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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-27918
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CENTURY ALUMINUM COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3070826
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2511 GARDEN ROAD, 93940
BUILDING A, SUITE 200, (ZIP CODE)
MONTEREY, CALIFORNIA
(ADDRESS OF REGISTRANT'S PRINCIPAL OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (831) 642-9300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $0.01 PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in a definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of February 26, 1999 20,000,000 shares of common stock of the registrant
were issued and outstanding. Based upon the NASDAQ closing price on February 26,
1999, the aggregate market value of the common stock held by non-affiliates of
the registrant was $66,388,504.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the Annual Meeting of
Stockholders to be held on June 8, 1999 (to be filed pursuant to Regulation 14A
within 120 days after the close of the fiscal year covered by this report on
Form 10-K) are incorporated by reference into Part III of this Form 10-K.
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PART I.
FORWARD-LOOKING STATEMENTS -- CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES
REFORM ACT OF 1995.
This annual report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Words such as "expects," "anticipates,"
"forecasts," "intends," "plans," "believes," "projects," and "estimates" and
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements include, but are not limited to,
statements regarding new business and customers, contingencies, Year 2000
readiness, environmental matters and liquidity 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." These statements are not
guarantees of future performance and involve risks and uncertainties and are
based on a number of assumptions that could ultimately prove to be wrong. Actual
results and outcomes may vary materially from what is expressed or forecast in
such statements. Among the factors that could cause actual results to differ
materially are: general economic and business conditions; changes in demand for
the Company's products and services or the products of the Company's customers;
fixed asset utilization; competition; the risk of technological changes and the
Company's competitors developing more competitive technologies; the Company's
dependence on certain important customers; the availability and terms of needed
capital; risks of loss from environmental liabilities; and other risks detailed
in this report. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 1. BUSINESS
Century Aluminum Company ("Century" or the "Company") is a leading North
American integrated producer of primary aluminum and a broad range of
value-added and specialized sheet and plate aluminum products. Century's
principal subsidiary, Century Aluminum of West Virginia, Inc. ("Century of West
Virginia"), formerly known as Ravenswood Aluminum Corporation, owns and operates
a reduction facility and a multi-purpose rolling mill, strategically located on
the Ohio River in Ravenswood, West Virginia. Century of West Virginia, through
its wholly owned subsidiary, Berkeley Aluminum Company ("Berkeley"), also owns a
26.67% undivided interest in a reduction facility in Mt. Holly, South Carolina
(the "Mt. Holly Facility"). Century's reduction facilities have an aggregate
annual capacity of approximately 495 million pounds of primary aluminum, of
which approximately 330 million pounds are used by Century of West Virginia's
rolling mills. In 1998, Century produced 495 million pounds of primary aluminum,
shipped 461.9 million pounds of aluminum sheet and plate products, and had total
net sales of $650.3 million. The Company's operations are grouped into two
business segments: primary aluminum, and aluminum sheet and plate products.
Primary aluminum represented 17.8%, 19.3% and 22.0% of total net sales and sheet
and plate represented 82.2%, 80.7% and 78.0% of total net sales in 1998, 1997
and 1996, respectively. See Note 16 to the Consolidated Financial Statements for
financial information about the Company's business segments.
In April 1996, the Company completed an initial public offering of its
Common Stock. The selling shareholders, which are subsidiaries of Glencore
International AG ("Glencore International" and, together with its subsidiaries,
the "Glencore Group"), have retained 7,925,000 common shares, or 39.6% of the
shares outstanding. Prior to March 1996, the Company had holdings in a number of
other entities in unrelated businesses that are presented as discontinued
operations. Effective March 28, 1996, the Company made a special distribution,
in the form of a pro rata redemption of shares to its then current shareholders,
comprised of these holdings.
On December 31, 1998, the Company acquired a cast aluminum plate business
located in Vernon, California, from Alcoa Inc. The business is named Century
Cast Plate, Inc. and operates as a wholly-owned subsidiary of Century. In 1998,
the business had revenues of nearly $30.0 million and has the capacity to
produce approximately 15.0 million pounds of cast and machined aluminum plate a
year.
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Century of West Virginia's reduction facility produces primary aluminum,
which is alloyed and cast into rolling ingot, principally for use by its rolling
plant. Through its interest in the Mt. Holly Facility, Century produces primary
aluminum products in the form of t-ingot, extrusion billet, rolling ingot and
foundry ingot. Extrusion billet and other shaped primary aluminum products are
considered to be premium products and, accordingly, sell at a premium to the
commodity-priced aluminum ingot. The Mt. Holly Facility, constructed in 1980, is
the most recently built reduction facility in the United States. Since January
1, 1996, Century's requirements for alumina, the raw material used by its
reduction facilities to produce primary aluminum, have been purchased pursuant
to a long-term fixed-price supply agreement with Alcoa L.L.C. and Alcoa
Australia.
The Company operates one of the largest multi-purpose rolling plants in
North America which, given its current product mix, has the capacity to
manufacture 500 million pounds of sheet and plate aluminum products a year. In
1998, the Company increased its heat-treated and non heat-treated plate capacity
from 25 to 50 million pounds a year with the $28.0 million expansion of its
plate mill. The Company's hot rolling mill processes aluminum ingot for the
production of plate as wide as 150 inches and sheet as wide as 103 inches. Its
130-inch cold rolling mill, one of the largest in North America, has the
capability to produce sheet up to 103 inches wide and up to one-quarter inch
thick. Its plate operations include what the Company believes is the world's
largest heavy-duty plate stretcher and a five-axis profiler, affording it the
ability to produce heavy gauge and uniquely-configured plate products. These
capabilities enable it to manufacture value-added products satisfying exacting
technical and production standards, as well as products with specifications that
only it and a limited number of competitors can meet. The Company believes that
these capabilities also enable it to maintain a diversified and balanced product
mix and provide it with the flexibility to target new markets and shift product
mix, thereby reducing the Company's dependence on any given product and its end-
user's industry.
The Company uses significant amounts of electricity in the aluminum
reduction process. To fulfill its power requirements at the Century of West
Virginia facility, the Company purchases electricity from Ohio Power under a
power supply agreement.
INDUSTRY OVERVIEW
The aluminum industry is highly cyclical, and the market prices of alumina
and primary aluminum (which is traded as a commodity) have been volatile from
time to time. In turn, prices of aluminum sheet and plate have reflected this
price volatility as well as fluctuations attributable to general and
industry-specific economic conditions.
Primary Aluminum
The most commonly used indicator for pricing primary aluminum is the price
per tonne for transactions on the London Metals Exchange ("LME"). The LME price
does not represent the actual price for the Company's products; rather, it is
the most commonly used benchmark for pricing both primary and many fabricated
aluminum products in the aluminum industry. The prices for primary aluminum have
fluctuated widely. Over the past 10 years, the average LME cash price has ranged
from a low of $.52 per pound in 1993 to a high of $1.17 per pound in 1988.
Prices for primary aluminum declined from 1989 to 1993 due to a worldwide
oversupply of aluminum, resulting from increased exports from the Commonwealth
of Independent States ("C.I.S.") and former Eastern Bloc countries, overcapacity
in the industry and weakness in the general economy. During 1994, inventories
began to decline and prices rose, principally due to the increased demand for
aluminum associated with the U.S. economic recovery. During 1995 and 1996, the
LME cash price steadily declined from an average of $0.94 per pound in January
1995 to $0.61 per pound in October 1996. During 1997, industry fundamentals
improved and the LME cash price increased to an average of $0.78 per pound in
August 1997. During 1998, selling by funds, consumer hesitation in anticipation
of lower prices and continued economic uncertainty in the Asian markets
adversely influenced the LME cash price. The average LME cash price was $0.62,
$0.73 and $0.68 per pound for the years ended December 31, 1998, 1997 and 1996,
respectively.
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Sheet and Plate Aluminum Products
The markets for aluminum products are highly diverse and include sheet,
plate and foil; rod, bar and wire; and extrusions, forgings, castings, powder
and paste. The Company competes in the markets for sheet and plate products,
which represented approximately 62% of the total United States aluminum mill
product shipments in 1998. The principal end-user markets for aluminum sheet and
plate products are: transportation; containers and packaging; aerospace;
building and construction; consumer durables; electrical; and machinery and
equipment. Manufacturers in these end-user markets use aluminum sheet and plate
to make numerous products, including: beverage cans; passenger cars, boats,
trucks, trailers, rail cars and aircraft; screens, roofing systems, and aluminum
siding; heating, ventilation and air conditioning equipment; electrical
components; and computers and copying machines.
Although the market for aluminum is cyclical, overall demand for
flat-rolled aluminum sheet and plate products in the United States, the
principal market served by the Company, has grown at an average annual rate of
3.7% over the last five years to approximately 10.5 billion pounds in 1998.
Although most sheet and plate products are sold directly to the end-user
markets, approximately 15% of sheet products and 53% of plate products are sold
through distributors. Distributors principally resell to the aerospace,
transportation, building and construction, and consumer durables markets.
Distributors have been increasing their share of the domestic aluminum sheet and
plate market in recent years as aluminum producers have been reducing downstream
processing and as end-users have been reducing their raw material inventories.
PRODUCTS AND MARKETS
The Company produces and sells primary aluminum, including premium primary
product such as rolling ingot and extrusion billet. The Company also produces a
diverse range of sheet and plate products for the aerospace, transportation and
industrial ("ATI") markets. The Company sells sheet and plate products directly
to manufacturers that fabricate them into finished products or to distributors
that resell into various markets. Among the various products using aluminum
sheet and plate manufactured by the Company are: passenger cars, boats, trucks,
trailers, rail cars and aircraft; roofing systems and aluminum siding; heating,
ventilation and air conditioning equipment; electrical components; and computer
and copying equipment. Within the ATI markets, the Company has focused on higher
margin, value-added and specialized products, including brazing sheet used in
automotive cooling systems, heat treatable and non-heat treatable aluminum plate
for the aerospace and defense industries, and heavy-gauge, wide-leveled coil and
sheet for the heavy truck, truck trailer, marine and rail car sectors.
Distributor coil and flat sheet accounted for 20.5%, 21.1% and 19.0%,
respectively; primary aluminum accounted for 17.8%, 19.3% and 22.0%,
respectively; brazing sheet accounted for 14.3%, 12.3% and 11.7%, respectively;
heat treated plate accounted for 10.2%, 7.2% and 7.0%, respectively; and can
body sheet accounted for 0.6%, 10.2% and 10.1%, respectively, of Century's net
sales for the years ended December 31, 1998, 1997 and 1996.
The Company's strategy is to focus on maximizing productivity, minimizing
operating costs, emphasizing higher margin, value-added and specialized
products, broadening its customer base and penetrating new markets. Consistent
with this strategy, the Company announced a new operating plan in the third
quarter of 1997. The new operating plan featured a continuation of the shift to
high-value sheet and plate aluminum products and a streamlining of the sheet and
plate products business to attain higher levels of operating efficiency. During
1998, the Company accelerated its planned withdrawal from the commodity beverage
can sheet business and began production in its $28.0 million plate mill
expansion project. The project doubled Century of West Virginia's capacity to
produce heat-treated plate.
COMPETITION
The markets for primary aluminum and aluminum sheet and plate products are
diverse and highly competitive. The Company competes in the production and sale
of primary aluminum and aluminum sheet and plate products with numerous other
producers in the United States and Canada (including continuous casters or
mini-mills, and other multi-purpose mills) and with imported products,
principally from Europe,
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Venezuela and the C.I.S. The Company competes on the basis of quality, price,
timeliness of delivery and customer service. 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 those of the Company. Among the Company's principal
competitors are Alcoa, Alcan, Kaiser and Reynolds.
Aluminum also competes with other materials such as steel, plastic and
glass for various applications. Higher or lower aluminum prices tend to make
aluminum products less or more competitive with these alternative materials.
PRICING
Century offers a number of pricing alternatives to its customers which,
combined with the Company's metals risk management program, are designed to
preserve for the Company prevailing margins for its sheet and plate sales and
lock-in a certain level of price stability on its primary aluminum production.
While the Company's pricing terms vary to accommodate sheet and plate
customer requirements, pricing of its products is generally offered on the
following bases: (i) a fixed-price basis, which is generally used only for short
or normal lead-time orders, (ii) a "take or pay" basis, where the customer is
required to purchase the product in accordance with the contract terms or pay
for the primary aluminum forward contract plus an administrative fee, or (iii)
an indexed price, where the customer pays an agreed-upon margin above an
established index, such as the LME. In 1998, fixed price orders generally
represented approximately 50% of these orders, "take or pay" represented 35% of
the orders, and the balance was on an indexed pricing basis. Century also
processes primary aluminum for selected customers on a tolling basis, where it
is paid a fee. In 1998, tolled product shipments amounted to 28.2 million
pounds, or 6.1% of total sheet and plate shipments, and accounted for revenues
of $8.5 million, or 1.6% of total revenues from sheet and plate production. See
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
SALES AND DISTRIBUTION
Century serves customers principally in the aerospace, transportation and
industrial sectors. Approximately 69%, 68% and 72% of Century's sheet and plate
shipments in 1998, 1997 and 1996, respectively, were made directly to customers
that manufacture finished products. The remaining portions of the Company's
sheet and plate shipments were to distributors. For the years ended December 31,
1998, 1997 and 1996, Century's 10 largest sheet and plate customers accounted
for approximately 49%, 46% and 43%, respectively, of total sheet and plate
sales. There can be no assurance that any of the Company's major customers will
continue to purchase their aluminum requirements from the Company at current
volumes. For financial information regarding export sales, see Note 16 to the
Consolidated Financial Statements.
Sales of primary aluminum products to the Glencore Group amounted to $74.3
million, $105.5 million and $138.7 million for the years ended 1998, 1997 and
1996, respectively. Sales to the Glencore Group represented 11.4%, 14.6% and
20.1% of the net sales of the Company for the years ended 1998, 1997 and 1996,
respectively. The Glencore Group has priced and unpriced agreements with the
Company to purchase at market rates 91.6 million pounds of primary aluminum
products during 1999. However, there can be no assurance that the Company will
continue to do business with the Glencore Group beyond the existing agreements.
BACKLOG
The Company's backlog was approximately $805 million at December 31, 1998,
of which approximately 43% will be filled during 1999. Long term contracts with
customers in the aerospace sector are the principal reason for the increase in
backlog. The Company's backlog at December 31, 1997 was approximately $341
million.
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ENVIRONMENTAL MATTERS
The Company's operations are subject to increasingly stringent
environmental, health and safety laws and regulations. In addition, past
manufacturing activities have resulted in environmental impacts requiring
remediation. Pursuant to certain environmental laws, the Company, regardless of
fault, may be liable for the costs of remediation of contaminated property or
for the amelioration of damage to natural resources. Although the Company
believes, based upon information currently available to management, that it will
not have liabilities in this regard which are likely to have a material adverse
effect on the Company, there can be no assurance that future remedial
requirements at currently 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
environmental capital expenditures for the years ending December 31, 1999, 2000,
and 2001 of approximately $0.9 million, $1.0 million and $1.5 million,
respectively. In addition, the Company expects to incur operating expenses
relating to environmental matters of approximately $6.6 million, $7.1 million
and $7.4 million for the years ending December 31, 1999, 2000 and 2001,
respectively. As part of its general capital expenditure plan, the Company also
expects to incur capital expenditures for other capital projects that may, in
addition to improving operations, reduce certain environmental impacts. See Item
7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Environmental Expenditures and Other Contingencies."
The 1990 amendments to the Clean Air Act impose stringent standards on
aluminum industry air emissions. These amendments will affect the operations of
the Company's facilities. Technology-based standards relating to smelters and
carbon plants have been promulgated, while those relating to casting have yet to
be finalized. Technology-based standards relating to fabrication plants have yet
to be proposed. Consequently, the Company cannot predict with certainty the
total amount of environmental expenditures the Company will incur to comply with
these standards. The Company's general capital expenditure plan includes certain
projects designed to improve the Company's compliance with respect to both the
known and anticipated requirements.
Pursuant to an Environmental Protection Agency ("EPA") order issued in
September 1994 under Section 3008(h) (the "3008(h) order") of the Resource
Conservation and Recovery Act ("RCRA"), Century of West Virginia is performing
remediation measures at a former oil pond area and in connection with cyanide
contamination in the groundwater. The Company also is conducting a RCRA facility
investigation ("RFI") and a corrective measures study ("CMS") to evaluate and
develop corrective alternatives for any areas that have contamination exceeding
certain levels. The Company anticipates that the RFI will not be completed
before mid 1999. Once the RFI and CMS are complete, the EPA will assess the need
for clean up, and if any clean up is required, a subsequent order will be
issued. At this time, the Company is unable to determine the extent of clean-up
measures, if any, that may be required. However, the Company is aware of some
environmental contamination at Century of West Virginia, and it is likely that
clean-up activities will be required in at least some areas of the facility. The
Company believes a significant portion of this contamination is attributable to
the operations of a prior owner and will be the financial responsibility of that
owner, as discussed below.
Prior to the Company's acquisition of the Century of West Virginia
facility, Kaiser Aluminum & Chemical Corporation ("Kaiser") owned and operated
the facility for approximately thirty years. Many of the conditions which the
Company is required to investigate under the 3008(h) order arise out of
activities which occurred during Kaiser's ownership and operation, and with
respect to those conditions, Kaiser will be responsible for the costs of the RFI
and required cleanup under the terms of the purchase agreement ("Kaiser Purchase
Agreement"). In addition, Kaiser retained title to certain land within the
Century of West Virginia premises and retains full responsibility for those
areas. Under current environmental laws, the Company may be required to
remediate any contamination discovered during or after completion of the RFI,
which contamination was discharged from areas which Kaiser previously owned or
operated, or for which Kaiser has retained ownership or responsibility. However,
if such remediation is required, the Company believes that Kaiser will be liable
for some or all of the costs thereof pursuant to the Kaiser Purchase Agreement.
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The Company is aware of two areas of contamination in the soil and
groundwater at its previously owned Virgin Islands Alumina Company ("Vialco")
facility. At the first of these areas, the Company has removed quantities of
contaminated soils and has transported and disposed of such soils in approved
facilities. In addition, it has begun a bioremediation program that it believes
will fulfill the remaining legal requirements with respect to such soils. In the
second area, the Company believes that a substantial amount of the contamination
originated from an adjacent refinery owned by Hess Oil Virgin Islands, Inc.
("HOVIC"). The Company further believes that the vast majority of any
contamination that did not originate from HOVIC was caused by releases on the
property that predated Vialco's ownership and will not be the legal
responsibility of Vialco. Pursuant to the Acquisition Agreement by which Vialco
sold the premises to St. Croix Alumina, L.L.C., a subsidiary of Alcoa Alumina
and Chemicals L.L.S. ("St. Croix"), Vialco retained liability for environmental
conditions existing at the time of the sale only to the extent such conditions
arose from operation of the facility by Vialco. In addition, indemnification
arises only if the conditions require remediation or give rise to claims under
the laws in effect at the time of sale. Finally, St. Croix may not request
indemnity from Vialco until St. Croix has spent $300,000 on such environmental
conditions and Vialco's indemnity is capped at $18.0 million. Management of the
Company does not believe that the retained liability, if any, will have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
It is the Company's policy to accrue for costs associated with
environmental assessments and remedial efforts when it becomes probable that a
liability has been incurred and the costs can be reasonably estimated. The
aggregate environmental related accrued liabilities were $1.4 million at
December 31, 1998 and $1.1 million at December 31, 1997. All accruals have been
recorded without giving effect to any possible future insurance or Kaiser
indemnity proceeds. With respect to ongoing environmental compliance costs,
including maintenance and monitoring, such costs are expensed as incurred.
Because of the uncertainties described above, and the Company's inability
to predict the requirements of 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. However, based upon all
available information, management does not believe the outcome of these
environmental matters will have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
RESEARCH AND DEVELOPMENT
Century performs ongoing process and product development work in
coordination with outside laboratories. Company programs have focused on both
product and process improvements. The Company has sought to produce new alloys
and products to enhance the strength, brazeability and corrosion resistance of
brazing sheet, develop tempers and higher gauge ranges for the improvement of
existing applications and the development of new applications in the aerospace
and tooling markets, and develop enhanced formability non-heat treatable alloys
for transportation applications. On the process side, the Company has made
efforts in its rolling operations to improve process control through the
application of mill models and enhanced diagnostics and in its reduction
operations to refine the computer control of pots and to reduce electricity
usage by using different anode stub configurations. Century also participates in
a consortium consisting of government research laboratories and other aluminum
companies to develop new alloys for use in automotive body applications.
Expenditures for third-party research and development totaled $1.7 million, $2.2
million and $2.6 million in 1998, 1997 and 1996, respectively, and are expected
to be $1.9 million in 1999.
PATENTS AND TRADEMARKS
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.
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EMPLOYEES AND LABOR RELATIONS
The Company currently employs approximately 2,140 persons. Century of West
Virginia's present work force is comprised of approximately 1,551 hourly
employees, represented by the United Steelworkers of America ("USWA"), and
approximately 465 salaried personnel. Century of West Virginia's hourly
employees are currently working under a four and one-half year labor agreement
with the USWA which expires on May 31, 1999.
Century Cast Plate, Inc., currently employs approximately 107 persons, 89
hourly employees represented by the International Union of United Automobile,
Aerospace and Agricultural Implement Workers of America, and approximately 18
salaried employees. The hourly employees' contract expires on August 27, 2002.
Century maintains noncontributory defined benefit pension plans,
postretirement healthcare and life insurance benefit plans and defined
contribution 401 (k) plans for its salaried and hourly employees. Management
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
Century of West Virginia's facility houses the Company's principal
operations. The facility occupies 105 acres under roof on a site totaling 2,800
acres strategically located on the Ohio River near Ravenswood, West Virginia,
165 miles southwest of Pittsburgh, Pennsylvania and 45 miles north of
Charleston, West Virginia.
The Company's reduction facilities at Ravenswood and Mt. Holly have an
aggregate annual capacity of approximately 495 million pounds of primary
aluminum. Its rolling plant has a production capacity of approximately 500
million pounds a year.
Century of West Virginia's reduction facility, which was built in 1955, has
an annual production capacity of approximately 375 million pounds and produces
primary aluminum, which is alloyed and cast into rolling ingot principally for
use by its rolling plant. Approximately 330 million pounds of its primary
aluminum production are used to satisfy the primary aluminum requirements of its
rolling and plate mills with the balance sold in the form of sow.
The Mt. Holly Facility was constructed in 1980 by Alumax using Alcoa
technology and is the most recently constructed reduction facility in the United
States. The Mt. Holly Facility has a total production capacity of approximately
450 million pounds, of which Century owns a 26.67% undivided interest. The
remaining undivided interest in the Mt. Holly Facility is owned 50.33% by Alumax
of South Carolina, Inc. ("ASC"), a subsidiary of Alcoa and 23.00% by a
subsidiary of Sudelektra Holding AG, a publicly traded Swiss company. The
Glencore Group is a major shareholder of Sudelektra Holding AG. ASC manages and
operates the 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 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.
The Company's rolling plant is one of the largest multi-purpose rolling
plants in North America. The Company's hot rolling mill processes aluminum ingot
for the production of plate as wide as 150 inches and sheet as wide as 103
inches. Its 130-inch cold rolling mill, one of the largest in North America, has
the capability to produce sheet up to 103 inches wide and up to one-quarter inch
thick. Its plate operations include what the Company believes is the world's
largest heavy-duty plate stretcher and a five-axis profiler, affording it the
capabilities to produce heavy gauge and uniquely-configured plate products.
During 1998, the Company doubled its heat-treated capacity with a $28 million
project. These capabilities enable it to manufacture value-added products
requiring exacting technical and production standards, as well as products
within the ATI market with specifications that only it and a limited number of
competitors can meet.
The Company acquired a cast aluminum plate business from Alcoa on December
31, 1998. The business is named Century Cast Plate, Inc., and is located in
Vernon, California. The facility occupies 14 acres under roof on a site totaling
28 acres. The plant has the capacity to produce approximately 15 million pounds
a year
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of cast and machined aluminum plate. Recent investments by Alcoa totaling $11
million have made the plant a technically advanced, low-cost producer of a wide
range of cast plate products.
Equipment failures at Century of West Virginia's facility 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. No assurance can be given that a material shutdown will not occur in
the future or that such a shutdown would not have a material adverse effect on
the Company. In addition to equipment failures, the facility also is subject to
the risk of catastrophic loss. The Company believes that it maintains adequate
property damage insurance to provide for reconstruction of damaged equipment, as
well as business interruption insurance to mitigate losses resulting from any
production shutdown caused by an insured loss.
ITEM 3. LEGAL PROCEEDINGS
Century of West Virginia is a named defendant (along with other companies)
in approximately 2,029 civil actions brought by individuals seeking to recover
compensatory and/or punitive damages in connection with alleged asbestos-related
diseases. All plaintiffs have been employees of independent contractors who
claim to have been exposed to asbestos in the course of performing services at
various facilities, including the Century of West Virginia facility. The cases
are typically resolved based upon factual determinations as to the facilities at
which the plaintiffs worked, the periods of time during which work was
performed, the type of work performed and the conditions in which work was
performed. If the plaintiffs' work was performed during the period when Kaiser
owned the Century of West Virginia facility, Kaiser has retained responsibility,
pursuant to the terms of the Kaiser Purchase Agreement, for defense and
indemnity. If a plaintiff is shown to have worked at the Century of West
Virginia facility after the time Century of West Virginia purchased the facility
from Kaiser, Kaiser assumes the defense and liability, subject to a reservation
of rights against Century of West Virginia. The Company believes it is unlikely
that existing or potential plaintiffs were exposed to asbestos at the Century of
West Virginia facility after Century of West Virginia purchased the facility
from Kaiser. There are currently 10 actions pending by individuals who claim
exposure after Century of West Virginia's assumption of the premises. Therefore,
while the impact of the asbestos proceedings is impossible to predict, the
Company believes that the ultimate resolution will not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
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, in the opinion of the
Company's management, such proceedings and actions should not, individually or
in the aggregate, have a material adverse effect on the Company's financial
condition, results of operations or liquidity. For a description of certain
environmental matters involving the Company, see Item 1 "-- Environmental
Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of 1998.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the executive
officers of the Company. Each of such persons serves at the discretion of the
Board of Directors.
BUSINESS EXPERIENCE AND PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AGE DURING THE PAST 5 YEARS; POSITIONS HELD WITH COMPANY
- ---- --- ----------------------------------------------------------
Craig A. Davis......................... 58 Chairman and Chief Executive Officer of the Company since
August 1995; Chairman and Chief Executive Officer of
Century Aluminum of West Virginia since August 1995;
Chairman and acting Chief Executive Officer of Century
Aluminum of West Virginia from April 1992 through July
1995; Executive of Glencore International and Glencore AG
from September 1990 to March 1996 and Director of Glencore
International since December 1993.
Gerald A. Meyers....................... 49 President and Chief Operating Officer and Director of the
Company since August 1995; President and Chief Operating
Officer of Century Aluminum of West Virginia since January
1993 and Director of Century Aluminum of West Virginia
since April 1994.
Gerald J. Kitchen...................... 58 Executive Vice President, General Counsel and Chief
Administrative Officer of the Company since September
1995; Vice President, General Counsel and Chief
Administrative Officer of Century Aluminum of West
Virginia since August 1995; Partner of the law firm of
Thoits, Love, Hershberger & McLean from November 1992 to
September 1995.
David W. Beckley....................... 54 Executive Vice President and Chief Financial Officer of
the Company since September 1995; Vice President and Chief
Financial Officer of Century Aluminum of West Virginia
since September 1995; Vice President and Corporate
Controller of Alliant Techsystems, Inc. (defense
contractor) from May 1990 through May 1995.
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
------ ------
1998
First Quarter............................................ $18.44 $12.00
Second Quarter........................................... $20.75 $13.88
Third Quarter............................................ $15.13 $ 7.25
Fourth Quarter........................................... $11.00 $ 5.75
1997
First Quarter............................................ $19.25 $16.50
Second Quarter........................................... $18.00 $14.00
Third Quarter............................................ $18.00 $14.50
Fourth Quarter........................................... $17.50 $13.00
The Company declared and paid dividends of $0.20 per share of Common Stock
during 1998 and 1997. The Company has a loan agreement that contains, among
other things, restrictions on the payment of dividends by the Company. See Note
4 and Note 18 to the Consolidated Financial Statements.
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At December 31, 1998, there were 17 holders of record and approximately
1,100 beneficial owners of the Company's common stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected 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, 1998 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,
1995 and 1994 is derived from the audited consolidated financial statements of
the Company which are not included herein. 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,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------- ----------- ----------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales -- third party customers........ $576,006 $615,467 $550,168 $610,722 $474,067
Net sales -- related parties.............. 74,252 105,521 138,711 137,260 95,558
-------- -------- -------- -------- --------
Total net sales........................... 650,258 720,988 688,879 747,982 569,625
Cost of goods sold........................ 611,796 691,887 636,486 653,487 573,386
-------- -------- -------- -------- --------
Gross profit (loss)....................... 38,462 29,101 52,393 94,495 (3,761)
Selling, general and administrative
expenses............................... 19,246 17,948 18,614 12,729 11,647
-------- -------- -------- -------- --------
Operating income (loss)................... 19,216 11,153 33,779 81,766 (15,408)
Interest expense -- net, others........... (2,204) (3,066) (2,058) (3,578) (6,620)
Interest expense -- net, affiliates....... -- -- -- (369) (2,158)
Other income.............................. 553 419 91 1,472 361
Net gain (loss) on forward contracts...... 10,574 (6,837) (6,670) 8,718 16,244
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes.................... 28,139 1,669 25,142 88,009 (7,581)
Income tax benefit (expense).............. (10,202) (601) (8,902) (34,502) 1,704
-------- -------- -------- -------- --------
Income (loss) from continuing
operations............................. 17,937 1,068 16,240 53,507 (5,877)
Income from discontinued operations -- net
of income taxes........................ -- -- 264 5,773 5,769
-------- -------- -------- -------- --------
Net income (loss)......................... $ 17,937 $ 1,068 $ 16,504 $ 59,280 $ (108)
======== ======== ======== ======== ========
Basic earnings per share:
Income (loss) from continuing
operations........................... $ 0.90 $ 0.05 $ 0.78 $ 2.31 $ (0.25)
Income from discontinued operations.... -- -- 0.01 0.25 0.25
-------- -------- -------- -------- --------
Net income............................. $ 0.90 $ 0.05 $ 0.79 $ 2.56 $ --
======== ======== ======== ======== ========
Diluted earnings per share:
Income (loss) from continuing
operations........................... $ 0.89 $ 0.05 $ 0.78 $ 2.31 $ (0.25)
Income from discontinued operations.... -- -- 0.01 0.25 0.25
-------- -------- -------- -------- --------
Net income............................. $ 0.89 $ 0.05 $ 0.79 $ 2.56 $ --
======== ======== ======== ======== ========
Cash dividends declared and paid per common
share..................................... $ 0.20 $ 0.20 $ 0.15 $ -- $ --
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YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------- ----------- ----------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA (AT PERIOD END):
Working capital........................... $188,156 $180,524 $170,037 $151,324 $ 17,332
Total assets.............................. 545,630 507,148 473,731 538,120 536,463
Long-term debt............................ 89,389 58,950 24,356 -- --
Total debt................................ 89,389 58,950 24,356 -- 130,000
Total noncurrent liabilities.............. 252,782 220,604 190,092 178,511 197,556
Total shareholders' equity................ 177,483 163,546 166,478 225,509 76,744
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, the Consolidated Financial Statements
of the Company, including the notes thereto, appearing in Item 8.
OVERVIEW
The Company is an integrated manufacturer of primary aluminum and a broad
range of value-added and specialized sheet and plate products. The Company's net
sales are derived from the sale of primary aluminum and aluminum sheet and plate
products and from the tolling of primary aluminum and scrap into sheet and plate
products. The Company sells sheet and plate products either directly to
customers, in which case revenues and cost of goods sold include metal costs, or
as a toll, in which case the customer provides the metal and the Company's
revenues and cost of goods sold do not include metal costs.
The aluminum industry is highly cyclical and the market price of primary
aluminum (which trades as a commodity) is determined by worldwide supply and
demand conditions, and as such, is highly volatile. For example, the cash price
for primary aluminum traded on the LME averaged $0.62, $0.73 and $0.68 per pound
for the years 1998, 1997, and 1996, respectively. In turn, prices of aluminum
sheet and plate products have reflected this volatility, as well as fluctuations
attributable to general and industry-specific economic conditions, which affect
the Company's volume and mix of sheet and plate products sold. The Company's
results of operations depend to a large degree on the market prices of primary
aluminum and its flat-rolled sheet and plate products. Any adverse changes in
the conditions that affect the market price of primary aluminum or the market
prices of the Company's sheet and plate products could have a material adverse
affect on the Company's results of operations.
Of the approximately 375 million pounds of primary aluminum produced at
Century of West Virginia's reduction facility in 1998, the Company utilized
approximately 330 million pounds for its rolling operations, with the balance
sold primarily to the Glencore Group and third parties at market prices. The
Company's interest in the Mt. Holly Facility amounted to approximately 120
million pounds of primary aluminum production in 1998. During 1998, Glencore
purchased 78.9 million pounds of primary aluminum that was produced at the Mt.
Holly Facility. Century's remaining share of the Mt. Holly Facility production
was sold to third parties. In total, the Company shipped 106.4 million pounds of
primary aluminum products in the form of t-ingot to the Glencore Group in 1998.
Revenues from these shipments amounted to $74.3 million (representing 11.4% of
1998 net sales). The Glencore Group has priced and unpriced agreements with the
Company to purchase at market rates 91.6 million pounds of primary aluminum
products during 1999.
The principal elements comprising the Company's cost of goods sold are raw
materials, energy and labor. The major raw materials and energy sources used by
the Company in its production process are alumina, aluminum scrap, coal tar
pitch, petroleum coke, aluminum fluoride and electricity. The market price of
alumina has been volatile from time to time. On July 24, 1995, Century entered
into a long-term fixed-price alumina supply contract with Alcoa L.L.C. and Alcoa
of Australia. Pursuant to the supply agreement, since January 1, 1996, Century
has paid a fixed price for alumina, subject to fixed annual price increases of
approximately 2.5% through 2001. Although the Company produces the primary
aluminum metal required by its rolling operations, it attempts to use as much
aluminum scrap as possible internally as well as through
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purchases in the open market to meet the total requirements of its rolling
operations. The market price for aluminum scrap closely follows the price of
primary aluminum and has been subject to significant cyclical price
fluctuations.
The Company uses significant amounts of electricity in the aluminum
reduction process. To fulfill its power requirements at the Century of West
Virginia facility, prior to July 1, 1996, the Company purchased electricity from
Ohio Power at a price based principally upon Ohio Power's costs of production.
The Company and the same public utility signed a power supply agreement,
covering the period from July 1, 1996 through July 31, 2003. Under this
agreement, the Company pays a fixed price for electricity used. Since, under the
terms of the agreement, the power rate is fixed, the Company's margins could be
adversely affected if aluminum prices decrease.
With respect to its labor costs, in 1992, the Company established a
progress share plan for eligible union employees, providing for contributions of
10% of Century of West Virginia's pre-plan, after-tax income (as defined) for
each plan year through 1997 when the plan terminated. On November 30, 1994, the
Company entered into a new four and one-half year labor contract with its hourly
workers. This agreement will expire on May 31, 1999. The agreement called for
increases in hourly wages in 1996, 1997 and 1998. Each of the three yearly wage
increases resulted in increased wage costs of approximately 2.0%. Additionally,
there is a cost-of-living adjustment equal to one cent per hour for each full
.3% change in the Consumer Price Index published by the U.S. Department of
Labor's Bureau of Labor Statistics. Although the Company anticipates a new labor
agreement will be negotiated by May 31, 1999, failure to reach a labor agreement
could have a material adverse affect on the Company's financial condition,
results of operations or liquidity.
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.
PERCENTAGE OF NET SALES
-----------------------
1998 1997 1996
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 94.1 96.0 92.4
----- ----- -----
Gross profit.............................................. 5.9 4.0 7.6
Selling, general and administrative expenses................ 3.0 2.5 2.7
----- ----- -----
Operating income.......................................... 2.9 1.5 4.9
Interest expense -- net..................................... (0.3) (0.4) (0.2)
Other income................................................ 0.1 0.1 --
Net gain (loss) on forward contracts........................ 1.6 (0.9) (1.0)
----- ----- -----
Income from continuing operations before income taxes....... 4.3 0.3 3.7
Income tax expense.......................................... (1.6) (0.1) (1.3)
----- ----- -----
Income from continuing operations........................... 2.7% 0.2% 2.4%
===== ===== =====
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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:
SHEET AND PLATE PRODUCTS PRIMARY ALUMINUM
------------------------------------------ -------------------
DIRECT(1) TOLL DIRECT(1)(2)
------------------- ------------------- -------------------
POUNDS $/POUNDS POUNDS $/POUNDS POUNDS $/POUNDS
------- -------- ------- -------- ------- --------
(POUNDS IN THOUSANDS)
1998
First Quarter............... 114,618 $1.23 7,154 $0.31 44,779 $0.74
Second Quarter.............. 103,355 $1.23 9,592 $0.26 38,022 $0.71
Third Quarter............... 109,205 $1.20 6,718 $0.29 43,146 $0.69
Fourth Quarter.............. 106,437 $1.19 4,778 $0.38 37,218 $0.70
------- ----- ------- ----- ------- -----
Total............... 433,615 $1.21 28,242 $0.30 163,165 $0.71
1997
First Quarter............... 138,916 $1.10 12,017 $0.32 47,666 $0.74
Second Quarter.............. 134,411 $1.14 13,130 $0.29 46,059 $0.76
Third Quarter............... 112,232 $1.17 9,217 $0.32 46,780 $0.76
Fourth Quarter.............. 106,112 $1.24 14,649 $0.26 44,121 $0.76
------- ----- ------- ----- ------- -----
Total............... 491,671 $1.15 49,013 $0.29 184,626 $0.75
1996
First Quarter............... 115,708 $1.17 20,936 $0.32 46,774 $0.79
Second Quarter.............. 113,333 $1.15 34,887 $0.29 31,349 $0.80
Third Quarter............... 104,146 $1.14 29,396 $0.32 36,702 $0.78
Fourth Quarter.............. 109,626 $1.09 20,493 $0.31 78,540 $0.75
------- ----- ------- ----- ------- -----
Total............... 442,813 $1.14 105,712 $0.31 193,365 $0.77
- ---------------
(1) Does not include materials and products processed by the Company for a fee
("tolling") and forward sales contracts without physical delivery.
(2) Does not include intersegment sales.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales. Consolidated net sales decreased $70.7 million (or 9.8%) in
1998 to $650.3 million from $721.0 million in 1997. Sheet and plate net sales
decreased $47.3 million (or 8.1%) in 1998 to $534.5 million from $581.8 million
in 1997. The segment shipped 461.9 million pounds of sheet and plate products in
1998 versus 540.7 million pounds of sheet and plate products in 1997. Most of
the declines were in products that have been de-emphasized as a result of the
sheet and plate restructuring completed in 1997. Lower sheet and plate volume
had the effect of decreasing sales by $73.1 million in 1998. The volume decline
was partially offset by a $25.8 million improvement in mix and selling prices of
sheet and plate products sold in 1998.
Primary sales decreased $20.2 million (or 5.5%) in 1998 to $350.3 million
from $370.5 million in 1997, including intersegment sales of $234.5 million and
$231.3 million during 1998 and 1997, respectively. The segment shipped 496.5
million pounds of primary products in 1998 versus 481.3 million pounds of
primary products in 1997 including intersegment shipments of 333.3 million
pounds and 296.7 million pounds during 1998 and 1997, respectively. Lower
average selling prices, as a result of lower LME prices, reduced revenues in
1998.
Gross Profit. Consolidated gross profit increased $9.4 million (or 32.3%)
in 1998 to $38.5 million from $29.1 million in 1997. Sheet and plate gross
profit increased $32.3 million in 1998 to $9.9 million from a loss of $22.4
million in 1997. The increase in gross profit was a result of the shift in
product mix from lower margin commodity products to higher margin value added
products and the positive impact of lower LME prices on aluminum raw material
costs.
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Primary gross profit decreased $22.8 million in 1998 to $28.8 million from
$51.6 million in 1997. The decrease in gross profit is a result of lower average
selling prices. Lower average selling prices were a result of the 1998 decline
in LME prices. See Note 16 to the Consolidated Financial Statements.
Selling General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million (or 7.2%) in 1998. The increase
was due primarily to variable compensation expenses.
Interest Expense. Interest expense decreased $0.9 million (or 28.1%) in
1998. This decline was a result of lower borrowing rates and higher amounts of
capitalized interest. These benefits were partially offset by an increase in the
amount of debt outstanding.
Net Gains on Forward Contracts. Lower LME prices during 1998 improved the
market value of the Company's forward contracts. As a result, the Company
recorded net gains on forward contracts of $10.6 million in 1998. During 1997,
the Company recorded a net loss on forward contracts of $6.8 million.
Net income. As a result of improved price realizations for sheet and plate
products, lower costs for scrap aluminum inputs and forward contract gains, net
income for the year ended 1998 increased $16.9 million over 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Net sales increased $32.1 million (or 4.7%) in 1997 to $721.0
million from $688.9 million in 1996. Shipments of sheet and plate products were
down 1.4% or 7.8 million pounds from 1996 totals. Although shipments were down
slightly, a shift from tolling of sheet and plate products to direct sales of
sheet and plate products increased revenue in 1997 by $20.7 million. Other
shifts in the volume on sheet and plate products sold increased revenue in 1997
by $17.6 over 1996 totals. Due to shifts in mix toward higher value-added
products and price improvements in the fourth quarter of 1997, average realized
prices in 1997 improved over the average realized prices in 1996. This
improvement caused revenues to be higher in 1997 by $6.5 million.
Primary sales increased $8.6 million (or 2.4%) in 1997 to $370.5 million
from $361.9 million in 1996, including intersegment sales of $231.3 million and
$210.0 million during 1997 and 1996. The segment shipped 481.3 million pounds of
primary products in 1997 versus 486.0 million pounds of primary products in
1996, including intersegment shipments of 296.7 million pounds and 292.7 million
pounds during 1997 and 1996. Higher average selling prices, as a result of
higher LME prices, increased revenues in 1997.
Gross Profit. Consolidated gross profit decreased $23.3 million (or 44.5%)
in 1997 to $29.1 million from $52.4 million. Sheet and plate gross profit
decreased $29.1 million in 1997 to a gross loss of $22.4 million from a gross
profit of $6.7 million in 1996. The increased sheet and plate revenue in 1997
was more than offset by increased cost of goods sold. Higher LME prices and the
resultant impact on aluminum raw material costs increased the net metal costs
for sheet and plate products. In addition, the Company experienced operating
problems at its cast house. The inefficiencies, increased costs and insufficient
production of rolling ingot that resulted from the operating problems caused
cost of goods sold to increase.
In the third quarter of 1997, the Company announced a new operating plan
that affected its Century of West Virginia operations. The new operating plan
featured a continuation of the shift to high-value rolled aluminum products, a
20% reduction in the production of certain low margin rolled aluminum products,
a streamlining of the sheet and plate products organization to attain higher
levels of operating efficiency and a voluntary early retirement program. As a
result of the new plan, the Company recorded $3.0 million of costs, primarily
for voluntary retirement incentives.
Primary gross profit increased $5.9 million in 1997 to $51.6 million from
$45.7 million in 1996. The increase in gross profit is the result of higher
average selling prices. Higher average selling prices were the result of the
1997 increase in LME prices. See Note 16 to the Consolidated Financial
Statements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $0.7 million (or 3.6%) lower in 1997 than in 1996.
Legal and administrative costs in 1997 were up $2.0 million. However, 1996 was
impacted negatively by a one-time charge of $2.7 million for certain
environmental matters and an increased provision for doubtful accounts.
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Net Losses on Forward Contracts. Higher LME prices during 1997 decreased
the market value of the Company's forward contracts. As a result, the Company
recorded net losses on forward contracts of $6.8 million and $6.7 million during
1997 and 1996.
Interest Expense. Interest expense was $1.0 million more in 1997 than in
1996 due to the increased level of borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Working capital amounted to $188.2 million and $180.5 million at December
31, 1998 and 1997, respectively. The Company's liquidity requirements arise
primarily from working capital needs, capital investments and debt service.
The Company's statements of cash flows for the years indicated are
summarized below:
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
Net cash from operating activities................. $ 25,369 $ 9,318 $ 8,438
Net cash used in investing activities.............. (51,838) (39,982) (72,592)
Net cash from financing activities................. 26,439 30,594 21,356
-------- -------- --------
Decrease in cash................................... $ (30) $ (70) $(42,798)
======== ======== ========
Net cash flows from operating activities were $25.4 million, $9.3 million
and $8.4 million during 1998, 1997 and 1996, respectively. In 1998, higher net
income and a reduction in accounts receivable, caused by favorable changes in
product/customer mix and trade accounts receivable terms, added to the positive
cash flow. This was partially offset by a reduction in accounts payable, as a
result of payments for metal purchases, maintenance expenditures and capital
expenditures, and an increase in raw materials inventory. In 1997, lower net
income and growth in accounts receivable due to a shift from toll to direct
sales and higher realized prices caused the cash flow from operations to
decrease from the 1996 amount. However, this decrease was offset by the increase
in accounts payable, resulting in a net increase in cash flow.
The Company's net cash used in investing activities was $51.8 million,
$40.0 million and $72.6 million during 1998, 1997 and 1996, respectively.
Capital expenditures were $44.3 million, $40.0 million and $20.6 million for the
years ended December 31, 1998, 1997 and 1996, respectively. The Company used
these expenditures to purchase, modernize or upgrade production equipment,
maintain facilities and comply with environmental regulations. Significant
portions of the expenditures in 1998 were for the expansion of the Company's
heat-treated plate production capacity. The Company's other investing activities
during 1998 consisted primarily of the purchase of a cast aluminum plate
business from Alcoa. In 1996, the Company purchased $50.0 million of its
accounts receivable concurrent with the refinancing of the Company's credit
facilities. Capital expenditures for 1999 are expected to be approximately $25.0
million and will be principally related to upgraded production equipment,
maintenance of facilities and compliance with environmental requirements. The
Company contemplates spending approximately $200 million for capital
expenditures for projects between 1999 and 2003.
Net cash flows from financing activities were $26.4 million, $30.6 million,
and $21.4 million in 1998, 1997 and 1996, respectively.
On January 30, 1996 Century of West Virginia and Berkeley entered into a
bank revolving credit facility ("Facility") with BankAmerica Business Credit,
Inc. ("Bank of America"). The Facility provides for a revolving credit facility
that consists of borrowings and letters of credit up to $150 million in the
aggregate. On May 11, 1998, the Company and Bank of America agreed to amend and
extend the Facility to January 30, 2001. See Note 4 to the Consolidated
Financial Statements.
On February 24, 1999, the Company entered into an agreement with
BankBoston, N.A. and the CIT Group/Business Credit, Inc. ("Bank Agreement") to
provide up to $180.0 million of credit facilities to refinance indebtedness, to
finance certain capital expenditures and for other general corporate purposes.
The
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borrowing base for purposes of determining availability is based upon certain
eligible inventory and receivables. The credit facilities consist of a revolving
loan of up to $160.0 million and a term loan of $20.0 million. On March 31,
1999, the Company closed on the revolving loan. The revolving loan is secured by
Century of West Virginia's, Berkeley's and Century Cast Plate's inventory and
receivables. To the extent the Company draws on the term loan, the credit
facilities are secured by a first priority security interest in all of Century
of West Virginia's, Berkeley's and Century Cast Plate's inventory, receivables,
property, plant and equipment and stock of certain subsidiaries. The credit
facilities have a variable interest rate and mature five years from the closing
date. Subject to certain limitations, the borrowers may select base rate or
LIBOR loans. The interest rate margins that the Company will pay are dependent
upon the Company's attainment of a defined coverage ratio.
The Bank Agreement provides for various restrictive covenants, including
the following: (i) standard restrictions on dispositions of property and assets
except in the ordinary course of business, (ii) restrictions on the incurrence
of indebtedness and liens and the making of capital expenditures and
investments, (iii) a prohibition on the payment of dividends except dividends up
to $5.0 million per year, (iv) a prohibition on change of business or change of
control and (v) maintenance of certain financial ratios.
The Bank Agreement provides customary events of default, including default
for nonpayment of principal, interest, fees or other amounts, any violation of
restrictive covenants and insolvency by the borrower. The Company expects to
complete the $20.0 million term loan financing in the second quarter of 1999.
See Note 18 to the Consolidated Financial Statements.
Pursuant to an agreement with the Pension Benefit Guaranty Corporation
("PBGC Agreement"), the Company is required to make scheduled contributions to
its pension plan for hourly employees in 1999. The Company estimates that its
scheduled contribution will be approximately $7.0 million above the minimum
required contribution under Section 412 of the Internal Revenue Code. See Note
12 to the Consolidated Financial Statements.
The Company believes that cash flows from operations and funds available
under its bank agreements will be sufficient to fund its working capital
requirements, capital expenditures, pension funding and debt service
requirements in the near term and for the foreseeable future.
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. Capital expenditures for
environmental control for the years ended December 31, 1998, 1997 and 1996 were
approximately $1.1 million, $3.4 million and $0.7 million, respectively, and
operating expenses relating to environmental matters were approximately $7.3
million, $7.4 million and $7.0 million for the same years. The Company has
planned environmental capital expenditures for the years ending December 31,
1999, 2000 and 2001 of approximately $0.9 million, $1.0 million and $1.5
million, respectively. In addition, the Company expects to incur operating
expenses relating to environmental matters of approximately $6.6 million, $7.1
million and $7.4 million for the years ending December 31, 1999, 2000 and 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 have changed rapidly in recent years and the
Company may become subject to more stringent environmental laws and regulations
in the future. In addition, the Company may be required to conduct remediation
activities in the future pursuant to various orders issued by the EPA and West
Virginia Department of Environmental Protection. 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. See 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".
16
18
YEAR 2000 COMPLIANCE PROGRAM
The Company began its Year 2000 program in September 1996, using funds from
its annual information services budget. In August 1997, the Board of Directors
approved $8.7 million of funding for this program and for installation of new
systems. At the same time, the Company allocated approximately 30 people (from
both inside and outside resources) to the effort. To date, the Company has
incurred $5.4 million in total costs relating to Year 2000 compliance, which is
approximately 50% of the Company's total information technology budget for the
period (including the August 1997 authorization). The Company estimates total
Year 2000 compliance costs will be about $6.0 million. Century has not had to
defer any of its information technology projects due to its Year 2000 compliance
efforts.
The Company's inventory of potentially affected systems (both information
technology and non-information technology) is 99% complete. Major systems have
been determined to be Year 2000 compliant. Each of the Company's business units
has a Year 2000 compliance plan in place, establishing time tables, staff and
responsibilities. Each of the Company's business units conducted its own
inventory, identified its mission-critical systems and is upgrading or replacing
those systems that were not Year 2000 compliant.
Each business unit reports the results of its Year 2000 program quarterly
to a corporate steering committee. This central coordination allows the Company
to evaluate and, if necessary, remedy, common applications or software only
once, reducing costs. The Company expects to complete all software and hardware
testing and implementation by the end of the second quarter of 1999.
The Company expects to formulate its Year 2000 contingency plan at the end
of the second quarter of 1999, once the Company has completed its final
remediation testing and implementation. The primary goal is to ensure that the
Company can continue to produce and invoice for production. The Company's plan
will emphasize uninterrupted production, accounting, staffing and delivery, as
well as address potential banking, raw material supply and utility failures.
While the Company has not detailed its contingency plans, it is developing an
emergency response team for each business unit to be on hand for the turn of the
millennium. Each team will be made up of senior staff and an information systems
representative. Each unit site will be equipped with satellite telephones to
insure communications in the event of a telephone outage. All locations will
thus be able to report problems.
The Company has sent questionnaires to 349 selected vendors and suppliers,
inquiring as to their Year 2000 readiness. To date, the Company has received
responses to 99% of the questionnaires from those vendors and suppliers. If
vendors and suppliers do not respond, or there is evidence of noncompliance, the
Company contacts those vendors and suppliers directly for more detailed
information. The Company intends to have its key vendor and supplier review
complete in the second quarter of 1999. In addition to the foregoing, the
Company has visited critical vendors in order to conduct in person reviews of
their Year 2000 readiness preparations. A six page audit form questionnaire is
sent to these vendors in advance of the meetings and is used as a form for
discussions with these critical vendors. If the Company concludes that any of
its material vendors or suppliers are not Year 2000 compliant, the Company will
identify alternative sources for their products and services as part of its
contingency plan, to the extent possible. The Company has, for example,
conducted such an interview with its electrical supplier, since a disruption in
electricity could result in a shut down of the facilities. That visit involved a
review of the preparations being made by the Company's electrical supplier.
To date, the Company has received no indication that any third party
supplier or vendor may not have accurately assessed their state of readiness or
that they may have a Year 2000 problem which may have a material adverse affect
on the Company's results of operations. However, the risk remains that those
vendors and suppliers may not have accurately assessed their state of readiness.
The contingency plan which will be developed at the end of the second quarter
will address, where feasible, solutions to those identifiable risks.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
modifies the accounting for derivative and
17
19
hedging activities and is effective for fiscal years beginning after June 1999.
The Company is currently evaluating the potential impact SFAS No. 133 will have
on its results of operations and financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICES
Century produces primary aluminum products and manufactures aluminum sheet
and plate products. The Company's earnings are exposed to aluminum price
fluctuations. The Company manages this risk through the issuance of fixed price
commitments and financial instruments. The Company does not engage in trading or
speculative transactions. Although the Company has not materially participated
in the purchase of call options, in cases where Century sells forward primary
aluminum, it may purchase call options to preserve the benefit from price
increases significantly above forward sales prices. In addition, it may purchase
put options to protect itself from price decreases.
The Company had fixed price commitments to sell 543.9 million pounds of
primary, scrap aluminum and sheet and plate products at December 31, 1998. The
Company had fixed price commitments to purchase 190.8 million pounds of aluminum
and alloy raw materials at December 31, 1998. In addition, the Company has a
long-term supply agreement for 936.0 million pounds of alumina annually;
whereby, the Company will pay a fixed price for alumina with annual price
increases of approximately 2.5% through 2001.
At December 31, 1998, the Company had entered into 18.0 million pounds of
forward primary aluminum purchase contracts, primarily with the Glencore Group,
to mitigate the risk of commodity price fluctuations inherent in a portion of
its anticipated future sales of aluminum sheet and plate products. At December
31, 1998, the Company had also entered into 65.6 million pounds of forward
primary aluminum sales contracts with the Glencore Group to mitigate the risk of
commodity price fluctuations inherent in a portion of its inventory and fixed
price purchase commitments. These contracts will be settled in cash at various
dates in 1999. Based on market prices at December 31, 1998, these financial
instruments could be settled by the Company receiving approximately $3.1
million. The actual settlement will be based on market prices at the respective
settlement dates.
A hypothetical $0.10 per pound increase in the market price of primary
aluminum is estimated to have an unfavorable impact of $5.1 million on net
income in 1999 as a result of the forward primary aluminum purchase and sale
contracts entered into by the Company at December 31, 1998. The effect of the
hypothetical change of $0.10 per pound was calculated using a parallel shift in
the December 31, 1998 forward price curve for primary aluminum. The price curve
takes into account the time value of money, as well as future expectations
regarding the price of primary aluminum. Actual changes in commodity prices may
differ from hypothetical changes. 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 fixed price commitments, or the
offsetting impact upon the purchase price of raw materials and sales price of
aluminum products.
All gains and losses from forward contract activity are reported separately
in the statements of operations. Unrealized gains or losses on the forward
primary aluminum contracts, realized gains or losses from the cash settlement of
the forward primary aluminum contracts, and reversals of prior period unrealized
losses are reported as either gains or losses on forward contracts.
Century monitors its overall position, and its metals 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.
INTEREST RATES
The Company is exposed to interest rate volatility with regard to its
variable rate revolving term debt of $89.4 million at December 31, 1998. The
primary exposure is movement in the U.S. Treasury rates and LIBOR. A
hypothetical 1% increase in these interest rates would increase annual interest
expense by approximately $0.9 million. Actual changes in interest rates may
differ from hypothetical changes. This analysis does not take into effect other
changes that might occur in the economic environment due to such changes in
short term interest rates.
18
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Independent Auditors' Report................................ 20
Consolidated Balance Sheets at December 31, 1998 and 1997... 21
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.......................... 22
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996.............. 23
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... 24
Notes to the Consolidated Financial Statements.............. 25-41
19
21
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, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 9, 1999
(March 31, 1999 as to Note 18)
20
22
CENTURY ALUMINUM COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 12 $ 42
Restricted cash equivalents............................... 5,814 5,805
Accounts receivable, trade -- net......................... 74,948 111,146
Due from affiliates....................................... 16,036 8,362
Inventories............................................... 197,705 170,085
Prepaid and other assets.................................. 9,006 8,082
-------- --------
Total current assets................................... 303,521 303,522
PROPERTY, PLANT AND EQUIPMENT -- NET........................ 227,320 198,341
OTHER ASSETS................................................ 14,789 5,285
-------- --------
TOTAL............................................. $545,630 $507,148
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade................................... $ 37,450 $ 51,411
Due to affiliates......................................... 15,146 10,560
Accrued and other current liabilities..................... 36,733 22,364
Accrued employee benefits costs -- current portion........ 26,036 38,663
-------- --------
Total current liabilities.............................. 115,365 122,998
-------- --------
REVOLVING TERM LOAN......................................... 89,389 58,950
ACCRUED PENSION BENEFITS COSTS -- Less current portion...... 9,792 12,139
ACCRUED POSTRETIREMENT BENEFITS COSTS -- Less current
portion................................................... 129,318 118,532
DUE TO AFFILIATES........................................... -- 6,673
OTHER LIABILITIES........................................... 24,283 24,310
-------- --------
Total noncurrent liabilities........................... 252,782 220,604
-------- --------
CONTINGENCIES AND COMMITMENTS (Note 12)
SHAREHOLDERS' EQUITY:
Common Stock (one cent par value, 50,000,000 shares
authorized; 20,000,000 shares outstanding at December
31, 1998 and 1997, respectively)....................... 200 200
Additional paid-in capital................................ 161,953 161,953
Retained earnings......................................... 15,330 1,393
-------- --------
Total shareholders' equity............................. 177,483 163,546
-------- --------
TOTAL............................................. $545,630 $507,148
======== ========
See notes to consolidated financial statements.
21
23
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NET SALES:
Third-party customers.................................. $576,006 $615,467 $550,168
Related parties........................................ 74,252 105,521 138,711
-------- -------- --------
650,258 720,988 688,879
COST OF GOODS SOLD....................................... 611,796 691,887 636,486
-------- -------- --------
GROSS PROFIT............................................. 38,462 29,101 52,393
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............. 19,246 17,948 18,614
-------- -------- --------
OPERATING INCOME......................................... 19,216 11,153 33,779
INTEREST EXPENSE -- Net.................................. (2,204) (3,066) (2,058)
OTHER INCOME............................................. 553 419 91
NET GAIN (LOSS) ON FORWARD CONTRACTS..................... 10,574 (6,837) (6,670)
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES.... 28,139 1,669 25,142
INCOME TAX EXPENSE....................................... (10,202) (601) (8,902)
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS........................ 17,937 1,068 16,240
INCOME FROM DISCONTINUED OPERATIONS --
Net of income taxes.................................... -- -- 264
-------- -------- --------
NET INCOME............................................... $ 17,937 $ 1,068 $ 16,504
======== ======== ========
BASIC EARNINGS PER SHARE:
Income from continuing operations...................... $ 0.90 $ 0.05 $ 0.78
Income from discontinued operations.................... -- -- 0.01
-------- -------- --------
Net Income............................................. $ 0.90 $ 0.05 $ 0.79
======== ======== ========
DILUTED EARNINGS PER SHARE:
Income from continuing operations...................... $ 0.89 $ 0.05 $ 0.78
Income from discontinued operations.................... -- -- 0.01
-------- -------- --------
Net Income............................................. $ 0.89 $ 0.05 $ 0.79
======== ======== ========
CASH DIVIDENDS PAID PER COMMON SHARE..................... $ 0.20 $ 0.20 $ 0.15
======== ======== ========
See notes to consolidated financial statements.
22
24
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS SHAREHOLDERS'
STOCK CAPITAL (DEFICIT) EQUITY
------ ---------- --------- -------------
(DOLLARS IN THOUSANDS)
BALANCE, DECEMBER 31, 1995...................... $ 231 $232,257 $(6,979) $225,509
Net Income.................................... 16,504 16,504
Dividends..................................... (3,000) (3,000)
Special distribution of discontinued
operations................................. (31) (70,304) (2,200) (72,535)
----- -------- ------- --------
BALANCE, DECEMBER 31, 1996...................... 200 161,953 4,325 166,478
Net Income.................................... 1,068 1,068
Dividends..................................... (4,000) (4,000)
----- -------- ------- --------
BALANCE, DECEMBER 31, 1997...................... 200 161,953 1,393 163,546
Net Income.................................... 17,937 17,937
Dividends..................................... (4,000) (4,000)
----- -------- ------- --------
BALANCE, DECEMBER 31, 1998...................... $ 200 $161,953 $15,330 $177,483
===== ======== ======= ========
See notes to consolidated financial statements.
23
25
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 17,937 $ 1,068 $ 16,504
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization...................... 19,685 18,427 18,009
Deferred income taxes.............................. (3,767) (6,392) (7,921)
Pension and other postretirement benefits.......... (12,021) (4,992) (23,932)
Workers' compensation.............................. (1,314) 308 1,469
Income from discontinued operations................ -- -- (264)
Change in operating assets and liabilities:
Accounts receivable, trade -- net................ 37,588 (21,863) 19,312
Due from affiliates.............................. (7,674) 4,319 3,507
Inventories...................................... (22,789) 6,064 (16,293)
Prepaids and other assets........................ (876) 1,830 (1,882)
Accounts payable, trade.......................... (14,594) 20,069 (6,346)
Due to affiliates................................ (2,087) (5,433) 7,945
Accrued and other current liabilities............ 13,366 (5,065) (3,764)
Other -- net..................................... 1,995 978 2,094
--------- --------- ---------
Net cash provided by operating activities.......... 25,369 9,318 8,438
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of accounts receivable....................... -- -- (50,000)
Purchase of property, plant and equipment............. (44,259) (39,967) (20,561)
Business acquisitions................................. (7,251) -- --
Investment in Mt. Holly............................... (319) (11) (2,815)
Restricted cash deposits.............................. (9) (4) 784
--------- --------- ---------
Net cash used in investing activities.............. (51,838) (39,982) (72,592)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings............................................ 233,610 234,816 200,833
Repayment of borrowings............................... (203,171) (200,222) (176,477)
Dividends............................................. (4,000) (4,000) (3,000)
--------- --------- ---------
Net cash provided by financing activities.......... 26,439 30,594 21,356
--------- --------- ---------
DECREASE IN CASH........................................ (30) (70) (42,798)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............ 42 112 42,910
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR.................. $ 12 $ 42 $ 112
========= ========= =========
See notes to consolidated financial statements.
24
26
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT 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 subsidiary is
Century Aluminum of West Virginia, Inc. ("Century of West Virginia"), formerly
known as Ravenswood Aluminum Corporation, which operates a primary aluminum
reduction facility and an aluminum fabrication facility near Ravenswood, West
Virginia. Century of West Virginia, through its wholly-owned subsidiary,
Berkeley Aluminum, Inc. ("Berkeley"), holds a 26.67% interest in a partnership
which operates a primary aluminum reduction facility in Mt. Holly, South
Carolina (the "Mt. Holly Facility") and a 26.67% undivided interest in the
property, plant and equipment comprising the Mt. Holly Facility. As of December
31, 1998, the remaining interest in the partnership and the remaining undivided
interest in the Mt. Holly Facility are owned 50.33% by Alumax of South Carolina,
Inc., a subsidiary of Alcoa ("ASC") and 23.00% by a subsidiary of Sudelektra
Holding AG, a publicly traded Swiss company. Glencore International AG
("Glencore" and, together with its subsidiaries, the "Glencore Group") is a
major shareholder of Sudelektra Holding AG. ASC manages and operates the
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.
The Company produces primary aluminum products and manufactures aluminum
sheet and plate products.
As explained in Note 11, the Company had holdings in a number of other
entities in unrelated businesses that are presented as discontinued operations
in 1996. The Company made a special distribution, in the form of a pro rata
redemption of shares to its then current shareholders, comprised of these
holdings effective March 28, 1996. The disclosures herein relate to continuing
operations, unless otherwise indicated.
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, 1998, 1997 and 1996, the Glencore Group owned
39.6% of Century's common shares outstanding.
On December 31, 1998, the Company acquired a cast aluminum plate business
located in Vernon, California, from Alcoa Inc. The business is named Century
Cast Plate, Inc. and operates as a wholly owned subsidiary of Century. The
business produces cast and machined aluminum plate.
The Company's historical results of operations included in the accompanying
consolidated financial statements may not be indicative of the results of
operations to be expected in the future.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Century Aluminum Company and its subsidiaries, after
elimination of all significant intercompany transactions and accounts.
Berkeley's interest in the Mt. Holly partnership is accounted for under the
equity method. There are no material undistributed earnings in the Mt. Holly
partnership.
Revenue -- Revenue is recognized when title passes to customers in
accordance with contract terms, which may precede or coincide with shipments to
customers. Included in net sales are tolling fees that the Company earns from
smelting, casting and fabricating material supplied by third-party customers.
Net sales includes tolling fees of $8,469, $14,428 and $32,480 for the years
ended December 31, 1998, 1997 and 1996, respectively. Sales returns and
allowances are treated as a reduction of sales and are provided for based on
historical experience and current estimates.
25
27
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Restricted Cash Equivalents -- Cash and restricted 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 and
restricted cash equivalents approximates fair value.
Accounts Receivable -- The accounts receivable, trade are net of an
allowance for uncollectable accounts of $2,390 and $2,270 at December 31, 1998
and 1997, respectively.
Inventories -- Alumina and aluminum inventories are stated at the
lower-of-cost (using the last-in, first-out ("LIFO") method) or market. The
remaining inventories (operating and other supplies) are valued at the lower of
average cost or market.
Property, Plant and Equipment -- Property, plant and equipment is stated at
cost. Additions, renewals and improvements are capitalized. Asset and
accumulated depreciation accounts are relieved for dispositions with resulting
gains or losses included in earnings. Maintenance and repairs are expensed as
incurred. 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 reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that their carrying value may not be
recoverable.
Other Assets -- At December 31, 1998 and 1997, other assets consist
primarily of the Company's investment in the Mt. Holly partnership and deferred
tax assets.
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 valuing
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.
Interest Expense -- Net -- The Company does not have significant interest
income. Interest incurred in the construction of qualifying assets is
capitalized as a component of the construction costs.
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.
Fixed-Price Commitments and Forward Contracts -- The Company has entered
into various fixed-price commitments to purchase alumina and primary aluminum
and to sell primary and scrap aluminum and aluminum sheet and plate products.
The Company has also entered into forward primary aluminum contracts to be
settled in cash to manage the Company's exposure to changing primary aluminum
prices. A change in market value of a forward contract is recognized as a gain
or loss in the period of change and is recognized in the statements of
operations as a gain or loss on forward contracts.
Financial Instruments -- The Company's financial instruments (principally
receivables, payables, debt and forward contracts) are carried at amounts that
approximate fair value.
26
28
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk -- Financial instruments, in addition to
forward contracts, which potentially expose the Company to concentrations of
credit risk, consist principally of cash investments and trade receivables. The
Company places its cash investments with highly rated financial institutions. At
times, such investments may be in excess of the FDIC insurance limit.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base, and
their dispersion across many different geographical regions and markets. 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 generally accepted accounting principles 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".
Reclassifications -- Certain reclassifications of 1997 and 1996 information
were made to conform to the 1998 presentation.
New Accounting Standards -- In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 modifies the accounting for derivative and
hedging activities and is effective for fiscal years beginning after June 1999.
The Company is currently evaluating the potential impact SFAS No. 133 will have
on its results of operations and financial position.
2. INVENTORIES
Inventories, at December 31, consist of the following:
1998 1997
-------- --------
Raw materials............................................... $ 81,474 $ 62,440
Work-in-process............................................. 71,045 62,675
Finished goods.............................................. 25,858 23,199
Operating and other supplies................................ 19,328 18,206
Unrealized losses on forward contracts...................... -- 3,565
-------- --------
$197,705 $170,085
======== ========
At December 31, 1998 and 1997, approximately 90% and 89% of inventories
were valued at the lower of LIFO cost or market. The excess of the LIFO cost (or
market, if lower) of inventory over the first-in, first-out ("FIFO") cost was
approximately $20,150 and $16,670 at December 31, 1998 and 1997, respectively.
27
29
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at December 31, consists of the following:
1998 1997
-------- --------
Land and improvements....................................... $ 5,775 $ 5,696
Buildings and improvements.................................. 36,509 33,991
Machinery and equipment..................................... 295,711 262,398
Construction in progress.................................... 50,951 38,939
-------- --------
388,946 341,024
Less accumulated depreciation............................... 161,626 142,683
-------- --------
$227,320 $198,341
======== ========
At December 31, 1998 and 1997, the cost of property, plant and equipment
includes $51,454 and $49,561, respectively, and accumulated depreciation
includes $20,547 and $18,559, respectively, representing the Company's undivided
interest in the primary aluminum reduction facility in Mt. Holly, South
Carolina.
The Company has various operating lease commitments through 2003 relating
to machinery and equipment. Expenses under all operating leases were $1,839,
$1,504 and $1,717 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1998 are approximately $1,060 annually through 2003.
4. DEBT
On January 30, 1996 Century of West Virginia and Berkeley entered into a
bank revolving credit facility ("Facility") with BankAmerica Business Credit,
Inc. ("Bank of America"). The Facility provides for a revolving credit facility
that consists of borrowings and letters of credit up to $150 million in the
aggregate, based on availability. The borrowing base for purposes of determining
availability under the Facility is based upon certain eligible inventory and
receivables. On May 11, 1998, the Company and Bank of America agreed to amend
and extend the Facility to January 30, 2001.
The variable interest rate on the borrowings under the Facility was 7.1% on
December 31, 1998. Borrowings of $89,389 as of December 31, 1998 are
collateralized by Century of West Virginia's and Berkeley's inventory and
receivables and are guaranteed by the Company.
The Facility provides customary events of default, including default upon
the nonpayment of principal, interest, fees or other amounts, the occurrence of
a change of control and a cross-default with respect to certain other
obligations of the Company. The Facility also provides for various restrictive
covenants, including restrictions on the payment of dividends and the making of
capital expenditures, and requires the maintenance of certain financial ratios.
There were two instances of noncompliance with certain of these restrictive
covenants at December 31, 1998. The Company obtained waivers for the two
instances of noncompliance from Bank of America effective as of December 31,
1998.
See Note 18 for a discussion of subsequent events.
28
30
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS AT DECEMBER 31
1998 1997
------- -------
Accrued and Other Current Liabilities
Income taxes................................................ $19,954 $10,276
Salaries, wages and benefits................................ 9,973 6,953
Other....................................................... 6,806 5,135
------- -------
$36,733 $22,364
======= =======
Accrued Employee Benefit Costs -- Current Portion
Pensions.................................................... $10,418 $25,779
Postretirement benefits..................................... 7,843 5,800
Employee benefits cost...................................... 7,775 7,084
------- -------
$26,036 $38,663
======= =======
Other Liabilities
Workers' compensation....................................... $20,427 $21,829
Other....................................................... 3,856 2,481
------- -------
$24,283 $24,310
======= =======
Century of West Virginia is self-insured for workers' compensation, except
for certain catastrophic coverage that is provided under State of West Virginia
insurance programs. Cash equivalents of $5,650 are restricted by the Company's
self-insurance arrangements. The liability for self-insured workers'
compensation claims has been discounted at 6% at December 31, 1998 and 1997. The
components of the liability for workers' compensation at December 31 are as
follows:
1998 1997
------- -------
Undiscounted liability................................... $41,015 $43,322
Less discount............................................ 14,631 15,536
------- -------
$26,384 $27,786
======= =======
6. PENSION AND OTHER POSTRETIREMENT BENEFITS
Pension Benefits
The Company maintains noncontributory defined benefit pension plans
covering substantially all of its 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, plan benefits are based
primarily on a formula that provides a specific benefit for each year of
service. The Company's funding policy is to contribute annually an amount based
upon actuarial and economic assumptions designed to achieve adequate funding of
the projected benefit obligations and to meet the minimum funding requirements
of ERISA. Plan assets consist principally of U.S. equity securities, growth
funds and fixed income accounts. As explained in Note 12, the Company agreed to
make additional contributions to the hourly plan in connection with the initial
public offering of the Company's common stock. In addition, the Company provides
supplemental executive retirement benefits for its executive officers.
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
29
31
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
1998 1997
-------------------- --------------------
PENSION OPEB PENSION OPEB
-------- -------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year......... $152,386 $137,493 $141,140 $126,517
Service cost.................................... 3,004 3,220 2,995 2,786
Interest cost................................... 10,383 10,113 10,444 9,676
Plan changes.................................... -- -- 1,987 --
Actuarial loss.................................. 3,931 11,809 5,817 4,546
Obligation assumed in acquisition............... -- 7,300 -- --
Benefits paid................................... (11,602) (8,474) (9,997) (6,032)
-------- -------- -------- --------
Benefit obligation at end of year............... $158,102 $161,461 $152,386 $137,493
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year.......................................... $120,159 $ -- $ 86,326 $ --
Actual return on plan assets.................... 16,309 -- 22,060 --
Employer contribution........................... 20,604 8,474 21,770 6,032
Benefits paid................................... (11,602) (8,474) (9,997) (6,032)
-------- -------- -------- --------
Fair value of assets at end of year............. $145,470 $ -- $120,159 $ --
======== ======== ======== ========
FUNDED STATUS OF PLAN
Funded status................................... $ 12,631 $161,461 $ 32,227 $137,493
Unrecognized actuarial gain (loss).............. 14,186 (25,494) 13,602 (14,507)
Unrecognized prior service cost................. (6,607) 1,194 (7,911) 1,346
-------- -------- -------- --------
Net liability recognized........................ $ 20,210 $137,161 $ 37,918 $124,332
======== ======== ======== ========
Net periodic benefit costs were comprised of the following elements:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
PENSION OPEB PENSION OPEB PENSION OPEB
-------- ------- ------- ------- ------- -------
Service cost............................ $ 3,004 $ 3,220 $ 2,995 $ 2,786 $ 2,597 $ 2,521
Interest cost........................... 10,383 10,113 10,444 9,676 9,983 9,212
Expected return on plan assets.......... (11,468) -- (7,666) -- (9,912) --
Net amortization and deferral........... 978 670 2,737 (149) 7,571 (95)
-------- ------- ------- ------- ------- -------
Net periodic pension cost............... $ 2,897 $14,003 $ 8,510 $12,313 $10,239 $11,638
======== ======= ======= ======= ======= =======
30
32
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following assumptions were used in the actuarial computations at
December 31:
1998 1997 1996
---- ---- ----
Discount rate............................................... 6.75% 7.00% 7.50%
Rate of increase in future compensation levels
Hourly pension plan....................................... 4.00% 4.00% 5.00%
Salaried pension plan..................................... 4.00% 4.00% 4.50%
Long term rate of return on pension plan assets............. 9.00% 9.00% 8.00%
For measurement purposes, a 5.50%, 5.50% and 6.00% annual rate increase in
the per capita cost of covered health care benefits was assumed for 1998, 1997
and 1996, respectively. The rates were assumed to decrease gradually to 5.25%
and remain at that level thereafter.
A one-percentage-point increase in the assumed rate of inflation in future
medical costs would increase the postretirement benefit obligation at December
31, 1998 by $22,501 and would increase aggregate 1998 service and interest cost
by $2,275. A one-percentage-point decrease in the assumed rate of inflation in
future medical costs would decrease the postretirement benefit obligation at
December 31, 1998 by $17,800 and would decrease aggregate 1998 service and
interest cost by $1,778.
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. Effective July 1, 1996 the
contribution matching provision was increased to 60% of the first 6% of a
participant's annual compensation contributed to the savings plan. One half of
the Company's contribution is invested in the common stock of Century and one
half of the Company's contribution is in cash. Company contributions to the
savings plan were $774, $806 and $661 for the years ended December 31, 1998,
1997 and 1996, respectively.
7. SHAREHOLDERS' EQUITY
Common Stock -- On February 19, 1996, the Board of Directors approved a
40,000 for 1 split of the Company's common stock.
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.
8. 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 1,200,000. Granted stock
options vest one-third on the grant date and an additional one-third on each of
the first and second anniversary dates. The Company awarded 460,000 performance
share units at the time of the initial public offering for no consideration. The
performance share units represent the right to receive common stock, on a
one-for-one basis on their vesting dates. The value of the performance share
units, $13 per share, is being charged to compensation expense over their five
year vesting period, which is one-third at the end of each of the third, fourth
and fifth anniversary dates. The Stock Incentive Plan, as presently
administered, provides for additional grants upon the attainment of certain
established performance goals. Based upon the Company's performance in 1998,
48,874 performance share units were earned. These
31
33
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
performance share units will be converted to common stock in 1999. In 1998, the
Company recognized $1,620 of expense related to the Stock Incentive Plan. The
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
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.
The Company applies APB Opinion 25 and related interpretations in
accounting for the 1996 Stock Incentive Plan. Accordingly, no compensation cost
has been recognized for the stock option portions of the plan. Had compensation
cost for the Stock Incentive Plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the method of SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
1998 1997 1996
------- ------ -------
Net Income As Reported................... $17,937 $1,068 $16,504
Pro Forma..................... $17,568 $ 681 $16,176
Basic earnings per share As Reported................... $ 0.90 $ 0.05 $ 0.79
Pro Forma..................... $ 0.88 $ 0.03 $ 0.78
Diluted earnings per share As Reported................... $ 0.89 $ 0.05 $ 0.79
Pro Forma..................... $ 0.87 $ 0.03 $ 0.77
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 67,000 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, 1998, 1997 and 1996
and changes during the year ended on that date is presented below:
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------- ------- -------- ------- -------- ------- --------
Outstanding at beginning of
year......................... 595,600 $13.31 543,000 $13.13 -- --
Granted........................ 102,900 $14.01 53,700 $15.12 543,000 $13.13
Exercised...................... -- -- -- -- -- --
Forfeited...................... (88,600) $15.22 (1,100) $13.00 -- --
------- ------ ------- ------ ------- ------
Outstanding at end of year..... 609,900 $13.15 595,600 $13.31 543,000 $13.13
======= ====== ======= ====== ======= ======
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------- -----------------------------
NUMBER WEIGHTED-AVG. WEIGHTED-AVG. NUMBER
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE WEIGHTED-AVG.
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE PRICE AT 12/31/98 EXERCISE PRICE
- --------------- ----------- ---------------- ------------- ------------ --------------
$14.50 to $16.72 58,700 8.1 years $15.67 50,967 $15.56
$11.50 to $14.49 529,300 7.3 years $13.04 521,467 $13.03
$ 8.63 to $11.49 21,900 9.9 years $ 9.01 7,300 $ 9.01
32
34
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1998 and 1997:
1998 1997
----- -----
Weighted average fair value per option granted during the
year...................................................... $3.43 $3.83
Dividends per quarter....................................... $0.05 $0.05
Risk-free interest rate..................................... 5.32% 5.91%
Expected volatility......................................... 30% 30%
Expected lives (in years)................................... 3 3
9. EARNINGS PER SHARE
Basic and diluted earnings per share for income from continuing operations
for the years ended December 31, are as follows (shares in thousands):
1998 1997 1996
------- ------ -------
BASIC EARNINGS PER SHARE:
Numerator:
Income from continuing operations available to common
shareholders...................................... $17,937 $1,068 $16,240
Denominator:
Average common shares outstanding.................... 20,000 20,000 20,780
Basic earnings per share............................... $ 0.90 $ 0.05 $ 0.78
======= ====== =======
DILUTED EARNINGS PER SHARE:
Numerator:
Income from continuing operations available to common
shareholders...................................... $17,937 $1,068 $16,240
Denominator:
Average common shares outstanding.................... 20,000 20,000 20,780
Effect of dilutive securities:
Stock options and performance awards................. 266 241 96
------- ------ -------
Common shares outstanding, assuming dilution........... 20,266 20,241 20,876
Diluted earnings per share............................. $ 0.89 $ 0.05 $ 0.78
======= ====== =======
10. INCOME TAXES
Significant components of the income tax expense from continuing operations
consist of the following:
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- ------- --------
Federal:
Current expense................................... $(12,487) $(6,056) $(14,628)
Deferred benefit.................................. 3,592 5,554 7,002
State:
Current expense................................... (1,482) (937) (2,195)
Deferred benefit.................................. 175 838 919
-------- ------- --------
Total income tax expense.......................... $(10,202) $ (601) $ (8,902)
======== ======= ========
33
35
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory U.S. Federal income tax rate to the
effective income tax rate on income from continuing operations is as follows:
1998 1997 1996
---- ---- ----
Federal statutory rate...................................... 35% 35% 35%
Effect of:
Permanent differences..................................... (2) (3) (3)
State taxes, net of Federal benefit....................... 3 4 3
-- -- --
36% 36% 35%
== == ==
Permanent differences primarily relate to the Company's foreign sales
corporation.
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
1998 1997
-------- --------
FEDERAL
Deferred federal tax assets:
Accrued postretirement benefit cost....................... $ 34,882 $ 27,957
Accrued liabilities....................................... 9,880 12,710
-------- --------
Net deferred federal tax assets........................ 44,762 40,667
Deferred federal tax liabilities:
Tax over financial statement depreciation................. (30,316) (33,541)
-------- --------
Net deferred federal tax asset......................... 14,446 7,126
-------- --------
STATE
Deferred state tax assets:
Accrued postretirement benefit cost....................... 4,983 3,994
Accrued liabilities....................................... 1,512 1,899
-------- --------
Net deferred state tax assets.......................... 6,495 5,893
Deferred state tax liabilities:
Tax over financial statement depreciation................. (4,331) (4,713)
-------- --------
Net deferred state tax asset........................... 2,164 1,180
-------- --------
Net deferred tax asset...................................... $ 16,610 $ 8,306
======== ========
Of the $16,610 net deferred tax asset at December 31, 1998, $7,137 is
included in other assets; the remainder is included in current assets. At
December 31, 1997, $1,566 of the net deferred tax asset was included in other
assets; the remainder was included in current assets.
11. DISCONTINUED OPERATIONS
The Company made a special distribution of certain holdings of the Company
in the form of a pro rata redemption of shares of its then current shareholders
on March 28, 1996. The special distribution was comprised of the Company's
holdings in several operations whose businesses were unrelated to the continuing
aluminum operations of the Company, consisting principally of an inactive oil
trading business, a distributor of ferro alloys and a finance business, whose
principal activities consisted of providing financing to entities within the
Glencore Group. The net assets and operating activities related to the
businesses comprising the special
34
36
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
distribution have been classified as discontinued operations in the accompanying
consolidated financial statements.
Summary operating results of discontinued operations for the year ended
December 31, 1996 are as follows:
Net sales................................................... $31,065
=======
Income before income taxes.................................. $ 433
Income tax expense.......................................... (169)
-------
Income from discontinued operations......................... $ 264
=======
12. CONTINGENCIES AND COMMITMENTS
Environmental Contingencies
The Company's operations are subject to various environmental laws and
regulations. The Company has spent, and expects to spend in the future,
significant amounts for compliance with those laws and regulations.
Pursuant to an Environmental Protection Agency ("EPA") order issued in
September 1994 under Section 3008(h) (the "3008(h) order") of the Resource
Conservation and Recovery Act ("RCRA"), Century of West Virginia is performing
remediation measures at a former oil pond area and in connection with cyanide
contamination in the groundwater. The Company also is conducting a RCRA facility
investigation ("RFI") and a corrective measures study ("CMS") to evaluate and
develop corrective alternatives for any areas that have contamination exceeding
certain levels. The Company anticipates that the RFI will not be completed
before mid 1999. Once the RFI and CMS are complete, the EPA will assess the need
for clean up, and if any clean up is required, a subsequent order will be
issued. At this time, the Company is unable to determine the extent of clean-up
measures, if any, that may be required. However, the Company is aware of some
environmental contamination at Century of West Virginia, and it is likely that
clean-up activities will be required in at least some areas of the facility. The
Company believes a significant portion of this contamination is attributable to
the operations of a prior owner and will be the financial responsibility of that
owner, as discussed below.
Prior to the Company's acquisition of the Century of West Virginia
facility, Kaiser Aluminum & Chemical Corporation ("Kaiser") owned and operated
the facility for approximately thirty years. Many of the conditions which the
Company is required to investigate under the 3008(h) order arise out of
activities which occurred during Kaiser's ownership and operation, and with
respect to those conditions, Kaiser will be responsible for the costs of the RFI
and required cleanup under the terms of the purchase agreement ("Kaiser Purchase
Agreement"). In addition, Kaiser retained title to certain land within the
Century of West Virginia premises and retains full responsibility for those
areas. Under current environmental laws, the Company may be required to
remediate any contamination discovered during or after completion of the RFI,
which contamination was discharged from areas which Kaiser previously owned or
operated, or for which Kaiser has retained ownership or responsibility. However,
if such remediation is required, the Company believes that Kaiser will be liable
for some or all of the costs thereof pursuant to the Kaiser Purchase Agreement.
The Company is aware of two areas of contamination in the soil and
groundwater at its previously owned Virgin Islands Alumina Company ("Vialco")
facility. At the first of these areas, the Company has removed quantities of
contaminated soils and has transported and disposed of such soils in approved
facilities. In addition, it has begun a bioremediation program that it believes
will fulfill the remaining legal requirements with respect to such soils. In the
second area, the Company believes that a substantial amount of the contamination
originated from an adjacent refinery owned by Hess Oil Virgin Islands, Inc.
("HOVIC"). The Company further believes that the vast majority of any
contamination that did not originate from HOVIC was
35
37
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
caused by releases on the property that predated Vialco's ownership and will not
be the legal responsibility of Vialco. Pursuant to the Acquisition Agreement by
which Vialco sold the premises to St. Croix Alumina, L.L.C., a subsidiary of
Alcoa Alumina and Chemicals L.L.S. ("St. Croix"), Vialco retained liability for
environmental conditions existing at the time of the sale only to the extent
such conditions arose from operation of the facility by Vialco. In addition,
indemnification arises only if the conditions require remediation or give rise
to claims under the laws in effect at the time of sale. Finally, St. Croix may
not request indemnity from Vialco until St. Croix has spent $300 on such
environmental conditions and Vialco's indemnity is capped at $18,000. Management
of the Company does not believe that the retained liability, if any, will have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
It is the Company's policy to accrue for costs associated with
environmental assessments and remedial efforts when it becomes probable that a
liability has been incurred and the costs can be reasonably estimated. The
aggregate environmental related accrued liabilities were $1,374 and $1,052 at
December 31, 1998 and 1997, respectively. All accruals have been recorded
without giving effect to any possible future insurance or Kaiser indemnity
proceeds. 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 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 will have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
Legal Contingencies
Century of West Virginia is a named defendant (along with other companies)
in approximately 2,029 civil actions brought by individuals seeking to recover
compensatory and/or punitive damages in connection with alleged asbestos-related
diseases. All plaintiffs have been employees of independent contractors who
claim to have been exposed to asbestos in the course of performing services at
various facilities, including the Century of West Virginia facility. The cases
are typically resolved based upon factual determinations as to the facilities at
which the plaintiffs worked, the periods of time during which work was
performed, the type of work performed and the conditions in which work was
performed. If the plaintiffs' work was performed during the period when Kaiser
owned the Century of West Virginia facility, Kaiser has retained responsibility,
pursuant to the terms of the Kaiser Purchase Agreement, for defense and
indemnity. If a plaintiff is shown to have worked at the Century of West
Virginia facility after the time Century of West Virginia purchased the facility
from Kaiser, Kaiser assumes the defense and liability, subject to a reservation
of rights against Century of West Virginia. The Company believes it is unlikely
that existing or potential plaintiffs were exposed to asbestos at the Century of
West Virginia facility after Century of West Virginia purchased the facility
from Kaiser. There are currently 10 actions pending by individuals who claim
exposure after Century of West Virginia's assumption of the premises. While the
impact of the asbestos proceedings is impossible to predict, the Company
believes that the ultimate resolution will not have a material adverse effect on
the Company's financial condition, results of operations or liquidity.
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.
36
38
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commitments
The Company and a public utility have a fixed price power supply agreement,
covering the period from July 1, 1996 through July 31, 2003.
On January 23, 1996, the Company and the Pension Benefit Guaranty
Corporation ("PBGC") entered into an agreement (the "PBGC Agreement") which
provided that the Company make scheduled cash contributions to its pension plan
for hourly employees in 1996, 1997, 1998 and 1999. The Company made its
scheduled contributions for 1996, 1997 and 1998 and estimates that its scheduled
contribution in the remaining year will be $7,000 above the minimum required
contribution under Section 412 of the Internal Revenue Code. The Company has
granted the PBGC a first priority security interest in (i) the property, plant
and equipment at its Century of West Virginia facility and (ii) all of the
outstanding shares of Berkeley. In addition, Century must grant the PBGC a first
priority security interest in the first $50,000 of the property, plant and
equipment of any business or businesses that the Company acquires. The Company,
at its discretion, may, however, substitute Berkeley's undivided interest in the
Mt. Holly Facility in lieu of any such after-acquired property, plant and
equipment as well as the shares of Berkeley.
Other
Century of West Virginia's hourly employees, which comprise 72% of the
Company's workforce, are represented by the United Steelworkers of America and
are currently working under a four and one-half year labor agreement which
expires May 31, 1999. Although the Company anticipates a new labor agreement
will be negotiated by May 31, 1999, failure to reach a labor agreement could
have a material adverse affect on the Company's financial condition, results of
operations or liquidity.
13. FIXED-PRICE COMMITMENTS AND FORWARD CONTRACTS
The Company produces primary aluminum products and manufactures aluminum
sheet and plate products and manages the risks of each accordingly through the
issuance of fixed-price commitments and financial instruments.
The Company had fixed price commitments to sell 543.9 million pounds and
302.7 million pounds of primary, scrap aluminum and sheet and plate products at
December 31, 1998 and 1997, respectively. Of the total fixed-price sales
commitments, 34.6 million pounds and 138.5 million pounds at December 31, 1998
and 1997, respectively, were with the Glencore Group. In addition, the Company
had fixed price commitments to purchase 190.8 million pounds and 110.3 million
pounds of aluminum and alloy raw materials at December 31, 1998 and 1997,
respectively. Of the total fixed-price purchase commitments, 162.1 million
pounds and 36.7 million pounds at December 31, 1998 and 1997, respectively, were
with the Glencore Group.
In order to manage the company's exposure to fluctuating commodity prices,
the Company enters into forward sales and purchase contracts for primary
aluminum that will be settled in cash. At December 31, 1998 and 1997, the
Company had forward sales contracts, primarily with the Glencore Group, for 65.6
and 100.0 million pounds, respectively. At December 31, 1998 and 1997, the
Company had forward purchase contracts, primarily with the Glencore Group, for
18.0 million and 2.0 million pounds, respectively. Forward purchase and sales
contracts at December 31, 1998 are scheduled for settlement at various dates in
1999. Based on market prices at December 31, 1998, these contracts could be
settled by the Company receiving approximately $3,121. The actual settlement
will be based on market prices on the respective settlement dates.
The Company entered into a long-term supply agreement for 936 million
pounds of alumina annually, beginning January 1, 1996. The Company will pay a
fixed price for alumina with annual price increases of approximately 2.5%
through 2001. Pricing for the years 2002 through 2006 will be subject to
agreement between the parties.
37
39
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Although the Company has not materially participated in the purchase of
call options, in cases where Century sells forward primary aluminum, it may
purchase call options to preserve the opportunity to benefit from price
increases significantly above the forward sales prices. In addition, in cases
where the Company purchases forward primary aluminum, it may purchase put
options to protect itself from price decreases.
14. RELATED PARTY TRANSACTIONS
The related party transactions occurring during the years ended December
31, 1998, 1997 and 1996, and not discussed elsewhere in the notes to the
consolidated financial statements, are described below.
Related Party Transactions -- Century
During the years 1996, 1997 and 1998 and at December 31, 1998, the Chairman
of the Board of Directors of Century was a member of the Board of Directors of
Glencore International AG. Prior to March 28, 1996, he was also an officer of
Glencore. In addition, during the year ended and at December 31, 1998, one of
Century's Board members was employed by Glencore International AG.
Related Party Transactions -- Century of West Virginia
During the years ended December 31, 1998, 1997 and 1996, Century of West
Virginia purchased alumina and bought and sold primary and scrap aluminum in
transactions with Glencore Ltd. at prices which management believes approximated
market.
Related Party Transactions -- Berkeley
A substantial portion of Berkeley's sales during the years ended December
31, 1998, 1997 and 1996 were to Glencore. Effective January 1, 1996, and for the
term of one year, the Company entered into the Services and Marketing Agreement
with Glencore pursuant to which Glencore furnished training and marketing
assistance in connection with Century's ownership of the Mt. Holly Facility.
Summary
A summary of the aforementioned related party transactions for the years
ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996
------- -------- --------
Net sales........................................... $74,252 $105,521 $138,711
Purchases........................................... 43,651 84,250 89,832
Management, consulting and training fees............ -- -- 500
Net gain (loss) on forward contracts................ 10,574 (6,837) (6,670)
See Note 13 for a discussion of the Company's fixed-price commitments and
forward contracts with related parties.
15. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------ ------ -------
Cash paid for:
Interest.............................................. $5,528 $4,629 $ 2,694
Income taxes.......................................... 9,850 9,260 17,280
Cash received from income tax refunds................... 5,584 159 448
38
40
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Non-Cash Investing Activities
During the years ended December 31, 1998, 1997 and 1996, $3,242, $1,292 and
$89, respectively, of interest cost incurred in the construction of equipment
was capitalized.
16. BUSINESS SEGMENTS
The Company's two reportable business segments are primary aluminum and
sheet and plate products. The primary aluminum segment produces rolling ingot,
t-ingot, extrusion billet and foundry ingot for internal use and sales to
customers. The sheet and plate segment produces a wide range of products such
as: brazing sheet for sale to automobile manufacturers, heat treated and
non-heat treated plate for sale to aerospace and defense manufacturers, heavy
gauge, wide-leveled coil for sale to heavy truck, truck trailer, marine and rail
car manufacturers and sheet and coil for sale to building products
manufacturers.
The accounting policies of the segments are the same as those described in
Note 1 "Summary of Significant Accounting Policies" except that intersegment
revenues are accounted for based upon a market-based standard established by the
Company. The Company evaluates segment performance based upon gross profit.
Century's business segments are strategic business units that manufacture
and sell different products. The two business segments are managed separately
and require different technology, manufacturing processes and sales and
marketing strategies.
CORPORATE,
UNALLOCATED
PRIMARY SHEET AND PLATE & ELIMINATIONS TOTAL
1998 -------- --------------- -------------- --------
Net Sales
Third-party customers.................. $ 41,484 $534,522 $ -- $576,006
Related party customers................ 74,252 -- -- 74,252
Intersegment........................... 234,541 -- (234,541) --
Depreciation and amortization............ 9,308 10,191 186 19,685
Segment gross profit (loss).............. 28,791 9,857 (186) 38,462
Segment assets(1)........................ 181,383 353,028 11,219 545,630
Expenditures for segment assets.......... 19,132 25,126 1 44,259
CORPORATE,
UNALLOCATED
PRIMARY SHEET AND PLATE & ELIMINATIONS TOTAL
1997 -------- --------------- -------------- --------
Net Sales
Third-party customers.................. $ 33,682 $581,785 $ -- $615,467
Related party customers................ 105,521 -- -- 105,521
Intersegment........................... 231,274 -- (231,274) --
Depreciation and amortization............ 9,026 9,341 60 18,427
Segment gross profit (loss).............. 51,609 (22,448) (60) 29,101
Segment assets(1)........................ 166,603 329,775 10,770 507,148
Expenditures for segment assets.......... 10,703 26,397 2,867 39,967
39
41
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CORPORATE,
UNALLOCATED
PRIMARY SHEET AND PLATE & ELIMINATIONS TOTAL
1996 -------- --------------- -------------- --------
Net Sales
Third-party customers.................. $ 13,103 $537,065 $ -- $550,168
Related party customers................ 138,711 -- -- 138,711
Intersegment........................... 210,044 -- (210,044) --
Depreciation and amortization............ 9,062 8,947 -- 18,009
Segment gross profit (loss).............. 45,731 6,662 -- 52,393
Segment assets(1)........................ 157,671 313,764 2,296 473,731
Expenditures for segment assets.......... 9,715 10,768 78 20,561
- ---------------
(1) Segment assets include accounts receivable, due from affiliates, inventory
and property, plant and equipment-net, the remaining assets are unallocated
corporate assets, deferred tax assets and intersegment eliminations.
Included in the consolidated financial statements are the following amounts
related to geographic locations:
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Net Sales
United States.................................... $568,136 $586,339 $585,407
Canada........................................... 54,763 60,300 50,532
Europe........................................... 14,611 46,388 46,687
Other............................................ 12,748 27,961 6,253
At December 31, 1998 and 1997, all of the Company's long-lived assets were
located in the United States.
Revenues from one customer, Glencore, in Century's primary segment
represented 11.4%, 14.6% and 20.1% of the Company's consolidated revenues in
1998, 1997 and 1996, respectively.
17. QUARTERLY INFORMATION (UNAUDITED)
Financial results by quarter for the years ended December 31, 1998 and 1997
are as follows:
GROSS NET INCOME
NET PROFIT INCOME (LOSS)
SALES (LOSS) (LOSS) PER SHARE
-------- ------- ------- ---------
1998:
1st Quarter............................. $176,390 $13,511 $ 5,828 $ 0.29
2nd Quarter............................. 156,762 11,826 8,110 0.41
3rd Quarter............................. 162,727 6,523 1,942 0.10
4th Quarter............................. 154,379 6,602 2,057 0.10
1997:
1st Quarter............................. $191,531 $ 6,946 $ 1,726 $ 0.09
2nd Quarter............................. 191,477 11,581 2,783 0.14
3rd Quarter............................. 169,709 (155) (3,203) (0.16)
4th Quarter............................. 168,271 10,729 (238) (0.01)
40
42
CENTURY ALUMINUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUBSEQUENT EVENT
On February 24, 1999, the Company entered into an agreement with
BankBoston, N.A. and the CIT Group/Business Credit, Inc. ("Bank Agreement") to
provide, based on availability, up to $180,000 of revolving loans, term loans
and letters of credit to refinance indebtedness, to finance certain capital
expenditures and for other general corporate purposes. The borrowing base for
purposes of determining availability is based upon certain eligible inventory
and receivables. The credit facilities consist of a revolving loan of up to
$160,000 and a term loan of $20,000. On March 31, 1999, the Company closed on
the revolving loan. The revolving loan is secured by Century of West Virginia's,
Berkeley's and Century Cast Plate's inventory and receivables. To the extent the
Company draws on the term loan, the credit facilities are secured by a first
priority security interest in all of Century of West Virginia's, Berkeley's and
Century Cast Plate's inventory, receivables, property, plant and equipment and
stock of certain subsidiaries. The credit facilities have a variable interest
rate and mature five years from the closing date. Subject to certain
limitations, the borrowers may select base rate or LIBOR loans. The interest
rate margins that the Company will pay are dependent upon the Company's
attainment of a defined coverage ratio.
The Bank Agreement provides for various restrictive covenants, including
the following: (i) standard restrictions on dispositions of property and assets
except in the ordinary course of business, (ii) restrictions on the incurrence
of indebtedness and liens and the making of capital expenditures and
investments, (iii) a prohibition on the payment of dividends except dividends up
to $5,000 per year, (iv) a prohibition on change of business or change of
control and (v) maintenance of certain financial ratios.
The Bank Agreement provides customary events of default, including default
for nonpayment of principal, interest, fees or other amounts, any violation of
restrictive covenants and insolvency by the borrower. The Company expects to
complete the $20,000 term loan financing in the second quarter of 1999.
41
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the captions "1. ELECTION OF DIRECTORS" and
Section 16(a) Beneficial Ownership Reporting Compliance" to be included in the
Company's definitive Proxy Statement relating to the Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year covered by this report on Form 10-K, is incorporated
herein by reference. The information regarding Executive Officers of the
Registrant is included in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The (i) information set forth under the caption "Board and Committee
Meetings; Directors' Compensation" and (ii) information set forth under the
captions "Executive Compensation," "Employment Agreements", "Severance
Compensation Arrangements", "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions and Relationships" all to be included
in the Company's definitive Proxy Statement relating to the Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year covered by this report on Form 10-K, is incorporated
herein by reference. Notwithstanding the foregoing, (i) the information set
forth in said Proxy Statement under the caption "Report of the Compensation
Committee" and (ii) the information set forth under the caption "Performance
Graph" in said Proxy Statement, is NOT incorporated by reference herein or in
any other filing of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT" to be included in the Company's definitive
Proxy Statement relating to the Annual Meeting of Stockholders to be filed
pursuant to Regulation 14A within 120 days after the close of the fiscal year
covered by this report on Form 10-K, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions and
Relationships" to be included in the Company's definitive Proxy Statement
relating to the Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A within 120 days after the close of the fiscal year covered by
this report on Form 10-K, is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) LIST OF FINANCIAL STATEMENTS
The following Consolidated Financial Statements of Century Aluminum Company
and the Independent Auditors' Report are included in Part II, Item 8 of this
Form 10-K.
Independent Auditors' Report.
Consolidated Balance Sheets at December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
42
44
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
Notes to the Consolidated Financial Statements.
(a)(2) LIST OF FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report.
Schedule I -- Condensed Financial Information of Registrant as of and for
the years ended December 31, 1998, 1997 and 1996.
Schedule II -- Valuation and Qualifying Accounts for the years ended
December 31, 1998, 1997 and 1996.
(a)(3) LIST OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1 Restated Certificate of Incorporation of Registrant.*
3.2 Amended and Restated Bylaws of Registrant.*
4.1 Form of Stock Certificate.*
10.2 Alumina Supply Agreement between Alcoa Alumina & Chemicals,
L.L.C., Alcoa of Australia, Ltd. and Ravenswood Aluminum
Corporation, dated July 24, 1995.*(a)
10.4 Agreement between Ravenswood Aluminum Corporation and United
Steelworkers of America AFL-CIO, Local 5668, dated November
30, 1994.*
10.5 Agreement between Ravenswood Aluminum Corporation and United
Steelworkers of America AFL-CIO, Local 5668, dated June 12,
1992.*
10.6 Form of Employment Agreement between Century Aluminum
Company and Craig A. Davis.*(b)
10.7 Form of Employment Agreement between Century Aluminum
Company and Gerald A. Meyers.*(b)
10.8 Form of Employment Agreement between Century Aluminum
Company and Gerald J. Kitchen.*(b)
10.9 Form of Employment Agreement between Century Aluminum
Company and David W. Beckley.*(b)
10.10 Form of Employment Agreement between Century Aluminum
Company and Steven R. Sedberry.*(b)
10.11 Form of Severance Agreement between Century Aluminum Company
and Craig A. Davis.*(b)
10.12 Form of Severance Agreement between Century Aluminum Company
and Gerald A. Meyers.*(b)
10.13 Form of Severance Agreement between Century Aluminum Company
and Gerald J. Kitchen.*(b)
10.14 Form of Severance Agreement between Century Aluminum Company
and David W. Beckley.*(b)
10.15 Form of Severance Agreement between Century Aluminum Company
and Steven R. Sedberry.*(b)
10.16 1996 Stock Incentive Plan.*(b)
10.17 Non-Employee Directors Stock Option Plan.*(b)
10.18 Amended and Restated Asset Purchase Agreement between Kaiser
Aluminum & Chemical Corporation and Ravenswood Acquisition
Corporation, dated as of December 13, 1988.*
10.19 Acquisition Agreement between Virgin Islands Alumina
Corporation and St. Croix Alumina, L.L.C., dated July 19,
1995.*
10.20 Ravenswood Environmental Services Agreement between Kaiser
Aluminum & Chemical Corporation and Ravenswood Aluminum
Corporation, dated as of February 7, 1989.*
43
45
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.22 Form of Tax Sharing Agreement.*
10.23 Form of Disaffiliation Agreement.*
10.26 Loan and Security Agreement among various financial
institutions, BankAmerica Business Credit, Inc., as agent,
Ravenswood Aluminum Corporation and Berkeley Aluminum, Inc.,
dated as of January 30, 1996.*
10.27 Security Agreement, made by Century Aluminum Company in
favor of BankAmerica Business Credit, Inc. dated as of
January 30, 1996.*
10.28 Guaranty by Century Aluminum Company in favor of BankAmerica
Business Credit, Inc. dated as of January 30, 1996.*
10.29 Agreement among the Pension Benefit Guaranty Corporation,
Century Aluminum Company, Ravenswood Aluminum Corporation,
Berkeley Aluminum, Inc., Ravenswood Receivables Corporation,
Ravenswood International Sales Corp., Virgin Islands Alumina
Corporation, Glencore Holdings AG, Glencore International
AG, Glencore AG, Vialco Holdings Ltd., Glencore Marketing
Inc., Pickands Mather Sales, Inc., Berkeley Finance
Corporation, Adam Maritime Corp., Glencore Canada, Inc. and
Clarendon Coal, Inc., dated as of January 23, 1996.*
10.30 Intercreditor Agreement between the Pension Benefit Guaranty
Corporation and BankAmerica Business Credit, Inc., dated as
of January 30, 1996.*
10.31 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.*
10.32 Limited Term Firm Power Supply Agreement between Ravenswood
Aluminum Corporation and Ohio Power Company dated as of June
28, 1996.(c)
10.33 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)
10.34 Tenth Amendment to Loan and Security Agreement by and among
Century Aluminum of West Virginia, Inc. and Berkeley
Aluminum, Inc. and BankAmerica Business Credit, Inc. entered
into as of May 11,1998.(d)
10.37 Century Aluminum Company 1996 Stock Incentive Plan
Implementation Guidelines.(b)(d)
10.38 Century Aluminum Company Incentive Compensation Plan.(b)(d)
11.1 Calculation of Basic and Diluted Earnings per Common Share.
21.1 List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
27.0 Financial Data Schedule.
- ---------------
* Incorporated by reference to the Registrant's Form S-1 Registration
Statement, as amended, Registration No. 33-95486.
(a) Confidential treatment has been granted as to portions of this exhibit.
(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.
(b) REPORTS ON FORM 8-K: NONE
44
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized.
CENTURY ALUMINUM COMPANY
By: /s/ GERALD A. MEYERS
------------------------------------
Gerald A. Meyers
President and Chief Operating
Officer
Dated: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CRAIG A. DAVIS Chairman and Chief Executive March 31, 1999
- --------------------------------------------------- Officer
Craig A. Davis
/s/ WILLIAM R. HAMPSHIRE Vice Chairman March 31, 1999
- ---------------------------------------------------
William R. Hampshire
/s/ GERALD A. MEYERS President, Chief Operating March 31, 1999
- --------------------------------------------------- Officer and Director
Gerald A. Meyers
/s/ DAVID W. BECKLEY Executive Vice President and March 31, 1999
- --------------------------------------------------- Chief Financial Officer
David W. Beckley (Principal Financial Officer
and Principal Accounting
Officer)
/s/ ROMAN A. BNINSKI Director March 31, 1999
- ---------------------------------------------------
Roman A. Bninski
/s/ JOHN C. FONTAINE Director March 31, 1999
- ---------------------------------------------------
John C. Fontaine
/s/ WILLY R. STROTHOTTE Director March 31, 1999
- ---------------------------------------------------
Willy R. Strothotte
45
47
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, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998, and have
issued our report thereon dated February 9, 1999 (March 31, 1999 as to Note 18
to the consolidated financial statements) included elsewhere in this Form 10-K.
Our audits also included the financial statement schedules listed in Item 14 of
this Form 10-K. These financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 9, 1999
46
48
CENTURY ALUMINUM COMPANY
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
PROPERTY, PLANT AND EQUIPMENT -- NET........................ $ 1,029 $ 1,214
INVESTMENTS IN WHOLLY-OWNED SUBSIDIARIES.................... 195,734 170,546
-------- --------
TOTAL............................................. $196,763 $171,760
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
DUE TO SUBSIDIARIES......................................... $ 18,700 $ 8,214
OTHER CURRENT LIABILITIES................................... 580 --
-------- --------
CURRENT LIABILITIES.................................... 19,280 8,214
CONTINGENCIES AND COMMITMENTS (Note 2)
SHAREHOLDERS' EQUITY
Common Stock.............................................. 200 200
Additional paid-in capital................................ 161,953 161,953
Retained earnings......................................... 15,330 1,393
-------- --------
Total shareholders' equity............................. 177,483 163,546
-------- --------
TOTAL............................................. $196,763 $171,760
======== ========
See notes to condensed financial information
47
49
CENTURY ALUMINUM COMPANY
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
EQUITY IN INCOME FROM CONTINUING OPERATIONS OF WHOLLY-OWNED
SUBSIDIARIES.............................................. $17,937 $1,068 $16,240
EQUITY IN INCOME FROM DISCONTINUED OPERATIONS OF
WHOLLY-OWNED SUBSIDIARIES................................. -- -- 264
------- ------ -------
NET INCOME.................................................. $17,937 $1,068 $16,504
======= ====== =======
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations......................... $ 0.90 $ 0.05 $ 0.78
Income from discontinued operations....................... -- -- 0.01
------- ------ -------
Net income................................................ $ 0.90 $ 0.05 $ 0.79
======= ====== =======
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations......................... $ 0.89 $ 0.05 $ 0.78
Income from discontinued operations....................... -- -- 0.01
------- ------ -------
Net income................................................ $ 0.89 $ 0.05 $ 0.79
======= ====== =======
See notes to condensed financial information
48
50
CENTURY ALUMINUM COMPANY
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- ------- --------
(DOLLARS IN THOUSANDS)
NET CASH FROM OPERATING ACTIVITIES
Net income................................................ $ 17,937 $ 1,068 $ 16,504
Equity in undistributed net income of subsidiaries........ (17,937) (1,068) (16,504)
Change in other current liabilities....................... 580 -- --
-------- ------- --------
Net cash provided by operating activities................... 580 -- --
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment................. (1) (1,275) --
Business acquisitions..................................... (7,251) -- --
-------- ------- --------
Net cash used in investing activities....................... (7,252) (1,275) --
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from subsidiaries.............................. 10,672 5,275 3,000
Dividends paid............................................ (4,000) (4,000) (3,000)
-------- ------- --------
Net cash provided by financing activities................... 6,672 1,275 --
-------- ------- --------
Net increase/(decrease) in cash............................. -- -- --
Beginning cash.............................................. -- -- --
-------- ------- --------
ENDING CASH................................................. $ -- $ -- $ --
======== ======= ========
See notes to condensed financial information
49
51
CENTURY ALUMINUM COMPANY
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- In the accompanying condensed financial
information of the Registrant ("parent-company-only financial statements"), the
Company's investment in subsidiaries is stated at cost plus equity in
undistributed earnings and losses of subsidiaries. The Company's share of income
from continuing and discontinued operations of subsidiaries is reflected using
the equity method of accounting. Parent-company-only financial statements should
be read in conjunction with the Company's consolidated financial statements and
the notes to such consolidated financial statements appearing in this Form 10-K
("Consolidated Financial Statements").
2. CONTINGENCIES AND COMMITMENTS
For disclosure of contingencies and commitments, see Notes 4, 12, 13 and 18
to the Consolidated Financial Statements.
3. SHAREHOLDERS' EQUITY
For disclosure of information concerning shareholders' equity, see Note 7
to the Consolidated Financial Statements.
50
52
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, 1996:
Allowance for doubtful trade accounts
receivable................................. $ 700 $1,000 $-- $1,700
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful trade accounts
receivable................................. $1,700 $ 570 $-- $2,270
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful trade accounts
receivable................................. $2,270 $ 120 $-- $2,390
51