-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FDt7tvut4NOwK/slYtB02XUN5pAdphPtFf7GPJvnJijgxpt/Xl//O9e3Aangy85b K8zn7QHmgGdniQ3uM1iYHg== 0000891020-00-000676.txt : 20000331 0000891020-00-000676.hdr.sgml : 20000331 ACCESSION NUMBER: 0000891020-00-000676 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN NORTHWEST ALUMINUM INC CENTRAL INDEX KEY: 0001079177 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY PRODUCTION OF ALUMINUM [3334] IRS NUMBER: 931249606 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-72245 FILM NUMBER: 588061 BUSINESS ADDRESS: STREET 1: 3313 WEST SECOND STREET CITY: DALLAS STATE: OR ZIP: 97058 BUSINESS PHONE: 5412966161 MAIL ADDRESS: STREET 1: 3313 WEST SECOND STREET CITY: DALLES STATE: OR ZIP: 97058 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWEST ALUMINUM SPECIALTIES INC CENTRAL INDEX KEY: 0001079176 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 931019176 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-72245-01 FILM NUMBER: 588062 BUSINESS ADDRESS: STREET 1: 3313 WEST SECOND STREET CITY: DALLAS STATE: OR ZIP: 97058 BUSINESS PHONE: 5412966161 MAIL ADDRESS: STREET 1: 3313 WEST SECOND STREET CITY: DALLES STATE: OR ZIP: 97058 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWEST ALUMINUM CO CENTRAL INDEX KEY: 0001079178 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 930905834 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-72245-02 FILM NUMBER: 588063 BUSINESS ADDRESS: STREET 1: 3313 WEST SECOND STREET CITY: DALLAS STATE: OR ZIP: 97058 BUSINESS PHONE: 5412966161 MAIL ADDRESS: STREET 1: 3313 WEST SECOND STREET CITY: DALLES STATE: OR ZIP: 97058 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWEST ALUMINUM TECHNOLOGIES LLC CENTRAL INDEX KEY: 0001079191 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-72245-03 FILM NUMBER: 588064 BUSINESS ADDRESS: STREET 1: 3313 W SECOND ST CITY: THE DALLES STATE: OR ZIP: 97058 BUSINESS PHONE: 5412966161 MAIL ADDRESS: STREET 1: 3313 W SECOND ST CITY: THE DALLES STATE: OR ZIP: 97058 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDENDALE HOLDING CO CENTRAL INDEX KEY: 0001079192 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-72245-04 FILM NUMBER: 588065 BUSINESS ADDRESS: STREET 1: 3313 W SECOND ST CITY: THE DALLES STATE: OR ZIP: 97058 BUSINESS PHONE: 5412966161 MAIL ADDRESS: STREET 1: 3313 W SECOND ST CITY: THE DALLES STATE: OR ZIP: 97058 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDENDALE ALUMINUM CO CENTRAL INDEX KEY: 0001079194 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-72245-05 FILM NUMBER: 588066 BUSINESS ADDRESS: STREET 1: 3313 W SECOND ST CITY: THE DALLES STATE: OR ZIP: 97058 BUSINESS PHONE: 5412966161 MAIL ADDRESS: STREET 1: 3313 W SECOND ST CITY: THE DALLES STATE: OR ZIP: 97058 10-K405 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 0-19657 GOLDEN NORTHWEST ALUMINUM, INC. (Exact name of registrant as specified in its charter) OREGON 93-1249606 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization)
3313 WEST SECOND STREET THE DALLES, OREGON 97058 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (541) 296-6161 ------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None (Title of each class) 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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 27, 2000 the aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was $0. Solely for purposes of this calculation, the registrant has treated its Board of Directors and executive officers as affiliates. As of March 27, 2000, the number of shares of the registrant's Common Stock outstanding was 1,000 shares. DOCUMENTS INCORPORATED BY REFERENCE: Not applicable. 2 This annual report on Form 10-K also constitutes an annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the following subsidiaries of Golden Northwest Aluminum, Inc.:
State of I.R.S. Employer Commission file incorporation or Identification Company number organization Number - ------- --------------- ---------------- --------------- Goldendale Holding Company 333-72245-04 Delaware 91-1785763 Goldendale Aluminum Company 333-72245-05 Delaware 91-1380241 Northwest Aluminum Company 333-72245-02 Oregon 93-0905834 Northwest Aluminum Specialties, Inc. 333-72245-01 Oregon 93-1019176 Northwest Aluminum Technologies, LLC 333-72245-03 Washington 93-1196863
The address of the principal executive offices for each of these entities is 3313 West Second Street, The Dalles, Oregon 97058 and their telephone number is (541) 296-6161. SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. No annual report or proxy material has been sent to security holders. 3 GOLDEN NORTHWEST ALUMINUM, INC. TABLE OF CONTENTS
ITEM PAGE NO. NO. - ---- ---- PART I 1. Business......................................................................................... 1 2. Properties.......................................................................................11 3. Legal Proceedings................................................................................11 4. Submission of Matters to a Vote of Security Holders..............................................11 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters............................12 6. Selected Financial Data..........................................................................12 7. Management's Discussion and Analysis of Financial Condition......................................13 7(a). Quantitative and Qualitative Disclosures about Market Risk.......................................20 8. Financial Statements and Supplemental Data.......................................................20 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............21 PART III 10. Directors and Executive Officers of the Registrant...............................................22 11. Executive Compensation...........................................................................24 12. Security Ownership of Certain Beneficial Owners and Management...................................25 13. Certain Relationships and Related Transactions...................................................25 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................27
4 PART I ITEM 1. BUSINESS Our company was incorporated in 1998, and, through its three primary operating subsidiaries, Goldendale Aluminum Company, Northwest Aluminum Company and Northwest Aluminum Specialties, Inc., is a leading producer of primary aluminum and selected specialty engineered high quality value-added aluminum products. Our revenues come from two main sources: fees received from tolling alumina into aluminum and sales of value-added aluminum products. At our two facilities on the Columbia River east of Portland, Oregon, we operate two primary aluminum smelters with combined production capacity of 250,000 metric tons, making us one of the five largest primary aluminum producers in the United States. We produce approximately two-thirds of our primary aluminum under a tolling agreement with Hydro Aluminum Louisville, Inc., a large international industrial and trading company. In conjunction with our smelter operations, we operate three casthouses that produce a range of value-added aluminum products, including our proprietary line of direct-cast, small diameter, alloyed billet products. We sell value-added billet and related products directly to the extrusion and direct forge industries for further processing into final products such as fire extinguishers, automobile air bag canisters, golf club heads, bicycle frames and a variety of automotive and aircraft parts. We believe our cost competitive position, strategic relationships, investment in new smelting and casting technologies and mix of higher-margin, value-added products are key competitive advantages and have been primary determinants of our historical profitability. We believe we rank among the lower cost aluminum producers in the United States. We attribute our historical profitability to a number of factors including access to and innovative procurement of low-cost hydroelectric power, technical innovation at the plant level, good labor relations and low levels of corporate overhead. OPERATIONS We conduct our business and derive revenues through two principal business activities: the production of primary aluminum under a tolling contract and the production of value-added specialty aluminum products under tolling contracts and for direct sales. All of our business is conducted under one segment as defined by Statement of Financial Accounting Standards No. 131. PRODUCTION OF PRIMARY ALUMINUM Our subsidiaries operate two aluminum smelters in The Dalles, Oregon and Goldendale, Washington. The smelters have the capacity to produce approximately 250,000 metric tons of primary aluminum per year. A metric ton is equal to 2,204.6 pounds. These smelters consist of 826 vertical pin Soderberg technology reduction cells organized into five pot lines. The smelters use advanced conservation technology, computer control procedures and environmental control equipment to enhance their efficiency. Capital investment in the facilities by us and the smelters' previous owners over the life of the facilities, competitive wage rates, access to low cost hydroelectric power, low overhead and tolling agreements that have historically insured full smelter utilization have also contributed to the smelters' efficiency. The efficiency of the smelters allows us to maintain a competitive cost position relative to other industry participants, many of which are significantly larger than we are. SMELTING METHODS. Smelting, which involves the reduction of alumina to aluminum ingot, is an electrolytic process. Raw alumina is dissolved in an electrolytic bath in large cells, or pots, which are insulated with brick and lined with carbon. The cell lining acts as the negative cathode, and a carbon block, which is partially immersed in the electrolytic bath serves as a positive anode. The carbon anode is composed of petroleum coke and coal tar pitch and is consumed in the smelting process, as oxygen released from alumina in the reduction process binds with the carbon to form carbon dioxide. Because of the high cost of removing metallic impurities from aluminum, careful attention must be given to avoiding impurity introduction by way of the raw materials used in the anode manufacturing process. Petroleum coke and coal tar pitch are used as the carbon and binder sources because of their relatively high purity. Gases and particulate matter are collected in the hood around the lower rim of the anode casing and are passed through the smelter's air and water purification systems. Molten aluminum is drawn from the bottom of the cell, and, typically, poured into molds as unalloyed metal, or sow, or routed into holding furnaces where various alloying ingredients may be added before casting into plate, slab, logs or ingot. 1 5 The world's aluminum smelters are evenly split between two basic anode technologies, Soderberg and pre-bake. The two processes differ only in the fabrication and connection of the carbon anode. Most recently constructed smelters use pre-bake technology, which has certain inherent advantages relative to Soderberg technology and may permit primary aluminum production at a lower cost, albeit at a higher initial investment. Soderberg anodes are baked by utilizing waste heat from the smelting cell and, as such, are referred to as self-baking. A steel casing or mold six to eight meters by two meters containing the coke aggregate and coal tar pitch mixture is mounted over the smelting cell and its contents bake as they progress toward the electrolytic bath. The carbon mass is allowed to slip through the casing at the rate of its oxidation in the electrolytic bath. In the vertical spike version of the Soderberg cell, electrical contact is made by steel tipped aluminum spikes entering from the top. They are pulled by a special tool and reset as their tips approach the electrolytic bath surface due to consumption of the anode. In the horizontal spike version of the Soderberg cell the steel-aluminum spikes enter through the side of the casing instead of through the top. They must be removed and reset as the anode is consumed. Pre-bake anodes are formed by blending sized petroleum coke aggregate and coal tar pitch, molding it into blocks complete with preformed electrical connection sockets by hydraulic pressing or vibration forming, and firing in oil- or gas-fired ceramic-lined ring furnace pits. A typical block is 70 centimeters wide, 125 centimeters long and 50 centimeters high. Electrical contact and physical support is obtained through aluminum or copper rods welded or bolted to steel stubs. The stubs are set in the anode sockets and molten cast iron is poured around them to produce a strong joint with low electrical resistance. GOLDENDALE SMELTER. The smelter in Goldendale, Washington was built in 1971, making it the most recently constructed aluminum smelter in the Pacific Northwest, and was expanded in 1981. The total annual production capacity of the Goldendale smelter is 168,000 metric tons of primary aluminum output. The Goldendale smelter employs vertical pin Soderberg technology and consists of 526 reduction cells organized into three pot lines. The Goldendale smelter has undergone a number of technology upgrades during its lifetime. These upgrades have resulted in a significant improvement in production efficiencies over the years as measured by energy consumption, carbon consumption and cell life. The Goldendale smelter was constructed from engineering plans based on Norsk Hydro ASA's Karmoy, Norway facility, and as such is similar in terms of layout, smelter design and operating processes. The Goldendale smelter was also designed to operate in tandem with our smelter located in The Dalles, Oregon. NORTHWEST SMELTER. Located across the Columbia River and approximately 35 miles west of the Goldendale smelter, our smelter in The Dalles produces primary aluminum. Built in 1958, The Dalles smelter consists of 300 vertical pin Soderberg reduction cells organized into two pot lines. The smelter's production capacity is about 82,000 metric tons of primary aluminum per year. We also operate a carbon plant at The Dalles facility. The plant produces approximately 40,000 metric tons of carbon briquettes, which are consumed during the alumina reduction process. We have surplus capacity in the plant and recently have begun selling briquettes to a non-affiliated aluminum producer. CELL RELINING. Each smelter's cells are grouped into series electrical circuits varying from 150 to 186 cells. Each cell must be relined on average every 2,300 to 2,600 days. When a cell is relined, it is removed from the production process by electrically isolating the cell, allowing the electricity to flow past the cell to the next cell in the circuit. The cell is allowed to cool and the lower half of the cell, known as the cathode, is removed and taken from the cell lines to our cell relining area. The residual cooled and hardened electrolyte and aluminum and the spent pot liner, which consists of carbon blocks and insulating brick, are removed from the steel cell casing. The steel casing is then straightened and patched if necessary. The cell is then relined with new insulating brick, carbon blocks and other material and supplies, including ramming paste and collector bars. The total cell relining costs are approximately $75,000 per cell. The number of cells relined each year varies based on the quality of materials used, operating conditions and the number of cells that have been relined over the years. 2 6 THE HYDRO TOLLING AGREEMENT. Goldendale and Hydro Aluminum Louisville, Inc. entered into a ten-year contract effective January 1, 1997. The Hydro tolling agreement has been extended another five years, until December 2011. Under the terms of the Hydro tolling agreement, Goldendale must use its smelter exclusively to produce at least 157,000 metric tons of aluminum annually from the alumina supplied to it by Hydro, and Hydro is required to supply sufficient alumina to enable Goldendale to produce that amount of aluminum. Hydro supplies the alumina at no cost to Goldendale, and at all times the alumina and aluminum inventory is owned by Hydro. Goldendale bears the entire cost of unloading and storing the alumina and transporting it to the smelter from Goldendale's unloading facility. Hydro pays a tolling fee to Goldendale for converting the alumina to aluminum based on a percentage of the price of aluminum on the London Metal Exchange. Pursuant to its tolling agreement with Hydro, Goldendale receives an additional tolling fee for casting the aluminum into value-added "casthouse products" such as extrusion billet, foundry "T" or sheet ingot. In addition, Goldendale shares premiums that Hydro is able to realize on sales of value-added products in the market. Hydro is required to place orders for at least 70,000 metric tons of value-added products each year. The tolling agreement also specifies quality and efficiency requirements. If the products or production schedules do not meet the required specifications, the parties have agreed to work together to identify and correct the problem; however, Hydro may terminate the agreement if Goldendale's production were to continue to fall below the product or schedule specifications. The Hydro agreement also requires Goldendale to use any additional smelter capacity resulting from the installation of new point feeder technology under the facilities investment program, discussed below, exclusively to produce aluminum products for Hydro, subject to some maximum volumes. Hydro is required to supply sufficient alumina to enable Goldendale to produce the additional volume. However, Hydro's commitment to place orders for value-added products remains at 70,000 metric tons and has not been increased to reflect the additional casthouse capacity expected to result from the facilities investment program. Hydro has informed us that it will utilize the additional casthouse capacity. Hydro would like to receive more of the primary aluminum produced at the Goldendale smelter in the form of billet rather than ingot. In contrast to ingot, billet is a casthouse product. If Hydro's demand for billet does not use the full capacity of the Goldendale casthouse, we anticipate using the excess capacity to cast primary aluminum from the smelter at The Dalles into commodity billet for other value-added customers. THE GLENCORE TOLLING AGREEMENT. Northwest was a party to a tolling contract with Glencore, Ltd. until the contract expired in December 1999. Under the Glencore tolling agreement, Glencore provided alumina to Northwest for conversion into primary aluminum. Glencore supplied enough alumina to support the full production capacity of the Northwest smelter, and Northwest used its best efforts to produce 82,000 metric tons of aluminum ingot and other finished products for Glencore in exchange for a tolling fee based on a certain percentage of the London Metal Exchange price for aluminum. Due to the growth of its value-added operations, Northwest had increased its purchases of primary aluminum from Glencore and others to such an extent that it was purchasing more primary aluminum from Glencore and others than the production capacity of the Northwest smelter. Glencore's tolling contract allowed us to operate The Dalles smelter at full capacity while we had no developed market for our smelter production. The success of our non-tolled products, however, reduced the importance of this contract, and we did not renew it when it expired in December 1999. We have, however, entered into an agreement with Glencore to have Glencore supply the smelter at The Dalles with all of its alumina requirements from October 1, 1999 to December 31, 2004 at what we believe are favorable rates as compared to current market prices. UNLOADING FACILITIES. We receive raw alumina at our Portland, Oregon unloading facility. A ship channel maintained by the U.S. Army Corps of Engineers serves the facility. Three steel silos are located on the property with the capacity to store 42,000 metric tons of alumina. Alumina is delivered to the facility by ship and is then transferred into silos for short-term storage and delivered to our smelters by rail. The unloading facility has sufficient capacity to handle our unloading and storage requirements. 3 7 PRODUCTION OF VALUE-ADDED SPECIALTY ALUMINUM PRODUCTS We operate a value-added production operation which blends primary aluminum, produced at both our smelters or purchased from Hydro, Glencore and other aluminum producers, with various alloys into a variety of value-added products, including proprietary small diameter billet ("SDB") and related products. Our SDB products are cast directly from molten aluminum in a process that eliminates the expense associated with the extrusion process typically required to manufacture SDB products. Our SDB products are frequently manufactured to customer specifications, and, as such, can be priced to provide us with enhanced margins relative to commodity aluminum products. Since Northwest Aluminum Specialties began its value-added operations in the early 1990s, the business has grown to represent a significant percentage of our total revenues. Our SDB products are typically forged or extruded by our customers into end use forms which include fire extinguishers, automobile air bag canisters, golf club heads, bicycle frames and a variety of automotive and aircraft parts. In late 1996, Specialties added a new billet machining operation that allows us to manufacture SDB in any diameter between 2 inches and 5 inches, within extremely tight engineering tolerances. Bar sawing capabilities were also added that allow us to deliver cut billet "pucks" that meet customer specifications. These new capabilities have led to additional business and opportunities that we believe will allow us to continue to increase the size of our value-added aluminum business and enhance the average premium received. Our value-added standard extrusion billet and hot molten metal products that are not produced under tolling arrangements are sold at the Midwest market price, which includes a premium of $.03 to $.05 per pound over the London Metal Exchange price, plus a premium of between $.06 and $.13 per pound. Our specialty extrusion billet, hot closed die forging, cold impact forging and semi-solid forging are sold at the Midwest market price plus a premium of between $.13 and $.81 per pound. FACILITIES INVESTMENT PROGRAM Both we and previous owners of our facilities have periodically made major investments in new plant and equipment. From 1978 to 1981, Martin Marietta Corporation made a major investment in both smelters by implementing new anode and cathode technology, modernizing electrical and environmental control systems and adding the third cell line at the Goldendale smelter. In 1991 and 1997, Northwest Aluminum Specialties added new casting capability. We have undertaken the facilities investment program to expand capacity and enhance operating efficiency. With the financial and technical support of Hydro, we plan to expand the casthouse at Goldendale and upgrade the cell lines at Goldendale and at The Dalles. We have borrowed $20.0 million from Hydro under a note purchase agreement to partially finance the facilities investment program. We intend to implement the facilities investment program over the next five years, in two stages. In the first stage, we plan to modernize the Goldendale casthouse and complete a demonstration of its new cell line technology. The Goldendale casthouse expansion is designed to increase the facility's capacity to produce value-added billet from 13 million pounds per month to an initial capacity of 22 million pounds per month, with the option to expand capacity to over 30 million pounds per month. The additional value-added production will be sold by Hydro under the tolling agreement, with the same sharing of market premiums in excess of costs. As discussed below, our share of any incremental earnings from the facilities investment program will be used to repay the debt owed to Hydro. Hydro has informed us that its own U.S. extrusion plants should be able to use a significant portion of this additional capacity. The expansion is underway, and should be substantially completed by the end of 2000. We expect the cost will be approximately $13.5 million. Through December 1999, expenditures related to this expansion totaled $8.5 million, which is consistent with our estimate of the project's total cost. The first stage will also include a 12 to 18-month demonstration of the planned cell line improvements in a 34-cell section at Goldendale. Conversion of this section and the demonstration are budgeted to cost $6.4 million. Cell improvements include pointfeeders to control alumina additions, magnetic compensation to stabilize cell operations, cathode redesign to optimize heat balance, new computer controls and other related technologies. The technology for the cell line improvements has been licensed from Hydro, which already has implemented these changes at a 4 8 similar smelter in Norway. Based upon Hydro's experience, we expect the improvements to increase smelter production, reduce average unit costs of production, increase production efficiencies and significantly reduce air emissions. The improvements are underway, and should be substantially completed by the end of 2000. We expect the cost will be approximately $6.4 million. Through December 1999, expenditures related to this conversion totaled $2.9 million, which is consistent with our estimate of the project's total cost. Results of this test phase obtained thus far are positive. We plan to begin the second stage of converting the remaining cells at both smelters when we complete the demonstration of our cell line upgrades and obtain all necessary permits. The conversion can be performed cell by cell, with minimal disruption of operations, and can be accelerated or slowed for market or other reasons. We estimate that conversion of the remaining cells at both smelters will cost approximately $55.0 million, and estimate that the cost of conversion of a cell will be recovered in 3.5 years. Hydro has agreed, subject to certain conditions, to provide an additional $10.0 million of subordinated financing if we decide to convert the remaining cells at Goldendale. We expect the remaining $45.0 million, and any additional costs of the facilities investment program, will be funded through cash from operations and borrowings under our revolving credit facility. BATH RECLAIM FACILITY In 1999, we completed a bath reclaim facility for $1.8 million that will enable us to reclaim electrolytic material, or bath, alumina and aluminum from recovered material from the basements of our smelter facilities. This reclaiming will reduce our outside purchases of electrolytic material. Additionally, the facility has excess capacity that can be utilized to service other aluminum companies. RESEARCH AND DEVELOPMENT AND INTELLECTUAL PROPERTY We have traditionally placed emphasis on innovation and research and development. We have laboratory facilities dedicated to environmental compliance, quality testing and research and development. We engage in several research and development activities designed to improve earnings by increasing value-added margins or reducing costs. Expenditures for activities designated as research and development were $2,070,000 in 1999, $1,194,000 in 1998 and $544,000 in 1997. We also have received grants from state and federal governments for certain research and development activities. Our research and development encompasses five broad initiatives: - First, we undertake research and development to develop new alloys and casting and homogenizing practices that improve the characteristics of metal sold to customers. We endeavor to protect our proprietary interest in our products and processes by filing patent applications where appropriate and otherwise by seeking to protect them as trade secrets. This research has resulted in several proprietary products and an issued patent for a new alloy. - Second, we have focused research in the area of semi-solid metalworking ("SSM"). SSM is intended to give automotive and other parts the physical properties of forgings with the production cost of die-castings. We have obtained a patent for the casting and transformation of aluminum to produce SSM parts. - Third, we have undertaken an initiative to further develop a process to recycle Spent Pot Lining ("SPL"). We believe this process may allow SPL to be recycled into several marketable products rather than being treated and land filled at a significant cost. We have a patent on our method of treating SPL from aluminum reduction cells and have applications for other patents on SPL recycling. - Fourth, our subsidiary, Northwest Aluminum Technologies, has acquired and expects to develop a new technology to smelt aluminum in a low temperature bath using inert metallic anodes and titanium diboride cathodes. In our pursuit of this technology, we have acquired four patents and intend to file additional patent applications. We also have received three grants from the U.S. government to fund additional research to develop new smelting technologies. 5 9 - Fifth, we engage in several other research and development projects to continuously improve our smelting and casting operations. We have eight patents and two trademarks. We have set out a description and the termination date of each in the following table. We also have a number of patents pending.
DESCRIPTION OF PATENT OR TRADEMARK TERMINATION DATE - ---------------------------------- ---------------- A patent for a method and apparatus for the electrolytic reduction of alumina.......................................... October 25, 2014 A patent for the electrolytic reduction of alumina............ August 31, 2008 A patent for the electrolytic reduction of alumina............ February 13, 2010 A patent for a point feeder and a method for Soderberg aluminum reduction cells............................................... October 4, 2010 A patent for non-consumable anode and lining for aluminum electrolytic reduction cell................................... April 17, 2012 A patent for casting, thermal transformation and semi-solid forming of aluminum alloys.................................... April 14, 2015 A patent for a high strength aluminum alloy................... September 12, 2014 A patent for a method of treating SPL from aluminum reduction cells............................................... December 8, 2015 A trademark for "Direct Forge", the name under which Northwest Aluminum Specialties markets its small diameter billet........ December 15, 2002; automatically renewed for subsequent 10 year terms if still in use A trademark for "Direct Form"................................. April 18, 2007; automatically renewed for subsequent 10 year terms if still in use
SALES AND MARKETING Through their tolling agreements, Hydro and Glencore have been our largest customers, accounting for 37% and 17% of our revenues in fiscal 1999 and 37% and 19% of our revenues in fiscal 1998. The Glencore tolling arrangement expired on December 31, 1999, and will result in a substantial reduction in the amount of revenue from Glencore. We directly sell value-added aluminum products to approximately 100 extruders, forgers, casters, traders and other customers throughout the United States and abroad. Northwest Aluminum Company's Vice President of Sales and Marketing oversees a small sales and customer service group that makes and supports these direct sales. SUPPLIERS The major raw materials we use are alumina, petroleum coke and coal tar pitch, aluminum ingot, scrap aluminum and alloying elements and electricity. We obtain our raw materials either through annual contracts or on the spot market. Alumina consumed in the production of aluminum is supplied by Hydro for all the alumina requirements of the smelter operations at Goldendale under the tolling agreement. Glencore supplies all of the alumina requirements of the smelter at The Dalles under a supply agreement lasting until December 31, 2004. 6 10 The other raw materials involved in the reduction of alumina are petroleum coke, coal tar pitch and carbon lining. Petroleum coke is used to make anodes and carbon lining and is sourced locally from a large producer of quality coke, which is one of several suppliers. Coal tar pitch is available from several suppliers. Carbon lining, which acts as the cathode in the smelting cells, is purchased from various suppliers. We annually purchase aluminum to supplement our smelter production. Prior to December 31, 1999, we were buying back from Glencore almost the entire 82,000 metric tons of our smelter production at The Dalles. Additionally, we were purchasing approximately 45,000 metric tons from other producers, including Hydro, at market prices in the form of primary ingot, primary molten metal and scrap metal. Primary suppliers include Hydro, Vanalco and Alcoa. The other major inputs in the making of aluminum products are alloying elements, such as magnesium and silicon, which are provided by various suppliers. POWER CONTRACTS Because electricity is both necessary for the manufacturing of aluminum and the single largest cost of making primary aluminum, the availability and pricing of electricity and access to transmission is crucial to our operations. Approximately 80% of all power produced or consumed in the Pacific Northwest is delivered over the transmission system of the Bonneville Power Administration, or BPA. Both The Dalles smelter and Goldendale smelter are connected directly to the main high voltage transmission grid of BPA. Each plant has a 20-year transmission agreement with BPA, expiring in April 2015, for transmission capacity that we believe is sufficient to meet both plants' existing and projected energy needs. These transmission agreements obligate BPA to offer Goldendale Aluminum Company and Northwest Aluminum Company a new transmission agreement upon the expiration of the current agreements. Moreover, the transmission agreements also obligate BPA to act as agent for Goldendale and Northwest to obtain transmission services over other transmission systems if requested. With the exception of limited rights to restrict transmission service in the event of certain threats to system stability, the transmission agreements obligate BPA to provide Goldendale and Northwest with the same open access transmission available to utilities and power companies under the rules of the Federal Energy Regulatory Commission. Goldendale and Northwest are buying energy from BPA under a five-year power sale agreement through which approximately 60% of each plant's energy needs are contractually secured at predetermined prices through September 30, 2001. The published annual average rate for power from BPA is 2.2 cents per kilowatt-hour. The power sale agreement allows us to schedule our purchases in different months when power is priced at different rates in such a way that power purchased from BPA has an actual rate that is lower than the published average rate. The remaining 40% of Northwest's and Goldendale's energy requirements is obtained by purchasing blocks of energy under periodic contracts from various suppliers, including BPA, PacifiCorp, Enron, Illinova Energy, Duke Energy, Avista Energy, the Avista Utilities and others. Recently, power costs have increased both because we have been required to purchase more energy under our BPA contract and because market prices for purchases of the remaining energy requirements have increased. For the period October 2001 through September 2006, BPA has proposed a new policy to meet approximately 50% of our power needs rather than the 60% supplied during the previous five years. The average cost of this BPA power after 2001 will be somewhat higher than the cost during the previous period. However, BPA also may offer an option to vary the price of BPA power with the price of aluminum. We are working with various power suppliers and resource developers to arrange a supply of competitively priced power for the other half of our load requirements not served by BPA. Due to our transmission agreements and the smelters' geographical location on an unconstrained segment of the main transmission network in the region, we believe we will be able to obtain competitively priced power in the foreseeable future. We do face the normal risks associated with the market price of energy, however. Numerous short-term and long-term developments can affect power prices, including worldwide demand for fossil fuels, changing environmental standards, the overall economic activity in the United States and the Pacific Northwest, weather temperature and precipitation. Due to the high percentage of hydroelectric generation in the power supply of the Pacific Northwest, energy prices in the region tend to be sensitive to drought conditions that reduce the availability of low cost hydroelectric power supply. The hydroelectric system in the Pacific Northwest, however, has significant flexibility and excess capacity to meet spikes in demand or short-term thermal plant outages that have 7 11 caused large price swings in other regions of the country. For the longer term, we expect that the geographical proximity to the low-cost Western Canadian natural gas supply and the operating flexibility and stability of the Federal Columbia River Hydro System should keep the market price of electricity attractive in the Pacific Northwest relative to the average market price of power in the United States. In addition, we are exploring opportunities to develop generating capability either on our own or in conjunction with BPA, publicly owned local utilities or other resource developers. HEDGING ACTIVITIES Our revenues and earnings are sensitive to changes in the price of primary aluminum and in the premiums for, and mix of, our value-added products. For example, the tolling fees and premiums received by us are tied to the London Metal Exchange price of aluminum. Primary aluminum prices historically have been subject to significant cyclical price fluctuations. The timing of changes in the market price of aluminum largely are unpredictable. Aluminum prices historically have shown long periods of average, or below average, prices followed by sudden, relatively short periods of above average prices. These prices have historically fluctuated widely and are affected by numerous factors beyond our control. Those factors include the overall demand for, and worldwide supply of, primary aluminum, the availability and price of competing commodities, international economic trends, currency exchange rate fluctuations, expectations of inflation, actions of commodity market participants, consumption and demand patterns and political events in major producing countries. Over the twelve-year period between January 1, 1988 and December 31, 1999, the three month price of aluminum on the London Metal Exchange has ranged between a low of approximately $0.47 per pound to a high of approximately $1.26 per pound. During this period prices averaged $0.72 per pound. We attempt to mitigate fluctuations in the price of commodity aluminum through our strategy of minimizing the costs of production and maximizing the margins of our value-added products. When we sell value-added products for future delivery at a fixed price, we generally purchase metal or otherwise fix the price of the commodity aluminum required in that period to support the sale. From time to time, we may leave some quantities for some duration uncovered, or acquire put or call options. This policy generally leaves us with a fixed margin on our value-added sales and open prices for our future primary production that will vary with London Metal Exchange aluminum prices. We do not actively hedge our production. BACKLOG We generally receive the bulk of the orders for value-added specialty aluminum products in the three months preceding the calendar year in which the products are to be shipped to customers. This year, due to expectations of future prices being lower, those customers did not make their commitments until after December 31, 1999. As a result, our fixed price backlog at December 31, 1999 was $31.7 million, compared to $62.6 million at December 31, 1998. At March 22, 2000, our fixed price backlog was $62.4 million. For a variety of reasons, including the timing of shipments and product mix, backlog may not be a reliable measure of future sales for any succeeding period. COMPETITION Competition within the aluminum industry is intense. We compete with both domestic and foreign producers of primary aluminum and with primarily domestic producers of extrusion billet and other value-added products and with primarily domestic producers of other products such as copper, steel, glass and plastic. Many of our competitors have greater financial resources than we do, which may adversely affect our ability to compete effectively. Primary aluminum is a commodity with standard qualities. Competition generally is based upon the ability to produce primary aluminum at a cost below the market price, which generally is established through trading on the London Metal Exchange. We also compete with various aluminum producers, casting companies, extruders and other fabricators in the production of extrusion billet, sheet ingot, small diameter ingot and other value-added products. In the extrusion billet market, we compete primarily with Alcan and Alumax, which was recently acquired by Alcoa. Northwest Aluminum Specialties' major competition in the small diameter billet segment comes from Alcoa, Kaiser, Pimalco, a large, efficient extruder and subsidiary of Alcoa, Newman and Allgoods, which are 8 12 both punched plate producers. Competition in the sale of these value-added products generally is based upon price, quality, availability, service and other factors. We concentrate on the sale of value-added products in which we believe we have production expertise, cost, quality, geographic and other competitive advantages. ENVIRONMENTAL AND HEALTH MATTERS We are subject to federal, state and local environmental laws. From time to time, these environmental laws are amended and new ones are adopted. These laws regulate, among other things, air emissions and water discharges; the use, generation, storage, treatment, transportation and disposal of solid and hazardous materials and wastes; and the release of hazardous or toxic substances or other contaminants into the environment. In addition, we are subject to various federal, state and local workplace health and safety laws and regulations. The environmental and health laws are administered by the U.S. Environmental Protection Agency, and various other federal, state and local agencies. To operate our business in compliance with environmental and health laws, we must obtain and maintain in effect permits for each of our facilities for a variety of operations. These permits include without limitation permits for discharges of wastewater, emission of air pollutants and management of hazardous wastes. As a result, we sometimes are required to make expenditures for pollution control equipment or for other purposes related to our permits and compliance with the environmental and health laws. We have been fined or penalized for breaches or alleged breaches of the environmental and health laws and subjected to claims and litigation brought by federal, state or local agencies and by private parties seeking remedial or other enforcement action under the environmental and health laws or damages related to injuries or alleged injuries to health or to the environment. The Dalles smelter, the Goldendale smelter and the Portland unloading facility were subject to an environmental compliance assessment by an independent environmental consultant in 1996 that was updated in the summer of 1998. In both cases, we hired and paid the consultant. These assessments were intended to evaluate our compliance with the environmental laws regulating discharges of wastewater, emission of air pollutants and the management of hazardous wastes. These assessments identified no condition of non-compliance that we believe would have a material adverse effect on our financial condition or results of operations, nor are we aware of any such material condition. Our manufacturing facilities have been in operation for several decades, and these facilities have used substances and generated and disposed of wastes that are or may be considered hazardous. For example, these facilities have in the past stored or disposed of wastewater treatment sludge in on-site surface impoundments such as ponds and lagoons and have handled spent pot liner and disposed of spent pot liner and other wastes in on-site surface impoundments. Martin Marietta Corporation, a prior owner of The Dalles smelter, conducted an investigation of soil and groundwater at the smelter and implemented clean-up measures at the smelter site, including the removal of hazardous substances from groundwater and certain areas of the site and the encapsulation of other areas where hazardous substances were disposed or released. Martin Marietta performed this work under the supervision of the U.S. Environmental Protection Agency. In 1996, Martin Marietta completed the investigations and clean-up measures required by the EPA at The Dalles smelter site. Although the purpose of the Martin Marietta investigation was to identify all areas at the smelter where hazardous substances had been disposed or released, some affected areas may not have been identified or the clean-up measures may not perform as expected in the future. Hazardous substances have also been released at the Goldendale facility, and the site was listed in the EPA's Comprehensive Environmental Response, Compensation, and Liability Information System database in 1980. We expect expenditures will be necessary at the Goldendale smelter to investigate and clean up releases of hazardous substances disposed or released at the Goldendale smelter. We have requested the State of Washington Department of Ecology to approve a plan to close an on-site surface impoundment at the Goldendale facility by 2005-2006. We expect to receive a response from the State of Washington. As of December 31, 1999, the estimated cost of the surface impoundment closure and post-closure actions was over $1.8 million. We have established a trust fund of approximately $587,000 as of December 31, 1999, to help pay these costs, and we have procured insurance coverage to provide funds to the State of Washington for closure if we default. The actual closure costs may exceed our estimate. Under a contract with the former owners of the Goldendale smelter, the former owners have agreed to reimburse Goldendale Aluminum Company for certain anticipated expenditures. We do not assure you the former 9 13 owners of the Goldendale smelter will contribute their contractually allocated share of the costs necessary to investigate and cleanup hazardous substances disposed or released at the Goldendale smelter site or to obtain regulatory closure of surface impoundments at the site. Due to continuing environmental regulations regarding spent pot liner disposal, over the past few years we have experienced substantial increases in costs associated with the disposal of SPL from our smelters. We presently dispose of SPL under a contract with a chemical waste treatment company, which expires in December 31, 2000, and which provides for increased treatment costs as the contract continues. We are in the process of negotiating a new contract with the same company. EPA is presently writing a new SPL treatment and disposal regulation which is expected to be published in second quarter of 2000, and has called for proposals from aluminum producers for alternative methods of disposing spent pot liner. We continue to evaluate and develop our patented process designed to recycle SPL into marketable products which we plan to submit to the EPA for approval. We also expect several other producers to make proposals to the EPA. We cannot predict, however, whether our process, or any other proposed process, will be approved by the EPA; whether any such process, if approved, will be cost efficient; or what additional costs of disposal of spent pot liner, if any, we may have in the absence of EPA approval of an available, cost efficient disposal process. (1) An environmental condition that we do not know about could exist as to one or more of our properties and could have an adverse effect on our results of operations or financial condition. (2) Future environmental or health laws could have an adverse effect on our results of operation or financial condition. EMPLOYEES As of December 31, 1999, we employed 1,238 workers, 581 of which are members of Local 8147 and 423 of which are members of Local 9170 of the United Steelworkers of America. Goldendale Aluminum Company is signatory to a collective bargaining agreement with the USW for the period May 24, 1996 through May 31, 2001. Northwest Aluminum Company is a signatory to a collective bargaining agreement with the USW for the period July 1, 1996 through June 30, 2001. Both labor agreements provide for a 4% wage increase each year of the contract. During the contract period there is a no strike/no lockout agreement. We provide profit sharing programs in addition to the base compensation for all employees, and a fully paid medical, dental and vision health care plan. We have a 401(k) plan but no defined benefit plan. We believe we have a good relationship with the union and an employee involvement process that encourages creativity, productivity and positive employer-employee relations. FORWARD-LOOKING STATEMENTS This Form 10-K includes 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 relating to our goals, plans and expectations regarding: the facilities investment program, the ability of spent pot liner to be recycled into marketable products, the development of new smelting technology by Northwest Aluminum Specialties, the Year 2000 Issue, and capital expenditures. Risk factors related to these forward looking statements are discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -Forward-Looking Statements." 10 14 ITEM 2. PROPERTIES We own all of our facilities. The following table shows (1) each facility, (2) its square footage, (3) its annual production capacity and (4) its use.
FACILITIES SQUARE ANNUAL FACILITY FOOTAGE CAPACITY OPERATIONS -------- ------- -------- ---------- GOLDENDALE Smelter 1,209,730 168,000 mt Alumina reduction Casthouse Included in above 168,000 mt Produce sow, billet, sheet Unloading Facility 7.9 acres 42,000 mt (Portland) shipments Paste Plant 37,711 85,000 mt Carbon briquette production Laboratory 18,995 Quality control, R & D Real Property 6,473 acres NORTHWEST Smelter 636,000 82,000 mt Alumina reduction Casthouse 122,000 99,800 mt Produce sow, billet, ingot Paste Plant 108,000 85,000 mt Carbon briquette production Real Property 390 acres SPECIALTIES Casthouse 160,000 Up to 54,500 mt Value-added billet depending on product mix Sawing/Turning 100,000 Saw: Semi-fabrication 130,000 mt Turning: 1,000,000 logs
We believe these facilities are adequate to meet our current needs. We are expanding or upgrading some of our facilities as a result of the facilities investment program. Most of our facilities are subject to mortgages and other claims held by our creditors to secure our 12% first mortgage notes and our indebtedness to Hydro. See Item 1, "Business -- Facilities Investment Program." ITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in various legal proceedings arising from our normal business activities. We believe these legal proceedings, individually or combined, will not have a material adverse effect on our financial condition, results of operations or cash flows. In December 1999, Goldendale settled a dispute with the Internal Revenue Service relating to proposed adjustments in its taxable income for prior years. In August 1999, Northwest settled a similar dispute with the IRS. Goldendale and Northwest have agreed to capitalize certain expenditures for prior years. As a result, we paid a dividend of $1.9 million to our shareholder for payment of these taxes. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1999. 11 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for our common stock. There is one holder of our common stock. We are a subchapter S corporation and pay dividends to our sole shareholder. In 1998 and 1999, we paid cash dividends of $0 and $1.9 million to our sole shareholder. With certain exceptions, we will not, and will not permit our subsidiaries to, create or otherwise allow to exist any consensual restrictions on the ability of any subsidiaries to pay dividends or make any other distributions on their capital stock or pay any indebtedness owed to us or any of our other subsidiaries or to make loans or advances or transfer any of their assets to us or any of our other subsidiaries. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below includes the accounts of Northwest Aluminum Company, Northwest Aluminum Technologies and Northwest Aluminum Specialties for all periods presented. It also includes the accounts of Goldendale Holding Company and Goldendale Aluminum Company from May 22, 1996, the date Goldendale was acquired by Brett Wilcox, our sole shareholder. This data should be read in conjunction with the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this document.
FISCAL YEAR ENDED ----------------------------------------------------------------------- SEPT. 3, DEC. 31, DEC. 31, DEC. 31, DEC. 31, 1995 1996 1997 1998 1999 ------------- ------------- ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) INCOME STATEMENT DATA: Revenues.............................. $ 289,693 $ 373,038 $ 497,872 $ 470,850 $ 444,174 Cost of revenues...................... 256,211 329,739 436,511 440,732 429,784 General and administrative expenses... 8,293 9,746 17,115 18,119 16,672 Interest expense...................... (948) (9,454) (16,723) (14,180) (21,977) Other income (expense), net........... (545) 1,442 4,246 1,889 603 Income (loss) before income taxes..... 23,696 25,541 31,769 (292) (23,656) Income tax expense (benefit).......... -- 6,636 13,274 3,009 (3,745) Net income (loss)..................... 23,696 18,905 18,495 (3,301) (19,911) Net income (loss) per share of common Stock............................... 23,696 16,686 14,847 (8,501) (23,559) Ratio of earnings to fixed charges.... 26.0x 2.8x 2.1x -- --(1) BALANCE SHEET DATA: Cash and cash equivalents............. $ 1,066 $ 6,345 $ 1,251 $ 37,633 $ 1,929 Working capital....................... 43,512 61,908 36,398 79,292 52,238 Total assets.......................... 113,656 350,815 347,011 364,634 370,631 Total long-term debt.................. 3,000 185,441 134,941 192,955 199,294 Goldendale Holding Company Preferred Stock............................... 29,663 29,663 29,663 Total shareholders' equity............ 80,325 103,615 115,680 77,516 52,081 OTHER DATA: EBITDA................................ $ 32,900 $ 47,137 $ 63,315 $ 32,370 $ 21,290 Dividend per common share............. 4,000 67,587 2,932 -- 1,876
- --------------------- (1) For the years ended December 31, 1998 and 1999, earnings were insufficient to cover fixed charges. The earnings deficiency was $2,390 and $27,880 in 1998 ans 1999, respectively. 12 16 EBITDA represents operating income before deductions for depreciation and amortization. EBITDA has been presented because we believe it is commonly used by investors to analyze operating performance and to determine a company's ability to take on additional indebtedness or service indebtedness. EBITDA should not be considered in isolation or as a substitute for net income, cash flow from operations or any other measure of income or cash flow that is prepared as generally accepted accounting principles require, or as a measure of a company's profitability or liquidity. In addition, our definition of EBITDA may not be identical to similarly entitled measures used by other companies. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements included elsewhere in this document. For purposes of the computation of the ratio of earnings to fixed charges, fixed charges consist of interest expense, amortization of deferred financing costs and dividends accrued on the Goldendale preferred stock. Earnings consist of income before income taxes plus fixed charges. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to reading this section, you should read the consolidated financial statements and related notes that begin on page F-1. That section contains all of our detailed financial information including our results of operations. BASIS OF PRESENTATION We were incorporated in the state of Oregon in June 1998 for the purposes of becoming the holding company of Northwest Aluminum Company, Northwest Aluminum Specialties, Inc., Northwest Aluminum Technologies, LLC and Goldendale Holding Company and its wholly owned subsidiary, Goldendale Aluminum Company. For purposes of this section only, the term "Northwest" refers to Northwest Aluminum Company and Northwest Aluminum Specialties, Inc., the term "Goldendale" refers to Goldendale Holding Company and Goldendale Aluminum Company and the term "Technologies" refers to Northwest Aluminum Technologies, LLC. We, along with Goldendale and Technologies, report on a December 31 fiscal year basis. Northwest reports on a September 30 fiscal year basis. Included in intercompany receivable at December 31, 1999 is $13.1 million representing the portion of intercompany advances that do not eliminate due to the differing year-ends. All other significant intercompany accounts and transactions have been eliminated. We do not believe seasonal or other factors materially affect the consolidation of these differing fiscal periods. OVERVIEW Our revenues have historically come from two primary sources: (1) fees received from smelting alumina into aluminum and casting that aluminum into primary and value-added aluminum products under tolling contracts with Hydro and Glencore, and (2) the sale of non-tolled value-added aluminum products to other customers. Revenue from fees for the conversion of alumina and processing of aluminum under tolling arrangements is recognized upon completion of the tolling process. Under the tolling arrangements, alumina suppliers deliver their alumina to us. The alumina is converted to aluminum in reduction cells by putting it in liquid form by dissolving it in an "electrolyte" solution and then passing electric current through the electrolyte to separate the alumina into its two parts, aluminum and oxygen. This process is continuous and is nearly instantaneous as the alumina is dissolved in the electrolyte. The molten aluminum is withdrawn from the cells and cast or formed into finished products. Revenue from the sale of non-tolled value-added aluminum products is recognized upon shipment to the customer. Because our tolling fees are a percentage of prices of aluminum on the London Metal Exchange, the amount of revenue from tolling activities varies depending on market aluminum prices, especially LME prices and gross smelter production volumes. The tolling fees are based on prior three-month average LME prices and not current market aluminum prices. Additional revenue for tolled value- 13 17 added products is dependent on the volume of value-added production and the cost of production versus the dollar amount of pricing premiums. The amount of revenue from non-tolled value-added sales varies depending on market aluminum prices, demand for our value-added products and the pricing premiums we are able to realize for these products. Our revenues from non-tolled value-added products may not be as strongly affected by lower LME prices as is the case with tolling fees because of increased demand for value-added products at lower prices. The aluminum industry is highly cyclical, with market prices fluctuating widely based on global supply and demand factors, most of which are beyond our control. As shown below, for 1999, the average price per pound of aluminum on the London Metal Exchange was approximately the same as for 1998, which was lower than the average price in any of the three previous years. The average three-month LME prices per pound of aluminum over the last five years were as follows:
PRICE PER YEAR ENDED DECEMBER 31, POUND ----------------------- --------- 1995...............................................$0.83 1996...............................................$0.70 1997...............................................$0.74 1998...............................................$0.63 1999...............................................$0.63
The timing and magnitude of an increase or decrease in aluminum prices is uncertain. As of December 31, 1999, the three-month LME price per pound of aluminum was $0.75, and more recently LME prices have fluctuated around $0.73 per pound. Accordingly, we believe our cash flow and earnings in the near term will be somewhat higher than amounts reported for comparable prior periods. Our cash flow and earnings are highly sensitive to aluminum prices because production costs are largely fixed. At low market aluminum prices, we are able to reduce some variable costs, but most of the production costs of primary aluminum are constant in the short term (alumina, labor, carbon, power), and therefore declines in market prices will cause declines in earnings. Conversely, increased market aluminum prices will cause increases in earnings. For these reasons we strive to maintain full plant utilization, which reduces the average cost per pound of aluminum. We do not actively hedge our production. To reduce our reliance on market-priced primary aluminum and to improve overall profitability, we have pursued a strategy of increasing both our "tolled" and "non-tolled" value-added production through specialty casting and processing operations. Through these operations, we are able to realize premiums over market LME prices, the amount of which varies with the degree of value-added content of the product and uniqueness of the product in the marketplace. Our volume of value-added production has increased significantly over the past decade relative to the volume of our primary production. Our continued investment in value-added production operations is designed to further increase our value-added production capabilities. As a consequence of this strategy, the volume of non-tolled value-added production at Northwest has grown from 153.7 million pounds in 1993 to 245.3 million pounds in 1999. As a result of this growth, we purchase at market prices more primary aluminum for further processing by Northwest into non-tolled value-added products than we produce for Glencore under the tolling contract. The Glencore tolling contract allowed us to operate our smelter at The Dalles at full capacity while we were developing value-added products. The success of our non-tolled products, however, reduced the importance of this contract, and it was not renewed in December 1999. The effect of this non-renewal will be to eliminate the revenue and gross margin we derived from tolling aluminum for Glencore. This may be more than offset by an increase in gross margin from the sale of non-tolled products, because the underlying cost for primary aluminum will be our own production cost rather than the market price. We do not assure you, however, that we will be able to realize any such increased gross margin. THE BUSINESS COMBINATION On December 18, 1998, Brett Wilcox contributed to Golden Northwest Aluminum, Inc. his membership interest in Technologies and all of the outstanding shares of common stock of Northwest and Goldendale. This business combination is treated for accounting purposes as a combination of entities under common control in a manner similar to a pooling of interests. The business combination has not had and we do not expect it to have a significant impact on 14 18 our financial position, results of operations or cash flows. In accordance with generally accepted accounting principles, however, the amount recorded as Goldendale preferred stock has been reclassified and recorded as a minority interest of our company. RESULTS OF OPERATIONS The following table sets forth the consolidated statement of income data as a percentage of revenues for 1997, 1998 and 1999.
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1998 1999 ----- ----- ----- Revenues....................................................... 100.0% 100.0% 100.0% Cost of revenues............................................... 87.7 93.6 96.8 ----- ----- ----- Gross margin................................................... 12.3 6.4 3.2 General and administrative expenses............................ 3.4 3.8 3.7 ----- ----- ----- Operating income (loss)........................................ 8.9 2.6 (0.5) Interest expense............................................... (3.4) (3.0) (4.9) Other income, net.............................................. 0.9 0.4 0.1 ----- ----- ----- Net other expenses............................................. (2.5) (2.6) (4.8) ----- ----- ----- Income before income taxes..................................... 6.4 0.0 (5.3) Income tax expense (benefit)................................... 2.7 0.7 (0.8) ----- ----- ----- Income (loss) before extraordinary item........................ 3.7 (0.7) (4.5) Extraordinary item............................................. 0.0 (0.3) 0.0 ----- ----- ----- Net income (loss).............................................. 3.7% (1.0)% (4.5)% ===== ===== =====
1999 COMPARED TO 1998 Primary and value-added aluminum produced under tolling contracts increased slightly from 526.3 million pounds in 1998 to 527.9 million pounds in 1999. Shipments of non-tolled value-added aluminum products were 270.5 million pounds and 268.1 million pounds for 1998 and 1999, respectively, a decrease of less than 1%. Revenues decreased from $470.9 million in 1998 to $444.2 million in 1999, a decrease of $26.7 million, or 5.7%. Revenues from tolling contracts decreased 9.3% from $266.3 million in 1998 to $241.6 million in 1999, primarily due to the decrease in average effective LME aluminum prices from $.67 per pound in 1998 to $.60 per pound in 1999. Sales on non-tolled value-added products decreased slightly from $204.6 million in 1998 to $202.6 million in 1999, due to the slight decrease in shipments from 1998 to 1999. Tolling revenues earned in 1998 and 1999 under the Hydro and Glencore tolling contracts were $178.1 million and $166.6 million, and $88.2 million and $75.0 million, respectively. Cost of revenues decreased from $440.7 million in 1998 to $429.8 million in 1998, a decrease of $10.9 million, or 2.5%. The cost of revenues decreased due to the decrease in the effective market aluminum prices in 1999 and reduced power costs from the liquidation of a power contract for $3.5 million. Gross margin decreased from $30.1 million in 1998 to $14.4 million in 1999, a decrease of 52.5%. As a percentage of revenues, gross margin declined from 6.4% to 3.2%. Gross margin declined due primarily to the decrease in revenues of $26.7 million, offset by a decrease in cost of revenues of $10.9 million. General and administrative expenses decreased from $18.1 million in 1998 to $16.7 million in 1999, primarily due to the $1.5 million write-off of a long-term trade receivable in 1998. General and administrative expenses for 1999 were slightly less than those of 1997, which were $17.1 million. As a percentage of revenues, general and administrative expenses decreased from 3.8% in 1998 to 3.7% in 1999. Interest expense increased from $14.2 million in 1998 to $22.0 million in 1999, or 54.9%, primarily as a result of the first mortgage notes that have a substantially greater interest rate than our prior borrowings and because of 15 19 increased indebtedness. Our debt load during 1999 included the 12% first mortgage notes, the Hydro note, and beginning in the fourth quarter, borrowings against our revolving credit facility. Income tax expense decreased from $3.0 million in 1998 to an income tax benefit of $3.7 million in 1999, primarily as a result of Goldendale's loss before income taxes of $13.0 million. As a result of the foregoing factors, we reported a net loss of $19.9 million in 1999 versus a net loss of $4.9 million in 1998. 1998 COMPARED TO 1997 Primary and value-added aluminum produced under tolling contracts decreased less than 1%, from 530.4 million pounds in 1997 to 526.3 million pounds in 1998. Shipments of non-tolled value-added aluminum products were 263.9 million pounds and 270.5 million pounds for 1997 and 1998, respectively. The increase in non-tolled value-added products resulted from an increase in shipments of value-added billet produced at Northwest. Revenues decreased from $497.9 million in 1997 to $470.9 million in 1998, a decrease of 5.4%. Revenues from tolling contracts decreased 8.2% from $290.2 million in 1997 to $266.3 million in 1998, primarily due to the decrease in market aluminum prices in 1998. Sales of non-tolled value-added products decreased slightly from $207.7 million in 1997 to $204.6 million in 1998, due to the decrease in market aluminum prices in 1998, but offset by the increase in shipments of those products. Tolling revenues earned in 1997 and 1998 under the Glencore and Hydro tolling contracts were $178.1 million and $201.6 million, and $88.2 million and $88.6 million , respectively. Gross margin decreased from $61.4 million in 1997 to $30.1 million in 1998, a decrease of 51.0%. As a percentage of revenues, gross margin declined from 12.3% to 6.4%. Gross margin declined due primarily to the decreased market prices of aluminum. In addition, power costs increased as a result of contractual terms in the power contract with the BPA, which increased the amount of power required to be purchased at predetermined prices from BPA. Power costs in 1998 have been at rates we expect to continue through 2001. General and administrative expenses increased slightly from $17.1 million in 1997 to $18.1 million in 1998. As a percentage of revenues, general and administrative expenses increased from 3.4% to 3.8%. The increase resulted primarily from the $1.5 million write-off of a long-term trade receivable. This write-off related to a long-term trade receivable from a long-standing customer that experienced liquidity problems. Sales of aluminum to this customer were discontinued when the account aged beyond reason. However, we continue to utilize this customer for access to the Texas market through their marketing, warehouse and delivery services. Attempts in 1998 to obtain a secured interest in the real properties of this customer proved unsuccessful. The account was written down to $1.5 million, the amount perceived to be collectable based on a thorough review of the customer's financial condition. We routinely perform evaluations of the financial condition of this and other customers as part of our normal credit process. This coupled with a relatively small number of customers, with whom we are in continuous contact, enables us to minimize our exposure to credit risk. Interest expense decreased from $16.7 million in 1997 to $14.2 million in 1998, or 15.0%, primarily as a result of the lower average level of debt outstanding in 1998. In December 1998, we completed an offering of $150 million of 12% first mortgage notes. Additionally, we borrowed $20 million under a note purchase agreement with Hydro. As a result of these borrowings, we anticipate a significant increase in interest expense in 1999. We used some of the proceeds from the first mortgage notes to retire our previous credit facilities with BankBoston. As a result of the debt extinguishment in 1998, we incurred an extraordinary loss of $1.6 million, which represented the unamortized balance of deferred finance costs associated with the retired debt. Income tax expense decreased from $13.3 million in 1997 to $3.0 million in 1998, or 77.4%, primarily as result of a decrease in Goldendale's income before income taxes from $31.6 million in 1998 to $3.9 million in 1999. As a result of the foregoing factors, we reported a net loss of $4.9 million in 1998 versus net income of $18.5 million in 1997. 16 20 LIQUIDITY AND CAPITAL RESOURCES Historically, our cash and capital requirements have been satisfied through cash generated from operating activities and borrowings under our primary credit facilities. Before December 21, 1998, Goldendale and Northwest operated under independent credit facilities which were scheduled to mature in 2001 and consisted of total borrowings at December 21, 1998 of $125.2 million under term loans and revolving credit facilities. See Note 5 to the consolidated financial statements. We repaid these credit facilities with proceeds from the sale of our 12% first mortgage notes. Our new credit facility with Fleet Capital (previously BankBoston) is a $75.0 million senior secured revolving credit facility collateralized by all of the inventory, accounts receivable and other rights to payment of our subsidiaries. Availability under the revolving line of credit is controlled by a borrowing base formula based on eligible receivables and inventory, and there must always be at least $15 million available for borrowing at any given time. Based on this formula, we had net availability of approximately $66.4 million under the revolving line of credit at December 31, 1999, against which we had borrowed $25.1 million. Our liquidity and capital needs relate primarily to payment of principal and interest on borrowings, capital expenditures, including our facilities investment program, and distributions to our sole shareholder to pay income taxes. Subject to reasonable market aluminum prices, we will require approximately $9.9 million in 2000 for the facilities investment program. The first stage of the facilities investment program consisting of an expansion of the Goldendale casthouse and a 34-cell demonstration of new cell line technology should be substantially completed by the end of 2000. We have borrowed $20.0 million from Hydro under a note purchase agreement to partially finance this facilities investment program. Our liquidity and capital needs also relate to working capital and other general corporate requirements, including the incremental working capital needs anticipated in connection with the termination of the Glencore tolling agreement in December 1999. Additionally, the Goldendale preferred stock became redeemable at our discretion after December 31, 1998. We anticipate that the funds necessary to redeem the Goldendale preferred stock would be drawn from our revolving credit facility with Fleet Capital. The initial redemption price for the Goldendale preferred stock will be $30.4 million plus any accrued but unpaid dividends, which totaled $13.2 million at December 31, 1999. Furthermore, we are subject to a number of contingencies and uncertainties. Our statement of cash flows for the periods indicated is summarized below:
Year Ended December 31, --------------------------------------------- 1997 1998 1999 --------- -------- --------- (Dollars in Thousands) Net cash provided by (used in) operating activities................$ 56,092 $ 28,738 $(25,426) Net cash used in investing activities.............................. (7,091) (18,718) (32,609) Net cash provided by (used in) financing activities................ (54,095) 26,362 22,331 Increase (decrease) in cash and cash equivalents................... (5,094) 36,382 (35,704)
Net cash provided by (used in) operating activities was $56.1 million, $28.7 million and $(25.4) million for 1997, 1998 and 1999. The net cash used in operating activities during 1999 of $25.4 million was primarily attributable to cash provided by our net loss, as adjusted for non-cash charges, of $3.9 million, and $4.9 million attributable to an increase in accounts payable, offset by cash used in operating activities of $34.2 million, attributable to increases in accounts receivable, inventories, intercompany receivable and other assets and a decrease in accrued expenses. The increase in accounts receivable, inventories and accounts payable were primarily due to the increase in market aluminum prices in December 1999. The increase in intercompany receivable was primarily due to the net borrowings of Northwest during the fourth quarter of 1999 in connection with its transition to a non-tolling operation. The net cash provided by operating activities during 1998 of $28.7 million was primarily attributable to our net loss, as adjusted for non-cash charges and a decrease in accounts receivable. The decrease in accounts receivable was primarily due to the decrease in market aluminum prices in 1998. The net cash provided by operating activities during 1997 was primarily attributable to net income, as adjusted for non-cash charges, of $43.1 million, and an increase in accounts payable and accrued expenses of $26.6 million, offset by an increase in inventories of $9.5 17 21 million. The increase in inventories and accounts payable was due to a temporary modification of the Glencore metal repurchase terms which allowed us to extend the timing of payments due Glencore. Net cash used in investing activities was $32.6 million in 1999, compared to net cash used in investing activities of $18.7 million in 1998 and $7.1 million in 1997. Cash used in investing activities in 1999 was primarily attributable to capital expenditures of $33.1 million, of which $11.4 million relates to the facilities investment program. Cash used in investing activities in 1998 was primarily attributable to capital expenditures of $19.0 million. Cash used in investing activities in 1997 primarily resulted from proceeds of $12.8 million received by us through the sale of certain of our power generation assets, offset by capital expenditures of $14.3 million and combined advances to our shareholder and a related company of $5.6 million. Net cash provided by financing activities was $22.3 million in 1999, compared to net cash provided by financing activities of $26.3 million in 1998, and net cash used in financing activities of $54.1 million in 1997. Net cash provided from financing activities in 1999 was primarily attributable to net borrowings of $25.3 million under our credit facility and $1.9 million paid in dividends. Net cash provided from financing activities in 1998 was primarily attributable to $38.9 million of net proceeds from the first mortgage notes, offset by $12.6 million in net repayments on our credit facilities and deferred compensation notes. Net cash used in financing activities in 1997 was primarily attributable to $50.5 million in net repayments on our credit facility and $2.9 million paid in dividends. We believe cash flow from operations, available borrowings under our revolving credit facility and under our note purchase agreement with Hydro and cash on hand will provide adequate funds for our foreseeable working capital needs, planned capital expenditures and debt service and other obligations through 2001. Our ability to fund operations, make planned capital expenditures, such as our facilities investment program, make principal and interest payments on the notes, and remain in compliance with all of the financial covenants under our debt agreements will be dependent on our future operating performance. Our future operating performance is dependent on a number of factors, including aluminum prices, many of which are beyond our control. These factors include prevailing economic conditions and financial, competitive, regulatory and other factors affecting our business and operations, and may be dependent on the availability of borrowings under our revolving credit facility or other borrowings. We do not assure you our cash flow from operations, together with other sources of liquidity, will be adequate - to make required payments of principal and interest on the notes and our other debt; - to finance anticipated capital expenditures; - to fund working capital requirements; or - to fund the possible redemption of all outstanding shares of the Goldendale preferred stock. If we do not have sufficient available resources to repay any of our indebtedness when it becomes due and payable, we may need to refinance the indebtedness. We do not assure you refinancing will be available or available on reasonable terms. SEASONALITY AND INFLATION Our results of operations can be affected by seasonal factors, such as substantial increases in the cost of electricity in the fall and winter. We do not believe inflation has had a material effect on the consolidated financial statements for the periods presented. 18 22 EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized as income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. We are currently analyzing the financial impact, if any, the adoption of SFAS No. 133 will have on our consolidated financial statements. YEAR 2000 COMPLIANCE We retained outside experts to review our year 2000 readiness and make recommendations on year 2000 compliance issues. Our major business systems were reviewed and tested for year 2000 compliance. All critical business systems are year 2000 compliant with the implementation of a SAP R/3 enterprise resource planning system. The business systems included are sales, accounting, purchasing, production, inventory management and plant maintenance. We completed 100% of the testing of our remaining information technology systems, including process system, as well as the non-information technology systems for year 2000 compliance. An audit by outside experts confirmed our year 2000 readiness. We made inquiries of our customers and suppliers to determine the potential effect of their year 2000 readiness on our operations. We contacted all vendors and suppliers and believe that most are compliant. All vendors identified as critical are either compliant or alternate vendors have been identified. One critical raw material, electricity, is sole sourced from the Bonneville Power Administration for delivery and cannot be otherwise obtained. BPA has assured us that it is year 2000 compliant; however BPA does not guarantee an interruption-free supply. We also made inquiries of our customers and found that all critical customers were addressing the year 2000 issue. To prepare for year 2000 issues and upgrade computer systems, we have spent approximately $6.0 million. This is not solely to resolve potential year 2000 problems, but also to upgrade and further integrate our business and process systems. Although as of March 27, 2000 we have experienced no material technical problems related to the year 2000, there can be no assurance that we will not discover year 2000 compliance problems in our systems that will require substantial revisions or replacements. In addition there can be no assurance that governmental agencies, utility companies, suppliers, customers or others outside our control will be year 2000 compliant. The failure by these entities to be year 2000 compliant could have a material adverse effect on our business, results of operation and financial condition. FORWARD-LOOKING STATEMENTS This section contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this section and elsewhere in this document such as in Item 1, "Business". Such statements can be identified by the use of forward looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans," or "anticipates" or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include the following: - Our revenues and earnings are heavily affected by the price of primary aluminum. 19 23 - Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under our first mortgage notes. - Despite our current indebtedness levels, we and our subsidiaries may still be able to borrow more money. - To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. - Our obligation to repay the first mortgage notes is subordinate to other lenders' rights to any collateral securing the lenders' loans to us. Proceeds from the sale of the collateral will be used to pay those lenders before they are used to repay the first mortgage notes. - The terms of our indebtedness place several restrictions on our ability to operate our business that could result in our inability to repay the notes. - Federal and state environmental laws may decrease the value of the collateral securing the first mortgage notes and may result in our lenders being liable for environmental clean-up costs at our facility. - Our smelters are based on a technology which is generally not used in the design of newer smelters and our continued competitiveness depends on our ability to operate efficiently. - Large increases in the cost of electricity could have a material adverse effect on us. - We have been insulated from changes in the price of alumina because of our tolling agreements with Hydro and Glencore. The expiration of the Glencore agreement, and the future loss of the Hydro agreement could subject us to the risks associated with buying raw materials on the open market. - Our management is dependent on certain key personnel. - Our results could be materially affected to the extent we have not addressed any year 2000 computer issues. - Our workforce and the workforce of certain of our customers consist of union employees. A strike could adversely effect our results. Other factors include the effectiveness of management's strategies and decisions, general economic and business conditions, developments in technology, new or modified statutory or regulatory requirements, and changing prices and market conditions. This section and our registration statement on Form S-4 (Commission File No. 333-72245) identify other factors that could cause such differences. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We manage interest rate risk through the strategic use of fixed and variable interest rate debt and, to a limited extent, interest rate derivatives. At December 31, 1999, our derivative instrument consisted of an interest rate swap agreement which expires in 2003 and effectively fixes our interest rate at 6.4% on a notional principal amount of $20.0 million on our floating rate long-term debt. The agreement requires quarterly cash settlements for interest rate fluctuation outside of the fixed rate. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The financial statements and supplementary data required by this item are included in this Report on Form 10-K commencing on page F-1. 20 24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On June 15, 1998, we engaged BDO Seidman, LLP as our independent public accountants. BDO's engagement was approved by our board of directors. Under this engagement, BDO audited our consolidated financial statements for the year ended December 31, 1997, which consolidated financial statements are included in this document. Prior to this engagement, we had not consulted with BDO on issues relating to our accounting principles or the type of audit opinion to be issued for our financial statements. Perkins & Company, P.C. were the prior auditors and audited the combined financial statements of Northwest Aluminum Company and Northwest Aluminum Specialties, Inc. for the year ended September 3, 1995. Perkins resigned on May 22, 1998, and referred us to BDO Seidman. Perkins is a member of the BDO Seidman Alliance. The report of Perkins on those financial statements did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audit by Perkins for the year ended September 3, 1995, there was no disagreement between us and Perkins on any matter, accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which, if not resolved to the satisfaction of Perkins, would have caused them to make reference to the matter in their report. Arthur Andersen LLP had previously audited Goldendale Aluminum Company's financial statements as of December 31, 1996 and 1997. In connection with the audit by Arthur Andersen for these periods, there was no disagreement between us and Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which, if not resolved to the satisfaction of Arthur Andersen would have caused them to make reference to the matter in their report. 21 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information about our directors, executive officers and certain other key employees as of the date of this document.
NAME AGE POSITIONS WITH THE COMPANY - ---- --- -------------------------- Brett E. Wilcox............................ 46 Chairman, President and Director Allen Barkley.............................. 44 Vice President and General Manager--Northwest William R. Reid............................ 51 Chief Financial Officer--Golden Northwest Aluminum, Inc. and Northwest Daniel J. Gnall............................ 42 Vice President--Sales and Marketing--Northwest Muhsin (Mac) Seyhanli...................... 55 Vice President and General Manager--Golden Northwest Aluminum, Inc. and Goldendale Gerald Miller.............................. 58 Vice President, General Counsel and Secretary--Golden Northwest Aluminum, Inc. and Goldendale Jessie Casswell............................ 50 Chief Financial Officer--Goldendale and Technologies A. Ray Roberts............................. 58 President--Technologies Stephen E. Babson.......................... 49 Director David Bolender............................. 67 Director Mark O. Hatfield........................... 77 Director Michael G. Psaros.......................... 32 Director
Brett E. Wilcox has served as our President since our inception in June 1998. Mr. Wilcox is also the President of Northwest Aluminum Company, which he founded in 1986, and since 1996 has served as the President of Goldendale Aluminum Company. Before founding Northwest in 1986, Mr. Wilcox was the Executive Director of Direct Service Industries, a trade association of ten large aluminum and other energy-intensive companies that purchase electricity from the Bonneville Power Administration. Before 1986 Mr. Wilcox was an attorney with Preston and Gates in Seattle, Washington, concentrating in energy and general business matters. Mr. Wilcox is chairman of the Oregon Economic Development Commission, Vice Chair of the Oregon Progress Board and active in various civic and business organizations. Allen Barkley joined Northwest in June 1995 as Production Engineering Manager and became Vice President and General Manager in October 1996. Before joining Northwest, Mr. Barkley spent 18 years at a primary aluminum smelter facility in Columbia Falls, Montana where he served in a variety of capacities, including production, engineering, maintenance and public affairs. William R. Reid joined Northwest in 1986, became its Controller in 1993 and was appointed Chief Financial Officer of Northwest in 1996 and of Golden Northwest Aluminum in August 1998. Before joining Northwest, Mr. Reid was a senior auditor with Touche Ross & Co. Daniel J. Gnall joined Northwest in August 1991 as a metal trader, and in 1992 became Vice President -- Sales and Marketing responsible for metal purchasing and sales. Before joining Northwest, Mr. Gnall was an account executive with Martin Marietta Corporation and worked for Cassmet International, Inc., a metals trading company where he served as its General Manager in charge of physical operations and non-ferrous metal purchasing and sales. Muhsin (Mac) Seyhanli became Vice President and General Manager of Golden Northwest Aluminum in August 1998. He was one of the founders of Columbia Aluminum Company, the predecessor of Goldendale, and since 1994 has been the general manager for all operations at Goldendale, becoming its Vice President and General Manager in 1996. Before his current position, Mr. Seyhanli was a cell line manager for both Columbia and Commonwealth Aluminum. Mr. Seyhanli has over 29 years of experience in the aluminum industry. 22 26 Gerald Miller became Vice President, General Counsel and Secretary of Golden Northwest Aluminum in August 1998. He joined Columbia Aluminum Company in 1989 as General Counsel and Corporate Secretary. In 1996, Mr. Miller was named to the additional post of Vice President -- Energy and Government Affairs of Goldendale. Before joining Goldendale, Mr. Miller was a trial lawyer in private practice in the state of Washington. Mr. Miller is a member of the Board of Directors of the State of Washington Economic Development Finance Authority. Jessie Casswell has been the Chief Financial Officer of Goldendale since 1998 and the Controller since 1984. She has served as Chief Financial Officer of Technologies since 1999. From 1972 to 1984, Ms. Casswell served as the Controller of Northwest. Ms. Casswell is also a member of the Executive Committee of the Goldendale profit sharing plan and is the Chairperson of the Trustees of the profit sharing plan. A. Ray Roberts joined Northwest in 1992 as Operations Manager and was responsible for smelter operations. In 1997, Mr. Roberts was named President of Northwest Aluminum Technologies. In his over 28 years of experience in the aluminum industry and before joining Northwest, Mr. Roberts has worked for several smelting facilities in various engineering and managerial capacities, including production, marketing manager, technology development and liaison to government. Stephen E. Babson became a director of Golden Northwest Aluminum in 1998. Since 1996, he has served as a director of Goldendale. Mr. Babson is the Chairman and a partner in the Portland office of Stoel Rives LLP, which acts as our counsel, since 1984. Mr. Babson is also a director of Roseburg Forest Products Co. and Pensiontracker.com, Inc., and serves on the advisory boards of several Pacific Northwest based technology companies. He is the general partner of Babson Capital Partners, LP, a private investment fund, and the secretary and director of the Oregon Symphony Association. David Bolender became a director of Golden Northwest Aluminum in 1998. Since 1996, he has served as a director of Goldendale. Since 1992, Mr. Bolender has served as Chairman of the Board of Electro Scientific Industries, Inc., a manufacturer of machine tools for the electronics industry. In May 1998, Mr. Bolender became Chief Executive Officer and Chairman of the Board of Protocol Systems, a manufacturer of medical vital sign monitoring instrumentation. From 1982 to 1991, Mr. Bolender was President of Pacific Power and Light Company and PacifiCorp Electric Operations Group. Before joining PacifiCorp in 1982, Mr. Bolender spent 12 years with Westinghouse Electric Corporation, where he managed the construction and operation of power plants around the world. He is a member of the boards of directors of Benson Industries and Micro Monitors. Mark O. Hatfield became a director of Golden Northwest Aluminum and Goldendale in 1999. Since 1997, he has served as an administrative consultant to the Lasker Foundation. From 1967 to 1997, Mr. Hatfield served in the United States Senate as senator from the state of Oregon. From 1959 to 1967, he served as Governor of the state of Oregon. Mr. Hatfield serves on the board of directors of Lattice Semiconductor Corporation, a developer of high-performance programmable logic devices. Michael G. Psaros became a director of Golden Northwest Aluminum in 1998. Since 1996, he has served as a director of Goldendale. Since 1991, Mr. Psaros has been a Principal of Keilin & Co. LLC, a New York investment bank. In 1998, Mr. Psaros became a founding Principal of KPS (Keilin, Psaros, Shapiro) Special Situations Fund, L.P., a private equity fund focused on investing in underperforming, distressed and troubled companies. Before joining Keilin and founding KPS, Mr. Psaros worked in the investment banking department of Bear, Stearns & Co. Inc. Mr. Psaros was originally nominated to Goldendale's board by the President of the United Steelworkers of America. 23 27 ITEM 11. EXECUTIVE COMPENSATION COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION In the last fiscal year, our board of directors utilized the services of Messrs. Babson, Bolender, Hatfield and Psaros, our four outside directors, as a compensation committee. With the advice of the compensation committee, Brett Wilcox made the compensation decisions for executive officers. EXECUTIVE COMPENSATION Compensation Summary. The following table sets forth compensation information for the President and our other six most highly compensated executives, each of whose total annual compensation exceeded $100,000 in 1999.
Summary Compensation Table Annual Compensation Other Annual Salary Bonus Compensation -------- -------- ------------ Brett E. Wilcox, Chairman, President and Director 1999...................... $603,581 $532 $0 1998...................... $601,806 $903,001 $0 Muhsin (Mac) Seyhanli, Vice President and General Manager - Golden Northwest Aluminum, Inc. and Goldendale 1999...................... $150,000 $100,573 $0 1998...................... $150,000 $253,380 $0 Gerald Miller, Vice President, General Counsel and Secretary - Golden Northwest Aluminum, Inc. and Goldendale 1999...................... $120,000 $50,869 $211,043 1998...................... $120,000 $49,101 $211,043 Jessie Casswell, Chief Financial Officer - Goldendale and Technologies 1999...................... $92,800 $50,989 $211,043 1998...................... $88,615 $68,718 $211,043 Allen Barkley, Vice President and General Manager - Northwest 1999...................... $108,810 $1,316 $0 1998...................... $106,950 $100,000 $0 Daniel J. Gnall, Vice President - Sales and Marketing - Northwest 1999...................... $108,810 $1,316 $0 1998...................... $106,950 $100,000 $0 William R. Reid, Chief Financial Officer - Golden Northwest Aluminum, Inc. and Northwest 1999...................... $108,810 $1,316 $0 1998...................... $106,950 $100,000 $0
24 28 The salaries of the above-named executive officers will be the same in fiscal 2000. Any increases in bonuses or other annual compensation will be dependent upon operating results and performance in fiscal 2000. In connection with the acquisition of Goldendale, we entered into deferred compensation agreements with certain employees in exchange for the employees waiving their rights under stock-based compensation and other employment agreements which existed at the time. Payments made under those agreements are included above under Other Annual Compensation. LIMITATION OF LIABILITY AND INDEMNIFICATION Our articles of incorporation eliminate, to the fullest extent permitted by Oregon law, liability of our directors for monetary damages for conduct as a director. Although liability for monetary damages has been eliminated, equitable remedies such as injunctive relief or rescission remain available. In addition, a director is not relieved of his responsibilities under any other law, including the federal securities laws. Our articles of incorporation require us to reimburse the directors for any liabilities and related expenses arising from our operations to the fullest extent not prohibited by law. We believe that the limitation of liability provisions in our articles of incorporation may enhance our ability to attract and retain qualified individuals to serve as directors. DIRECTORS' COMPENSATION Directors who are not our employees receive a fee of $5,000 per board meeting attended. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 30, 2000, 1,000 shares of common stock were outstanding, held of record by Brett E. Wilcox. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We sell semi-solid metalworking and other value-added products to Hot Metal Technologies, Inc. and Hot Metal Moldings, Inc. under annual purchase orders. Hot Metal Technologies and Hot Metal Moldings, suppliers of automotive parts, are each wholly owned by Brett Wilcox, our President and sole shareholder. Our sales to these companies under these purchase orders totaled approximately $3.6 million for the year ended December 31, 1998 and approximately $3.3 million for the year ended December 31, 1999. The terms of these sales were comparable to similar sales to non-affiliates. We also made advances to Hot Metal Technologies and Hot Metal Moldings during the years ended December 31, 1998 and 1999 by way of payroll and benefits expenses paid by Northwest Aluminum Company for Northwest employees on loan to these companies. On December 31, 1997, $4.0 million of the total amount then owed by Hot Metal Technologies and Hot Metal Moldings to us for accounts receivable and advances was converted to a note receivable. The note bears interest at 9.25% per year and is payable in quarterly installments beginning April 1, 1998 through January 2002. As of December 31, 1999, a combined total of approximately $4.0 million was owed by these companies to us, consisting of approximately $2.7 million on the note receivable and accounts receivable of approximately $1.3 million. The highest amount of total indebtedness of Hot Metal Technologies and Hot Metal Moldings to us since January 1, 1997 was $6.5 million. In 1998, the federal government made a grant of $750,000 to Hot Metal Technologies as contractor, and Northwest Aluminum Specialties as subcontractor, for semi-solid metalworking research. In 1999, we paid $1.9 million to Mr. Wilcox to pay taxes owed by him as a result of Internal Revenue Service adjustments for taxes owed for earlier periods for Northwest, who files as a Subchapter S corporation. In 1997, Northwest Aluminum Company paid $4.9 million to Mr. Wilcox to pay taxes owed by him as a result of Northwest's status as a Subchapter S corporation. The amount paid was in excess of actual tax liabilities and, of this amount, $2.9 million was recorded as a dividend. The remaining $2.0 million is recorded as a receivable on our combined balance sheet and is outstanding. No interest is payable upon the receivable. 25 29 Mr. Wilcox has entered into an agreement with Northwest, Northwest Aluminum Specialties and us under which we have agreed not to file any amended income tax return or change any election or accounting method without the consent of Mr. Wilcox if the filing or change would increase any tax liability of Mr. Wilcox. In addition, the companies have agreed to reimburse Mr. Wilcox for any adjustment for taxes owed for earlier periods, including interest on any such payments, and for certain other fees and costs relating to periods before December 18, 1998. Under a voting agreement effective May 17, 1996, Mr. Wilcox must cause Goldendale Holding Company to vote the shares of Goldendale Aluminum Company common stock held by it to ensure that (1) the Goldendale Aluminum Company board of directors consists of not more than five directors; (2) not less than one director is a nominee designated by the President of the United Steel Workers of America; and (3) not less than two directors are nominees of Mr. Wilcox who have no significant continuing business relationship with Mr. Wilcox or any entity controlled by him. The voting agreement will remain in force so long as the USW represents the collective bargaining unit of the Goldendale facility, except that clauses (1) and (3) of the preceding sentence will continue only until the termination of the initial term of the Collective Bargaining Agreement dated April 7, 1996 between Goldendale Aluminum Company and the USW. 26 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS Page in this Report. -------------------- Report of Independent Certified Public Accountants................. F-2 Balance Sheets..................................................... F-3 Statements of Operations........................................... F-4 Statements of Shareholders' Equity................................. F-5 Statements of Cash Flows........................................... F-6 Summary of Significant Accounting Policies......................... F-7 Notes to Combined Financial Statements............................. F-12 2. FINANCIAL STATEMENT SCHEDULES: NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC. Report of Independent Certified Public Accountants.........................S-2 Combined Balance Sheets....................................................S-3 Combined Statements of Operations..........................................S-4 Combined Statements of Shareholder's Equity................................S-5 Combined Statements of Cash Flows..........................................S-6 Summary of Significant Accounting Policies.................................S-7 Notes to Combined Financial Statements ....................................S-10 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY Report of Independent Certified Public Accountants.........................S-15 Consolidated Balance Sheets................................................S-16 Consolidated Statements of Operations......................................S-17 Consolidated Statements of Shareholders' Equity ...........................S-18 Consolidated Statements of Cash Flows......................................S-19 Summary of Significant Accounting Policies.................................S-20 Notes to Consolidated Financial Statements ................................S-24
27 31 3. EXHIBITS: (a) The exhibits listed below are filed as part of this report
Exhibit Number ------- 3.1 Articles of Incorporation of Registrant. Incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 3.2 Bylaws of Registrant. Incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 4.1 Indenture, dated as of December 21, 1998, between Registrant, as Issuer, Northwest Aluminum Specialties, Inc., Northwest Aluminum Company, Northwest Aluminum Technologies, LLC, Goldendale Holding Company, and Goldendale Aluminum Company, as Guarantors, and U.S. Trust Company, N.A., as Trustee. Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 4.2 Credit Agreement, dated December 21, 1998, among the Financial Institutions named therein, BancBoston, N.A., as Administrative Agent, U.S. Bank National Association, as Documentation Agent, Northwest Aluminum Company, Northwest Aluminum Specialties, Inc., Goldendale Aluminum Company, and Northwest Aluminum Technologies, as amended by the Agreement and Amendment No. 1, dated as of January 21, 1999. Incorporated by reference to Exhibit 4.2 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 4.3 Registration Rights Agreement, dated as of December 21, 1998, by and among the Registrant, the Subsidiary Guarantors party to this Agreement; and BancBoston Robertson Stephens Inc., and Libra Investments, Inc. Incorporated by reference to Exhibit 4.3 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 4.4 Certificate of Incorporation of Goldendale Holding Company. Incorporated by reference to Exhibit 4.4 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.1 Agreement to Toll Convert Alumina into Aluminum, dated May 22, 1996, between Hydro Aluminum Louisville, Inc., and Goldendale Aluminum Company. Incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). (Confidential treatment of portions of this document has been granted by order of the Commission. The information omitted from this exhibit has been filed with the Commission.) 10.2 First Amendment to Agreement to Toll Convert Alumina into Aluminum, dated December 21, 1998. Incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.3 Tax Indemnification Agreement, dated as of December 21, 1998, between Registrant, Northwest Aluminum Company, Northwest Aluminum Specialties, Inc., and Brett E. Wilcox. Incorporated by reference to Exhibit 10.8 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.4 General Transmission Agreement, dated April 7, 1995, executed by the United States of America Department of Energy acting by and through the Bonneville Power Administration and Northwest Aluminum Company. Incorporated by reference to Exhibit 10.9 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.5 Power Sale Agreement, dated September 28, 1995, between the United States of America Department of Energy acting by and through the Bonneville Power Administration and Northwest Aluminum Company. Incorporated by reference to Exhibit 10.10 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.6 Voting Agreement dated May 17, 1996, by Brett Wilcox for the benefit of the United Steelworkers of America, Local 8147. Incorporated by reference to Exhibit 10.11 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
28 32
Exhibit Number ------- 10.7 General Transmission Agreement, dated May 4, 1995, executed by the United States of America Department of Energy acting by and through the Bonneville Power Administration and Columbia Aluminum Company. Incorporated by reference to Exhibit 10.12 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.8 Power Sales Agreement, dated September 18, 1995, executed by the United States of America Department of Energy acting by and through the Bonneville Power Administration and Columbia Aluminum Company. Incorporated by reference to Exhibit 10.13 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.9 Cancelable Swap Agreement dated January 21, 1999, between Goldendale Aluminum Company and BankBoston, N.A. Incorporated by reference to Exhibit 10.14 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.10 Alumina Supply Agreement dated October 15, 1999 by Glencore Ltd. and Northwest Aluminum Company. (Confidential treatment of portions of this document has been requested. The information omitted from this exhibit has been filed with the Commission.) 10.11 Phantom Stock Termination Agreement dated August 1, 1996 between Goldendale Aluminum Company and Jessie Casswell.* 12.1 Statements re Computation of Ratios. 21.1 Subsidiaries of the Registrant. 24.1 Powers of Attorney (included on signature pages of the Registration Statement). 27.1 Financial Data Schedule.
- -------------------- * Management contract or compensatory arrangement. (b) Reports on Form 8 Not applicable. 29 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Golden Northwest Aluminum, Inc., and the Co-Registrants named below, have duly caused this Report to be signed on their behalf by the undersigned, thereunto duly authorized, in The Dalles, Oregon, on March 28, 1999. GOLDEN NORTHWEST ALUMINUM, INC. Brett E. Wilcox By:_________________________________________ Brett E. Wilcox President and Chairman of the Board CO-REGISTRANTS GOLDENDALE HOLDING COMPANY GOLDENDALE ALUMINUM COMPANY NORTHWEST ALUMINUM COMPANY NORTHWEST ALUMINUM SPECIALTIES, INC. Brett Wilcox By__________________________________________ Brett Wilcox President NORTHWEST ALUMINUM TECHNOLOGIES, L.L.C. William R. Reid By__________________________________________ William R. Reid Vice President 34 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Brett E. Wilcox and William R. Reid his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on March 28, 1999 on behalf of the Registrant and in the capacities indicated: REGISTRANT OFFICERS AND DIRECTORS Signature Title - -------------------------- --------------------------------------------- Brett E. Wilcox - -------------------------- President, Chairman of the Board and Director Brett E. Wilcox (Principal Executive Officer) William R. Reid - -------------------------- Chief Financial Officer William R. Reid (Principal Financial Officer and Principal Accounting Officer) Stephen E. Babson - -------------------------- Director Stephen E. Babson - -------------------------- Director David Bolender Mark O. Hatfield - -------------------------- Director Mark O. Hatfield Michael G. Psaros - -------------------------- Director Michael G. Psaros CO-REGISTRANT OFFICERS AND DIRECTORS Signature Title - -------------------------- --------------------------------------------- GOLDENDALE HOLDING COMPANY Brett E. Wilcox - -------------------------- President and Director Brett E. Wilcox (Principal Executive Officer) Jessie Casswell - -------------------------- Chief Financial Officer Jessie Casswell (Principal Financial Officer and Principal Accounting Officer) 35 NORTHWEST ALUMINUM COMPANY NORTHWEST ALUMINUM SPECIALTIES, INC. Brett E. Wilcox - -------------------------- President and Director Brett E. Wilcox (Principal Executive Officer) William R. Reid - -------------------------- Chief Financial Officer William R. Reid (Principal Financial Officer and Principal Accounting Officer) GOLDENDALE ALUMINUM COMPANY Brett E. Wilcox - -------------------------- President and Chairman of the Board Brett E. Wilcox (Principal Executive Officer and Principal Financial Officer and Principal Accounting Officer) Stephen E. Babson - -------------------------- Director Stephen E. Babson - -------------------------- Director David Bolender Mark O. Hatrield - -------------------------- Director Mark O. Hatfield Michael G. Psaros - -------------------------- Director Michael G. Psaros NORTHWEST ALUMINUM TECHNOLOGIES, L.L.C. A. Ray Roberts - -------------------------- President A. Ray Roberts (Principal Executive Officer) Jessie Casswell - -------------------------- Chief Financial Officer Jessie Casswell (Principal Financial Officer and Principal Accounting Officer) Brett E. Wilcox - -------------------------- Director Brett E. Wilcox 36 INDEX TO FINANCIAL STATEMENTS GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES Report of Independent Certified Public Accountants................................... F-2 Consolidated Balance Sheets as of December 31, 1998 and 1999......................... F-3 Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999......................................................................... F-4 Consolidated Statements of Shareholder's Equity for the years ended December 31, 1997, 1998 and 1999.............................................................. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999......................................................................... F-6 Summary of Significant Accounting Policies........................................... F-7 Notes to Consolidated Financial Statements........................................... F-12
F-1 37 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Golden Northwest Aluminum, Inc. and Subsidiaries The Dalles, Oregon We have audited the accompanying consolidated balance sheets of Golden Northwest Aluminum, Inc. and Subsidiaries as of December 31, 1998 and 1999 and the related consolidated statements of operations, shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the consolidated 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Golden Northwest Aluminum, Inc. and Subsidiaries as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. BDO Seidman, LLP Spokane, Washington March 22, 2000 F-2 38 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (Note 4)
DECEMBER 31, -------------------------------- 1998 1999 ----------- ----------- (IN THOUSANDS) Current assets: Cash and cash equivalents.................................................... $ 37,633 $ 1,929 Trade accounts receivable, less allowance for doubtful accounts of $100 (Note 13)................................................................. 48,164 54,752 Current portion of receivable due from related company (Note 12)............. 2,126 2,639 Inventories (Note 1)......................................................... 55,083 65,618 Intercompany receivable...................................................... - 13,106 Prepaid expenses............................................................. 786 666 Income taxes refundable (Note 9)............................................. - 3,121 ----------- ----------- Total current assets................................................ 143,792 141,831 ----------- ----------- Property, plant and equipment, net (Note 2)....................................... 117,761 132,961 Goodwill, net of accumulated amortization of $9,494 and $14,241 (Note 9)......... 88,140 81,348 Advances to shareholder........................................................... 2,000 2,000 Receivable due from related company, less current portion (Note 12)............... 2,826 1,824 Other assets, net (Notes 3 and 13)................................................ 10,115 10,667 ----------- ----------- $ 364,634 $ 370,631 =========== =========== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Current portion of long-term debt (Note 4).................................. $ - $ 25,279 Trade accounts payable...................................................... 41,035 45,925 Accrued expenses (Note 7)................................................... 19,598 16,806 Deferred income taxes (Note 9).............................................. 1,670 1,583 Income taxes payable ....................................................... 2,197 - ----------- ----------- Total current liabilities.......................................... 64,500 89,593 ----------- ----------- Long-term debt, less current portion (Note 4)............................... 170,000 170,000 Deferred income taxes (Note 9).............................................. 9,965 13,644 Deferred compensation notes payable (Note 6)................................ 1,734 662 Other long-term liabilities (Note 8)........................................ 1,741 1,825 Dividends payable (Note 10)................................................. 9,515 13,163 ----------- ----------- Total liabilities.................................................. 257,455 288,887 ----------- ----------- Commitments and Contingencies (Notes 5, 6, 8 and 9) Preferred stock of subsidiary (Note 10).......................................... 29,663 29,663 Shareholder's Equity: Common stock, $0.10 par value; 350,000 shares authorized; 1,000 shares issued and outstanding................................................... - - Additional paid-in capital.................................................. 65,504 63,628 Retained earnings (accumulated deficit)..................................... 12,012 (11,547) ----------- ----------- Total shareholder's equity......................................... 77,516 52,081 ----------- ----------- $ 364,634 $ 370,631 =========== ===========
See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-3 39 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1997 1998 1999 -------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues (Notes 5 and 12)...................................... $ 497,872 $ 470,850 $ 444,174 Cost of revenues............................................... 436,511 440,732 429,784 -------------- ------------- ------------- Gross margin................................................... 61,361 30,118 14,390 General and administrative expenses............................ 17,115 18,119 16,672 -------------- ------------- ------------- Operating income (loss)........................................ 44,246 11,999 (2,282) -------------- ------------- ------------- Other income (expense): Interest expense (Note 4)................................... (16,723) (14,180) (21,977) Other income, net........................................... 4,246 1,889 603 -------------- ------------- ------------- Net other expense.............................................. (12,477) (12,291) (21,374) -------------- ------------- ------------- Income (loss) before income taxes.............................. 31,769 (292) (23,656) Income tax expense (benefit) (Note 9).......................... 13,274 3,009 (3,745) -------------- ------------- ------------- Income (loss) before extraordinary item........................ 18,495 (3,301) (19,911) Extraordinary item - loss on extinguishment of debt (net of income tax benefit of $513) (Note 4)................ - (1,552) - -------------- ------------- ------------- Net income (loss) $ 18,495 $ (4,853) $ (19,911) ============== ============= ============= Income (loss) before extraordinary item........................ $ 18,495 $ (3,301) $ (19,911) Dividends accrued on preferred stock of subsidiary............. (3,648) (3,648) (3,648) -------------- ------------- ------------- Income (loss) available to common shareholder.................. 14,847 (6,949) (23,559) Extraordinary item............................................. - (1,552) - -------------- ------------- ------------- Net income (loss) available to common shareholder.............. $ 14,847 $ (8,501) $ (23,559) ============== ============= ============= Earnings (loss) per share - basic and diluted: Income (loss) before extraordinary item........................ $ 14,847 $ (6,949) $ (23,559) Extraordinary item............................................. - (1,552) - -------------- ------------- ------------- Net income (loss) per share of common stock.................... $ 14,847 $ (8,501) $ (23,559) ============== ============= ============= Weighted average shares of common stock outstanding............ 1,000 1,000 1,000 ============== ============= =============
See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-4 40 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
RETAINED COMMON STOCK ADDITIONAL EARNINGS TOTAL --------------------------- PAID-IN (ACCUMULATED SHAREHOLDER'S SHARES AMOUNT CAPITAL DEFICIT) EQUITY ----------- ------------ ------------ ------------ ------------- (IN THOUSANDS EXCEPT SHARE DATA) Balance at January 1, 1997 ............... 1,000 $ - $ 65,354 $ 8,598 $ 73,952 Cash contributed to capital............... - - 150 - 150 Dividends accrued on preferred stock...... - - - (3,648) (3,648) Dividends paid on common stock............ - - - (2,932) (2,932) Net income................................ - - - 18,495 18,495 ----------- ------------ ------------ ------------ ------------- Balance at December 31, 1997.............. 1,000 - 65,504 20,513 86,017 Dividends accrued on preferred stock...... - - - (3,648) (3,648) Net loss.................................. - - - (4,853) (4,853) ----------- ------------ ------------ ------------ ------------- Balance at December 31, 1998.............. 1,000 - 65,504 12,012 77,516 Dividends accrued on preferred stock ..... - - - (3,648) (3,648) Dividends paid on common stock ........... - - (1,876) - (1,876) Net loss.................................. - - - (19,911) (19,911) ----------- ------------ ------------ ------------ ------------- Balance at December 31, 1999.............. 1,000 $ - $ 63,628 $ (11,547) $ 52,081 =========== ============ ============ ============ =============
See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-5 41 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1997 1998 1999 -------------- ------------- ------------- (IN THOUSANDS) Cash flows from operating activities: Net income (loss).......................................... $ 18,495 $ (4,853) $ (19,911) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............................ 19,069 20,371 23,572 Loss (gain) on disposal of assets........................ (2,600) (38) 197 Provision for bad debts.................................. - 1,500 - Extraordinary loss....................................... - 2,065 - Deferred income taxes.................................... 8,136 487 4,376 Change in assets and liabilities, net of effect of acquisition: Trade accounts receivable............................ (1,372) 13,198 (6,588) Inventories.......................................... (9,503) 5,809 (10,535) Prepaid expenses..................................... 150 (259) 120 Other assets......................................... 2,850 527 (1,676) Trade accounts payable............................... 22,914 (6,878) 4,890 Accrued expenses..................................... 3,641 (2,739) (1,113) Intercompany payable................................. - 418 (13,524) Income taxes refundable.............................. (4,886) (955) (5,318) Other liabilities.................................... (802) 85 84 -------------- ------------- ------------- Net cash provided by (used in) operating activities........... 56,092 28,738 (25,426) -------------- ------------- ------------- Cash flows from investing activities: Proceeds from disposal of assets........................... 12,821 1,210 - Acquisition of property, plant and equipment............... (14,281) (19,010) (33,098) Advances to shareholder.................................... (2,000) - - Net payments from (advances to) related company............ (3,631) (918) 489 -------------- ------------- ------------- Net cash used in investing activities......................... (7,091) (18,718) (32,609) -------------- ------------- ------------- Cash flows from financing activities: Borrowings under revolving credit facilities............... 319,219 300,772 57,000 Repayments under revolving credit facilities............... (326,793) (299,762) (31,721) Contribution of capital.................................... 150 - - Principal repayments of term loan facilities............... (42,926) (11,904) - Proceeds from long-term borrowings......................... - 45,953 - Deferred finance costs..................................... - (7,035) - Principal payments on deferred compensation notes.......... (813) (1,662) (1,072) Dividends paid (2,932) - (1,876) -------------- ------------- ------------- Net cash provided by (used in) financing activities........... (54,095) 26,362 22,331 -------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents.......... (5,094) 36,382 (35,704) Cash and cash equivalents, beginning of year.................. 6,345 1,251 37,633 -------------- ------------- ------------- Cash and cash equivalents, end of year........................ $ 1,251 $ 37,633 $ 1,929 ============== ============= ============= Supplemental Disclosures of Cash Flow Information (Note 11)
See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-6 42 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS) OPERATIONS, PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The operations of Golden Northwest Aluminum, Inc. ("Golden" or the "Company") consist primarily of the smelting conversion of alumina to aluminum under tolling arrangements with alumina suppliers, processing of aluminum into primary products, and the sale of those products within one business segment. The operations are located in the Pacific Northwest on the Columbia River. The Company was incorporated in the state of Oregon on June 3, 1998 for the purposes of becoming the holding company of Northwest Aluminum Company, Northwest Aluminum Specialties, Inc., (collectively "Northwest"), Goldendale Holding Company and its wholly owned subsidiary, Goldendale Aluminum Company (collectively "Goldendale") and Northwest Aluminum Technologies, LLC ("Technologies"). The sole shareholder of the Company also owned all of the outstanding shares of common stock of Northwest, Goldendale and Technologies. On December 18, 1998, the sole shareholder of Golden contributed all of the issued and outstanding shares of common stock of Northwest, Goldendale and Technologies to the Company. The transaction was accounted for as a merger of entities under common control in a manner similar to a pooling of interests. Accordingly, the financial statements give retroactive effect to this transaction. The consolidated financial statements include the accounts of Northwest, Goldendale and Technologies. The Company, Goldendale and Technologies report on a December 31 year basis; Northwest reports on a September 30 fiscal year basis. Included in current assets at December 31, 1999 is $13,106 and included in accrued expenses at December 31, 1998 is $418, representing the portion of intercompany advances which do not eliminate due to the differing year ends. All other significant intercompany accounts and transactions have been eliminated. Consolidated and separate results of Northwest, Goldendale and Technologies are as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1997 1998 1999 ------------ ------------ ------------ Revenues: Northwest ................................................. $ 296,271 $ 293,596 $ 275,928 Goldendale................................................. 201,601 177,254 168,246 ------------ ------------ ------------ $ 497,872 $ 470,850 $ 444,174 ============ ============ ============ Net income (loss): Northwest.................................................. $ 367 $ (3,483) $ (8,278) Goldendale................................................. 18,290 (111) (9,220) Technologies............................................... (162 ) (336) (551) Consolidating adjustments.................................. - (923) (1,862) ------------ ------------ ------------ $ 18,495 $ (4,853) $ (19,911) ============ ============ ============
F-7 43 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS) REVENUE RECOGNITION Revenues for the conversion of alumina and processing of aluminum under tolling arrangements are recognized upon completion of the tolling process. Under the tolling arrangements, alumina suppliers deliver their alumina to the Company. The alumina is converted to aluminum in reduction cells by putting it in liquid form by dissolving it in an "electrolyte" solution and then passing electric current through the "electrolyte" to separate the alumina into its two parts, aluminum and oxygen. This process is continuous and is nearly instantaneous as the alumina is dissolved in the "electrolyte". Revenues from the processing and sale of aluminum products are recognized upon shipment. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the weighted-average cost method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment including cell relining costs are stated at cost, less accumulated depreciation. For financial reporting purposes, the costs of plant and equipment are depreciated over the estimated useful lives of the assets, which range from three to forty years, using the straight-line method. GOODWILL Goodwill represents the excess of the purchase price over the fair value of net assets acquired and is being amortized on a straight-line basis over twenty years. The Company periodically evaluates the recoverability of goodwill. The measurement of possible impairment is based primarily on the Company's ability to recover the unamortized balance of the goodwill from expected future operating cash flows on an undiscounted basis. ASSET IMPAIRMENT The Company evaluates its long-lived assets for financial impairment, and continues to evaluate them as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. The Company evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. INTEREST COSTS The Company follows the policy of capitalizing interest as a component of the cost of property, plant and equipment constructed for its own use. Interest costs of $0, $44 and $576 were capitalized during the year ended December 31, 1997, 1998 and 1999, respectively. F-8 44 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS) INCOME TAXES Both the Company and its Northwest subsidiary have elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Company, including its Northwest subsidiary, does not pay federal or state corporate income taxes on its taxable income. Instead, the Company's shareholder is liable for individual federal and state income taxes on its taxable income. It is the Company's intention to pay dividends to the shareholder in an amount no less than the sum of these federal and state income taxes. The Company's other subsidiary, Goldendale, accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 uses the liability method so that deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws and tax rates. Deferred income tax expense or benefit is based on the changes in the financial statement basis versus the tax basis in Goldendale's assets or liabilities from period to period. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. Those estimates and assumptions 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. CONCENTRATIONS OF CREDIT RISK Financial instruments, which potentially subject the Company to a concentration of credit risk, consist of cash and cash equivalents and trade accounts receivable. The Company places its cash and cash equivalents with various high quality financial institutions; these deposits may exceed federally insured limits at various times throughout the year. Northwest sells its products to various customers involved in the manufacturing of aluminum products located throughout the United States. Credit risk arising from these receivables is controlled through credit approval, credit limit and monitoring procedures. Receivables due from the Company's two primary tolling customers comprise 39% and 41% of the Company's total trade accounts receivable at December 31, 1998 and 1999, respectively. F-9 45 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS) FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS The fair values of financial instruments have been determined through information obtained from quoted market sources and management estimates. It is management's belief that financial instruments held by the Company approximate fair market value. The Company does not hold or issue financial instruments or derivative financial instruments for trading purposes. Goldendale has entered into an interest rate swap agreement for purposes of minimizing exposure to interest rate risk. The differential between the floating interest rate and the fixed interest rate, which is to be paid or received, is recognized in interest expense as the floating interest rate changes over the life of the agreement. RESEARCH AND DEVELOPMENT COSTS Expenditures associated with research and development for existing product process improvements are expensed as incurred. These costs amounted to $544, $1,194 and $2,070 during the years ended December 31, 1997, 1998 and 1999, respectively. Depreciation on equipment used for research and development amounted to $0, $0 and $47 during the periods ended December 31, 1997, 1998 and 1999. CASH AND CASH EQUIVALENTS For purposes of balance sheet classification and the statements of cash flows, the Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. ENVIRONMENTAL MATTERS The Company expenses environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company records a liability for an environmental matter when it is probable and can be reasonably estimated. The liability is adjusted as further information develops or circumstances change. The Company's estimated liability is reduced to reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs. The estimated liability of the Company is not discounted or reduced for possible recoveries from insurance carriers DEBT ISSUE COSTS Costs and fees incurred to obtain financing are capitalized and amortized over the term of the related debt. F-10 46 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS) RECLASSIFICATIONS Certain reclassifications of 1997 and 1998 amounts have been made to confirm to classifications used in 1999. EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized as income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company is currently analyzing the financial impact (if any) the adoption of SFAS No. 133 will have on its consolidated financial statements. EARNINGS (LOSS) PER SHARE Basic earnings per share includes no dilution and is calculated by dividing income (loss) available to common shareholders after preferred stock dividends accrued, by the average number of shares actually outstanding during the period. Diluted earnings per share reflects the potential dilution of securities (such as stock options, warrants and securities convertible into common stock) that could share in the earnings of an entity. The Company has no dilutive securities as of December 31, 1999. F-11 47 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. INVENTORIES INVENTORIES CONSIST OF THE FOLLOWING:
DECEMBER 31, ----------------------------- 1998 1999 ------------- ------------ Purchased metals and tolling in process............. $ 33,047 $ 42,880 Supplies and alloys ................................ 12,558 13,619 Carbon plant materials.............................. 5,793 5,414 Alumina............................................. 3,685 3,705 ------------- ------------ $ 55,083 $ 65,618 ============= ============
2. PROPERTY, PLANT AND EQUIPMENT AND RESTATEMENT PROPERTY, PLANT AND EQUIPMENT CONSIST OF THE FOLLOWING:
DECEMBER 31, ----------------------------- 1998 1999 ------------ ------------- Land and improvements $ 7,378 $ 8,419 Machinery and equipment............................. 124,797 148,950 Buildings and improvements.......................... 38,298 40,117 Capital projects in process......................... 8,435 12,133 ------------ ------------ 178,908 209,619 Less accumulated depreciation....................... 61,147 76,658 ------------ ------------ $ 117,761 $ 132,961 ============ ============
During 1998, in connection with the preparation of its financial statements to be used in the registration of debt securities discussed in Note 4, the Company changed its method of accounting for cell relining costs from expensing such costs as incurred to capitalizing and amortizing these costs over future periods. As a result of relining the cells with improved materials, the useful life of the individual cells has increased. In addition, the cell relining activity and related expenditures vary each year. The Company believes that the new method improves the matching of revenues and costs as technological improvements have extended the estimated period of economic benefit realized from cell relining. The change has been applied by retroactively restating the accompanying consolidated financial statements. The effect of this change was to increase net income by $2,067 for the year ended December 31, 1997. F-12 48 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 3. OTHER ASSETS Other assets consist of the following:
DECEMBER 31, -------------------------- 1998 1999 ------------ ----------- Long-term trade receivable, less allowance for $ 814 $ 1,572 doubtful accounts of $900.......................... Debt issue costs, net of accumulated amortization of $50 and $1,078.................................. 6,985 6,522 Restricted cash....................................... 1,300 1,844 Power project assets held for sale.................... 543 543 Other 473 186 ------------ ----------- $ 10,115 $ 10,667 ============ ===========
Restricted cash consists of cash held in trust and committed for environmental cleanup and workers compensation self-insurance as required by the State of Washington. These monies will be disbursed at a future date as required by the state. 4. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ---------------------------- 1998 1999 ------------ ------------ First mortgage notes.................................. $ 150,000 $ 150,000 Subordinated credit agreement......................... 20,000 20,000 Revolving credit facility ............................ - 25,279 ------------ ------------ Long-term debt........................................ 170,000 195,279 Less current portion.................................. - 25,279 ------------ ------------ Long-term debt less current portion................... $ 170,000 $ 170,000 ============ ============
In December 1998, the Company issued $150 million of 12% first mortgage notes due on December 15, 2006. Interest is payable semi-annually on June 15 and December 15, commencing June 15, 1999. Payment of the notes is guaranteed by all of the Company's subsidiaries. The debt is collateralized by substantially all of the real property, plant and equipment of the Company's subsidiaries and by a pledge of all of the issued and outstanding capital stock of the Company's subsidiaries. On or after December 15, 2002 the notes are redeemable at the option of the Company at specified redemption prices. There are no sinking fund requirements. The indenture agreement limits principal payments on subordinated debt, dividends or shareholder distributions, and investments in subsidiaries. In connection with the issuance of the notes, each of the Company's direct and indirect wholly-owned subsidiaries has jointly and severally guaranteed the notes on a full and unconditional basis. F-13 49 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) In December 1998, the Company entered into a $75 million bank revolving credit facility, which matures on December 20, 2003 and is collateralized by inventory, accounts receivable and related intangibles, including a security interest in the Company's tolling agreement. As specified in the credit agreement, borrowings under the credit facility bear interest at a floating base rate plus from 0.50% to 1.00% (9.25% at December 31, 1999) or the LIBOR rate plus from 2.00% to 2.50% (8.75% at December 31, 1999). The additional margin is dependent upon the consolidated ratio of earnings before interest, income taxes, depreciation and amortization to interest expense. The credit facility provides for the payment of a commitment fee of 0.50% per annum based on the unused portion of the credit facility. The credit agreement contains restrictive covenants, including a minimum net worth requirement, a minimum excess availability requirement and limitations on capital expenditures, dividends, additional indebtedness, mergers and other business combinations, assets sales, encumbrances, investments and transactions with affiliates. The Company was in compliance with these convenants at December 31, 1999. Also in December 1998, the Company entered into a subordinated credit agreement with Norsk Hydro USA, Inc. pursuant to which $20 million was advanced. The debt bears interest at LIBOR plus two percent (7.88% at December 31, 1999) and is due in December 2005. The debt is secured by a second lien and a pledge on the collateral securing the first mortgage notes and is guaranteed by the Company's subsidiaries. Except for the collateral security, the guarantees by the Company are subordinate to the indebtedness under the bank revolving credit facility. The credit agreement provides for additional borrowings of $10 million on or prior to December 31, 2001. On January 25, 1999 the Company terminated at no cost its existing interest rate swap agreements and entered into a new swap agreement that expires in 2003. The fixed interest rate paid on the new swap is 6.4% and covers $20 million of notional principal amount of floating rate (LIBOR) indebtedness of the Company. Although the Company is exposed to credit loss on the interest rate swap in the event of nonperformance by the counterparties, the Company estimates the likelihood of such nonperformance to be remote. At December 31, 1998 and 1999, the fair value of the interest rate swaps was approximately $92 and $1,029, respectively, which reflects the estimated amount that the Company would pay to terminate the contracts. 5. ALUMINA TOLLING CONVERSION AGREEMENTS Both Goldendale and Northwest had agreements with alumina suppliers for the conversion of alumina to aluminum for a tolling charge under which the entire production capacity of the smelting facilities is dedicated to the tolling of its supplier's alumina. The supplier is obligated to supply, without charge, alumina sufficient to meet the requirements for full operation. The tolling fees set forth in the contracts are a percentage of the price of aluminum quoted on the London Metal Exchange. Goldendale's agreement continues through December 31, 2006, and Northwest's agreement terminated on December 31, 1999. These two tolling customers accounted for 18% and 40% of the Company's consolidated revenues in 1997, 19% and 37% of the Company's consolidated revenue in 1998, and 17% and 37% of the Company's consolidated revenue in 1999. F-14 50 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) In connection with the expiration of Northwest's tolling arrangement, the Company executed an alumina supply agreement with Glencore. This new agreement states that Glencore will supply alumina to meet all of Northwest's current alumina requirements through the year ended December 31, 2004. 6. EMPLOYEE BENEFIT PLANS Profit Sharing Bonus Plans Northwest has entered into agreements, which continue through 2001, with the United Steelworkers of America, AFL-CIO, to pay annually as additional compensation 20% of the combined net income of Northwest, as adjusted in accordance with the agreements. Northwest's total additional compensation bonuses under these agreements amounted to approximately $1,300, $829 and $298 during the years ended December 31, 1997, 1998 and 1999, respectively. Goldendale has a profit sharing plan for its hourly and salaried employees. All Goldendale employees are eligible participants in this plan upon completion of a probationary period. The plan provides for payments equal to a percentage of Goldendale's profits, as defined. These amounts are to be distributed to eligible participants on or before March 31 following Goldendale's year-end. For the years ended December 31, 1997, 1998 and 1999, Goldendale recorded approximately $1,900, $380 and $389, respectively, of expense related to this plan. Retirement Benefit Plans Northwest has a defined contribution 401(k) profit sharing plan (the "401k Plan") covering substantially all Northwest employees under which employees may elect to defer pay subject to statutory limits. Northwest is committed to contribute the greater of $.25 per eligible hour worked or 5% of the combined adjusted net income of Northwest. Northwest may also make discretionary contributions to the 401k Plan. Total required and discretionary contributions by Northwest to the 401(k) Plan amounted to approximately $560, $341 and $304 during the years ended December 31, 1997, 1998 and 1999, respectively. Goldendale has a 401(k) profit sharing plan under which employees may elect to defer pay, subject to statutory limits; Goldendale also makes matching contributions for nonbargaining on the basis of percentages specified in the plan and discretionary contributions as determined on an annual basis. Goldendale also maintained a separate profit sharing retirement plan (the "DC Plan") which provided retirement benefits for substantially all of its employees. Goldendale is committed to contribute the greater of 5% of net income or $.25 per eligible hour worked. During 1999, the separate profit sharing retirement plan was merged into the 401(k) profit sharing plan. For the periods ended December 31, 1997, 1998 and 1999, Goldendale recorded approximately $730, $290 and $514 of expense for plan contributions. Deferred Compensation Notes Payable In connection with the acquisition of Goldendale in 1996, the Company entered into deferred compensation agreements with certain employees in exchange for the employees waiving their rights F-15 51 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) under stock-based compensation and other employment agreements which existed at that date. The liability is payable in monthly installments of approximately $115, including interest at 8.75%, through 2001. 7. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, ---------------------------- 1998 1999 ------------ ------------ Bonuses.............................................. $ 5,023 $ 4,275 Salaries and related expenses........................ 3,782 3,956 Interest............................................. 4,538 3,163 Intercompany payable................................. 418 - Other 5,837 5,412 ------------ ------------ $ 19,598 $ 16,806 ============ ============
8. COMMITMENTS AND CONTINGENCIES The Company, in the regular course of business, is involved in investigations and claims by various regulatory agencies. The Company is also engaged in various legal proceedings incidental to its normal business activities. The Company's management does not believe that the ultimate resolution of these investigations, claims and legal proceedings will have a material effect on its financial position, results of operations or cash flows. The Company has agreed to be contingently liable for the debts of a customer amounting to $1,336 at December 31, 1999. During 1999, the Company contracted for the design and construction of a bath reclaim facility at Goldendale. In connection therewith, a dispute has arisen over contract change orders to an engineering and construction contract. The Company has proposed a settlement in the amount of $411, which has been accrued in the financial statements for 1999. If the settlement offer is not accepted, the ultimate cost to the Company may exceed this accrual. As of December 31, 1998 and 1999, the Company had a liability of approximately $1,741 and $1,825 respectively, for estimated environmental remediation activities. The Company's estimate of this liability is based on a remediation study conducted by independent engineering consultants. The total cost of remediation is estimated at $2.5 million; however, under a court decree the Company is only responsible for approximately one-half of the total. The remaining cost is the responsibility of prior owners. No accrual has been provided for the Northwest facility as the Company is unaware of any current condition which would give rise to remedial action. F-16 52 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) The Company has entered into various agreements for the purchase of power, alumina and aluminum. Future estimated minimum payments under these noncancelable agreements are as follows:
YEAR ENDING DECEMBER 31, AMOUNT ------------------------- ------------ 2000 $ 83,990 2001 90,209 2002 31,429 2003 31,429 2004 31,429 2005 7,857 ------------ $ 276,343 ============
9. INCOME TAXES Income tax expense (benefit) consists of the following:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1998 1999 ----------- ----------- ---------- Current............................. $ 10,204 $ 2,009 $ (7,338) Deferred............................ 3,070 487 3,593 ----------- ----------- ----------- Income tax expense (benefit)........ $ 13,274 $ 2,496 $ (3,745) =========== =========== ===========
The difference between the federal statutory tax rate and the effective tax rate resulted from the following:
YEAR ENDED DECEMBER 31, ------------------------------------------ 1997 1998 1999 ----------- ---------- ---------- Federal statutory tax rate.......... 35.0 % 35.0 % (35.0)% Loss from entities not subject to income taxes...................... (3.1) (70.4) 15.8 Amortization of goodwill............ 5.3 (70.5) 7.0 Other items, net.................... 4.6 - (3.6) ----------- ---------- ----------- Effective tax rate.................. 41.8 % (105.9)% (15.8)% =========== ========== ===========
F-17 53 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) Significant components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, ---------------------------- 1998 1999 ------------ ----------- Current: Accrued expenses.................................... $ (1,811) $ (1,805) Inventory........................................... 140 55 Other 1 167 ------------ ----------- $ (1,670) $ (1,583) ============ =========== Non-current: Property, plant and equipment....................... $ (13,507) $ (16,286) Power project assets................................ 404 404 Deferred compensation............................... 607 231 Other 2,531 2,007 ------------ ----------- $ (9,965) $ (13,644) ============ ===========
The Internal Revenue Service ("IRS") has audited the Company's income tax returns and has proposed to change the Company's method of accounting for certain expenditures that were deducted when incurred. The IRS has proposed to capitalize and depreciate these expenditures over an estimated useful life. The Company had previously recorded a liability associated with the proposed change in accounting method that is effective for all tax years subsequent to 1989, of approximately $11.5 million, which included interest of $4 million. In 1999, the Company reached settlements with the IRS. As a result of the settlements, goodwill and interest expense were reduced by approximately $2 million and $1 million, respectively, during 1999. The sole shareholder of the Company will incur additional taxes and interest associated with this agreement. In December 1999, the Company made a dividend distribution of approximately $1.9 million to reimburse the shareholder for such amounts. Income taxes refundable include refund claims for net operating loss carrybacks arising in the current year and claims arising in earlier years amounting to approximately $9 million, offset by taxes payable as a result of the IRS settlement and state income taxes of approximately $6 million. The cash refund from the IRS will be reduced by accrued interest of $1.6 million. 10. PREFERRED STOCK OF SUBSIDIARY Goldendale has authorized 150,000 shares of $.01 par value Series A cumulative, nonconvertible preferred stock. At December 31, 1999 and 1998, 131,836.10 shares were issued and outstanding. The shares were issued in connection with the acquisition of Goldendale in 1996 and are stated at their per share fair value when issued of $225. The liquidation preference on the preferred stock is $225 per share. F-18 54 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) Terms of the Goldendale preferred stock provide for dividends accruing quarterly and payable in cash as declared by the Board of Directors according to the following schedule: YEAR ENDING DECEMBER 31, AMOUNT ------------------------ -------------- Through 2001................................. $ 27.68/share 2002......................................... 29.93/share 2003......................................... 32.18/share Thereafter................................... 34.43/share
Commencing on January 1, 2002, the preferred shareholders have the option of receiving additional shares of preferred stock in satisfaction of any cumulative dividend in arrears that may exist at that time. The Company may redeem any or all outstanding shares of Series A Preferred Stock at the following redemption prices at any time after December 31, 1999: YEAR ENDING DECEMBER 31, AMOUNT --------------------------------- -------------- Through 2000................................. $ 228.38 2001......................................... 227.25 Thereafter................................... 225.00
The shares of preferred stock and shares of common stock vote together as a single class on all matters submitted to a vote of shareholders of Goldendale. The holders of shares of preferred stock are entitled to one vote per share and have full voting rights and power equal to those of the holders of common stock. 11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Supplemental disclosures of cash flow information is as follows:
DECEMBER 31, ------------------------------------------- 1997 1998 1999 ----------- ----------- ------------- Cash paid (received) during the period for: Interest................................................. $ 14,346 $ 13,273 $ 21,779 Income taxes............................................. 10,545 2,900 (2,796) Non-cash investing and financing activities: Principal balance of debt refinanced..................... - 124,047 - Acquisition contingency accrual: Goodwill............................................... 2,699 - 2,045 Deferred income taxes.................................. 6,742 - 784 Accrued interest....................................... - - 1,261 Dividends accrued on preferred stock................... 3,648 3,648 3,648
12. RELATED PARTY TRANSACTIONS Sales to a company related by common ownership amounted to $3,613, $6,406, and $5,766 for the years ended December 31, 1997, 1998 and 1999, respectively. Receivable due from the related company includes the balance due from those sales, together with cash advances, of which $4,000 was converted to a note receivable on December 31, 1997. The note bears interest at 9.25% and is payable in quarterly F-19 55 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) installments through January 2002. Purchases from this related company amounted to $1,998 for the year ended December 31, 1999 of which $189 is included in trade accounts payable at December 31, 1999. There were no purchases from this related company in 1997 and 1998. 13. VALUATION AND QUALIFYING ACCOUNTS Allowance for doubtful accounts activity was as follows:
DECEMBER 31, ---------------------------------------- 1997 1998 1999 ---------- ----------- ----------- Balance, beginning of year.............. $ 1,296 $ 1,000 $ 1,000 Charged to expense...................... - 1,500 - Write-offs, net of recoveries........... (296) (1,500) - ---------- ----------- ----------- Balance, end of year.................... $ 1,000 $ 1,000 $ 1,000 ========== =========== ===========
F-20 56 INDEX OF FINANCIAL STATEMENT SCHEDULES NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC. Report of Independent Certified Public Accountants...................... S-2 Combined Balance Sheets................................................. S-3 Combined Statements of Operations....................................... S-4 Combined Statements of Shareholder's Equity............................. S-5 Combined Statements of Cash Flows....................................... S-6 Summary of Significant Accounting Policies.............................. S-7 Notes to Combined Financial Statements ................................. S-10 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY Report of Independent Certified Public Accountants...................... S-15 Consolidated Balance Sheets............................................. S-16 Consolidated Statements of Operations................................... S-17 Consolidated Statements of Shareholders' Equity......................... S-18 Consolidated Statements of Cash Flows................................... S-19 Summary of Significant Accounting Policies.............................. S-20 Notes to Consolidated Financial Statements.............................. S-24
S-1 57 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Northwest Aluminum Company and Northwest Aluminum Specialties, Inc. The Dalles, Oregon We have audited the accompanying combined balance sheets of Northwest Aluminum Company and Northwest Aluminum Specialties, Inc. as of September 30, 1998 and 1999, and the related combined statements of operations, shareholder's equity, and cash flows for each of the three years in the period ended September 30, 1999. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined 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 audits to obtain reasonable assurance about whether the combined 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, the combined financial statements referred to above present fairly, in all material respects, the financial position of Northwest Aluminum Company and Northwest Aluminum Specialties, Inc. as of September 30, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999 in conformity with generally accepted accounting principles. BDO Seidman, LLP Spokane, Washington November 11, 1999 S-2 58 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC. COMBINED BALANCE SHEETS ASSETS (Note 4)
SEPTEMBER 30, ------------------------------------- 1998 1999 -------------- ------------- (in thousands) Current assets: Cash and cash equivalents.............................................. $ 614 $ 194 Trade accounts receivable, less allowance for doubtful accounts of $100............................................................. 35,765 38,313 Current portion of receivable due from related company (Note 10)....... 2,126 2,639 Inventories (Notes 1 and 10)........................................... 35,146 41,267 Prepaid expenses....................................................... 363 500 -------------- ------------- Total current assets........................................................ 74,014 82,913 -------------- ------------- Property, plant and equipment, net (Notes 2 and 4).......................... 38,515 37,802 Advances to shareholder..................................................... 2,000 2,000 Receivable due from related company, less current portion (Note 10) 2,826 1,824 Other assets, net (Note 3).................................................. 1,413 1,572 -------------- ------------- $ 118,768 $ 126,111 ============== ============= LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Trade accounts payable (Note 10)........................................ $ 32,525 $ 33,415 Accrued expenses (Notes 7 and 10)....................................... 5,227 10,310 -------------- -------------- Total current liabilities......................................... 37,752 43,725 Long-term debt due to parent (Note 4)....................................... - 74,248 Long-term debt (Note 4)..................................................... 64,600 - -------------- -------------- Total liabilities................................................. 102,352 117,973 -------------- -------------- Commitments and Contingencies (Notes 5, 6 and 8) Shareholder's Equity: Common stock, no par value; 2,000 shares authorized, 38 issued and outstanding............................................. 38 Additional paid-in capital.............................................. 20,736 20,736 Accumulated deficit..................................................... (4,358) (12,636) -------------- -------------- Total shareholder's equity.................................................. 16,416 8,138 -------------- -------------- $ 118,768 $ 126,111 ============== ==============
S-3 59 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC. COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, ----------------------------------------------- 1997 1998 1999 ------------ ------------ ------------- (IN THOUSANDS) Revenues (Notes 5 and 10)........................................... $ 296,271 $ 294,698 $ 276,258 Cost of revenues (Note 10).......................................... 282,439 282,707 268,125 ------------ ----------- ------------- Gross margin........................................................ 13,832 11,991 8,133 General and administrative expenses................................. 7,814 8,293 6,026 ------------ ----------- ------------- Operating income.................................................... 6,018 3,698 2,107 ------------ ----------- ------------- Other income (expense):............................................. Interest expense (Notes 4 and 10)................................ (6,406) (7,463) (10,269) Other income, net................................................ 755 282 433 ------------ ----------- ------------- Other expense, net.................................................. (5,651) (7,181) (9,836) ------------ ----------- ------------- Net income (loss) before extraordinary item......................... 367 (3,483) (7,729) Extraordinary item-loss on extinguishment of debt (Note 4)....................................................... - - 549 ------------ ------------ ------------- Net income (loss) .................................................. $ 367 $ (3,483) $ (8,278) ============ ============ =============
S-4 60 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC. COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
RETAINED TOTAL COMMON STOCK ADDITIONAL EARNINGS SHARE- ---------------- PAID-IN (ACCUMULATED HOLDER'S SHARES AMOUNT CAPITAL DEFICIT) EQUITY ------ ------ ---------- ----------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) Balance at October 1, 1996 ......... 2,000 $38 $20,736 $ 1,690 $ 22,464 Dividends paid on common stock ..... -- -- -- (2,932) (2,932) Net income ......................... -- -- -- 367 367 ----- --- ------- -------- -------- Balance at September 30, 1997 ...... 2,000 38 20,736 (875) 19,899 Net loss ........................... -- -- -- (3,483) (3,483) ----- --- ------- -------- -------- Balance at September 30, 1998 ...... 2,000 38 20,736 (4,358) 16,416 Net loss ........................... -- -- -- (8,278) (8,278) ----- --- ------- -------- -------- Balance at September 30, 1999 ...... 2,000 $38 $20,736 $(12,636) $ 8,138 ===== === ======= ======== ========
S-5 61 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC. COMBINED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEAR ENDED SEPTEMBER 30, ---------------------------------------- 1997 1998 1999 --------- --------- -------- (IN THOUSANDS) Cash flows from operating activities: Net income (loss) .......................................... $ 367 $ (3,483) $ (8,278) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ............................ 7,188 6,865 7,301 Loss (gain) on disposal of assets ........................ (382) 68 22 Provision for bad debts .................................. -- 1,500 -- Extraordinary loss ....................................... -- -- 549 Change in assets and liabilities: Trade accounts receivable ............................ (14,595) 7,419 (2,548) Inventories .......................................... (9,076) 4,925 (6,121) Prepaid expenses ..................................... (65) (93) (137) Other assets ......................................... 2,280 962 (758) Trade accounts payable ............................... 23,976 (6,990) 890 Accrued expenses ..................................... (938) 446 5,487 --------- --------- -------- Net cash provided by (used in) operating activities ........... 8,755 11,619 (3,593) --------- --------- -------- Cash flows from investing activities: Proceeds from sale of assets ............................... 233 10 -- Acquisition of property, plant and equipment ............... (3,837) (7,655) (6,560) Advances to shareholder .................................... (2,000) -- -- Receivable due from related company ........................ (3,631) (918) 489 --------- --------- -------- Net cash used in investing activities ......................... (9,235) (8,563) (6,071) --------- --------- -------- Cash flows from financing activities: Borrowings under revolving credit facilities ............... 169,438 191,166 31,733 Repayments under revolving credit facilities ............... (165,504) (189,702) (28,624) Principal repayment of term loan facilities ................ (1,875) (4,404) (1,250) Borrowings from parent ..................................... -- -- 9,440 Advances to parent ......................................... -- -- (2,055) Dividends paid ............................................. (2,932) -- -- Loan fees paid ............................................. -- (50) -- --------- --------- -------- Net cash provided by (used in) financing activities ........... (873) (2,990) 9,244 --------- --------- -------- Net increase (decrease) in cash and cash equivalents .......... (1,353) 66 (420) Cash and cash equivalents, beginning of year .................. 1,901 548 614 --------- --------- -------- Cash and cash equivalents, end of year ....................... $ 548 $ 614 $ 194 ========= ========= ========
Supplemental Disclosures of Cash Flow Information (Note 9) S-6 62 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Dollars in Thousands) PRINCIPLES OF COMBINATION, BASIS OF PRESENTATION, AND OPERATIONS The financial statements are presented on a combined basis as Northwest Aluminum Company and Northwest Aluminum Specialties, Inc. (the "Companies") are under common ownership and common management. All intercompany transactions have been eliminated in combination. On December 18, 1998, the sole shareholder of the Companies transferred all of the issued and outstanding shares of common stock of the Companies to Golden Northwest Aluminum, Inc. (GNA), a company also wholly-owned by the shareholder. The operations of the Companies consist primarily of the smelting conversion of alumina to aluminum under a tolling arrangement with an alumina supplier, processing of aluminum into primary products, and the sale of those products within one business segment. The operations are located in the Pacific Northwest on the Columbia River. Approximately 80% of the Companies' labor force is subject to collective bargaining agreements. REVENUE RECOGNITION Revenues for the conversion of alumina and processing of aluminum under tolling arrangements are recognized upon completion of the tolling process. Revenues from the sale of aluminum products are recognized upon shipment. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method, except for certain supply inventories that are based upon the weighted average cost method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. For financial reporting purposes, the costs of plant and equipment are depreciated over the estimated useful lives of the assets, which range from five to twenty-five years, using the straight-line method. ASSET IMPAIRMENT The Companies evaluate their long-lived assets for financial impairment and continue to evaluate them as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. The Companies evaluate the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. S-7 63 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Dollars in Thousands) INTEREST COSTS The Companies follow the policy of capitalizing interest as a component of the cost of property, plant and equipment constructed for its own use. Interest costs of $0, $147 and $76 were capitalized during the years ended September 30, 1997, 1998 and 1999. INCOME TAXES The Companies have elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Companies do not pay federal or state corporate income taxes on their taxable income. Instead, the shareholder is liable for individual federal and state income taxes on the Companies' taxable income. It is the Companies' intention to pay dividends to the shareholder in an amount no less than the sum of these federal and state income taxes. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions 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. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Companies to a concentration of credit risk consist of cash and cash equivalents and trade accounts receivable. The Companies place their cash and cash equivalents with various high quality financial institutions; these deposits may exceed federally insured limits at various times throughout the year. The Companies sell their products to various customers involved in the manufacturing of aluminum products located throughout the United States. Credit risk arising from these receivables is controlled through credit approval, credit limit and monitoring procedures. Receivables due from the Companies' primary tolling customer comprised 18% and 17% of the Companies' total trade accounts receivable at September 30, 1998 and 1999, respectively. FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS The fair values of financial instruments have been determined through information obtained from quoted market sources and management estimates. It is management's belief that financial instruments held by the Companies approximate fair market value. The Companies do not hold or issue financial instruments or derivative financial instruments for trading purposes. S-8 64 NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Dollars in Thousands) RESEARCH AND DEVELOPMENT COSTS Expenditures associated with research and development for existing product process improvements are expensed as incurred. These costs amounted to $85, $71 and $111 during the years ended September 30, 1997, 1998 and 1999, respectively. CASH AND CASH EQUIVALENTS For purposes of balance sheet classification and the statements of cash flows, the Companies consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. ENVIRONMENTAL MATTERS The Companies expense environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Companies record a liability for an environmental matter when it is probable and can be reasonably estimated. DEBT ISSUE COSTS Costs and fees incurred to obtain financing are capitalized and amortized over the term of the related debt. EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized as income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Companies are currently analyzing the financial impact (if any) the adoption of SFAS No. 133 will have on their combined financial statements. S-9 65 NORTHWEST ALUMINUM COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. INVENTORIES Inventories consist of the following:
1998 1999 ------- ------- Purchased metals and tolling in process $27,343 $33,633 Supplies and alloys 4,943 5,795 Carbon plant materials 2,470 1,449 Alumina 390 390 ------- ------- $35,146 $41,267 ======= =======
2. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
1998 1999 ------- ------- Land and improvements $ 2,974 $ 2,974 Machinery and equipment 54,331 57,760 Buildings and improvements 21,180 21,273 Capital projects in process 3,286 4,241 ------- ------- 81,771 86,248 Less accumulated depreciation 43,256 48,446 ------- ------- Property, plant and equipment, net $38,515 $37,802 ======= =======
3. OTHER ASSETS Other assets consist of the following:
1998 1999 ------ ------ Long-term trade receivable, less allowance for doubtful account of $900 $ 814 $1,572 Debt issue costs (net of accumulated amortization of $520) 599 -- ------ ------ $1,413 $1,572 ====== ======
S-10 66 NORTHWEST ALUMINUM COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 4. LONG-TERM DEBT Long-term debt consists of the following:
1998 1999 ------- ------- Revolving Credit Facility $47,129 $ -- Term Loan 17,471 -- ------- ------- Long-term debt 64,600 -- Less current portion -- -- ------- ------- Long-term debt less current portion $64,600 $ -- ======= =======
Amounts outstanding at September 30, 1998 under the Revolving Credit Facility and Term Loan were repaid in December 1998 with the proceeds from the first mortgage notes discussed below. In connection with the extinguishment of its existing debt, the Companies recognized an extraordinary loss of $549 in fiscal 1999. On December 21, 1998, GNA issued $150 million of 12% first mortgage notes due on December 15, 2006. Interest is payable semi-annually on June 15 and December 15, commencing June 15, 1999. Payment of the notes is guaranteed by the Companies and by other subsidiaries of GNA. The debt is collateralized by substantially all of the real property, plant and equipment of the Companies and by a pledge of all of the issued and outstanding capital stock of GNA. On or after December 15, 2002 the notes are redeemable at the option of GNA at specified redemption prices. There are no sinking fund requirements. The net proceeds from the sale of the notes were used to repay all amounts then outstanding under the Companies' then existing credit facility and term loan, to fund capital expenditures and for working capital and other general corporate purposes. The indenture agreement limits principal payments on subordinated debt, dividends or shareholder distributions, and investments in subsidiaries. On December 21, 1998, the Companies, together with GNA and its subsidiaries, entered into a $75 million bank revolving credit facility, collateralized by inventory, accounts receivable and related intangibles, including a security interest in Northwest Aluminum Company's tolling agreement with Glencore, which matures on December 31, 1999 (see Note 5). Borrowings under the credit facility bear interest at a floating base rate specified in the credit agreement plus 0.50% to 1.00% (9.25% at December 31, 1999) or LIBOR plus 2.00% to 2.50%, depending on the consolidated ratio of earnings before interest, income taxes (8.75% at December, 1999), depreciation and amortization to interest expense. The credit facility provides for the payment of a commitment fee of 0.50% per annum based on the unused portion of the credit facility. The credit agreement contains restrictive covenants, including a minimum net worth requirement, a minimum excess availability requirement and limitations on capital expenditures, dividends, additional indebtedness, mergers and other business combinations, asset sales, encumbrances, investments and transactions with affiliates. Also on December 21, 1998, GNA entered into a subordinated credit agreement for $20 million. The debt bears interest at LIBOR plus two percent (7.104% at September 30, 1999) and is due in December 2005. The debt is secured by a second lien and pledge on the collateral securing the first mortgage notes S-11 67 NORTHWEST ALUMINUM COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in Thousands) and is guaranteed by the Companies and by other subsidiaries of GNA. Except for the collateral security, the guarantees by the Companies are subordinate to the indebtedness under the bank revolving credit facility. The credit agreement provides for additional borrowings of $10 million on or prior to December 31, 2001. The long-term debt due to parent represents the Companies' allocable share of the proceeds from the first mortgage notes and is repayable to GNA under the same terms and conditions as the first mortgage notes described above. 5. ALUMINA SUPPLY Northwest Aluminum Company has an agreement with Glencore, Ltd. (Glencore), which continues through December 31, 1999, for the conversion of alumina to aluminum for a tolling charge under which the entire production capacity of the smelting facility is dedicated to the tolling of its supplier's alumina. The supplier is obligated to supply, without charge, alumina to meet the requirements for full operation. The tolling fee set forth in the contract is a percentage of the price of aluminum quoted on the London Metal Exchange. This tolling customer accounted for 30%, 30% and 27% of the Companies combined revenues in fiscal 1997, 1998 and 1999, respectively. On October 15, 1999, Northwest Aluminum Company entered into a 5-year agreement to purchase alumina from a supplier at a cost based on a percentage of the price of aluminum quoted on the London Metal Exchange. 6. EMPLOYEE BENEFIT PLANS PROFIT SHARING BONUS PLAN The Companies have entered into a contractual agreement, which continues through 2001, with the United Steelworkers of America, AFL-CIO, to pay annually as additional compensation 20% of the combined net income of the Companies, as adjusted in accordance with the agreement. The Companies total additional compensation bonuses under this agreement amounted to approximately $1,300, $829 and $298 in fiscal 1997, 1998 and 1999, respectively. RETIREMENT BENEFIT PLAN The Companies have also established a defined contribution 401(k) profit sharing plan (the "401(k) Plan") covering substantially all employees under which employees may elect to defer pay subject to statutory limits. The Companies are committed to contribute the greater of $.25 per eligible hour worked or 5% of the combined adjusted net income of the Companies. The Companies may also make discretionary contributions to the 401(k) Plan. Total required and discretionary contributions by the Companies to the 401(k) Plan amounted approximately to $560, $341 and $304 in fiscal 1997, 1998 and 1999, respectively. S-12 68 NORTHWEST ALUMINUM COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in Thousands) 7. ACCRUED EXPENSES Accrued expenses consist of the following:
1998 1999 ------- ------- Profit sharing and bonuses $ 1,351 $ 620 Salaries and related expenses 1,346 1,200 Interest (Note 10) 709 8,293 Other 1,821 197 ------- ------- $ 5,227 $10,310 ======= =======
8. COMMITMENTS AND CONTINGENCIES The Internal Revenue Service ("IRS") has audited the Companies' income tax returns and has proposed to change the Companies' method of accounting for certain expenditures that were deducted when incurred. The IRS has proposed to capitalize and depreciate these expenditures over an estimated useful life. The Companies have reached an agreement with the IRS to capitalize certain expenditures. The sole shareholder of the Companies will incur additional taxes and interest associated with this agreement. The Companies intend to declare and make a dividend distribution of approximately $1.9 million to reimburse the shareholder for such amounts. The Companies have agreed to be contingently liable for debts of a customer amounting to $1,336 at September 30, 1999. The Companies, in the regular course of business, are involved in investigations and claims by various regulatory agencies. The Companies are engaged in various legal proceedings incidental to its normal business activities. The Companies management does not believe that the ultimate resolution of these investigations, claims and legal proceedings will have a material effect on its financial position, results of operations or cash flows. The Companies have entered into various agreements for the purchase of power, alumina, and aluminum. Future estimated minimum payments under these non-cancelable agreements are as follows:
Year ending September 30, Amount ------------------------- ------ 2000 $ 44,056 2001 46,533 2002 31,429 2003 31,429 2004 31,429 2005 7,857 --------- $ 192,733 =========
S-13 69 NORTHWEST ALUMINUM COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in Thousands) 9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Supplemental disclosures of cash flow information is as follows
Year ended September 30, ----------------------------------------------- 1997 1998 1999 ------------ ------------ ------- Cash paid during the year for: Interest $ 6,536 $ 6,904 $ 2,670 ============ ============ ======= Non-cash investing and financing activities: Repayments of revolving credit facilities with new debt $ -- $ -- $50,238 Repayment of term loan facilities with new debt $ -- $ -- $16,221
10. RELATED PARTY TRANSACTIONS GNA, the parent of the Company, allocates substantially all of its costs to its subsidiaries based on the ratio of each subsidiary's borrowings to the total borrowings by all subsidiaries. For the year ended September 30, 1999, the Company incurred $8,308 and $485 in interest charges and other expenses, respectively, charged by GNA. Accrued expenses include $8,293 of interest payable to GNA at September 30, 1999. Sales to a company related by common ownership amounted to $3,613, $6,406 and $5,766 for the years ended September 30, 1997, 1998 and 1999, respectively. The receivable due from related company includes the balance due from those sales, together with cash advances, of which $4,000 was converted to a note receivable on December 31, 1997. The note bears interest at 9.25% and is payable in quarterly installments through January 2002. Purchases from this related company amounted to $1,998 for the year ended September 30, 1999 of which $189 is included in trade accounts payable at September 30, 1999. Sales to another company related by common ownership amounted to $348, $294 and $330, for the years ended September 30, 1997, 1998 and 1999, respectively. Purchases from this related company amounted to $1,041, $1,181 and $1,573 for the years ended September 30, 1997, 1998 and 1999, respectively. Trade accounts payable includes balances due this company amounting to $10 and $900 at September 30, 1998 and 1999, respectively. S-14 70 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Goldendale Holding Company and Subsidiary Goldendale, Washington We have audited the accompanying consolidated balance sheets of Goldendale Holding Company and Subsidiary as of December 31, 1998 and 1999 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 audits to obtain reasonable assurance about whether the consolidated 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Goldendale Holding Company and Subsidiary as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. BDO Seidman, LLP Spokane, Washington March 10, 2000 S-15 71 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS (Note 4)
DECEMBER 31, ------------------------- 1998 1999 --------- -------- (IN THOUSANDS) CURRENT ASSETS: Cash and cash equivalents ...................................................... $ 342 $ 244 Trade accounts receivable, net ................................................. 12,490 17,707 Inventories (Note 1) ........................................................... 19,937 24,351 Prepaid expenses ............................................................... 423 166 Income taxes refundable (Note 9) ............................................... -- 3,121 -------- -------- Total current assets .................................................. 33,192 45,589 -------- -------- Property, plant and equipment, net (Note 2) ......................................... 79,240 95,075 Goodwill, net of accumulated amortization of $9,494 and $14,241 (Note 9) ................................................. 88,140 81,348 Other assets, net (Note 3) .......................................................... 2,105 2,387 -------- -------- $202,677 $224,399 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Current portion of long-term debt due to parent (Note 4) ....................... $ -- $ 2,261 Trade accounts payable ......................................................... 7,819 13,184 Accrued expenses (Note 7) ...................................................... 14,335 13,277 Accrued expenses due to parent ................................................. -- 7,359 Income taxes payable (Note 9) .................................................. 2,197 -- Deferred income taxes (Note 9) ................................................. 1,670 1,583 -------- -------- Total current liabilities ............................................. 26,021 37,664 -------- -------- Long-term debt due to parent (Note 4) .......................................... 61,719 78,327 Deferred income taxes (Note 9) ................................................. 9,965 13,644 Deferred compensation notes payable (Note 6) ................................... 1,734 662 Other long-term liabilities (Note 8) ........................................... 1,741 1,825 Dividends payable (Note 10) .................................................... 9,515 13,163 -------- -------- Total liabilities ..................................................... 110,695 145,285 -------- -------- Commitments and Contingencies (Notes 5, 6, 8 and 9) Shareholders' Equity (Note 10): Preferred stock, cumulative, nonconvertible, $.01 par value; 150,000 shares authorized, 131,836.10 issued and outstanding 29,663 29,663 Common stock, $.01 par value, 350,000 shares authorized, 197,688.82 issued and outstanding ............................................ 2 2 Additional paid-in capital ..................................................... 44,478 44,478 Retained earnings .............................................................. 17,839 4,971 -------- -------- Total shareholders' equity .......................................................... 91,982 79,114 -------- -------- $202,677 $224,399 ======== ========
See accompanying summary of significant accounting policies and notes to consolidated financial statements. S-16 72 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 1998 1999 --------- --------- --------- (IN THOUSANDS) Revenues (Notes 5 and 12) ................................... $ 201,601 $ 177,456 $ 168,683 Cost of revenues ............................................ 154,072 159,329 163,290 --------- --------- --------- Gross margin ................................................ 47,529 18,127 5,393 General and administrative expenses ......................... 9,301 9,776 10,504 --------- --------- --------- Operating income (loss) ..................................... 38,228 8,351 (5,111) --------- --------- --------- Other income (expense): Interest expense (Note 12) ............................... (10,317) (6,386) (8,938) Other income, net ........................................ 3,653 1,886 1,084 --------- --------- --------- Net other expense ........................................... (6,664) (4,500) (7,854) --------- --------- --------- Income (loss) before income taxes ........................... 31,564 3,851 (12,965) Income tax expense (benefit) (Note 9) ....................... 13,274 3,009 (3,745) --------- --------- --------- Income (loss) before extraordinary item ..................... 18,290 842 (9,220) Extraordinary item - loss on extinguishment of debt (net of income tax benefit of $513) (Note 4) ................................................... -- (953) -- --------- --------- --------- Net income (loss) ........................................... $ 18,290 $ (111) $ (9,220) ========= ========= =========
See accompanying summary of significant accounting policies and notes to consolidated financial statements. S-17 73 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED COMMON STOCK STOCK ADDITIONAL ------------------------- --------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL (IN THOUSANDS, EXCEPT SHARE DATA) Balance at January 1, 1998 .............. 131,836.1 $ 29,663 197,688.82 $ 2 $ 44,478 Dividends accrued on preferred stock .... -- -- -- -- -- Net loss ................................ -- -- -- -- -- ----------- -------- ----------- -------- -------- Balance at December 31, 1998 ............ 131,836.1 29,663 197,688.82 2 44,478 Dividends accrued on preferred stock .... -- -- -- -- -- Net loss ................................ -- -- -- -- -- ----------- -------- ----------- -------- -------- Balance at December 31, 1999 ............ 131,836.1 $ 29,663 $197,688.82 $ 2 $ 44,478 =========== ======== =========== ======== ========
TOTAL SHARE- RETAINED HOLDERS' EARNINGS EQUITY Balance at January 1, 1998 .............. $ 21,598 $ 95,741 Dividends accrued on preferred stock .... (3,648) (3,648) Net loss ................................ (111) (111) -------- -------- Balance at December 31, 1998 ............ 17,839 91,982 Dividends accrued on preferred stock .... (3,648) (3,648) Net loss ................................ (9,220) (9,220) -------- -------- Balance at December 31, 1999 ............ $ 4,971 $ 79,114 ======== ========
S-18 74 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEAR ENDED DECEMBER 31, 1997 1998 1999 --------- --------- --------- (IN THOUSANDS) Cash flows from operating activities: Net income (loss) .................................... $ 18,290 $ (111) $ (9,220) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ...................... 11,877 13,448 15,197 Loss (gain) on disposal of assets .................. (2,218) (106) 175 Extraordinary loss ................................. -- 1,466 -- Deferred income taxes .............................. 1,394 487 4,376 Change in assets and liabilities: Trade accounts receivable ...................... 13,223 5,588 (5,217) Inventories .................................... (427) 884 (4,414) Prepaid expenses ............................... 215 (166) 257 Other assets ................................... 570 (285) (282) Trade accounts payable ......................... (1,062) (579) 5,365 Accrued expenses ............................... 7,278 (2,803) 203 Income taxes refundable ........................ (843) (955) (5,318) Other liabilities .............................. (802) 85 84 --------- --------- --------- Net cash provided by operating activities ............... 47,495 16,953 1,206 --------- --------- --------- Cash flows from investing activities: Proceeds from sale of assets ......................... 12,588 1,200 -- Acquisition of property, plant and equipment ......... (10,444) (11,140) (26,460) --------- --------- --------- Net cash provided by (used in) investing activities ..... 2,144 (9,940) (26,460) --------- --------- --------- Cash flows from financing activities: Borrowings under revolving credit facility ........... 149,781 107,747 -- Repayments under revolving credit facility ........... (161,289) (110,060) -- Principal repayments of term loan .................... (41,051) (7,500) -- Net borrowings from parent ........................... -- 4,131 26,228 Principal payments on deferred compensation notes .... (813) (1,662) (1,072) --------- --------- --------- Net cash provided by (used in) financing activities ..... (53,372) (7,344) 25,156 --------- --------- --------- Net decrease in cash and cash equivalents ............... (3,733) (331) (98) Cash and cash equivalents, beginning of year ............ 4,406 673 342 --------- --------- --------- Cash and cash equivalents, end of year ................. $ 673 $ 342 $ 244 ========= ========= =========
Supplemental Disclosures of Cash Flow Information (Note 11) See accompanying summary of significant accounting policies and notes to consolidated financial statements. S-19 75 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS) OPERATIONS, PRINCIPLES OF COMBINATION AND BASIS OF PRESENTATION The operations of the Company consist primarily of the smelting conversion of alumina to aluminum under a tolling arrangement with an alumina supplier. In addition, the Company operates an alumina unloading facility. The Company operates within one business segment. The operations are located in the Pacific Northwest on the Columbia River. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Goldendale Aluminum Company. All significant intercompany accounts and transactions have been eliminated in consolidation. Approximately 82% of the Companies' labor force is subject to collective bargaining agreements. REVENUE RECOGNITION Revenues for the conversion of alumina and processing of aluminum under tolling arrangements are recognized upon completion of the tolling process. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the weighted average cost method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. For financial reporting purposes, the costs of plant and equipment are depreciated over the estimated useful lives of the assets, which range from three to thirty years, using the straight-line method. GOODWILL Goodwill represents the excess of the purchase price over the fair value of net assets acquired and is being amortized on a straight-line basis over twenty years. The Company periodically evaluates the recoverability of goodwill. The measurement of possible impairment is based primarily on the Company's ability to recover the unamortized balance of the goodwill from expected future operating cash flows on an undiscounted basis. ASSET IMPAIRMENT The Company evaluates its long-lived assets for financial impairment, and continues to evaluate them as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. The Company evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. S-20 76 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS) INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 uses the liability method so that deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws and tax rates. Deferred income tax expense or benefit is based on the changes in the financial statement bases versus the tax bases in assets or liabilities from period to period. 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. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and trade accounts receivable. The Company places its cash and cash equivalents with various high quality financial institutions; these deposits may exceed federally insured limits at various times throughout the year. Receivables due from the Company's primary tolling customer comprised 96% and 98% of the Company's total trade accounts receivable at December 31, 1998 and 1999, respectively. FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS The fair values of financial instruments have been determined through information obtained from quoted market sources and management estimates. It is management's belief that financial instruments held by the Company approximate fair market value. The Company does not hold or issue financial instruments or derivative financial instruments for trading purposes. The Company has entered into an interest rate swap agreement for purposes of minimizing exposure to interest rate risk. The differential between the floating interest rate and the fixed interest rate which is to be paid or received is recognized in interest expense as the floating interest rate changes over the life of the agreement. S-21 77 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS) RESEARCH AND DEVELOPMENT COSTS Expenditures associated with research and development for existing product process improvements are expensed as incurred. These costs amounted to $297, $789 and $1,516 during the periods ended December 31, 1997, 1998 and 1999, respectively. Depreciation on equipment used for research and development amounted to $0, $0 and $47 during the years ended December 31, 1997, 1998 and 1999. CASH AND CASH EQUIVALENTS For purposes of balance sheet classification and the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. ENVIRONMENTAL MATTERS The Company expenses environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures which extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company records a liability for an environmental matter when it is probable and can be reasonably estimated. The Company's estimated liability is reduced to reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs. The estimated liability of the Company is not discounted or reduced for possible recoveries from insurance carriers. DEBT ISSUE COSTS Costs and fees incurred to obtain financing are capitalized and amortized over the term of the related debt. RECLASSIFICATIONS Certain reclassifications of 1997 and 1998 amounts have been made to conform to classifications used in 1999. EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is S-22 78 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY SUMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS) recognized as income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company is currently analyzing the financial impact (if any) the adoption of SFAS No. 133 will have on its consolidated financial statements. S-23 79 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. INVENTORIES Inventories consist of the following:
DECEMBER 31, -------------------- 1998 1999 ------- ------- Tolling in process ............. $ 451 $ 3,451 Supplies and alloys ............ 7,615 7,824 Electrolyte materials .......... 5,253 5,796 Carbon plant materials ......... 3,323 3,965 Alumina ........................ 3,295 3,315 ------- ------- $19,937 $24,351 ======= =======
2. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31, ---------------------- 1998 1999 -------- -------- Land and improvements .................. $ 4,404 $ 5,445 Machinery and equipment ................ 70,450 91,092 Buildings and improvements ............. 17,118 18,844 Capital projects in process ............ 5,149 7,892 -------- -------- 97,121 123,273 Less accumulated depreciation .......... 17,881 28,198 -------- -------- $ 79,240 $ 95,075 ======== ========
During 1998, in connection with the preparation of financial statements to be used by its parent company in a registration of debt securities, the Company changed its method of accounting for cell reline costs from expensing such costs as incurred to deferring and amortizing these costs over future periods. The Company believes that the new method is preferable since it improves the matching of revenues and costs as technological improvements have extended the estimated period of economic benefit realized from cell relining. The change has been applied by retroactively restating the accompanying consolidated financial statements. The effect of this change was to increase net income by $3,339 for the year ended December 31, 1997 and decrease net loss by $2,829 for the year ended December 31, 1998. S-24 80 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 3. OTHER ASSETS Other assets consist of the following:
DECEMBER 31, ------------------ 1998 1999 ------ ------ Restricted cash ............................ $1,300 $1,844 Power project assets held for sale ......... 543 543 Other ...................................... 262 -- ------ ------ $2,105 $2,387 ====== ======
Restricted cash consists of cash held in trust and committed for environmental cleanup and workers compensation self-insurance as required by the State of Washington. These monies will be disbursed at a future date as required by the state. 4. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, -------------------- 1998 1999 ------- ------- Long-term debt due to parent ................ $61,719 $80,588 Less current portion ........................ -- 2,261 ------- ------- Long-term debt less current portion ......... $61,719 $78,327 ======= =======
On December 18, 1998, the sole shareholder of the Company transferred all of the issued and outstanding shares of common stock of the Company to Golden Northwest Aluminum, Inc. (GNA), a company also wholly-owned by the shareholder. On December 21, 1998, GNA issued $150 million of 12% first mortgage notes due on December 15, 2006. Interest is payable semi-annually on June 15 and December 15, commencing June 15, 1999. Payment of the notes is guaranteed by the Company and by other subsidiaries of GNA. The debt is collateralized by substantially all of the real property, plant and equipment of the Company and by a pledge of all of the issued and outstanding capital stock of GNA. On or after December 15, 2002 the notes are redeemable at the option of GNA at specified redemption prices. There are no sinking fund requirements. The net proceeds from the sale of the notes were used to repay all amounts then outstanding under the Company's existing credit facility and term loans, to fund capital expenditures and for working capital and other general corporate purposes. In connection with the extinguishment of its existing debt, the Company recognized an extraordinary loss, net of income taxes, of $953 in 1998. The indenture agreement limits principal payments on subordinated debt, dividends or shareholder distributions, and investments in subsidiaries. On December 21, 1998, the Company, together with GNA and its subsidiaries, entered into a $75 million bank revolving credit facility which matures on December 20, 2003 and is collateralized by S-25 81 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) inventory, accounts receivable and related intangibles, including a security interest in the Company's tolling agreement with Hydro. As specified in the credit agreement, borrowings under the credit facility bear interest at a floating base rate plus from 0.50% to 1.00% (9.25% at December 31, 1999) or LIBOR plus from 2.00% to 2.50%, (8.75% at December 31, 1999) depending on the consolidated ratio of earnings before interest, income taxes, depreciation and amortization to interest expense. The credit facility provides for the payment of a commitment fee of 0.50% per annum based on the unused portion of the credit facility. The credit agreement contains restrictive covenants, including a minimum net worth requirement, a minimum excess availability requirement and limitations on capital expenditures, dividends, additional indebtedness, mergers and other business combinations, assets sales, encumbrances, investments and transactions with affiliates. Also on December 21, 1998, GNA entered into a subordinated credit agreement for $20 million. The debt bears interest at LIBOR plus two percent (7.88% at December 31, 1999) and is due in December 2005. The debt is secured by a second lien and pledge on the collateral securing the first mortgage notes and is guaranteed by the Company. Except for the collateral security, the guarantees by the Company are subordinate to the indebtedness under the bank revolving credit facility. The credit agreement provides for additional borrowings of $10 million on or prior to December 31, 2001. The long-term debt due to parent represents the Company's allocable share of the proceeds from the first mortgage notes, a portion of the proceeds from the subordinated credit agreement and the Company's net borrowings from the $75 million bank revolving credit facility. This debt is repayable to GNA under the same terms and conditions as the first mortgage notes, the subordinated credit agreement and the bank revolving credit facility described above. On January 25, 1999 the Company terminated at no cost its existing interest rate swap agreement and entered into a new swap agreement that expires in 2003. The fixed interest rate paid on the new swap is 6.4% and covers $20 million of notional principal amount of floating rate (LIBOR) indebtedness of the Company. The fixed interest rate paid on the old interest rate swap was 6.83%, covering, at December 31, 1998, $40 million notional principal amount of floating rate (Eurodollar) indebtedness. Although the Company is exposed to credit loss on the interest rate swap in the event of nonperformance by the counterparties, the Company estimates the likelihood of such nonperformance to be remote. At December 31, 1999 and 1998, the fair value of the interest rate swaps was approximately $92 and $761, respectively, which reflects the estimated amount that the Company would pay to terminate the contracts. 5. ALUMINA TOLLING CONVERSION AGREEMENT The Company has an agreement with an alumina supplier for the conversion of alumina to aluminum for a tolling charge under which the entire production capacity of the smelting facilities is dedicated to the tolling of the supplier's alumina. The supplier is obligated to supply, without charge, alumina sufficient to meet the requirements for full operation. The tolling fees set forth in the contract are a percentage of the price of aluminum quoted on the London Metal Exchange. The agreement continues through December 31, 2006. This tolling customer accounted for 99% of the Company's consolidated revenue in 1997, 1998 and 1999. S-26 82 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 6. EMPLOYEE BENEFIT PLANS Profit Sharing Bonus Plan The Company has a profit sharing plan for its hourly and salaried employees. All employees are eligible participants in this plan upon completion of a probationary period. The plan provides for payments equal to a percentage of profits, as defined. Allocation of the payments is based upon hours worked. These amounts are to be distributed to eligible participants on or before March 31 following the Company's year-end. For the years ended December 31, 1997, 1998 and 1999, the Company recorded approximately $1,900, $380 and $0, respectively, of expense related to this plan. Retirement Benefit Plans The Company has a 401(k) profit sharing plan under which employees may elect to defer pay, subject to statutory limits; the Company also makes matching contributions for nonbargaining on the basis of percentages specified in the plan and discretionary contributions as determined on an annual basis. The Company also maintained a separate profit sharing retirement plan (the "DC Plan") which provided retirement benefits for substantially all of its employees. Goldendale is committed to contribute the greater of 5% of net income or $.25 per eligible hour worked. During 1999, the separate profit sharing retirement plan was merged into the 401(k) profit sharing plan. For the years ended December 31, 1997, 1998 and 1999, the Company recorded approximately $730, $290 and $514 of expense for plan contributions. Deferred Compensation Notes Payable In connection with the acquisition of the Company in 1996, the Company entered into deferred compensation agreements with certain employees in exchange for the employees waiving their rights under stock-based compensation and other employment agreements which existed at the acquisition date. The notes are payable in monthly installments of approximately $115, including interest at 8.75%, through 2001. S-27 83 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 7. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, -------------------- 1998 1999 ------- ------- Bonuses and employee benefits .......... $ 3,672 $ 3,655 Salaries and related expenses .......... 2,436 2,756 Interest payable ....................... 4,211 1,651 Other .................................. 4,016 5,215 ------- ------- $14,335 $13,277 ======= =======
8. COMMITMENTS AND CONTINGENCIES The Company, in the regular course of business, is involved in investigations and claims by various regulatory agencies. The Company is engaged in various legal proceedings incidental to its normal business activities. The Company's management does not believe that the ultimate resolution of these investigations, claims and legal proceedings will have a material effect on its financial position, results of operations or cash flows. During 1999, the Company contracted for the design and construction of a bath reclaim facility. In connection therewith, a dispute has arisen over contract change orders to an engineering and construction contract. The Company has proposed a settlement in the amount of $411, which has been accrued in the financial statements for 1999. If the settlement offer is not accepted, the ultimate cost to the Company may exceed this accrual. As of December 31, 1998 and 1999, the Company had a liability of approximately $1,741 and $1,825, respectively, for estimated environmental remediation activities. The Company's estimate of this liability is based on a remediation study conducted by independent engineering consultants. The total cost of remediation is estimated at $3 million; however, under a court decree the Company is only responsible for approximately one-half of the total. The remaining cost is the responsibility of prior owners. The Company has entered into various agreements for the purchase of power and aluminum. Future estimated minimum payments under these noncancelable agreements are as follows:
YEAR ENDING DECEMBER 31, AMOUNT ------------------------ -------- 2000 .................................. $39,934 2001 .................................. 43,676 ------- $83,610 =======
S-28 84 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 9. INCOME TAXES Income tax expense (benefit) consists of the following:
YEAR ENDING DECEMBER 31, --------------------------------- 1997 1998 1999 ------- ------- ------- Current .................... $10,204 $ 2,009 $(7,338) Deferred ................... 3,070 487 3,593 ------- ------- ------- Income tax expense ......... $13,274 $ 2,496 $(3,745) ======= ======= =======
The difference between the federal statutory tax rate and the effective tax rate resulted from the following:
YEAR ENDING DECEMBER 31, -------------------------------- 1997 1998 1999 ------ ------ ------ Federal statutory tax rate ........ 35.0% 35.0% (35.0)% Amortization of goodwill .......... 5.3 69.6 12.8 IRS audit settlement .............. -- -- (8.7) Other items, net .................. 1.8 .1 2.0 ------ ------ ------ Effective tax rate ................ 42.1% 104.7% (28.9)% ====== ====== ======
Significant components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, ----------------------- 1998 1999 -------- -------- Current: Accrued expenses $ (1,811) $ (1,805) Inventory 140 55 Other 1 167 -------- -------- $ (1,670) $ (1,583) ======== ======== Noncurrent: Property, plant and equipment $(13,507) $(16,286) Power project assets 404 404 Deferred compensation notes 607 231 Other 2,531 2,007 -------- -------- $ (9,965) $(13,644) ======== ========
The Internal Revenue Service ("IRS") has audited the Company's income tax returns and has proposed to change the Company's method of accounting for certain expenditures that were deducted S-29 85 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) when incurred. The IRS has proposed to capitalize and depreciate these expenditures over an estimated useful life. The Company had previously recorded a liability associated with the proposed change in accounting method that is effective for all tax years subsequent to 1989, of approximately $11.5 million, which included interest of $4 million. In December 1999, the Company reached a settlement with the IRS. As a result of the settlement, goodwill and interest expense were reduced by approximately $2 million and $1 million, respectively, during 1999. Income taxes refundable include refund claims for net operating loss carrybacks arising in the current year and claims arising in earlier years amounting to approximately $9 million, offset by taxes payable as a result of the IRS settlement and state income taxes of approximately $6 million. The cash refund from the IRS will be reduced by accrued interest of $1.6 million. 10. SHAREHOLDERS' EQUITY Terms of the Company's preferred stock provide for dividends accruing quarterly and payable in cash as declared by the Board of Directors according to the following schedule:
YEAR ENDING DECEMBER 31, AMOUNT ------------------------ ------------ Through 2001 ............................. $27.68/share 2002 ............................. 29.93/share 2003 ............................. 32.18/share Thereafter ............................... 34.43/share
Commencing on January 1, 2002, the preferred shareholders have the option of receiving additional shares of preferred stock in satisfaction of any cumulative dividend in arrears that may exist at that time. The Company may redeem any or all outstanding shares of Series A Preferred Stock at the following redemption prices at any time after December 31, 1999:
YEAR ENDING DECEMBER 31, AMOUNT ------------------------ -------- Through 2000 ............................. $ 228.38 2001 ............................. 227.25 Thereafter ............................... 225.00
The shares of preferred stock and shares of common stock vote together as a single class on all matters submitted to a vote of the shareholders of the Company. The holders of shares of preferred stock are entitled to one vote per share and have full voting rights and power equal to those of the holders of common stock. S-30 86 GOLDENDALE HOLDING COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Supplemental disclosures of cash flow information is as follows:
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1998 1999 ------- ------- ------- Cash paid (received) during the period for: Interest ......................................... $ 7,810 $ 6,369 $ 3,345 Income taxes ..................................... 10,545 2,900 (2,796) Non-cash investing and financing activities: Debt refinanced with borrowings from parent ...... -- 57,588 -- Dividends accrued on preferred stock ............. 3,648 3,648 3,648 Acquisition contingency accrual: Goodwill ..................................... 2,699 -- 2,045 Deferred income taxes ........................ 6,742 -- 784 Accrued interest ............................. -- -- 1,261
12. RELATED PARTY TRANSACTIONS GNA, the parent of the Company, allocates substantially all of its costs to its subsidiaries based on the ratio of each subsidiary's borrowings to the total borrowings by all subsidiaries. For the year ended December 31, 1999, the Company incurred $9,978 in interest charges and other expenses charged by GNA. Sales to a company related by common ownership amounted to $1,069, $1,102 and $1,750 for the years ended December 31, 1997, 1998 and 1999, respectively. Purchases from this company amounted to $336, $202 and $561 for the years ended December 31, 1997, 1998 and 1999, respectively. S-31 87 EXHIBIT INDEX
Exhibit Number ------ 3.1 Articles of Incorporation of Registrant. Incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 3.2 Bylaws of Registrant. Incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 4.1 Indenture, dated as of December 21, 1998, between Registrant, as Issuer, Northwest Aluminum Specialties, Inc., Northwest Aluminum Company, Northwest Aluminum Technologies, LLC, Goldendale Holding Company, and Goldendale Aluminum Company, as Guarantors, and U.S. Trust Company, N.A., as Trustee. Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 4.2 Credit Agreement, dated December 21, 1998, among the Financial Institutions named therein, BancBoston, N.A., as Administrative Agent, U.S. Bank National Association, as Documentation Agent, Northwest Aluminum Company, Northwest Aluminum Specialties, Inc., Goldendale Aluminum Company, and Northwest Aluminum Technologies, as amended by the Agreement and Amendment No. 1, dated as of January 21, 1999. Incorporated by reference to Exhibit 4.2 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 4.3 Registration Rights Agreement, dated as of December 21, 1998, by and among the Registrant, the Subsidiary Guarantors party to this Agreement; and BancBoston Robertson Stephens Inc., and Libra Investments, Inc. Incorporated by reference to Exhibit 4.3 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 4.4 Certificate of Incorporation of Goldendale Holding Company. Incorporated by reference to Exhibit 4.4 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.1 Agreement to Toll Convert Alumina into Aluminum, dated May 22, 1996, between Hydro Aluminum Louisville, Inc., and Goldendale Aluminum Company. Incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). (Confidential treatment of portions of this document has been granted by order of the Commission. The information omitted from this exhibit has been filed with the Commission.) 10.2 First Amendment to Agreement to Toll Convert Alumina into Aluminum, dated December 21, 1998. Incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.3 Tax Indemnification Agreement, dated as of December 21, 1998, between Registrant, Northwest Aluminum Company, Northwest Aluminum Specialties, Inc., and Brett E. Wilcox. Incorporated by reference to Exhibit 10.8 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.4 General Transmission Agreement, dated April 7, 1995, executed by the United States of America Department of Energy acting by and through the Bonneville Power Administration and Northwest Aluminum Company. Incorporated by reference to Exhibit 10.9 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.5 Power Sale Agreement, dated September 28, 1995, between the United States of America Department of Energy acting by and through the Bonneville Power Administration and Northwest Aluminum Company. Incorporated by reference to Exhibit 10.10 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245).
88
Exhibit Number ------ 10.6 Voting Agreement dated May 17, 1996, by Brett Wilcox for the benefit of the United Steelworkers of America, Local 8147. Incorporated by reference to Exhibit 10.11 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.7 General Transmission Agreement, dated May 4, 1995, executed by the United States of America Department of Energy acting by and through the Bonneville Power Administration and Columbia Aluminum Company. Incorporated by reference to Exhibit 10.12 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.8 Power Sales Agreement, dated September 18, 1995, executed by the United States of America Department of Energy acting by and through the Bonneville Power Administration and Columbia Aluminum Company. Incorporated by reference to Exhibit 10.13 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.9 Cancelable Swap Agreement dated January 21, 1999, between Goldendale Aluminum Company and BankBoston, N.A. Incorporated by reference to Exhibit 10.14 to our Registration Statement on Form S-4, as amended (Registration No. 333-72245). 10.10 Alumina Supply Agreement dated October 15, 1999 by Glencore Ltd. and Northwest Aluminum Company. (Confidential treatment of portions of this document has been requested. The information omitted from this exhibit has been filed with the Commission.) 10.11 Phantom Stock Termination Agreement dated August 1, 1996 between Goldendale Aluminum Company and Jessie Casswell.* 12.1 Statements re Computation of Ratios. 21.1 Subsidiaries of the Registrant 24.1 Powers of Attorney (included on signature pages of the Registration Statement). 27.1 Financial Data Schedule.
* Management contract or compensatory arrangement. EX-10.10 2 ALUMINA SUPPLY AGREEMENT 1 EXHIBIT 10.10 ALUMINA SUPPLY AGREEMENT CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT ASTERISKS (*) DENOTE SUCH OMISSIONS THIS ALUMINA SUPPLY AGREEMENT (this "Agreement") is entered into as of this 15th day of October, 1999, by GLENCORE LTD., a Swiss corporation and NORTHWEST ALUMINUM COMPANY, a US corporation. RECITALS WHEREAS, the parties desire to sell and purchase alumina pursuant to the terms provided herein. NOW, THEREFORE, the parties, intending to be legally bound, agree as follows: ARTICLE I DEFINITIONS SECTION 1.1. DEFINED TERMS. In this Agreement, the following words have the following meanings: - - "Alumina" means smelter grade alumina produced by A of A, Gove or other mutually agreed origins. - - "A of A" means the alumina refineries in Australia owned by Alcoa World Alumina. - - "Bill of Lading Date" means the date of completion of loading for the particular shipment in question. - - "Buyer" means Northwest Aluminum Company. - - "CIF" means CIF as defined in Incoterms 1990, published by the International Chamber of Commerce, Paris, France. - - "The Dalles" means the aluminum smelter located at The Dalles, Oregon, USA. - - "Dollars" or "$" means United States of America dollars. - - "Gove" means the alumina refinery located in Gove, Australia. - - "LME Price" means the London Metal Exchange Three Month Price as published by Reuters on Page MTLE and subsequently published in Metal Bulletin averaged over the applicable calendar quarter. In the event that LME prices are no longer reported or Metal Bulletin discontinues publication and such prices are no longer available, the parties will meet and agree upon a comparable mechanism to determine the LME Price. - - "MT" means metric tons of 1,000 kilograms each. - - "Portland" means the Goldendale facility at the port of Portland, Oregon, USA. 2 - - "Seller" means Glencore Ltd. ARTICLE II ALUMINA SECTION 2.1. TERM. This Agreement commences November 1, 1999 and, unless terminated earlier pursuant to the terms of this Agreement, ends 30 days after delivery of the quantity specified. SECTION 2.2. QUANTITY. Seller agrees to sell and Buyer agrees to purchase a total of 827,000 MT of Alumina for The Dalles, commencing November 1, 1999 and continuing until the quantity specified has been delivered under the following estimated schedule:
November - December, 1999 27,000 MT January - December, 2000 160,000 MT January - December, 2001 160,000 MT January - December, 2002 160,000 MT January - December, 2003 160,000 MT January - December, 2004 160,000 MT
The amount of any individual shipment and any annual quantity is subject to a tolerance of plus or minus five percent for shipping purposes. SECTION 2.3. ORIGIN/QUALITY. The Alumina supplied under this Agreement will comply with the standard specifications for Alumina produced by A of A at the time of delivery. The Buyer agrees, however, that Seller may from time to time supply Alumina from Gove, or other mutually agreed origins, which will comply with the standard specifications for smelter grade alumina from the relevant refinery at the time of delivery. Notwithstanding the above the Seller will endeavor to supply A of A Alumina at all times. Except as expressly provided in this Section, SELLER MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCT SOLD HEREUNDER AND, SPECIFICALLY, SELLER MAKES NO WARRANTY THAT THE PRODUCT WILL BE MERCHANTABLE OR FIT FOR ANY PARTICULAR PURPOSE. SECTION 2.4. PRICE. The price per MT of Alumina delivered CIF Portland supplied under this contract will be ***% of the LME price. 40,000 MT of Alumina will be priced each quarter based on the LME price one quarter prior to the applicable quarter irrespective of physical shipment, with the exception of 4Q 1999 where only 27,000 MT will be priced. For example, 40,000 MT of Alumina for 4Q 2000 will be priced at the average LME for 3Q 2000. 2 3 SECTION 2.5. PAYMENT. Payment shall be made in Dollars by wire transfer no later than 30 days after the Bill of Lading Date. SECTION 2.6. DELIVERY. Alumina will be delivered CIF Portland in suitable vessels. Deliveries will be reasonably evenly spread throughout the year. The exact schedule for each calendar year will be determined by mutual agreement of the Buyer and Seller by September 30 of the prior year. The schedule for November 1, 1999 through December 31, 2000 shall be mutually agreed by October 30, 1999. SECTION 2.7 VESSEL/PORT RESTRICTIONS. Seller guarantees the following at the unloading facility in Portland, Oregon: Draft: 38 feet at mean low water LOA: 650 feet Beam: 110 feet Holds: Open deck, free of beams, frames and self-trimming. Discharge: 8,000 MT PDPR SHINC for demurrage/despatch calculation purposes. Demurrage/Despatch: the Seller will invoice/credit the Buyer for any demurrage/despatch that is incurred/earned on each vessel at the applicable charter party terms. In chartering vessels, Seller understands that Buyer's Portland unloading facility is limited to a discharge rate of 6,000 MT and will endeavor to avoid/minimize demurrage. ARTICLE III GENERAL PROVISIONS SECTION 3.1. WEIGHING. Cargo weights will be determined by an independent draft survey at the port of origin and these weight determinations will be conclusive for the final settlement for each cargo. SECTION 3.2. LOADING TERMS AND CONDITIONS. The standard loading terms and conditions for the load port at the time of loading will be applicable. Seller will arrange, at its expense, for the vessels necessary to transport the product. Seller will be responsible for payments to the operators of the vessels and for all port or other charges incurred. SECTION 3.3. TITLE, OWNERSHIP AND RISK OF LOSS. Per the provisions of Incoterms relating to CIF, the Buyer shall have the right of possession and risk of loss from the time the Alumina crosses the ship's rail while loading onto the vessel. SECTION 3.4. LIMITATION OF LIABILITY. Seller's liability is limited to direct losses suffered by Buyer. Seller is not liable for incidental or consequential losses. In no event will Seller's liability for each shipment hereunder exceed the value of such shipment. 3 4 SECTION 3.5. DEFAULT OR BANKRUPTCY. In addition for any other rights provided herein or by law, Seller may cancel this contract immediately for future deliveries if Buyer fails to comply with its obligations hereunder, or becomes bankrupt or makes an assignment, agreement or composition with its creditors or suffers distress or process of execution to be levied on its property or goes into liquidation. SECTION 3.6. SAMPLING. Representative samples to determine the quality for each shipment of material will be taken during the loading operation, according to the standard methods being applied at the load port. Two equal portions of each final sample will be placed in sealed containers and duly marked. One portion shall be sent to Buyer, and the other retained at the load port. The material is deemed to comply with the applicable specification of the relevant alumina production facility, unless Buyer notifies Seller, within 30 days of receipt of the material, that the material delivered does not conform to the applicable specification and the nature of that non-conformity. Seller will then advise Buyer, within 15 days, whether or not Seller agrees with the Buyer's analysis. In case of disagreement between Seller and Buyer about the material's conformity, the sample retained at the material load port will be analyzed by a referee laboratory agreeable to Buyer and Seller. The result of the referee analysis will be definitive and binding for both parties. The cost of such analysis will be borne by the party whose results differ most from those given by the mutually agreeable referee laboratory. If chemical impurities and/or physical specifications exceed the applicable specification of the relevant alumina production facility, the parties shall meet to reach an amicable settlement to compensate the Buyer. If an amicable settlement cannot be reached, the dispute shall be referred to arbitration. SECTION 3.7. FORCE MAJEURE. (a) Except as provided in this Section, neither party will be liable for failure to comply with any term (other than those relating to payment obligations) of this Agreement if hindered, delayed, or prevented, directly or indirectly, by any circumstances outside its reasonable control, including but not limited to war, conditions of war, acts of enemies, national emergency, sabotage, revolution or other disorders; inadequate transportation facilities; inability to secure raw materials, supplies, fuel or power; fire, flood, windstorm, or other acts of God; strikes, lockouts or other labor disturbances; breakdown of plants; orders or acts of any governmental agency or authority; or interference by civil or military authority. (b) The party invoking, this provision must give prompt written notice to the other party after the occurrence of any such circumstances and must state the probable extent to which it will be unable to perform or will be delayed in performing its obligations hereunder. Such party must exercise due diligence to eliminate or remedy any such circumstances which delay or interrupt its performance; provided, however, that the settlement of strikes or other events of labor unrest will be entirely within the discretion of the party having the difficulty and that such party will not be required to settle such strikes or labor unrest by acceding to the demands of the opposing party when such course of action is deemed inadvisable in the discretion of the party having the difficulty. 4 5 (c) In the event of a force majeure affecting Seller, Buyer may elect to either: (i) extend the term of this Agreement to the extent that Seller has invoked this provision; or (ii) purchase from other suppliers quantities of Alumina which Seller is or expects to be unable to deliver, and Seller shall not be liable to Buyer for any cost, expense or loss whatsoever of Buyer arising out of any purchase it may make from other suppliers. Buyer shall give Seller written notice of such purchases, and they shall be deducted from the Annual Quantity. (d) In the event of force majeure affecting Buyer, Seller may elect to either: (i) extend the term of this Agreement to the extent that Buyer has invoked this provision; or (ii) sell to other buyers quantities of Alumina which Buyer is or expects to be unable to accept, and Buyer shall not be liable to Seller for any cost, expense or loss whatsoever of Seller arising out of such sales. Seller shall give Buyer written notice of such sales, and they shall be deducted from the Annual Quantity. SECTION 3.8. TERMINATION. This Agreement may be terminated prior to expiration of its term: (a) by mutual agreement of the parties; (b) by either party, if such party is not in default under this Agreement and the other party has breached or failed to perform any of its material covenants and agreement and such breach or failure continues for 30 days after notice thereof by the non-defaulting party (or 10 days after notice thereof if such default is a default of a payment obligation). SECTION 3.9. NOTICES. All notices or communications required or permitted hereunder must be in writing and will be deemed to have been duly given when received or when transmitted by facsimile and confirmed by written receipt if sent to the address and facsimile numbers below (or at such other address as a party may subsequently designate to the other in writing by notice given in accordance with this Section): If to Buyer: Attention: Brett Wilcox, C.E.O. Bill Reid, C.F.O. Northwest Aluminum Company 3313 West 2nd Street The Dalles, OR 97058 Facsimile Number: (541) 298-0800 If to Seller: Attention: Alumina Department Glencore Ltd. Three Stamford Plaza 301 Tresser Blvd. Stamford, CT 06901-3244 Facsimile Number: (203) 353-2765 Certain notices, however, must be delivered by overnight or express courier or in person to be effective. These notices are notices of default, cancellation or termination under Sections 3.5 or 3.9; and arbitration under Section 3.15. 5 6 SECTION 3.10. PRECEDENCE. In the event of any inconsistency between this Agreement and the terms of any other document specific to the transaction or delivery in question, the terms of this Agreement will govern. SECTION 3.11. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction and which is not material in implementing the intentions of the parties shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions or affecting the validity or enforceability of any provision in any other jurisdiction. SECTION 3.12. ASSIGNMENT. This Agreement is binding upon the parties and their successors. No party may assign this Agreement or the rights and duties hereunder without the prior written consent of the other party (and such consent will not be unreasonably withheld), and any purported assignment without such written consent will be null and void. SECTION 3.13. GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of New York, U.S.A., excluding those relating to choice or conflicts of law and excluding the United Nations Convention for the International Sale of Goods. SECTION 3.14. ARBITRATION. Any dispute arising out of or relating to this Agreement, including its validity, interpretation, application, scope, enforceability, performance, breach, and termination, shall be resolved exclusively and finally by arbitration, to the exclusion of the courts. Notice of arbitration shall be deemed proper if made in accordance with Section 3.10 of this Agreement. If the parties fail to agree in writing on the place where the arbitration is to be conducted, such arbitration shall be held in New York, New York, U.S.A. In any such arbitration, the parties hereby adopt the discovery provisions of the United States Federal Rules of Civil Procedure so that each party may obtain discovery of anything relevant to the dispute and not privileged. Arbitration shall be conducted in English, pursuant to International Chamber of Commerce ("ICC") Arbitration Rules in force at the time of the arbitration, by a panel of three arbitrators who are fluent in the English language and who are skilled in the legal and business aspects of the subject matter of this Agreement. The arbitrators shall be appointed in accordance with ICC Rules. Any monetary award made pursuant to such arbitration shall be calculated and paid exclusively in U.S. dollars. Judgment upon the award rendered may be entered in any court having jurisdiction or an application may be made to any court for a judicial acceptance of the award and an order of enforcement, as the case may be. SECTION 3.15. WAIVER. No party will be deemed to have waived any right, power or privilege under this Agreement unless such waiver is in writing and duly executed by it. No failure or delay in exercising any right hereunder will be deemed a waiver thereof by any party. No exercise or partial exercise of any right, power or privilege will preclude any other or further exercise thereof or of any other right, power or privilege. 6 7 SECTION 3.16. ENTIRE AGREEMENT. This Agreement is the exclusive and complete agreement between the parties with respect to the subject matter hereof, sets forth their entire understanding and merges all prior and contemporaneous writings, representations and understandings between the parties. This Agreement may be amended only by another written agreement duly signed by the parties. SECTION 3.19. POSSIBLE EXTENSION. The parties agree to meet during 2003 to discuss a five-year extension or renewal of this Agreement upon mutually satisfactory terms and conditions. IN WITNESS WHEREOF, the parties hereto have caused their duly authorized representatives to execute this Agreement. NORTHWEST ALUMINUM CORPORATION BRETT WILCOX - ----------------------------------- By: Brett Wilcox, President Date: October 19, 1999 GLENCORE LTD. ANDREW BENTLEY - ----------------------------------- By: Andrew Bentley Date: October 15, 1999 7 EX-10.11 3 PHANTOM STOCK TERMINATION AGREEMENT 1 EXHIBIT 10.11 PHANTOM STOCK TERMINATION AGREEMENT This Phantom Stock Termination Agreement ("Agreement") is made as of the 1st day of August, 1996, by and between Goldendale Aluminum Company (formerly Columbia Aluminum Corporation) (the "Company"), and Jessie Casswell ("Optionholder"). RECITALS A. The Company and Optionholder are parties to a Nonqualifed Phantom Stock Agreement made May 24, 1991 and effective as of March 15, 1989, and any and all amendments or modifications thereof (the "Phantom Stock Agreement"). B. The Company and Optionholder are parties to an Employment Agreement made May 24, 1991 and effective as of March 15, 1989, and any and all amendments or modifications thereof (the "Employment Agreement"). C. The Company and Optionholder are also parties to a Memorandum of Agreement dated May 16, 1996 (the "Memorandum"), which is related to the foregoing agreements. D. The Company and Optionholder desire to terminate their respective rights and obligations under the Phantom Stock Agreement, Section 12 of the Employment Agreement (regarding antidilution) and the Memorandum, pursuant to the terms set forth in this Agreement. NOW, THEREFORE, the Company and Optionholder agree as follows: 1. Termination of Agreements. The Phantom Stock Agreement, Section 12 of the Employment Agreement (regarding antidilution) and the Memorandum are hereby terminated, and neither the Company nor Optionholder shall have any further rights, obligations or liabilities pursuant to the Phantom Stock Agreement, Section 12 of the Employment Agreement or the Memorandum. 2. Optionholder Compensation Adjustment. In consideration for this Agreement, the Company shall, upon the execution and delivery of this Agreement, increase the base compensation of the Optionholder by the amount of $8,177.04 per biweekly payroll period, for a period of five years beginning with the first payroll period in August, 1996 3. Entire Agreement. This Agreement constitutes the entire agreement between the parties and contains all the agreements between them with respect to the subject matter hereof. It also supersedes any and all other agreements or contracts, either oral or written, between the parties with respect to the subject matter hereof. 2 4. Applicable Law. This Agreement shall be construed and enforced under and in accordance with the laws of the state of Washington. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. COLUMBIA ALUMINUM CORPORATION By: BRETT WILCOX -------------------------------- Title: President ----------------------------- JESSIE CASSWELL ------------------------------------ Jessie Casswell EX-12.1 4 STATEMENT RE COMPUTATION OF RATIOS 1 EXHIBIT 12.1 Golden Northwest Aluminum Company Statement of Ratio of Earnings to Fixed Charges Year Ended December 31, 1999 (Amounts in Thousands)
Fixed Charges: Interest expense $21,977 Capitalized interest 576 Preferred stock dividend requirement 3,648 (1) ------------- Fixed charges $ 26,201 ============= Earnings: Loss before income taxes $ (23,656) Fixed charges 26,201 Interest capitalized (576) Preferred stock dividend requirement (3,648) ------------- $ (1,679) ============= Deficiency of earnings to cover fixed charges $ 27,880 =============
(1) No consideration given to tax effect due to tax benefit recognized in 1999. EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 LIST OF SUBSIDIARIES Jurisdiction of Name Incorporation - ---- --------------- Goldendale Holding Company Delaware Goldendale Aluminum Company Delaware Northwest Aluminum Company Oregon Northwest Aluminum Specialties, Inc. Oregon Northwest Aluminum Technologies, LLC Washington EX-27.1 6 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE GOLDEN NORTHWEST ALUMINUM, INC. FINANCIAL AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000 YEAR DEC-31-1999 DEC-31-1999 1,929 0 54,752 1,000 65,618 141,831 132,961 0 370,631 89,593 195,279 0 29,663 0 63,628 370,631 444,174 444,174 429,784 429,784 0 603 21,977 (23,656) 0 0 0 0 0 0 0 0
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