
salaried employees at the Ravenswood facility, and approximately 610 hourly
employees and 170 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 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 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.
WEBSITE ACCESS
The Company's Internet address is www.centuryaluminum.com. Through its
Internet website, the Company makes available, free of charge, its Annual Report
on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K,
and amendments to those reports, as soon as reasonably practicable after it
electronically files such material with, or furnishes such material to, the
Securities and Exchange Commission. The Company is not including the information
contained on or available through its website as a part of, or incorporating
such information by reference into, this Annual Report on Form 10-K or in any
other report or registration statement of the Company.
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 489 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 adjacent to the Ohio River in Hawesville, Kentucky. The Hawesville
facility began operations in 1970. The Hawesville facility has a total
production capacity of approximately 538 million pounds. As of December 31,
2002, Century's pro rata portion of the annual production capacity of the
Hawesville facility was 430 million pounds. Each owner is responsible for its
pro rata share of alumina and operating and conversion costs. After the
completion of the acquisition of Glencore's Hawesville interest, the Company
will own the total production capacity of the Hawesville facility. See Item 1,
"Business ----Facilities and Production ----Hawesville Facility."
11
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 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. Century's insurance
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.
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 the Company's power
suppliers' facilities, or transmission lines that would cause an interruption of
the power supply to the Company's facilities. This insurance contains large
deductibles and self-insured amounts. Century renewed its property and business
interruption insurance policies in April 2002 for one year. As expected,
premiums increased significantly in the aftermath of September 11 and the
policies contain much higher deductibles and self-insured amounts.
ITEM 3. LEGAL PROCEEDINGS
Century was a named defendant, along with Kaiser and many other
companies, in civil actions brought prior to the Kaiser Bankruptcy 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 those asbestos claims.
Since the Kaiser Bankruptcy, the Company has been named in an additional 61
civil actions based on similar allegations. The Company does not know if any of
the 61 claimants were in the Ravenswood facility during the Company's ownership,
but the Company will investigate such claims. Management believes that the costs
of investigation or settlements, if any, will be immaterial.
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."
12
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 2002.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
executive officers of the Company. Each such person 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........ 62 Chairman of the Company for more than five years. Chief Executive
Officer of the Company for more than five years through December
2002.
Gerald A. Meyers...... 53 President and Chief Executive Officer since January 2003. President
and Chief Operating Officer of the Company for more than five
years through January 2003.
Gerald J. Kitchen..... 62 Executive Vice President, General Counsel and Chief Administrative
Officer of the Company for more than five years.
David W. Beckley...... 58 Executive Vice President and Chief Financial Officer of the Company
for more than five years.
E. Jack Gates......... 61 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... 49 Vice President and Treasurer of the Company since September 1998;
Treasurer of the Company from September 1997.
Steve Schneider....... 47 Vice President and Corporate Controller of the Company since April
2002; Corporate Controller of the Company since April 2001; Private
Business Consultant from 2000 through April 2001; various management
positions with Alcoa Inc. from 1977 until 2000.
Peter C. McGuire...... 55 Vice President and Associate General Counsel for the Company since
April 2002; Associate General Counsel for the Company since 1998;
Senior Attorney of Kenetech Corp. for more than five years through
1998.
Gerald A. Meyers, previously the President and Chief Operating Officer,
succeeded Craig A. Davis as Chief Executive Officer January 1, 2003, and is now
President and Chief Executive Officer.
13
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
------- -------
2002
First Quarter........ $ 16.50 $ 11.00
Second Quarter....... $ 17.51 $ 12.70
Third Quarter........ $ 15.19 $ 6.71
Fourth Quarter....... $ 8.63 $ 5.70
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
At February 28, 2003, there were 35 holders of record of the Company's
outstanding common stock, which does not include the number of beneficial owners
whose common stock was held in street name.
The Company declared and paid annual dividends of $0.15 and $0.20 per
share of Common Stock (paid in quarterly amounts of $0.05 per share) during 2002
and 2001, respectively. Additionally, the Company declared and paid preferred
dividends of $1.5 million on its preferred stock in 2002 and 2001. The indenture
governing the Company's senior secured first mortgage notes contains, among
other things, restrictions on the payment of dividends by the Company. The
Company suspended its common and preferred stock dividends in the fourth quarter
of 2002. This action was taken because the Company is near the limits on
allowable dividend payments under the covenants in its indenture. See "Liquidity
and Capital Resources" in Item 7.
EQUITY COMPENSATION PLAN INFORMATION
AS OF DECEMBER 31, 2002
NUMBER OF SHARES TO WEIGHTED NUMBER OF SHARES REMAINING
BE ISSUED UPON AVERAGE AVAILABLE FOR FUTURE ISSUANCE
EXERCISE OF EXERCISE UNDER EQUITY COMPENSATION PLANS,
PLAN CATEGORY OUTSTANDING OPTIONS PRICE EXCLUDING OUTSTANDING OPTIONS
------------- ------------------- ----- -----------------------------
Equity compensation plans approved
by security holders (1)(2) 691,200 $ 12.58 683,738
Equity compensation plans not
approved by security holders - - -
------- ----------- -------
Total 691,200 $ 12.58 683,738
======= =========== =======
- -------------------
(1) All equity compensation plan information presented in this table
relates to the following plans approved by the Company's shareholders:
1996 Stock Incentive Plan
Non-Employee Directors Stock Option Plan
(2) Includes 381,202 unvested shares which have been awarded pursuant
to the Company's 1996 Stock Incentive Plan (the "Plan"), of which 20,168 are
restricted shares and 361,034 are performance shares. The restricted shares and
performance shares each vest and are issued in accordance with the guidelines
set forth in the Plan, as implemented by the Company's Board of Directors.
14
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, 2002
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, 1999 and
1998 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 results for those periods and
prior periods are not fully comparable to the results of operations for fiscal
year 2002 and 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,
----------------------------------------------------------------
2002 2001(3) 2000(2) 1999(1)(5) 1998
--------- --------- --------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales -- third party customers........ $ 603,744 $ 543,453 $ 299,277 $497,475 $576,006
Net sales -- related parties.............. 107,594 111,469 129,320 68,801 74,252
--------- --------- --------- -------- --------
Total net sales........................... 711,338 654,922 428,597 566,276 650,258
Cost of goods sold ....................... 691,277 634,214 396,139 572,921 611,796
--------- --------- --------- -------- --------
Gross profit (loss)....................... 20,061 20,708 32,458 (6,645) 38,462
Selling, general and administrative
expenses .............................. 15,783 18,598 13,931 18,884 19,246
--------- --------- --------- -------- --------
Operating income (loss)................... 4,278 2,110 18,527 (25,529) 19,216
Gain on sale of fabricating businesses.... -- -- 5,156 41,130 --
Interest expense.......................... (40,813) (31,565) (408) (5,205) (2,204)
Interest income .......................... 392 891 2,675 1,670 --
Other income (expense).................... (1,843) 2,592 6,461 (2,917) 553
Net gain (loss) on forward contracts (4).. -- (203) 4,195 (5,368) 10,574
--------- --------- --------- -------- --------
Income (loss) before income taxes and
minority interest...................... (37,986) (26,175) 36,606 3,781 28,139
Income tax benefit (expense).............. 14,126 8,534 (11,301) 138 (10,202)
--------- --------- --------- -------- --------
Income (loss) before minority interest. (23,860) (17,641) 25,305 3,919 17,937
Minority interest ........................ 5,252 3,939 -- -- --
--------- --------- --------- -------- --------
Net income (loss) ........................ (18,608) (13,702) 25,305 3,919 17,937
Preferred dividends....................... (2,000) (1,500) -- -- --
--------- --------- ---------- -------- --------
Earnings (loss) applicable to common
shareholders........................... $ (20,608) $ (15,202) $ 25,305 $ 3,919 $ 17,937
========= ========= ========= ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic..................................... $ (1.00) $ (0.74) $ 1.25 $ 0.19 $ 0.90
Diluted................................... $ (1.00) $ (0.74) $ 1.24 $ 0.19 $ 0.89
DIVIDENDS PER COMMON SHARE.................. $ 0.15 $ 0.20 $ 0.20 $ 0.20 $ 0.20
15
DECEMBER 31,
------------
2002 2001(3) 2000(2) 1999(1) 1998
--------- --------- --------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA (AT PERIOD END):
Working capital........................... $ 94,618 $ 62,312 $ 76,701 $124,391 $188,156
Intangible asset - power contract......... 119,744 146,002 -- -- --
Total assets.............................. 765,167 776,706 333,770 310,802 545,630
Long-term debt............................ 321,852 321,446 -- -- 89,389
Total noncurrent liabilities.............. 453,011 441,329 74,511 58,831 252,782
Total shareholders' equity................ 192,132 217,185 202,639 179,728 177,483
- -----------------
(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 following that date do not include results from the rolling and
fabrication businesses. 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 49.67%. 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 Statement of Financial Accounting
Standard ("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) are 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.
(5) In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." The provisions of the
Statement require that any gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods presented that does not
meet certain criteria shall be reclassified. In 1999, the Company had
previously recorded an extraordinary loss of $1,364 for the write-off of
deferred bank fees, net of income tax benefit of $766. This item was
reclassified to Other income (expense) for the year.
16
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) does not include results from the Company's additional
interest in the Mt. Holly facility until it was acquired in April 2000, and (2)
does not include results from the Company's 80% interest in the Hawesville
facility until it was acquired in April 2001. Accordingly, the results for
fiscal years 2000 and 2001 are not fully comparable to the results of operations
for fiscal year 2002 and are not indicative of the Company'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. 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 489 million pounds
of primary aluminum, and Century's interest represents 243 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 538 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 a like principal amount of 11 3/4% senior
secured first mortgage notes due 2008 (the "Exchange Notes") for the Notes, in a
transaction registered under the Securities Act of 1933.
On January 28, 2003, the Company announced that it had signed a letter
of intent to purchase the 20% interest in its Hawesville, Kentucky aluminum
reduction plant that is owned by Glencore. The expected purchase price is $105
million. In connection with the acquisition of Glencore's Hawesville interest,
the Company will enter into a 10-year contract with Glencore under which
Glencore will agree to purchase 45 million pounds, per year, of primary aluminum
produced at the Ravenswood and Mt. Holly facilities, at prices based on then
current markets. The Company intends to finance the purchase price with $65
million in available cash and a six-year $40 million note payable to Glencore
with an interest rate of 10%. The $105 million transaction is subject to
completion of definitive documents and approval by Century's Board of Directors.
Closing is expected during the second quarter of 2003. Glencore is a related
party and beneficially owns approximately 41.5% of Century's common stock.
In January 2003, the Company agreed to terminate the Glencore Metal
Agreement for delivery of metal for the years 2005 through 2009. The Company
will enter into a new 110 million pound per year contract with Glencore which
will include delivery of metal from the Mt. Holly facility for the years 2005
through 2009 at prices based on the then-current market. The price will remain
fixed for the years 2003 and 2004. In consideration for the above, the Company
will receive $35 million. Because the contract was terminated, delivery on the
contract under its original fixed price terms is no longer probable.
Accordingly, the contract will no longer qualify as normal under SFAS 133, as
amended, and the entire contract (including 2003 and 2004) will be
marked-to-market in the first quarter of 2003 with subsequent gains and losses
reported in the statement of operations.
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 Company was party to a long-term supply
agreement to purchase alumina through the end of 2001. Beginning January 2,
2002, that agreement was replaced by new long-term supply agreements with
Glencore that extends through 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 the Hawesville facility, the Company assumed a market
based alumina supply agreement (the "Supply Agreement") with Kaiser which
expires in 2005. In connection with its ongoing Chapter 11 bankruptcy
proceedings, Kaiser filed a motion for an Order Authorizing the Assumption of
Certain Critical Customer Supply Contracts (the "Motion"). The Motion was
granted by the Bankruptcy Court on August 27, 2002. As a result, Kaiser has
assumed the Supply Agreement and cured all existing defaults thereunder.
The Company uses significant amounts of electricity in the aluminum
production process. The Company purchases all of the electricity requirements
for the Ravenswood Facility from Ohio Power Company, a unit of American Electric
Power Company, pursuant to a fixed price power supply agreement. That agreement
expires on July 31, 2003. On May 3, 2002, the Company signed a new contract to
purchase electric power for its Ravenswood facility from Ohio Power. The new
agreement is effective August 1, 2003, when the Company's current power contract
with Ohio Power expires. The new contract will provide power for the Ravenswood
facility at competitive rates under a GS-4 schedule approved by the Public
Utilities Commission of Ohio. The GS-4 schedule is due to expire on December 31,
2005. The Mt. Holly facility purchases all of its power from the South Carolina
Public Service Authority at rates fixed by published schedules. One of those
schedules contains a Fuel Adjustment Clause which permits the Authority to pass
through certain charges or credits to the extent its actual costs vary from
those costs used in the formula set in the Fuel Adjustment Clause. The Mt. Holly
power contract expires December 31, 2005. The Hawesville facility currently
purchases all of its power from
17
Kenergy Corporation at fixed prices. Approximately 14% of the Hawesville
facility's power requirements were unpriced in calendar year 2003 through 2005.
The unpriced portion of the contract increases to approximately 26% in 2006. On
June 26, 2002, the Company entered into a fixed price power supply agreement for
the 14% of the power that was unpriced for calendar year 2003.
The Company's labor costs at the Ravenswood and Hawesville facilities
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 collective bargaining agreement
are substantially similar to those previously in place at the Hawesville
facility. The employees at the Mt. Holly facility are employed by Alcoa, and are
not unionized.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are discussed in Note 1
of the Consolidated Financial Statements. The preparation of the financial
statements requires that management make subjective estimates, assumptions and
judgments in applying these accounting policies. Those judgments are normally
based on knowledge and experience about past and current events and on
assumptions about future events. Critical accounting estimates require
management to make assumptions about matters that are highly uncertain at the
time of the estimate and a change in these estimates may have a material impact
on the presentation of the Company's financial position or results of
operations. Significant judgments and estimates made by the Company include
expenses and liabilities related to pensions and other postemployment benefits.
PENSION AND OTHER POSTEMPLOYMENT BENEFIT LIABILITIES
The Company sponsors various pension plans and also participates in a
union sponsored multi-employer pension plan for the employees at the Hawesville
facility. The liabilities and annual income or expense of the Company's pension
and other postemployment benefit plans are determined using methodologies that
involve several actuarial assumptions, the most significant of which are the
discount rate and the long-term rate of asset return.
In developing its expected long-term rate of return assumption for
pension fund assets, the Company evaluated input from its actuaries, including
their review of asset class return expectations as well as long-term inflation
assumptions. Projected returns are based on historical returns of broad equity
and bond indices. The Company also considered its historical 10-year compound
returns. Century anticipates that, as the economy recovers, the Company's
investment managers will continue to generate long-term rates of return of 9.0%.
Our expected long-term rate of return is based on an assumed asset allocation of
65% equity funds and 35% fixed-income funds.
The discount rate that the Company utilizes for determining future
pension and post employment obligations is based on a review of long-term bonds
that receive one of the two highest ratings given by a recognized rating agency.
The discount rate determined on this basis has decreased to 6.5% at December 31,
2002 from 7.25% at December 31, 2001.
Lowering the expected long-term rate of return by 0.5% (from 9.0% to
8.5%) would have increased the Company's pension expense for the year ended
December 31, 2002 by approximately $0.2 million. Lowering the discount rate
assumptions by 0.5% would have increased the Company's pension expense for the
year ended December 31, 2002 by approximately $0.4 million.
The Company provides postemployment benefit plans that provide health
care and life insurance benefits for substantially all retired employees. 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.
Measurement of the Company's postretirement benefit obligations
requires the use of several assumptions about factors that will affect the
amount and timing of future benefit payments. The assumed health care cost trend
rates are the most critical assumptions for measurement of the postretirement
benefits obligation. Changes in the health care cost trend rates have a
significant effect on the amounts reported for the health care benefit
obligations.
18
The Company assumes medical inflation is initially 10%, declining to 5%
over six years and thereafter. A one-percentage-point change in the assumed
health care cost trend rates would have the following effects in 2002:
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(IN THOUSANDS)
Effect on total of service and interest cost components............. $ 1,958 $ (1,505)
Effect on accumulated postretirement benefit obligation............. $ 16,234 $(12,912)
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
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
-------------------------------
2002 2001 2000
----- ----- -----
Net sales....................................... 100.0% 100.0% 100.0%
Cost of goods sold.............................. 97.2 96.8 92.4
----- ----- -----
Gross profit.................................. 2.8 3.2 7.6
Selling, general and administrative expenses.... 2.2 2.9 3.3
----- ----- -----
Operating income.............................. 0.6 0.3 4.3
Gain on sale of fabricating businesses.......... - - 1.2
Interest expense................................ (5.7) (4.8) (0.1)
Interest income ................................ 0.1 0.1 0.6
Other income (expense).......................... (0.3) 0.4 1.5
Net gain on forward contracts................... - - 1.0
----- ----- -----
Income (loss) from continuing operations before (5.3) (4.0) 8.5
income taxes and minority interest.............
Income tax benefit (expense).................... 2.0 1.3 (2.6)
----- ----- -----
Income (loss) from continuing operations before
minority interest.............................. (3.3) (2.7) 5.9
Minority Interest............................... 0.7 0.6 -
----- ----- -----
Net income (loss) .............................. (2.6)% (2.1)% 5.9%
===== ===== =====
19
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
--------------------
DIRECT
------
POUNDS $/POUNDS
------ --------
(POUNDS IN THOUSANDS)
2002
First Quarter.............. 263,019 $ 0.68
Second Quarter............. 262,470 0.69
Third Quarter.............. 262,262 0.67
Fourth Quarter............. 261,544 0.67
--------- -------
Total.............. 1,049,295 0.68
2001
First Quarter.............. 149,274 $ 0.74
Second Quarter(2).......... 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(1).......... 149,530 0.73
Third Quarter.............. 151,219 0.73
Fourth Quarter............. 152,787 0.73
--------- -------
Total.............. 581,618 0.74
- -----------------
(1) The table includes results from the Company's additional 23% interest in Mt.
Holly facility since its acquisition in April 2000.
(2) The table includes the results from the Company's 80% interest in the
Hawesville facility since its acquisition in April 2001.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
The following discussion reflects Century's historical results of
operations, which 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, 2002 increased
$56.4 million or 8.6% to $711.3 million from $654.9 million for the year ended
December 31, 2001. Increased shipment volume accounted for $93.3 million of the
increase, primarily as a result of a full year of production at the Hawesville
facility in 2002 versus a partial year in 2001. Lower price realizations for
primary aluminum in 2002 partially offset the volume increase by $36.9 million.
Gross profit. Gross profit for the year ended December 31, 2002
decreased $0.6 million or 3.1% to $20.1 million from $20.7 million for the same
period in 2001. Gross profit remained relatively flat period to period despite
an increase in shipments of 130.9 million pounds in 2002, primarily a result of
including a full year of shipments from the Hawesville facility versus nine
months in 2001. The additional gross profit from increased shipment volumes in
2002 was offset by (a) declining market prices for primary aluminum which
reduced net sales $36.9 million and (b) increased depreciation and amortization
charges of $12.2 million, primarily a result of a full year of charges from the
Hawesville facility versus nine months in 2001. Gross profit was improved by (a)
a reduction of $23.0 million in the cost of alumina purchased under new market
based agreements in 2002, (b) reduced charges to cost of goods sold for Lower of
Cost or Market inventory adjustments, and (c) lower operating costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 2002 decreased to $15.8
million from $18.6 million for the year ended December 31, 2001. The decrease
was a result of a charge for bad debts of $4.4 million during the year end
December 31, 2001 with no associated charge in the year ended December 31, 2002.
This reduction was partially offset due to additional expenses associated with a
full year of charges from the Hawesville facility versus nine months of expense
in 2001 and increases in insurance and other expenses.
20
Operating income. Operating income for the year ended December 31, 2002
increased $2.2 million to $4.3 million from $2.1 million for the year ended
December 31, 2001. Changes in operating income are a result of changes in gross
profit and decreases in selling, general and administrative expenses for the
reasons discussed above.
Interest Expense. Interest expense during the year ended December 31,
2002 increased $9.2 million or 29.3% to $40.8 million from $31.6 million in
2001. The change in interest expense was due to the length of the time the
Exchange Notes were outstanding. The Exchange Notes were outstanding for all of
2002 versus nine months in 2001.
Interest Income. Interest income during the year ended December 31,
2002 decreased $0.5 million to $0.4 million from $0.9 million in 2001. The
change in interest income was primarily the result of reduced available cash
invested after the acquisition of the Hawesville facility in April 2001.
Other Income/Expense. Other Expense for the year ended December 31,
2002 was $1.8 million. This compares to Other Income of $2.6 million for the
same period in 2001. The Other Expense in 2002 was a result of a write-off of
$1.7 million in deferred costs associated with a prospective acquisition. Other
Income of $2.6 million in 2001 resulted principally from the receipt of $3.4
million in settlement of the Company's business interruption and property damage
claim with its insurance carrier associated with an illegal work stoppage at the
Ravenswood facility in August 1999. This settlement was partially offset by a
loss on disposal of assets of $0.9 million during the year ended December 31,
2001.
Tax Provision/Benefit. Income tax benefit for the year ended December
31, 2002 increased $5.6 million to $14.1 million from $8.5 million for the year
ended December 31, 2001. The change in income taxes was a result of a larger
pre-tax loss in 2002 compared to 2001. The change in the 2002 effective tax rate
from 2001 was affected by a $1.5 million reduction in 2002 of estimated income
taxes payable relating to the reversal of prior period accruals.
Net Loss before Minority Interest. Net loss before minority interest
for the year ended December 31, 2002 increased $6.3 million to $23.9 million
from $17.6 million for the year ended December 31, 2001. Net loss before
minority interest increased 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. The Minority Interest effectively represents the amortization of the
power contract. Minority Interest for the year ended December 31, 2002 increased
$1.4 million to $5.3 million from $3.9 million for the year ended December 31,
2001. The increase was a result of including a full year of amortization of the
intangible asset from the Hawesville facility in 2002 versus nine months in
2001.
Net Loss. Net loss for the year ended December 31, 2002 increased $4.9
million to $18.6 million from $13.7 million for the year ended December 31,
2001. Net loss increased for the reasons discussed above.
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.
Gross profit. Gross profit for the 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
21
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. 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. 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 $8.5 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.
Net Income or Loss before Minority Interest. The Company had a net loss
before minority interest of $17.6 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 was $3.9 million for the year end
December 31, 2001, which represented nine months of amortization of the
intangible asset from the Hawesville facility.
Net Income or Loss. 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.
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 its revolving credit facility. The Company's
principal uses of cash are payments of interest on the Company's outstanding
debt, the funding of capital expenditures and investments in related businesses,
working capital and other general corporate requirements. Common and preferred
stock dividends were suspended in the fourth quarter of 2002 and the Company
does not expect to use cash for common or preferred stock dividend payments in
the near future.
22
Debt Service
As of December 31, 2002, the Company had approximately $329.7 million
of indebtedness outstanding, including $321.9 million of principal amount of the
Exchange Notes, net of unamortized issuance discount, and $7.8 million in
industrial revenue bonds which were assumed in connection with the Hawesville
acquisition. In connection with the proposed acquisition of Glencore's
Hawesville interest, the Company expects to incur additional debt of
approximately $40.0 million.
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 Exchange 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 Exchange Notes will mature in 2008. The indenture governing the
Exchange 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. The Company
suspended its common and preferred stock dividends in the fourth quarter of
2002. This action was taken because the Company is near the limits on allowable
dividend payments under the covenants in its indenture. 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 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. There were no outstanding borrowings under the
Revolving Credit Facility as of December 31, 2002. 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 $45.0 to $55.0 million under the revolving credit facility.
In connection with the proposed acquisition of Glencore's Hawesville interest,
the Company's banks have agreed to make certain amendments to the revolving
credit facility agreement to permit the Company to complete the acquisition and
to increase the Company's borrowing base. Assuming the completion of the
acquisition, the Company expects the borrowing base, less the reserve, to
increase approximately $10.0 to $15.0 million. 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, 2002, the interest rate on the industrial revenue
bonds was 1.90%. In connection with the proposed acquisition of Glencore's
Hawesville interest, the Company will assume Glencore's pro rata portion of the
debt service costs on the industrial revenue bonds. The bonds will continue to
be secured by a Glencore letter of credit, although the Company will be
responsible for the servicing costs for that letter of credit. 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. In accordance with
current accounting guidance, no liability for cumulative preferred dividends is
recorded until the dividends are declared. As of December 31, 2002, the Company
had total unrecorded cumulative preferred dividend arrearages of $0.5 million
or $1.00 per preferred stock share.
23
Working Capital
Working capital was $94.6 million at December 31, 2002. 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 2002 were approximately $18.4 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. The Company
anticipates that capital expenditures will be approximately $20.0 million in
2003.
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 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,
2002, 2001 and 2000 are summarized below:
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
Net cash provided by operating
activities..................................... $ 54,486 $ 38,623 $ 56,419
Net cash used in investing
activities..................................... (18,196) (382,245) (104,474)
Net cash (used in) provided by financing
activities..................................... (4,586) 324,048 (4,170)
--------- --------- ---------
(Decrease) increase in cash...................... $ 31,704 $ (19,574) $ (52,225)
========= ========= =========
Net cash from operating activities of $54.5 million in 2002 was $15.9
million more than the $38.6 million in 2001. The increase in net cash provided
by operating activities in 2002 was primarily a result of a $14.4 million
increase in operating income before depreciation and amortization due to
increased shipments of 130.9 million pounds. Tax refunds of $17.6 million
received during the year versus tax payments of $0.9 million in 2001 contributed
an additional $18.5 million in net cash from operations in 2002. However,
increased net interest payments, primarily a result of a full year of
outstanding debt in 2002 versus nine months in 2001 offset the favorable change
in net taxes paid by $17.7 million. Net cash from operating activities of $38.6
million in 2001 was $17.8 million less than the $56.4 million cash from
operating activities in 2000. The $17.8 million decline in net cash from
operating activities in 2001 was 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 cash provided from operating activities was higher in 2000
compared to 1999, due to an increase in net income, adjusted to exclude the
effect of depreciation and amortization and 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. In 2000, the Company
reduced working capital by $10.6 million primarily through an increased focus on
the collection of receivables.
24
The Company's net cash used for investing activities was $18.2 million
during 2002 and $382.2 million during 2001. The use of cash for investing
activities in 2002 consisted primarily of capital expenditures to maintain and
improve plant operations. The use of cash in 2001 was 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 $104.5 million during 2000. The cash was
used primarily for the acquisition of an additional 23% interest in the Mt.
Holly Facility in April 2000.
Net cash used in financing activities was $4.6 million for 2002. Net
cash provided by financing activities was $324.0 million for 2001 and $4.2
million for 2000. The cash used for financing activities in 2002 related
primarily to common and preferred stock dividend payments made during the year.
During 2001, the cash provided by 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 common stock dividends.
The Company believes that cash flow from operations and its unused
revolving credit facility will provide sufficient liquidity to meet working
capital needs, fund capital improvements, and provide for debt service
requirements.
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 $1.4 million and $1.8 million at
December 31, 2002 and December 31, 2001, 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 $0.1 million for 2003, $0.5 million for 2004 and $1.5 million for
2005. In addition, the Company expects to incur operating expenses relating to
environmental matters of approximately $5.5 million, $5.6 million, and $6.1
million in each of 2003, 2004 and 2005. 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 2001, the Financial Accounting Standards Board ("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. This Statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The Company is currently assessing, but has
not yet determined the impact of adopting SFAS No. 143 on the Company's
financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement establishes
standards for accounting for costs associated with disposal activities, or with
exit (or restructuring) activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of the Statement are effective for exit and disposal activities that are
initiated after December 31, 2002. As of December 31, 2002, the Company had not
committed to any exit or disposal plans and had not recorded any liability
associated with an exit or disposal plan. The Company will apply the Statement
to any future exit or disposal activities.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123." The Statement provides additional transition provisions for
entities that voluntarily change to the fair value based method of accounting
for stock-based compensation. Additionally, the Statement requires new
disclosure about the effects on reported net income of the accounting policy
decisions for stock-based employee compensation. The Statement requires these
effects to be reported on an annual as well as interim basis. The disclosure
provisions of the Statement are effective for fiscal
25
years ended after December 15, 2002. The Company will continue to account for
stock-based employee compensation in accordance with APB No. 25 "Accounting for
Stock Issued to Employees." The Company has adopted the Statement's additional
disclosure requirements for the current period. There was no impact on the
Company's consolidated statements of operations or its financial position from
the adoption of SFAS No. 148.
In November 2002, FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." The Interpretation addresses the
disclosure and reporting requirements for guarantors with regard to obligations
under certain guarantees it has issued. It requires that guarantors recognize,
at the inception of a guarantee, a liability for the fair value of their
obligation under the guarantee. The initial recognition and measurement
provisions of FIN 45 are to be applied prospectively for guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for the Company as of December 31, 2002. Century has not issued or
modified any guarantees subsequent to December 31, 2002. The Company has
assessed the Interpretation and does not believe that FIN 45 will have a
material impact on the Company's consolidated statements of operations or its
financial position.
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, see Item 7 for a
discussion of the contract termination. In connection with the Hawesville
acquisition, the Company entered into the Southwire Metal Agreement 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 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
329.0 and 377.1 million pounds of primary aluminum at December 31, 2002 and
December 31, 2001, respectively. Of these forward delivery contracts, the
Company had fixed price commitments to sell 42.9 and 115.7 million pounds of
primary aluminum at December 31, 2002 and December 31, 2001, respectively.
Forward delivery contracts of 0.3 million pounds and 25.5 million pounds at
December 31, 2002 and December 31, 2001, respectively, were with the Glencore
Group.
The Company was party to a long-term supply agreement to purchase
alumina 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, 2002 and December 31, 2001, the Company had entered
into 181.0 million pounds and 248.8 million pounds, respectively, 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 in 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
26
usage of natural gas. At December 31, 2002, and December 31, 2001, the Company
had financial instruments for 1.5 million and 3.1 million DTH of
natural gas, respectively (one decatherm, or DTH, is equivalent to one million
British Thermal Units). These financial instruments are scheduled for settlement
at various dates in 2003 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 $1.2 million after tax on accumulated other comprehensive
income for the year ended December 31, 2002 as a result of the forward primary
aluminum financial sale contracts entered into by the Company at December 31,
2002.
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 $0.5 million after tax on accumulated other comprehensive income for
the year ended December 31, 2002 as a result of the forward natural gas
financial purchase contracts entered into by the Company at December 31, 2002.
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 are reported in accumulated other comprehensive income until
settled, rather than in the Statement of Operations.
The Company's 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 2003, approximately 61% and 37% of the Company's production
for the years 2003 and 2004, respectively, was either hedged by the alumina
contracts and/or by fixed price forward delivery and financial sales contracts.
INTEREST RATES
Interest Rate Risk. The Company's primary debt obligations are the
outstanding Exchange Notes, borrowings under its revolving credit facility and
the industrial revenue bonds the Company assumed in connection with the
Hawesville acquisition. Because the Exchange 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, 2002, 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.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................ 29
Consolidated Balance Sheets at December 31, 2002 and 2001............... 30
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000...................................... 31
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 2002, 2001 and 2000.......................... 32
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000...................................... 33
Notes to the Consolidated Financial Statements.......................... 34-62
28
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, 2002 and 2001, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 5, 2003
29
CENTURY ALUMINUM COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
ASSETS:
Cash and cash equivalents ........................................................ $ 45,092 $ 13,388
Accounts receivable -- net ....................................................... 46,240 48,365
Due from affiliates .............................................................. 22,732 15,699
Inventories ...................................................................... 77,135 75,217
Prepaid and other current assets ................................................. 4,777 3,918
---------- ----------
Total current assets ........................................................ 195,976 156,587
Property, Plant and Equipment -- Net ............................................. 417,621 430,074
Intangible Asset -- Net .......................................................... 119,744 146,002
Due from Affiliates - Less current portion ....................................... 974 8,364
Other Assets ..................................................................... 30,852 35,679
---------- ----------
TOTAL .................................................................. $ 765,167 $ 776,706
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable, trade .......................................................... $ 37,757 $ 42,394
Due to affiliates ................................................................ 15,811 2,201
Industrial revenue bonds ......................................................... 7,815 7,815
Accrued and other current liabilities ............................................ 24,114 32,785
Accrued employee benefits costs -- current portion ............................... 10,890 7,201
Deferred Taxes -- current portion ................................................ 4,971 1,879
---------- ----------
Total current liabilities ................................................... 101,358 94,275
---------- ----------
Long Term Debt -- Net ............................................................ 321,852 321,446
Accrued Pension Benefits Costs -- Less current portion ........................... 10,751 4,017
Accrued Postretirement Benefits Costs -- Less current portion .................... 70,656 65,627
Other Liabilities ................................................................ 8,376 10,697
Deferred Taxes ................................................................... 41,376 39,542
---------- ----------
Total noncurrent liabilities ................................................ 453,011 441,329
---------- ----------
Minority Interest ................................................................ 18,666 23,917
Contingencies and Commitments (Note 12) ..........................................
SHAREHOLDERS' EQUITY:
Convertible preferred stock (8% cumulative, 500,000 shares outstanding) .......... 25,000 25,000
Common stock (one cent par value, 50,000,000 shares authorized;
21,054,302 and 20,513,287 shares issued and outstanding at December
31, 2002 and 2001, respectively) ................................................. 211 205
Additional paid-in capital ....................................................... 172,133 168,414
Accumulated other comprehensive income ........................................... 1,173 6,752
Retained earnings (deficit) ...................................................... (6,385) 16,814
---------- ----------
Total shareholders' equity .................................................. 192,132 217,185
---------- ----------
TOTAL .................................................................. $ 765,167 $ 776,706
========== ==========
See notes to consolidated financial statements.
30
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
NET SALES:
Third-party customers ............................................................ $ 603,744 $ 543,453 $ 299,277
Related parties .................................................................. 107,594 111,469 129,320
---------- ---------- ----------
711,338 654,922 428,597
Cost of Goods Sold ............................................................... 691,277 634,214 396,139
---------- ---------- ----------
Gross Profit ..................................................................... 20,061 20,708 32,458
Selling, General and Administrative Expenses ..................................... 15,783 18,598 13,931
---------- ---------- ----------
Operating Income ................................................................. 4,278 2,110 18,527
Gain On Sale of Fabricating Businesses ........................................... -- -- 5,156
Interest Expense ................................................................. (40,813) (31,565) (408)
Interest Income .................................................................. 392 891 2,675
Other Income (Expense) -- Net .................................................... (1,843) 2,592 6,461
Net Gain (Loss) On Forward Contracts ............................................. -- (203) 4,195
---------- ---------- ----------
Income (Loss) Before Income Taxes and Minority Interest .......................... (37,986) (26,175) 36,606
Income Tax Benefit (Expense) ..................................................... 14,126 8,534 (11,301)
---------- ---------- ----------
Income (Loss) Before Minority Interest ........................................... (23,860) (17,641) 25,305
Minority Interest ................................................................ 5,252 3,939 --
---------- ---------- ----------
Net Income (Loss) ................................................................ (18,608) (13,702) 25,305
Preferred Dividends .............................................................. (2,000) (1,500) --
---------- ---------- ----------
Net Income (Loss) Applicable to Common Shareholders .............................. $ (20,608) $ (15,202) $ 25,305
========== ========== ==========
EARNINGS (LOSS) PER COMMON SHARE:
Basic .......................................................................... $ (1.00) $ (0.74) $ 1.25
========== ========== ==========
Diluted ........................................................................ $ (1.00) $ (0.74) $ 1.24
========== ========== ==========
DIVIDENDS PER COMMON SHARE ....................................................... $ 0.15 $ 0.20 $ 0.20
========== ========== ==========
See notes to consolidated financial statements.
31
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
CONVERTIBLE ADDITIONAL OTHER RETAINED TOTAL
COMPREHENSIVE PREFERRED COMMON PAID-IN COMPREHENSIVE EARNINGS SHAREHOLDERS'
INCOME (LOSS) STOCK STOCK CAPITAL INCOME (LOSS) (DEFICIT) EQUITY
------------- ----- ----- ------- ------------- --------- ------
(DOLLARS IN THOUSANDS)
Balance, January 1, 2000 ................ $ 202 $ 164,409 $ 15,117 $ 179,728
Net Income and Comprehensive Income ... 25,305 25,305
Issuance of Common Stock .............. 1 1,775 1,776
Dividends - Common, $0.20 per share ... (4,170) (4,170)
------ --------- --------- ---------
Balance, December 31, 2000 .............. $ 203 $ 166,184 $ 36,252 $ 202,639
====== ========= ========= =========
Comprehensive Income - 2001
Net 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 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
========= ====== ========= ========= ========= =========
Comprehensive Income (Loss) - 2002
Net Loss - 2002 ....................... $ (18,608) (18,608) (18,608)
---------
Other Comprehensive Income (Loss):
Net unrealized gain on financial
instruments, net of $2,731 in tax .... 4,765
Net amount reclassified to income,
net of $1,603 in tax ................. (2,906)
Minimum Pension Liability Adjustment,
net of $4,183 in tax ................. (7,438)
---------
Other Comprehensive Loss .............. (5,579) (5,579) (5,579)
---------
Total Comprehensive Loss ................ $ (24,187)
=========
Dividends -
Common, $0.15 per share ............... (3,091) (3,091)
Preferred, $3 per share ............... (1,500) (1,500)
Issuance of Common Stock - Compensation
plans .................................. 1 544 545
Issuance of Common Stock-Pension plans .. 5 3,175 3,180
--------- ------ --------- --------- --------- ---------
Balance, December 31, 2002 .............. $ 25,000 $ 211 $ 172,133 $ 1,173 $ (6,385) $ 192,132
========= ====== ========= ========= ========= =========
See notes to consolidated financial statements.
32
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------
2002 2001 2000
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................... $ (18,608) $ (13,702) $ 25,305
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization ....................................... 56,655 44,433 14,395
Deferred income taxes ............................................... 4,965 (10,148) 12,448
Pension and other post retirement benefits .......................... 10,415 7,679 797
Workers' compensation ............................................... 1,619 1,311 (1,604)
Inventory market adjustment ......................................... (247) 5,166 1,631
(Gain) loss on disposal of assets ................................... 252 919 (337)
Gain on sale of fabricating businesses .............................. -- -- (5,156)
Minority interest ................................................... (5,252) (3,939) --
Change in operating assets and liabilities:
Accounts receivable -- net ........................................ 2,125 7,700 7,380
Due from affiliates ............................................... 2,918 5,190 3,106
Inventories ....................................................... (1,671) 763 3,086
Prepaids and other assets ......................................... (1,838) 2,216 (5,391)
Accounts payable, trade ........................................... (4,637) (13,487) (712)
Due to affiliates ................................................. 10,142 (1,964) 409
Accrued and other current liabilities ............................. (3,447) 7,528 1,621
Other -- net ...................................................... 1,095 (1,042) (559)
---------- ---------- ----------
Net cash provided by operating
activities ........................................................ 54,486 38,623 56,419
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment .............................. (18,427) (14,456) (15,947)
Proceeds from sale of property, plant and equipment .................... 231 54 565
Business acquisitions .................................................. -- (466,814) (94,734)
Divestitures ........................................................... -- 98,971 --
Restricted cash deposits ............................................... -- -- 5,642
---------- ---------- ----------
Net cash used in investing
activities ........................................................ (18,196) (382,245) (104,474)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ............................................................. -- 321,352 --
Financing fees ......................................................... -- (16,568) --
Issuance of common or preferred stock .................................. 5 25,000 --
Dividends .............................................................. (4,591) (5,736) (4,170)
---------- ---------- ----------
Net cash (used in) provided by financing
activities ........................................................ (4,586) 324,048 (4,170)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH .............................................. 31,704 (19,574) (52,225)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................. 13,388 32,962 85,187
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR ................................... $ 45,092 $ 13,388 $ 32,962
========== ========== ==========
See notes to consolidated financial statements.
33
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(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, 2002, the Glencore
Group owned 37.6% 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 41.5% 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 forward primary aluminum financial sales contracts.
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").
Effective April 1, 2000, the Company 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 Note 12. Simultaneous with the
closing, a subsidiary of Glencore effectively purchased a 20% interest in the
Hawesville facility for $99,000 plus the liability for 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
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.
34
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 ("EITF") 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.
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 are net of an allowance
for uncollectible accounts of $4,053 and $4,345 at December 31, 2002 and 2001,
respectively.
Inventories -- The majority of the Company's inventories, including
alumina and aluminum inventories, are stated at the lower of cost (using the
last-in, first-out ("LIFO") method) or market. The remaining inventories
(principally 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. 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 gross annual
benefit to the total as applied to the total recorded value of the power
contract. For the years ended December 31, 2002 and 2001, amortization expense
totaled $26,258 and $19,694, respectively, and accumulated amortization totaled
$45,952 and $19,694, respectively. The estimated intangible asset amortization
expense for the next five years is as follows:
Estimated Amortization Expense:
- -------------------------------
For the year ending 12/31/03 ....................... $ 19,710
For the year ending 12/31/04 ....................... 12,448
For the year ending 12/31/05 ....................... 14,600
For the year ending 12/31/06 ....................... 12,914
For the year ending 12/31/07 ....................... 13,686
35
Other Assets -- At December 31, 2002 and 2001, other assets consist
primarily of the Company's investment in the Mt. Holly partnership, deferred
financing costs, deferred pension assets, and intangible pension assets.
Deferred financing costs are amortized on a straight-line basis over the life of
the related financing. In 2002, the Company recorded an additional minimum
liability related to employee pension plan obligations as required under
Statement of Financial Accounting Standard ("SFAS") No. 87.
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 EITF 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 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 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. During 2002, the
Company recognized a $189 gain for ineffective portions of hedging instruments.
As of December 31, 2002, the Company had a deferred gain of $8,611 on its
hedges, net of tax.
Financial Instruments -- The Company's financial instruments
(principally receivables, payables, debt and forward financial contracts) are
carried at amounts that approximate fair value. At December 31, 2002 and
December 31, 2001, the Company's senior secure first mortgage notes had a
carrying amount of $321.9 and $321.4 million, respectively, and an estimated
fair value of $315.3 and $336.4 million, respectively.
36
Concentration of Credit Risk -- Financial instruments 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 Accounting Principles
Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees." No
compensation cost has been recognized for the stock option portions of the plan
because the exercise price of the stock options granted were equal to the market
value of the Company's stock on the date of grant. Had compensation cost for the
Stock Incentive Plan been determined using the fair value method provided under
SFAS No. 123, the Company's net income (loss) and earnings (loss) per share
would have changed to the pro forma amounts indicated below:
2002 2001 2000
---------- ---------- ----------
Net Income (loss) applicable to common shareholders As Reported $ (20,608) $ (15,202) $ 25,305
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 172 332 632
Deduct: Total Stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax
effects. (402) (421) (822)
--------- --------- ---------
Pro forma Net Income (loss) $ (20,838) $ (15,291) $ 25,115
========= ========= =========
Basic earnings (loss) per share As Reported $ (1.00) $ (0.74) $ 1.25
Pro Forma $ (1.01) $ (0.75) $ 1.24
Diluted earnings (loss) per share As Reported $ (1.00) $ (0.74) $ 1.24
Pro Forma $ (1.01) $ (0.75) $ 1.23
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 2002, 2001 and 2000:
2002 2001 2000
------- ------- -------
Weighted average fair value per option
granted during the year ...................... $ 6.66 $ 4.04 $ 4.05
Dividends per quarter .......................... $ 0.05 $ 0.05 $ 0.05
Risk-free interest rate ........................ 3.82% 4.55% 6.47%
Expected volatility ............................ 69% 30% 30%
Expected lives (in years) ...................... 5 5 5
New Accounting Standards -- In June 2001, the Financial Accounting
Standards Board ("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. This Statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company is
currently assessing, but has not yet determined the impact of adopting SFAS No.
143 on the Company's financial position and results of operations.
37
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement establishes
standards for accounting for costs associated with disposal activities, or with
exit (or restructuring) activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of the Statement are effective for exit and disposal activities that are
initiated after December 31, 2002. As of December 31, 2002, the Company had not
committed to any exit or disposal plans and had not recorded any liability
associated with an exit or disposal plan. The Company will apply the Statement
to any future exit or disposal activities.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123." The Statement provides additional transition provisions for
entities that voluntarily change to the fair value based method of accounting
for stock-based compensation. Additionally, the Statement requires new
disclosure about the effects on reported net income of the accounting policy
decisions for stock-based employee compensation. The Statement requires these
effects to be reported on an annual as well as interim basis. The disclosure
provisions of the Statement are effective for fiscal years ended after December
15, 2002. The Company will continue to account for stock-based employee
compensation in accordance with APB No. 25 "Accounting for Stock Issued to
Employees." See "Stock-Based Compensation" note above. The Company has adopted
the Statement's additional disclosure requirements for the current period. There
was no impact on the Company's consolidated statements of operations or its
financial position from the adoption of SFAS No. 148.
In November 2002, FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." The Interpretation addresses the
disclosure and reporting requirements for guarantors with regard to obligations
under certain guarantees it has issued. It requires that guarantors recognize,
at the inception of a guarantee, a liability for the fair value of their
obligation under the guarantee. The initial recognition and measurement
provisions of FIN 45 are to be applied prospectively for guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for the Company as of December 31, 2002. Century has not issued or
modified any guarantees subsequent to December 31, 2002. The Company has
assessed the Interpretation and does not believe that FIN 45 will have a
material impact on the Company's consolidated statements of operations or its
financial position.
Reclassification -- The consolidated financial statements contain
certain reclassifications of information from previously issued financial
statements in order to conform to the 2002 presentation.
2. Acquisitions and Dispositions
On January 28, 2003, the Company announced that it had signed a letter
of intent to purchase the 20% interest in its Hawesville, Kentucky aluminum
reduction plant that is owned by Glencore. The expected purchase price is $105
million. In connection with the acquisition of Glencore's Hawesville interest,
the Company will enter into a 10-year contract with Glencore under which
Glencore will agree to purchase 45 million pounds, per year, of primary aluminum
produced at the Ravenswood and Mt. Holly facilities, at prices based on then
current markets. The Company intends to finance the purchase price with $65
million in available cash and a six-year $40 million note payable to Glencore
with an interest rate of 10%. The $105 million transaction is subject to
completion of definitive documents and approval by Century's Board of Directors.
Closing is expected during the second quarter of 2003. Glencore is a related
party and beneficially owns approximately 41.5% of Century's common stock.
Effective April 1, 2001, the Company completed the acquisition of the
Hawesville facility, an aluminum reduction operation in Hawesville, Kentucky,
with a capacity of 538 million pounds per year. 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 Note 12. See Note 1 to
the Consolidated Financial Statements for additional details relating to the
Hawesville acquisition. The Company financed the Hawesville acquisition 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
38
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 the 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 2000 and 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 were at a fixed price. See Note 13 to the
Consolidated Financial Statements for contract termination. 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 $ 773,891
Net income (loss) ..................................... (14,427) 22,056
Net income (loss) applicable 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
3. INVENTORIES
Inventories, at December 31, consist of the following:
2002 2001
--------- ---------
Raw materials ...................... $ 32,064 $ 32,075
Work-in-process .................... 13,310 11,911
Finished goods ..................... 9,853 11,219
Operating and other supplies ....... 21,908 20,012
--------- ---------
$ 77,135 $ 75,217
========= =========
At December 31, 2002 and December 31, 2001, approximately 78% and 79%
of inventories were valued at the lower of last-in, first-out ("LIFO") cost or
market, respectively. At December 31, 2002 and December 31, 2001, the excess of
LIFO cost (or market, if lower) over first-in, first-out ("FIFO") cost (or
market, if lower) was approximately $1,105 and $180, respectively. Results of
operations include net write-ups of $247 and net charges of $5,166 for inventory
adjustments for the periods ended December 31, 2002 and December 31, 2001,
respectively.
39
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at December 31, consist of the following:
2002 2001
---------- ----------
Land and improvements ............... $ 13,375 $ 12,786
Buildings and improvements .......... 39,828 37,434
Machinery and equipment ............. 521,948 504,111
Construction in progress ............ 8,404 12,074
---------- ----------
583,555 566,405
Less accumulated depreciation ....... (165,934) (136,331)
---------- ----------
$ 417,621 $ 430,074
========== ==========
For the years ended December 31, 2002 and 2001, the Company recorded
depreciation expense of $30,397 and $24,739, respectively.
At December 31, 2002 and 2001, the cost of property, plant and
equipment includes $148,309 and $136,877, respectively, and accumulated
depreciation includes $42,323 and $35,397, respectively, representing the
Company's undivided interest in the property, plant and equipment comprising the
Mt. Holly facility.
At December 31, 2002 and 2001, the cost of property, plant and
equipment includes $261,433 and $256,915, respectively and accumulated
depreciation includes $29,619 and $12,629, respectively, representing the
Company's interest in the property, plant and equipment comprising the
Hawesville facility.
The Company has various operating lease commitments through 2007
relating to office space, machinery and equipment. Expenses under all operating
leases were $319, $297 and $310 for the years ended December 31, 2002, 2001 and
2000, respectively. There were no noncancelable operating leases as of December
31, 2002.
5. DEBT
On January 28, 2003, the Company announced plans to purchase Glencore's
Hawesville interest. The Company intends to finance a portion of the purchase
price with a six-year note payable to Glencore. The principal of the note
payable to Glencore is expected to be $40 million. The note is expected to have
an interest rate of 10%.
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, 2002, the Company had unamortized bond discounts on
the Notes of $3,148. 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. The Company suspended its common and preferred stock
dividends beginning in the fourth quarter of 2002. This action was taken because
the Company was very near the limits on allowable dividend payments under the
covenants in its bond indenture. The Note guarantees 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 a like principal amount of
11 3/4% senior secured first mortgage notes due 2008 (the "Exchange Notes") for
the Notes in a transaction 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, 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 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. During the year ended December 31, 2002, the borrowing base, less
the reserve, would have permitted the Company to borrow approximately $45.0 to
$55.0 million under the revolving credit facility. In connection with the
proposed acquisition of Glencore's Hawesville interest, the Company's banks have
agreed to make certain amendments to the revolving credit facility agreement to
permit the Company to complete the acquisition and to increase the
40
Company's borrowing base. Assuming the completion of the acquisition, the
Company expects the borrowing base, less the reserve, to increase approximately
$10.0 to $15.0 million. 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, 2002.
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 is liable for its 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, 2002 was 1.90%. 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. Upon
completion of the acquisition of Glencore's Hawesville interest, the Company
will assume Glencore's portion of the IRB debt. The IRBs will continue to be
secured by a Glencore letter of credit and the Company will provide for the
servicing costs for the Glencore letter of credit.
6. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS AT DECEMBER 31
2002 2001
---- ----
Accrued and Other Current Liabilities
Income taxes ................................................. $ 2,811 $ 7,245
Accrued bond interest ........................................ 7,956 8,168
Salaries, wages and benefits ................................. 7,975 9,576
Stock compensation ........................................... 269 539
Other ........................................................ 5,103 7,257
--------- ---------
$ 24,114 $ 32,785
========= =========
Accrued Employee Benefit Costs -- Current Portion
Postretirement benefits ...................................... $ 3,766 $ 2,871
Employee benefits cost ....................................... 7,124 4,330
--------- ---------
$ 10,890 $ 7,201
========= =========
Other Liabilities
Workers' compensation ........................................ $ 7,847 $ 7,162
Other ........................................................ 529 3,535
--------- ---------
$ 8,376 $ 10,697
========= =========
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 6.5% at December 31, 2002 and at 6.0% at December 31, 2001. The
components of the liability for workers' compensation at December 31 are as
follows:
2002 2001
--------- ---------
Undiscounted liability ..... $ 14,817 $ 13,398
Less discount .............. 4,601 3,871
--------- ---------
$ 10,216 $ 9,527
========= =========
41
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. In addition, the Company provides supplemental
executive retirement benefits ("SERB") for certain executive officers.
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,
2002 and 2001, the Company contributed $1,467 and $771, respectively, to the
plan, and had no outstanding liability at year end.
As of December 31, 2002, the Company's accumulated pension benefit
obligation exceeded the fair value of the pension plan assets at year end. Under
current accounting guidance, the Company was required to record a minimum
pension liability at year end of $7.4 million, after tax, with a corresponding
charge to other comprehensive income. In the future, the amount of the minimum
pension liability will vary depending on changes in market conditions,
performance of pension investments, and the level of company contributions to
the pension plans. The Company will evaluate and adjust the minimum pension
liability on an annual basis.
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:
2002 2001
---------------------- ---------------------
PENSION OPEB PENSION OPEB
------- ---- ------- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year ............ $ 47,644 $ 83,775 $ 42,100 $ 52,645
Service cost ....................................... 3,001 3,019 2,501 2,879
Interest cost ...................................... 3,554 6,229 3,149 5,237
Acquisition of businesses .......................... -- -- -- 18,562
Plan changes ....................................... 739 -- 3,767 --
(Gains) losses ..................................... 6,231 14,736 (1,194) 7,250
Benefits paid ...................................... (2,727) (3,724) (2,679) (2,798)
--------- ---------- --------- ---------
Benefit obligation at end of year .................. $ 58,442 $ 104,035 $ 47,644 $ 83,775
========= ========== ========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year ............................................. $ 39,878 $ -- $ 39,822 $ --
Actual return on plan assets ....................... (3,801) -- (1,519) --
Employer contributions ............................. 5,032 3,724 4,254 2,798
Benefits paid ...................................... (2,727) (3,724) (2,679) (2,798)
--------- ---------- --------- ---------
`Fair value of assets at end of year ............... $ 38,382 $ -- $ 39,878 $ --
========= ========== ========= =========
FUNDED STATUS OF PLANS
Funded status ...................................... $ (20,060) $ (104,035) $ (7,766) $ (83,775)
Unrecognized actuarial gain (loss) ................. 16,183 31,011 2,644 17,014
Unrecognized transition obligation ................. 408 -- 581 --
Unrecognized prior service cost .................... 7,135 (1,399) 7,601 (1,737)
--------- ---------- --------- ---------
Net asset (liability) recognized ................... $ 3,666 $ (74,423) $ 3,060 $ (68,498)
========= ========== ========= =========
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL
POSITION
Prepaid Benefit Cost ............................... $ -- $ -- $ 8,698 $ --
Accrued Benefit Liability .......................... (14,752) (74,423) (5,638) (68,498)
Intangible Asset ................................... 6,797 -- -- --
Accumulated Other Comprehensive Income ............. 11,621 -- -- --
--------- ---------- --------- ---------
Net Amount Recognized .............................. $ 3,666 $ (74,423) $ 3,060 $ (68,498)
========= ========== ========= =========
42
The hourly pension plan for the employees of the Ravenswood facility had a
projected benefit obligation, accumulated benefit obligation, and fair value of
plan assets of $34,941, 34,282 and 30,512, respectively, as of December 31, 2002
and $30,867, 30,867 and 33,495, respectively, as of December 31, 2001. The
salaried pension plan and SERB had an aggregate projected benefit obligation,
aggregate accumulated benefit obligation, and fair value of plan assets of
$23,501, 18,851 and 7,870, respectively, as of December 31, 2002 and $16,777,
10,408 and 6,383, respectively, as of December 31, 2001. There are no plan
assets in the SERB due to the nature of the plan.
Net periodic benefit costs were comprised of the following elements:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
2002 2001 2000
-------------------- -------------------- --------------------
PENSION OPEB PENSION OPEB PENSION OPEB
-------- -------- -------- -------- -------- --------
Service cost ................. $ 3,001 $ 3,019 $ 2,501 $ 2,879 $ 1,212 $ 1,697
Interest cost ................ 3,554 6,229 3,149 5,237 2,719 3,658
Expected return on plan
assets ..................... (3,554) -- (3,663) -- (3,601) --
Net amortization and
deferral ................... 1,425 401 1,226 339 416 207
-------- -------- -------- -------- -------- --------
Net periodic cost ............ $ 4,426 $ 9,649 $ 3,213 $ 8,455 $ 746 $ 5,562
======== ======== ======== ======== ======== ========
The following assumptions were used in the actuarial computations at
December 31:
2002 2001 2000
------ ------ ------
Discount rate .......................................... 6.50% 7.25% 7.25%
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, medical cost inflation is initially 10%,
declining to 5% over six years and thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care benefit obligations. A one-percentage-point
change in the assumed health care cost trend rates would have had the following
effects in 2002:
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components .................... $ 1,958 $ (1,505)
Effect on accumulated postretirement benefit obligation .................... $ 16,234 $ (12,912)
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 invested based on employee election.
Company contributions to the savings plan were $607, $484 and $241 for the years
ended December 31, 2002, 2001 and 2000, 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.
43
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 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.
On October 22, 2002, the Company announced that it would suspend its
common and preferred stock dividends beginning in the fourth quarter of 2002.
The action was taken because the Company was very near the limits on allowable
dividend payments under the covenants in its bond indenture and due to current
economic conditions. In accordance with current accounting guidance, no
liability for cumulative preferred dividends is recorded until the dividends are
declared. As of December 31, 2002, the Company had total cumulative preferred
dividend arrearages of $500 or $1.00 per preferred stock share.
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 and
were charged to expense 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, and $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. During 2001, the
final one-third (156,836) of the service based performance shares became vested
and were converted to Common Stock.
44
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, 2002, approximately 361,000
performance share units have been authorized and will vest upon the attainment
of the performance goals.
The Company recognized $269, $519 and $988 of expense related to the
Stock Incentive Plan in 2002, 2001 and 2000, 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 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.
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 137,000 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, 2002, 2001 and 2000
and changes during the year ended on those dates is presented below:
2002 2001 2000
----------------------- ----------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------- ------- -------- ------- -------- ------- --------
Outstanding at beginning of
year ........................... 595,267 $ 12.82 603,600 $ 12.77 530,200 $ 13.19
Granted .......................... 96,600 11.05 34,500 13.60 73,400 10.45
Exercised ........................ (667) 8.15 (35,333) 12.55 -- --
Forfeited ........................ -- -- (7,500) 13.78 -- --
------- -------- ------- -------- ------- --------
Outstanding at end of year ....... 691,200 $ 12.58 595,267 $ 12.82 603,600 $ 12.77
======= ======== ======= ======== ======= ========
The following table summarizes information about stock options
outstanding at December 31, 2002:
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING ------------------------------
- ---------------------------------------------------------------------------- NUMBER
NUMBER WEIGHTED AVG. WEIGHTED AVG. EXERCISABLE
RANGE OF OUTSTANDING REMAINING EXERCISE AT WEIGHTED AVG.
EXERCISE PRICES AT 12/31/02 CONTRACTUAL LIFE PRICE 12/31/02 EXERCISE PRICE
- ---------------- ----------- ---------------- ------------- ----------- --------------
$14.50 to $16.72 74,000 6.1 years $ 15.58 59,500 $ 15.66
$11.50 to $14.49 510,150 4.0 years $ 13.08 483,750 $ 13.04
$ 7.03 to $11.49 107,050 8.7 years $ 8.10 72,050 $ 8.15
------- -------
691,200 615,300
======= =======
45
The following table provides summarized information for securities
authorized for issuance under equity compensation plans.
NUMBER OF SHARES TO WEIGHTED NUMBER OF SHARES REMAINING
BE ISSUED UPON AVERAGE AVAILABLE FOR FUTURE ISSUANCE
EXERCISE OF EXERCISE UNDER EQUITY COMPENSATION PLANS,
PLAN CATEGORY OUTSTANDING OPTIONS PRICE EXCLUDING OUTSTANDING OPTIONS
------------- ------------------- ----- -----------------------------
Equity compensation plans approved by
security holders (1) (2) 691,200 $ 12.58 683,738
Equity compensation plans not approved
by security holders - - -
------- -------- -------
Total 691,200 $ 12.58 683,738
======= ======== =======
- ----------------------------------------------------------
(1) All equity compensation plan information presented in this table
relates to the following plans approved by the Company's shareholders:
1996 Stock Incentive Plan
Non-Employee Directors Stock Option Plan
(2) Includes 381,202 unvested shares which have been awarded pursuant
to the Company's 1996 Stock Incentive Plan (the "Plan"), of which 20,168 are
restricted shares and 361,034 are performance shares. The restricted shares and
performance shares each vest and are issued in accordance with the guidelines
set forth in the Plan, as implemented by the Company's Board of Directors.
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. The Company announced that it would
suspend its common and preferred stock dividends beginning in the fourth quarter
of 2002. However, in accordance with current accounting guidance, for the
purpose of calculating EPS, the cumulative preferred stock dividends accumulated
for the period were deducted from net income, as if declared. Diluted EPS
amounts assume the issuance of common stock for all potentially dilutive common
shares outstanding. Basic and diluted earnings (loss) per share for income
(loss) applicable to common shareholders for the years ended December 31, 2002,
2001 and 2000 are as follows (shares in thousands):
2002 2001 2000
---------- ---------- ---------
BASIC EARNINGS (LOSS) PER SHARE:
Numerator:
Net income (loss) applicable to common shareholders ... $ (20,608) $ (15,202) $ 25,305
Denominator:
Average common shares outstanding ..................... 20,555 20,473 20,308
---------- ---------- ---------
Basic earnings (loss) per share ......................... $ (1.00) $ (0.74) $ 1.25
========== ========== =========
DILUTED EARNINGS (LOSS) PER SHARE:
Numerator:
Net income (loss) applicable to common shareholders ... $ (20,608) $ (15,202) $ 25,305
Denominator:
Average common shares outstanding ..................... 20,555 20,473 20,308
Effect of dilutive securities:
Stock options and performance awards .................. - - 170
---------- ---------- ---------
Common shares outstanding, assuming dilution ............ 20,555 20,473 20,478
---------- ---------- ---------
Diluted earnings (loss) per share ....................... $ (1.00) $ (0.74) $ 1.24
========== ========== =========
There were 691,200 and 595,267 shares of common stock issuable under
the Company's stock option plan that were excluded in 2002 and 2001,
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.
46
11. INCOME TAXES
Significant components of the income tax expense from continuing
operations consist of the following:
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
--------- --------- ----------
Federal:
Current benefit (expense) ................... $ 20,004 $ (1,417) $ 656
Deferred (expense) benefit .................. (7,486) 8,840 (10,101)
State:
Current benefit (expense) ................... (913) (197) 491
Deferred (expense) benefit .................. 2,521 1,308 (2,347)
--------- --------- ----------
Total income tax benefit (expense) .......... $ 14,126 $ 8,534 $ (11,301)
========= ========= ==========
Income tax expense for the years ended December 31, 2002, 2001 and 2000
includes reductions in estimated income taxes payable of $1,500, $0, and $2,400,
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:
2002 2001 2000
---- ---- ----
Federal statutory rate .............................. 35% 35% 35%
Effect of:
Permanent differences ............................. - - 1
State taxes, net of Federal benefit ............... 3 3 3
Minority Interest ................................. (5) (5) -
Other ............................................. 4 - (8)
--- --- ---
37% 33% 31%
=== === ===
Permanent differences primarily relate to the Company's meal and
entertainment disallowance and other nondeductible expenses.
Significant components of the Company's deferred tax assets and
liabilities as of December 31 are as follows:
2002 2001
---------- ----------
FEDERAL
Deferred federal tax assets:
Accrued postretirement benefit cost .............. $ 9,868 $ 8,273
Accrued liabilities .............................. 8,482 4,133
Federal NOL carried forward ...................... 3,389 26,796
Pension .......................................... 6,118 --
Inventory write-down ............................. 2,780 3,832
General business credit .......................... 165 165
---------- ----------
Deferred federal tax assets ................... 30,802 43,199
Deferred federal tax liabilities:
Tax over financial statement depreciation ........ (68,007) (69,572)
Equity contra - other comprehensive income ....... (4,534) (3,412)
Inventory basis .................................. -- (4,866)
---------- ----------
Net deferred federal tax liability ............ (41,739) (34,651)
---------- ----------
STATE
Deferred state tax assets:
Accrued postretirement benefit cost .............. 1,410 1,182
Accrued liabilities .............................. 941 290
Inventory write-down ............................. 397 547
State NOL carried forward ........................ 2,133 2,133
Pension .......................................... 874 --
---------- ----------
Deferred state tax assets ..................... 5,755 4,152
Deferred state tax liabilities:
Tax over financial statement depreciation ........ (9,715) (9,938)
Equity contra - other comprehensive income ....... (648) (289)
Inventory basis .................................. -- (695)
---------- ----------
Net deferred state tax liability .............. (4,608) (6,770)
---------- ----------
Net deferred tax liability ......................... $ (46,347) $ (41,421)
========== ==========
47
Of the $46,347 net deferred tax liability at December 31, 2002, $4,971
is included in current liabilities. Of the $41,421 net deferred tax liability at
December 31, 2001, $1,879 is included in current liabilities. At December 31,
2002, the Company has a $10.0 million federal net operating loss that expires in
2023. 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 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 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") under the 3008(h)
Order 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, has completed interim remediation
measures at two sites identified in the RFI, and the Company expects that
neither the EPA, nor the State of West Virginia, will require further
remediation under the 3008(h) Order. The Company believes a significant portion
of the contamination on the two identified sites is attributable to the
operations of Kaiser Aluminum and Chemical ("Kaiser"), the 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 prior to its acquisition by Century of West Virginia. 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 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 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 Company does not believe that there are any undisclosed
pre-closing conditions or known off-site migration of hazardous substances, and
does not believe that it will be required to make any potential future payments
under this indemnification. However, the potential future payments under this
indemnification would be limited to $25,000 for on-site liabilities and
there is no limit on potential future payments for any off-site liabilities.
48
On July 6, 2000, while the Hawesville aluminum reduction facility was
owned by Southwire Company, the EPA issued a final Record of Decision ("ROD")
which detailed response actions to be implemented at several locations at the
Hawesville site to address actual or threatened releases of hazardous
substances. The ROD was issued under the federal Comprehensive Environmental
Response, Compensation and Liability Act. 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.
Under the Company's agreement with Southwire to purchase 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. The total
costs for the remedial actions to be undertaken and paid for by Southwire
relative to these liabilities are estimated under the ROD to be $12,600 and the
forecast of annual operating and maintenance costs is $1,200. Century will
operate and maintain the ground water treatment system required under the ROD on
behalf of Southwire, and Southwire will reimburse Century for any 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 pre-closing activities
at Hawesville that were not known to exist as of the date of the closing of the
acquisition, become known before March 31, 2007, 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 March 31, 2007 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. Upon completion of the acquisition of
Glencore's Hawesville interest, the Company will assume Glencore's
responsibilities for the environmental liabilities with respect to the
Hawesville facility.
The Company acquired the Hawesville facility by purchasing all of the
outstanding equity securities of Metalsco Ltd., which was a wholly owned
subsidiary of Southwire. Metalsco previously owned certain assets which are
unrelated to the Hawesville plant's operations, 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-Hawesville 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 Hawesville'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 the Hawesville
plant which pre-date the closing of the acquisition.
Southwire has secured its indemnity obligations to the Company for
environmental liabilities until April 1, 2008 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.
Century is a party to an Administrative Order on Consent with the
Environmental Protection Agency (the "Order") pursuant to which all other past
and present owners of an alumina facility at St. Croix, Virgin Islands have
agreed to carry out a Hydrocarbon Recovery Plan to remove and manage oil
floating on top of groundwater underlying the facility. Pursuant to the
Hydrocarbon Recovery Plan, 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 pay the parties participating
in the recovery effort the fair market value of the petroleum hydrocarbon
recovered. Lockheed Martin Corporation ("Lockheed"), which sold the facility to
one of the
49
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. Management does not believe
Vialco's liability under the Order or its indemnity to Lockheed will have a
material adverse effect on the Company's financial condition, results of
operations, or liquidity. The Company's best estimate of the future potential
payments under this indemnification is approximately $500. However, under the
indemnification, there is no limit to the potential future payments.
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 $1,370 and $1,800 at
December 31, 2002 and December 31, 2001, respectively. All accrued amounts have
been recorded without giving effect to any possible future 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 was a named defendant, along with Kaiser and many other
companies, in civil actions brought by employees of third party contractors
prior to the Kaiser Bankruptcy 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 those asbestos claims.
Since the Kaiser Bankruptcy, the Company has been named in an additional 61
civil actions based on similar allegations. The Company does not know if any of
the 61 claimants were in the Ravenswood facility during the Company's ownership,
but the Company will investigate such claims. Management believes that the costs
of investigation or settlements, if any, will be immaterial.
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.
Power Commitments
The Company purchases all of the electricity requirements for the
Ravenswood Facility from Ohio Power Company, a unit of American Electric Power
Company, pursuant to a fixed price power supply agreement. That agreement
expires on July 31, 2003. On May 3, 2002, the Company signed a new contract to
purchase electric power for its Ravenswood facility from Ohio Power. The new
agreement is effective August 1, 2003, when the Company's current power contract
with Ohio Power expires. The new contract will provide power for the Ravenswood
facility at competitive rates under a GS-4 schedule approved by the Public
Utilities Commission of Ohio. The GS-4 schedule is due to expire on December 31,
2005.
The Hawesville facility currently purchases all of its power from
Kenergy Corporation at fixed prices. Approximately 14% of the Hawesville
facility's power requirements were unpriced in calendar year 2003 through 2005.
The unpriced portion of the contract increases to approximately 26% in 2006. On
June 26, 2002, the Company entered into a fixed price power supply agreement for
the 14% of the power that was unpriced for calendar year 2003.
The Mt. Holly facility purchases all of its power from the South
Carolina Public Service Authority at rates fixed by published schedules. One of
those schedules is a fuel adjustment clause which permits the Authority to pass
through charges or credits to the extent its actual costs vary from those costs
in the formula set in the Fuel Cost Adjustment Clause. The Mt. Holly power
contract expires December 31, 2005.
50
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 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 revolving credit facility. Century's insurance 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. 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 the Company's power
suppliers' facilities, or transmission lines that would cause an interruption of
the power supply to the Company's 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. Century renewed its property and business
interruption insurance policies in April 2002 for one year. As expected,
premiums increased significantly in the aftermath of September 11 and the
policies contain much higher deductibles and self-insured amounts.
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 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.
Other Commitments
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 through July 31, 2003.
This contract will be automatically extended through July 31, 2007 provided that
the Company's power contract is extended through that date. 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
variable price determined by reference to the U.S. Midwest Market Price. After
July 31, 2003, Pechiney will have the right, upon 12 month's notice, to reduce
its purchase obligations under the contract by 50%.
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
51
were determined by a market-based formula while the remaining eight years are
at a fixed price as defined in the agreement. In January 2003, the Company
agreed to terminate the contract for delivery of metal for the years 2005
through 2009. The Company will enter into a new 110 million pound contract which
will include delivery of metal for the years 2005 through 2009 from the Mt.
Holly facility at prices based on the then current market. The price will remain
at a fixed price for the years 2003 and 2004. In consideration of the above, the
Company will receive $35 million. Because the contract was terminated, delivery
on the contract under its original fixed price terms is no longer probable.
Accordingly, the contract will no longer qualify as normal under SFAS 133, as
amended, and the entire contract (including 2003 and 2004) will be
marked-to-market in the first quarter of 2003 with subsequent gains and losses
reported in the statement of operations.
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 56% 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 month's notice that it has elected not to renew. Upon completion of
the acquisition of the remaining 20 percent of the Hawesville facility, the
Company will assume Glencore's share of Southwire Metal Agreement.
Apart from the Pechiney Metal Agreement, Glencore Metal Agreement and
Southwire Metal Agreement, the Company had forward delivery contracts to sell
329.0 million pounds and 377.1 million pounds of primary aluminum at December
31, 2002 and December 31, 2001, respectively. Of these forward delivery
contracts, 0.3 million pounds and 25.5 million pounds at December 31, 2002 and
December 31, 2001, respectively, were with the Glencore Group.
The Company was party to a long-term supply agreement with Alcoa to
purchase alumina through the end of 2006. The contract was unpriced from 2002
through 2006. The Company negotiated pricing with both Alcoa and Glencore which
resulted in a more competitive agreement with Glencore. The new long-term supply
agreements with Glencore, which replaced the Alcoa alumina agreement, will
extend through 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 the Hawesville facility, the Company assumed a market based
alumina supply agreement (the "Supply Agreement") with Kaiser Aluminum &
Chemical Corporation ("Kaiser") which expires in 2005. In connection with its
ongoing Chapter 11 bankruptcy proceedings, Kaiser filed a motion for an Order
Authorizing the Assumption of Certain Critical Customer Supply Contracts (the
"Motion"). The Motion was granted by the Bankruptcy Court on August 27, 2002. As
a result, Kaiser has assumed the Supply Agreement and cured all existing
defaults thereunder.
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 delivery contracts. At December 31, 2002 and December 31, 2001,
the Company had financial instruments, primarily with the Glencore Group, for
181.0 million pounds and 248.8 million pounds, respectively. These financial
instruments are scheduled for settlement at various dates through 2003. The
Company had no fixed price financial or delivery purchase contracts for aluminum
at December 31, 2002. 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, 2002, the Company had financial instruments for 1.5
million DTHs (one decatherm is equivalent to one million British Thermal Units).
These financial instruments are scheduled for settlement at various dates in
2003 through 2005. Based on the fair value of the Company's financial
instruments as of December 31, 2002, accumulated other comprehensive income of
$8,204 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.
52
14. RELATED PARTY TRANSACTIONS
The significant related party transactions occurring during the years
ended December 31, 2002, 2001 and 2000, and not discussed elsewhere in the notes
to the consolidated financial statements, are described below.
Related Party Transactions -- Century
During the years 2000, 2001 and 2002 and at December 31, 2002, 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, 2002, 2001 and 2000, 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, 2002, 2001 and 2000, Century of
West Virginia purchased and sold alumina, primary and scrap aluminum in
transactions with Glencore at prices which management believes approximated
market.
Related Party Transactions -- Berkeley
A substantial portion of Berkeley's sales during the years ended
December 31, 2002, 2001 and 2000 were to Glencore.
Summary
A summary of the aforementioned related party transactions for the
years ended December 31, 2002, 2001 and 2000 is as follows:
2002 2001 2000
---------- ---------- ----------
Net sales (a)....................................... $ 107,594 $ 111,469 $ 129,320
Purchases........................................... 97,469 19,964 16,993
Management fees..................................... 485 416 --
Net gain (loss) on forward contracts................ -- (1) 2,261
- -----------------------
(a) Net Sales includes gains and losses realized on the settlement of financial
contracts.
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,
-----------------------------------
2002 2001 2000
---------- ---------- ---------
Cash paid for:
Interest..................... $ 38,299 $ 21,114 $ 371
Income taxes................. 286 934 771
Cash received from:
Interest..................... 392 891 2,675
Income tax refunds........... 17,574 66 13,322
Non-Cash Activities
During the years ended December 31, 2002 and 2001, interest cost
incurred in the construction of equipment of $810 and $250, respectively, was
capitalized. No interest was capitalized during the year ended December 31,
2000. During 2002, the Company made non-cash contributions, consisting of the
Company's common stock, of $3,180 to the Company's pension plans.
53
16. BUSINESS SEGMENTS
The Company operates in only one reportable business segment, primary
aluminum. The primary aluminum segment produces molten metal, rolling ingot,
t-ingot, extrusion billet and foundry ingot.
The accounting policies of the segment were the same as those described
in Note 1 "Summary of Significant Accounting Policies." The Company evaluates
segment performance based upon gross profit.
All of the company's consolidated revenues and gross profits are from
this segment. All expenditures for capital assets and all material amounts of
depreciation and amortization expense relate to the primary aluminum segment. A
reconciliation of the Company's consolidated assets to the total of primary
aluminum segment assets is provided below.
CORPORATE,
SEGMENT ASSETS (1) PRIMARY UNALLOCATED TOTAL ASSETS
------------------ ----------- ----------- ------------
2002.......................................... $ 742,672 $ 22,495 $ 765,167
2001........................................... 757,774 18,932 776,706
2000.......................................... 327,131 6,639 333,770
- ----------
(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, and deferred tax assets.
Included in the consolidated financial statements are the following
amounts related to geographic locations:
YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
---------- ---------- ----------
Net Sales
United States........ $ 711,003 $ 654,922 $ 428,597
Other................ 335 -- --
At December 31, 2002, 2001, and 2000, all of the Company's long-lived
assets were located in the United States.
Revenues from Glencore represented 15.1%, 17.0% and 30.2% of the
Company's consolidated revenues in 2002, 2001 and 2000, respectively. Revenues
from Pechiney represented 31.0%, 31.1% and 55.1% of the Company's consolidated
sales in 2002, 2001 and 2000, respectively. Revenues from Southwire represented
22.2% and 18.9% of the Company's consolidated sales in 2002 and 2001.
54
17. QUARTERLY INFORMATION (UNAUDITED)
The following information includes 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, 2002 and
2001 are as follows:
GROSS NET INCOME
NET PROFIT NET INCOME (LOSS)
SALES (LOSS) (LOSS) PER SHARE
----------- ---------- ---------- ----------
2002:
1st Quarter (1)........... $ 179,100 $ 7,308 $ (3,468) $ (0.19)
2nd Quarter (2)........... 180,336 4,956 (4,600) (0.25)
3rd Quarter(3)(4)......... 176,992 247 (7,764) (0.40)
4th Quarter(5)............ 174,910 7,550 (2,776) (0.16)
2001:
1st Quarter (6)........... $ 110,690 $ 8,420 $ 3,151 $ 0.15
2nd Quarter (6)........... 188,919 13,765 843 0.04
3rd Quarter(6)(7)......... 183,371 3,270 (4,342) (0.21)
4th Quarter(8)............ 171,942 (4,747) (14,854) (0.72)
- --------------------
(1) The first quarter 2002 gross profit includes credits of $1,473 for
inventory adjustments.
(2) The second quarter 2002 gross profit includes a charge of $717 for
inventory adjustments.
(3) The third quarter 2002 gross profit includes a charge of $3,410 for
inventory adjustments.
(4) The third quarter 2002 net income includes an after-tax charge of $1,072 to
write-off deferred acquisition costs and an income tax benefit of $1,500
from a reduction in estimated income taxes.
(5) The fourth quarter 2002 gross profit includes credits of $2,901 for
inventory adjustments.
(6) 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.
(7) The third quarter 2001 includes a charge of $3,175 for inventory
adjustments and proceeds of $3,365 on final settlements of insurance
claims.
(8) 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.
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 Hawesville 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.
The Company's 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, 2002, and 2001, the Company allocated total corporate expenses of
$10.9 million and $8.5 million to its subsidiaries, respectively. Additionally,
the Company charges interest on certain intercompany balances.
55
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 balance sheets as of
December 31, 2002 and 2001, condensed consolidating statements of operations for
the years ended December 31, 2002 and 2001, and the condensed consolidating
statements of cash flows for the years ended December 31, 2002 and 2001 present
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.
56
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002
COMBINED
GUARANTOR NON-GUARANTOR THE RECLASSIFICATIONS
SUBSIDIARIES SUBSIDIARY COMPANY AND ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 745 $ - $ 44,347 $ - $ 45,092
Accounts receivable - net 45,936 304 - 46,240
Due from affiliates 87,071 10,102 353,292 (427,733) 22,732
Inventories 55,877 21,258 - - 77,135
Prepaid and other assets 2,887 178 4,434 (2,722) 4,777
----------------------------------------------------------------------
Total current assets 192,516 31,842 402,073 (430,455) 195,976
Investment in Subsidiaries 74,663 - 184,234 (258,897) -
Property, Plant and Equipment - net 416,590 780 251 - 417,621
Intangible Asset - net - 119,744 - - 119,744
Due from affiliates - Less current portion 974 - - - 974
Other Assets 13,041 - 17,811 - 30,852
----------------------------------------------------------------------
Total $ 697,784 $ 152,366 $604,369 $ (689,352) $ 765,167
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 14,588 $ 23,169 $ - $ - $ 37,757
Due to affiliates 32,711 - 64,243 (81,143) 15,811
Industrial Revenue Bonds - 7,815 - - 7,815
Accrued and other current liabilities 6,257 5,055 12,802 - 24,114
Accrued employee benefits costs - current portion 8,966 559 1,365 - 10,890
Deferred Taxes-current portion 7,763 - - (2,792) 4,971
----------------------------------------------------------------------
Total current liabilities 70,285 36,598 78,410 (83,935) 101,358
----------------------------------------------------------------------
Long Term Debt - net - - 321,852 - 321,852
Accrued Pension Benefit Costs - Less current portion 3,771 - 6,980 - 10,751
Accrued Postretirement Benefit Costs - Less current portion 48,335 21,840 481 - 70,656
Other Liabilities 354,297 599 - (346,520) 8,376
Deferred Taxes 36,862 - 4,514 - 41,376
----------------------------------------------------------------------
Total noncurrent liabilities 443,265 22,439 333,827 (346,520) 453,011
----------------------------------------------------------------------
MINORITY INTEREST - - - 18,666 18,666
SHAREHOLDERS' EQUITY:
Convertible Preferred Stock - - 25,000 - 25,000
Common stock 59 - 211 (59) 211
Additional paid-in capital 226,998 139,281 172,133 (366,279) 172,133
Accumulated Other Comprehensive Income 1,173 - 1,173 (1,173) 1,173
Retained earnings (deficit) (43,996) (45,952) (6,385) 89,948 (6,385)
----------------------------------------------------------------------
Total shareholders' equity 184,234 93,329 192,132 (277,563) (192,132)
----------------------------------------------------------------------
Total $ 697,784 $ 152,366 $604,369 $ (689,352) $ 765,167
======================================================================
57
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2001
COMBINED
GUARANTOR NON-GUARANTOR THE RECLASSIFICATIONS
SUBSIDIARIES SUBSIDIARY COMPANY AND ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,020 $ - $ 12,368 $ - $ 13,388
Accounts receivable - net 48,365 - - - 48,365
Due from affiliates 56,711 838 366,855 (408,705) 15,699
Inventories 46,649 28,568 - - 75,217
Prepaid and other assets 7,395 98 1,674 (5,249) 3,918
---------------------------------------------------------------------
Total current assets 160,140 29,504 380,897 (413,954) 156,587
Investment in Subsidiaries 95,670 - 208,419 (304,089) -
Property, Plant and Equipment - net 428,721 878 475 - 430,074
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 $713,362 $178,058 $606,575 $ (721,289) $ 776,706
====================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 19,922 $ 22,472 $ - $ - $ 42,394
Due to affiliates - 1,998 47,089 (46,886) 2,201
Industrial Revenue Bonds - 7,815 - - 7,815
Accrued and other current liabilities 15,157 5,269 17,680 (5,321) 32,785
Accrued employee benefits costs - current portion 7,054 147 - - 7,201
Deferred Tax Liabilities - current 1,879 - - - 1,879
--------------------------------------------------------------------
Total current liabilities 44,012 37,701 64,769 (52,207) 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 371,580 151 713 (361,747) 10,697
Deferred Tax Liabilities - Less current 42,788 - - (3,246) 39,542
--------------------------------------------------------------------
Total noncurrent liabilities 460,931 20,770 324,621 (364,993) 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 $713,362 $ 178,058 $606,575 $ (721,289) $ 776,706
====================================================================
58
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
COMBINED
GUARANTOR NON-GUARANTOR RECLASSIFICATIONS
SUBSIDIARIES SUBSIDIARY THE COMPANY AND ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------------
Net sales:
Third-party customers $ 603,744 $ - $ - $ - $ 603,744
Related parties 107,594 - - - 107,594
----------------------------------------------------------------------------
711,338 - - - 711,338
----------------------------------------------------------------------------
Cost of goods sold 665,032 279,614 - (253,369) 691,277
Reimbursement from owners - (253,541) - 253,541 -
----------------------------------------------------------------------------
Gross profit (loss) 46,306 (26,073) - (172) 20,061
Selling, general and admin expenses 15,783 - - - 15,783
----------------------------------------------------------------------------
Operating income (loss) 30,523 (26,073) - (172) 4,278
Interest expense (40,813) (134) - 134 (40,813)
Interest income 392 - - - 392
Other income (expense), net (1,830) (51) - 38 (1,843)
----------------------------------------------------------------------------
Income (loss) before taxes (11,728) (26,258) - - (37,986)
Income tax (expense) benefit 6,144 - - 7,982 14,126
----------------------------------------------------------------------------
Net income (loss) before minority interest (5,584) (26,258) - 7,982 (23,860)
Minority interest - - - 5,252 5,252
Equity earnings (loss) of subsidiaries (13,024) - (18,608) 31,632 -
----------------------------------------------------------------------------
Net income (loss) $ (18,608) $ (26,258) $(18,608) $ 44,866 $ (18,608)
============================================================================
59
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
COMBINED
GUARANTOR NON-GUARANTOR RECLASSIFICATIONS
SUBSIDIARIES SUBSIDIARY THE COMPANY AND 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 expense (31,403) (162) - - (31,565)
Interest income 891 - - - 891
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 - - 5,987 8,534
----------------------------------------------------------------------------
Net income (loss) before minority interest (3,934) (19,694) - 5,987 (17,641)
Minority interest 3,939 3,939
Equity earnings (loss) of subsidiaries (9,768) - (13,702) 23,470 -
----------------------------------------------------------------------------
Net income (loss) $ (13,702) $ (19,694) $(13,702) $ 33,396 $ (13,702)
============================================================================
60
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
COMBINED
GUARANTOR NON-GUARANTOR RECLASSIFICATIONS
SUBSIDIARIES SUBSIDIARY THE COMPANY AND ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------
Net cash provided by operating activities $ 40,245 $ 14,241 $ - $ - $ 54,486
------------------------------------------------------------------------------
Investing activities:
Purchase of property, plant and equipment (17,371) (1,056) - - (18,427)
Proceeds from sale of property, plant and
equipment 231 - - - 231
------------------------------------------------------------------------------
Net cash used in investing activities (17,140) (1,056) - - (18,196)
------------------------------------------------------------------------------
Financing activities:
Dividends - - (4,591) - (4,591)
Intercompany transactions (23,380) (13,185) 36,565 - -
Issuance of common stock - - 5 - 5
------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (23,380) (13,185) 31,979 - (4,586)
------------------------------------------------------------------------------
Net increase (decrease) in cash (275) - 31,979 - 31,704
Beginning cash 1,020 - 12,368 - 13,388
------------------------------------------------------------------------------
Ending cash $ 745 $ - $ 44,347 $ - $ 45,092
==============================================================================
61
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
COMBINED
GUARANTOR NON-GUARANTOR RECLASSIFICATIONS
SUBSIDIARIES SUBSIDIARY THE COMPANY AND ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------
Net cash provided by (used in)
operating activities $ 42,440 $ (3,817) $ - $ - $ 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 307,489 4,191 (311,680) - -
Issuance of preferred stock - - 25,000 - 25,000
---------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 307,489 4,191 12,368 - 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
===========================================================================
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This Item is incorporated by reference to the Registrant's definitive
proxy statement on Schedule 14A, which will be filed within 120 days after the
close of the fiscal year covered by this report on Form 10-K, or if the
Registrant's Schedule 14A is not filed within such period, will be included in
an amendment to this Report on Form 10-K which will be filed within such 120 day
period. Information regarding the Executive Officers of the Registrant is
included in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
This Item is incorporated by reference to the Registrant's definitive
proxy statement on Schedule 14A, which will be filed within 120 days after the
close of the fiscal year covered by this report on Form 10-K, or if the
Registrant's Schedule 14A is not filed within such period, will be included in
an amendment to this Report on Form 10-K which will be filed within such 120 day
period.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This Item is incorporated by reference to the Registrant's definitive
proxy statement on Schedule 14A, which will be filed within 120 days after the
close of the fiscal year covered by this report on Form 10-K, or if the
Registrant's Schedule 14A is not filed within such period, will be included in
an amendment to this Report on Form 10-K which will be filed within such 120 day
period.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This Item is incorporated by reference to the Registrant's definitive
proxy statement on Schedule 14A, which will be filed within 120 days after the
close of the fiscal year covered by this report on Form 10-K, or if the
Registrant's Schedule 14A is not filed within such period, will be included in
an amendment to this Report on Form 10-K which will be filed within such 120 day
period.
ITEM 14. CONTROLS AND PROCEDURES
a. Within the 90 days prior to the date of filing of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c))
and 15d-14(c)). Based upon that evaluation, the Company's management, including
its Chief Executive Officer and the Chief Financial Officer, concluded that the
Company's disclosure controls and procedures are effective to ensure that
information to be included in the Company's reports required to be filed under
the Exchange Act is recorded, processed, summarized and reported within the time
period specified in the rules and forms of the Securities and Exchange
Commission.
b. There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls subsequent to
the date the Company carried out this evaluation.
63
PART IV
ITEM 15. 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, 2002 and 2001.
Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000.
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, 2002, 2001 and 2000.
(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
64
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 June 12,
1992.(a)
10.2 Agreement between Ravenswood Aluminum Corporation and United
Steelworkers of America AFL-CIO, Local 5668, dated November 30,
1994.(a)
10.3 Extension of Labor Agreement, dated February 21, 2002, between
Century Aluminum of West Virginia, Inc. and the United
Steelworkers of America AFL-CIO.(k)
10.4 Employment Agreement between Century Aluminum Company and Craig A.
Davis.(b)(k)
10.5 Employment Agreement between Century Aluminum Company and Gerald
A. Meyers.(b)(k)
10.6 Employment Agreement between Century Aluminum Company and Gerald
J. Kitchen.(b)(e)
10.7 Employment Agreement between Century Aluminum Company and David W.
Beckley.(b)(k)
10.8 Form of Severance Agreement between Century Aluminum Company and
Craig A. Davis.(a)(b)
10.9 Amendment to Severance Protection Agreement between Century
Aluminum Company and Craig A. Davis.(b)(e)
10.10 Form of Severance Agreement between Century Aluminum Company and
Gerald A. Meyers.(a)(b)
10.11 Amendment to Severance Protection Agreement between Century
Aluminum Company and Gerald A. Meyers.(b)(e)
10.12 Form of Severance Agreement between Century Aluminum Company and
Gerald J. Kitchen.(a)(b)
10.13 Amendment to Severance Protection Agreement between Century
Aluminum Company and Gerald J. Kitchen.(b)(e)
10.14 Form of Severance Agreement between Century Aluminum Company and
David W. Beckley.(a)(b)
10.15 Amendment to Severance Protection Agreement between Century
Aluminum Company and David W. Beckley.(b)(e)
10.16 1996 Stock Incentive Plan as amended through June 28, 2001.(b)(e)
10.17 Non-Employee Directors Stock Option Plan.(a)(b)
10.18 Amended and Restated Asset Purchase Agreement between Kaiser
Aluminum & Chemical Corporation and Ravenswood Acquisition
Corporation, dated as of December 13, 1988.(a)
10.19 Acquisition Agreement between Virgin Islands Alumina Corporation
and St. Croix Alumina, L.L.C., dated July 19, 1995.(a)
10.20 Ravenswood Environmental Services Agreement between Kaiser
Aluminum & Chemical Corporation and Ravenswood Aluminum
Corporation, dated as of February 7, 1989.(a)
10.21 Asset Purchase Agreement Between Xstrata Aluminum Corporation and
Berkeley Aluminum, Inc. dated as of March 31, 2000.(g)
10.22 Form of Tax Sharing Agreement.(a)
10.23 Form of Disaffiliation Agreement.(a)
10.24 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)
10.25 Century Aluminum Company 1996 Stock Incentive Plan Implementation
Guidelines (as amended December 14, 2001).(b)(l)
10.26 Limited Term Firm Power Supply Agreement between Ravenswood
65
Aluminum Corporation and Ohio Power Company dated as of June 28,
1996.(c)
10.27 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)
10.28 Century Aluminum Company Incentive Compensation Plan.(b)(d)
10.29 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)
10.30 Collective Bargaining Agreement, effective April 2, 2001, between
Century Aluminum of Kentucky, LLC and the United Steelworkers of
America, AFL-CIO-CLC.(j)
10.31 Owners Agreement, dated as of April 2, 2001, between NSA, Ltd.,
Glencore Acquisition I LLC and Century Aluminum Kentucky, LLC.(j)
10.32 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)
10.33 Century Aluminum Company Supplemental Retirement Income Benefit
Plan.(b)(k)
10.34 Alumina Supply Contract, dated January 1, 2001, between Century
Aluminum of West Virginia and Glencore Ltd.(k)
10.35 Alumina Supply Contract, dated January 1, 2001, between Berkeley
Aluminum and Glencore AG.(k)
21.1 List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
99.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
- ----------
(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.
(k) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002.
(l) Incorporated by reference to the Registrant's Annual Report on Form
10-K/A for the year ended December 31, 2001, filed on June 4, 2002.
66
(b) REPORTS ON FORM 8-K:
NONE
67
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/ DAVID W. BECKLEY
--------------------------------------
David W. Beckley
Executive Vice President and
Chief Financial Officer
Dated: March 24, 2003
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 March 24, 2003
-------------------------
Craig A. Davis
/s/ WILLIAM HAMPSHIRE Vice-Chairman March 24, 2003
-------------------------
William R. Hampshire
/s/ GERALD A. MEYERS President, Chief Executive March 24, 2003
------------------------- Officer and Director
Gerald A. Meyers (Principal Executive Officer)
/s/ DAVID W. BECKLEY Executive Vice President and March 24, 2003
------------------------- Chief Financial Officer
David W. Beckley (Principal Financial Officer
and Principal Accounting
Officer)
/s/ ROMAN A. BNINSKI Director March 24, 2003
-------------------------
Roman A. Bninski
/s/ JOHN C. FONTAINE Director March 24, 2003
-------------------------
John C. Fontaine
/s/ WILLY R. STROTHOTTE Director March 24, 2003
-------------------------
Willy R. Strothotte
/s/ JOHN P. O'BRIEN Director March 24, 2003
-------------------------
John P. O'Brien
/s/ STUART M. SCHREIBER Director March 24, 2003
-------------------------
Stuart M. Schreiber
/s/ ROBERT E. FISHMAN Director March 24, 2003
-------------------------
Robert E. Fishman
68
CERTIFICATION
I, Gerald A. Meyers, Chief Executive Officer of Century Aluminum Company
(Century), certify that:
1. I have reviewed this annual report on Form 10-K of Century;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of Century as of, and for, the periods presented in this annual report;
4. Century's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for Century and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to Century, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of Century's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. Century's other certifying officer and I have disclosed, based
on our most recent evaluation, to Century's auditors and the audit committee of
Century's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect Century's ability to record,
process, summarize and report financial data and have identified for Century's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in Century's internal
controls; and
6. Century's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 24, 2003 /s/ GERALD A. MEYERS
--------------------------------
Title: Chief Executive Officer
69
CERTIFICATION
I, David W. Beckley, Executive Vice President and Chief Financial Officer of
Century Aluminum Company (Century), certify that:
1. I have reviewed this annual report on Form 10-K of Century;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of Century as of, and for, the periods presented in this annual report;
4. Century's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for Century and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to Century, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of Century's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. Century's other certifying officer and I have disclosed, based
on our most recent evaluation, to Century's auditors and the audit committee of
Century's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect Century's ability to record,
process, summarize and report financial data and have identified for Century's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in Century's internal
controls; and
6. Century's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses
Date: March 24, 2003
/s/ DAVID W. BECKLEY
--------------------------------------
Title: Executive Vice President and
Chief Financial Officer
70
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, 2002 and
2001, and for each of the three years in the period ended December 31, 2002, and
have issued our report thereon dated February 5, 2003 included elsewhere in this
Form 10-K. Our audits also included the financial statement schedule listed in
Item 15 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 5, 2003
SCHEDULE II
CENTURY ALUMINUM COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND END
OF PERIOD EXPENSE DEDUCTIONS OF PERIOD
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
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
YEAR ENDED DECEMBER 31, 2002:
Allowance for doubtful trade
accounts receivable................. $ 4,345 $ -- $ 292 $4,053
EXHIBIT INDEX
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 June 12,
1992.(a)
10.2 Agreement between Ravenswood Aluminum Corporation and United
Steelworkers of America AFL-CIO, Local 5668, dated November 30,
1994.(a)
10.3 Extension of Labor Agreement, dated February 21, 2002, between
Century Aluminum of West Virginia, Inc. and the United
Steelworkers of America AFL-CIO.(k)
10.4 Employment Agreement between Century Aluminum Company and Craig A.
Davis.(b)(k)
10.5 Employment Agreement between Century Aluminum Company and Gerald
A. Meyers.(b)(k)
10.6 Employment Agreement between Century Aluminum Company and Gerald
J. Kitchen.(b)(e)
10.7 Employment Agreement between Century Aluminum Company and David W.
Beckley.(b)(k)
10.8 Form of Severance Agreement between Century Aluminum Company and
Craig A. Davis.(a)(b)
10.9 Amendment to Severance Protection Agreement between Century
Aluminum Company and Craig A. Davis.(e)
10.10 Form of Severance Agreement between Century Aluminum Company and
Gerald A. Meyers.(a)(b)
10.11 Amendment to Severance Protection Agreement between Century
Aluminum Company and Gerald A. Meyers.(e)
10.12 Form of Severance Agreement between Century Aluminum Company and
Gerald J. Kitchen.(a)(b)
10.13 Amendment to Severance Protection Agreement between Century
Aluminum Company and Gerald J. Kitchen.(e)
10.14 Form of Severance Agreement between Century Aluminum Company and
David W. Beckley.(a)(b)
10.15 Amendment to Severance Protection Agreement between Century
Aluminum Company and David W. Beckley.(e)
10.16 1996 Stock Incentive Plan as amended through June 28, 2001.(b)(e)
10.17 Non-Employee Directors Stock Option Plan.(a)(b)
10.18 Amended and Restated Asset Purchase Agreement between Kaiser
Aluminum & Chemical Corporation and Ravenswood Acquisition
Corporation, dated as of December 13, 1988.(a)
10.19 Acquisition Agreement between Virgin Islands Alumina Corporation
and St. Croix Alumina, L.L.C., dated July 19, 1995.(a)
10.20 Ravenswood Environmental Services Agreement between Kaiser
Aluminum & Chemical Corporation and Ravenswood Aluminum
Corporation, dated as of February 7, 1989.(a)
10.21 Asset Purchase Agreement Between Xstrata Aluminum Corporation and
Berkeley Aluminum, Inc. dated as of March 31, 2000.(g)
10.22 Form of Tax Sharing Agreement.(a)
10.23 Form of Disaffiliation Agreement.(a)
10.24 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)
10.25 Century Aluminum Company 1996 Stock Incentive Plan Implementation
Guidelines (as amended December 14, 2001).(l)
10.26 Limited Term Firm Power Supply Agreement between Ravenswood
Aluminum Corporation and Ohio Power Company dated as of June 28,
1996.(c)
10.27 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)
10.28 Century Aluminum Company Incentive Compensation Plan.(b)(d)
10.29 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)
10.30 Collective Bargaining Agreement, effective April 2, 2001, between
Century Aluminum of Kentucky, LLC and the United Steelworkers of
America, AFL-CIO-CLC.(j)
10.31 Owners Agreement, dated as of April 2, 2001, between NSA, Ltd.,
Glencore Acquisition I LLC and Century Aluminum Kentucky, LLC.(j)
10.32 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)
10.33 Century Aluminum Company Supplemental Retirement Income Benefit
Plan.(b)(k)
10.34 Alumina Supply Contract, dated January 1, 2001, between Century
Aluminum of West Virginia and Glencore Ltd.(k)
10.35 Alumina Supply Contract, dated January 1, 2001, between Berkeley
Aluminum and Glencore AG.(k)
21.1 List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
99.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).
- ----------
(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.
(k) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002.
(l) Incorporated by reference to the Registrant's Annual Report on Form
10-K/A for the year ended December 31, 2001, filed on June 4, 2002.
(b) REPORTS ON FORM 8-K:
NONE