-----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, Agm7Iv+1S2Gp/wa5Mj8h3Ak3sn1N5aHxAqXVpwn/G2GjtxN/szCD1aypmEvo12+e lBI9ygyEeaIhE5Wd20F2cw== 0001169232-02-002950.txt : 20021114 0001169232-02-002950.hdr.sgml : 20021114 20021114171455 ACCESSION NUMBER: 0001169232-02-002950 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTURY ALUMINUM CO CENTRAL INDEX KEY: 0000949157 STANDARD INDUSTRIAL CLASSIFICATION: ROLLING DRAWING & EXTRUDING OF NONFERROUS METALS [3350] IRS NUMBER: 133070826 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27918 FILM NUMBER: 02826240 BUSINESS ADDRESS: STREET 1: 2511 GARDEN ROAD STREET 2: BUILDING A SUITE 200 CITY: MONTEREY STATE: CA ZIP: 93940 BUSINESS PHONE: 3042736000 MAIL ADDRESS: STREET 1: 2511 GARDEN ROAD STREET 2: BUILDING A SUITE 200 CITY: MONTEREY STATE: CA ZIP: 93940 10-Q 1 d52470_10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002. Commission file number 0-27918 Century Aluminum Company (Exact name of Registrant as specified in its Charter) Delaware 13-3070826 (State of Incorporation) (IRS Employer Identification No.) 2511 Garden Road Building A, Suite 200 Monterey, California 93940 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (831) 642-9300 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 |_| The registrant had 20,554,302 shares of common stock outstanding at November 01, 2002. PART I - FINANCIAL INFORMATION Item 1. - Financial Statements. CENTURY ALUMINUM COMPANY CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
September 30, December 31, 2002 2001 ------------- ------------ ASSETS Current Assets: Cash and cash equivalents .......................................................... $ 50,068 $ 13,388 Accounts receivable, trade - net ................................................... 49,218 48,365 Due from affiliates ................................................................ 22,288 15,699 Inventories ........................................................................ 73,547 75,217 Prepaid and other assets ........................................................... 6,830 3,918 --------- -------- Total current assets .......................................................... 201,951 156,587 Property, Plant and Equipment - net ...................................................... 419,347 430,074 Intangible Asset - net ................................................................... 126,309 146,002 Due from Affiliates - Less current portion ............................................... 4,661 8,364 Other Assets ............................................................................. 33,059 35,679 --------- -------- Total ......................................................................... $ 785,327 $776,706 ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable, trade ............................................................ $ 34,165 $ 42,394 Due to affiliates .................................................................. 18,413 2,201 Industrial revenue bonds ........................................................... 7,815 7,815 Accrued and other current liabilities .............................................. 43,685 34,065 Accrued employee benefits costs - current portion .................................. 8,541 7,800 --------- -------- Total current liabilities ..................................................... 112,619 94,275 --------- -------- Long Term Debt - net ..................................................................... 321,746 321,446 Accrued Pension Benefits Costs - Less current portion .................................... 5,255 4,017 Accrued Postretirement Benefits Costs - Less current portion ............................. 69,821 65,627 Other Liabilities ........................................................................ 8,583 10,697 Deferred Taxes ........................................................................... 45,538 39,542 --------- -------- Total noncurrent liabilities .................................................. 450,943 441,329 --------- -------- Minority Interest ........................................................................ 19,979 23,917 Contingencies and Commitments (See Note 5) Shareholders' Equity: Convertible preferred stock (8.0% cumulative, 500,000 shares outstanding) .......... 25,000 25,000 Common stock (one cent par value, 50,000,000 shares authorized; 20,554,302 and 20,513,287 shares outstanding at September 30, 2002 and December 31, 2001, respectively) .................................................................... 206 205 Additional paid-in capital ......................................................... 168,958 168,414 Accumulated other comprehensive income ............................................. 11,230 6,752 Retained earnings (deficit) ........................................................ (3,608) 16,814 --------- -------- Total shareholders' equity .................................................... 201,786 217,185 --------- -------- Total ......................................................................... $ 785,327 $776,706 ========= ========
See notes to consolidated financial statements 1 CENTURY ALUMINUM COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Amounts) (Unaudited)
Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- 2002 2001 2002 2001 --------- --------- --------- --------- NET SALES: Third-party customers ...................................... $ 149,412 $ 156,638 $ 451,989 $ 399,856 Related parties ............................................ 27,580 26,733 84,440 83,124 --------- --------- --------- --------- 176,992 183,371 536,429 482,980 Cost of Goods Sold ............................................. 176,745 180,101 523,916 457,525 --------- --------- --------- --------- Gross Profit ................................................... 247 3,270 12,513 25,455 Selling, General and Administrative Expenses ................... 4,282 3,943 12,221 10,305 --------- --------- --------- --------- Operating Income (Loss) ........................................ (4,035) (673) 292 15,150 Interest Expense ............................................... (10,360) (10,493) (30,515) (21,033) Interest Income ................................................ 111 235 240 784 Other Income (Expense) ......................................... (1,872) 3,264 (1,975) 3,203 Net Loss on Forward Contracts .................................. -- -- -- (176) --------- --------- --------- --------- Loss Before Income Taxes and Minority Interest ................. (16,156) (7,667) (31,958) (2,072) Income Tax Benefit ............................................. 7,079 2,519 12,187 111 --------- --------- --------- --------- Net Loss Before Minority Interest .............................. (9,077) (5,148) (19,771) (1,961) Minority Interest .............................................. 1,313 1,306 3,939 2,613 --------- --------- --------- --------- Net Income (Loss) .............................................. (7,764) (3,842) (15,832) 652 Preferred Dividends ............................................ (500) (500) (1,500) (1,000) --------- --------- --------- --------- Net Loss Available to Common Shareholders ...................... $ (8,264) $ (4,342) $ (17,332) $ (348) ========= ========= ========= ========= LOSS PER COMMON SHARE: Basic ...................................................... $ (0.40) $ (0.21) $ (0.84) $ (0.02) Diluted .................................................... $ (0.40) $ (0.21) $ (0.84) $ (0.02) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic ...................................................... 20,554 20,513 20,554 20,459 ========= ========= ========= ========= Diluted .................................................... 20,554 20,513 20,554 20,459 ========= ========= ========= ========= DIVIDENDS PER COMMON SHARE ..................................... $ 0.05 $ 0.05 $ 0.15 $ 0.15 ========= ========= ========= =========
See notes to consolidated financial statements 2 CENTURY ALUMINUM COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
Nine months ended September 30, ----------------------- 2002 2001 -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ....................................................... $(15,832) $ 652 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ...................................... 42,308 30,422 Deferred income taxes .............................................. 6,684 183 Pension and other postretirement benefits .......................... 6,173 5,703 Inventory market adjustment ........................................ 2,654 3,175 Loss on disposal of assets ......................................... 682 -- Minority Interest .................................................. (3,938) (2,613) Change in operating assets and liabilities: Accounts receivable, trade - net .............................. (853) (5,106) Due from affiliates ........................................... 4,002 5,347 Inventories ................................................... (984) 4,079 Prepaids and other assets ..................................... (1,317) (15) Accounts payable, trade ....................................... (8,229) (8,776) Due to affiliates ............................................. 12,743 (2,138) Accrued and other current liabilities ......................... 9,001 14,877 Other - net ................................................... 742 1,071 -------- --------- Net cash provided by operating activities .......................... 53,836 46,861 -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment ............................... (12,570) (9,257) Proceeds from sale of property, plant and equipment ..................... -- 22 Divestitures ............................................................ -- 98,971 Acquisitions ............................................................ -- (464,176) -------- --------- Net cash used in investing activities .............................. (12,570) (374,440) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings .............................................................. -- 321,352 Financing fees .......................................................... -- (15,440) Dividends ............................................................... (4,591) (4,210) Issuance of common or preferred stock ................................... 5 25,000 -------- --------- Net cash provided by (used in) financing activities ................ (4,586) 326,702 -------- --------- NET INCREASE (DECREASE) IN CASH ............................................ 36,680 (877) CASH, BEGINNING OF PERIOD .................................................. 13,388 32,962 -------- --------- CASH, END OF PERIOD ........................................................ $ 50,068 $ 32,085 ======== =========
See notes to consolidated financial statements 3 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) 1. General The Company's critical accounting policies are disclosed in Footnote 1 of the audited consolidated financial statements contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2001. As of September 30, 2002, there were no material changes to the significant accounting policies for the Company. The accompanying unaudited interim consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2001. In management's opinion, the unaudited interim consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, which are necessary for a fair presentation, in all material respects, of financial results for the interim periods presented. Operating results for the first nine months of 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. Certain reclassifications of 2001 information were made to conform to the 2002 presentation. 2. Inventories Inventories consist of the following: September 30, December 31, 2002 2001 ------------- ------------ Raw materials ...................... $33,807 $36,686 Work-in-process .................... 14,403 11,911 Finished goods ..................... 8,662 11,219 Operating and other supplies ....... 16,675 15,401 ------- ------- $73,547 $75,217 ======= ======= At September 30, 2002 and December 31, 2001, approximately 76% and 79% of inventories were valued at the lower of last-in, first-out ("LIFO") cost or market, respectively. The excess of LIFO cost (or market, if lower) over first in, first out ("FIFO") cost was approximately $598 at September 30, 2002. The excess of FIFO cost over LIFO cost (or market, if lower) of inventory was $3,374 at December 31, 2001. 3. Intangible Asset The intangible asset consists of the power contract acquired in connection with the Company's acquisition of an aluminum reduction facility located in Hawesville, Kentucky in April 2001. The contract value is being amortized over its term (ten years) using a method that results in annual amortization equal to the expected annual benefits. As of September 30, 2002, the gross carrying amount of the intangible asset was $165,696 with accumulated amortization of $39,387. For the three month and nine month periods ended September 30, 2002, amortization expense for the intangible asset totaled $6,565 and $19,694, respectively. For the year ending December 31, 2002, the estimated aggregate amortization expense for the intangible asset will be $26,258. 4 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) Estimated Amortization Expense: For the year ending 12/31/03 ................. $19,710 For the year ending 12/31/04 ................. 12,448 For the year ending 12/31/05 ................. 14,600 For the year ending 12/31/06 ................. 12,914 For the year ending 12/31/07 ................. 13,686 4. Debt Effective April 1, 2001, in connection with its acquisition of the Hawesville facility, the Company issued and sold $325,000 of its 11 3/4% senior secured first mortgage notes due 2008 (the "Notes") to certain institutional investors in a private placement under Rule 144A of the Securities Act of 1933. Payment obligations under the Notes are unconditionally guaranteed by all of the Company's material wholly owned direct and indirect subsidiaries (the "Guarantor Subsidiaries") and secured by mortgages and security interests granted by two of the Company's subsidiaries in all of their respective interests in the real property, plant and equipment comprising the Hawesville and Ravenswood facilities. The Company had unamortized bond discounts on the Notes of $3,254 and $3,554 at September 30, 2002 and December 31, 2001, respectively. The indenture governing the Notes contains customary covenants including limitations on the Company's ability to pay dividends, incur debt, make investments, sell assets or stock of certain subsidiaries, and purchase or redeem capital stock. The Company will suspend its common and preferred stock dividends beginning in the fourth quarter of 2002. This action is being taken because the Company is near the limits on allowable dividend payments under the covenants in its bond indenture. The Note guarantees rank equally in right of payment to the other senior indebtedness of the guarantors and senior in right of payment to all subordinated indebtedness of the guarantors. In November 2001, the Company exchanged the Notes for a like principal amount of 11 3/4% senior secured first mortgage notes due 2008 (the "Exchange Notes"), which are registered under the Securities Act of 1933. The terms of the Exchange Notes are substantially similar to the Notes, except the Exchange Notes do not have the transfer restrictions and registration rights relating to the Notes. The Exchange Notes are not listed on any securities exchange or included in any automated quotation system. Effective April 1, 2001, the Company entered into a $100,000 senior secured revolving credit facility (the "Revolving Credit Facility") with a syndicate of banks. The Revolving Credit Facility may be used for working capital needs, capital expenditures and other general corporate purposes. Borrowings under the Revolving Credit Facility are subject to a $30,000 reserve and limited to a borrowing base based upon certain eligible inventory and receivables. The Company is subject to customary covenants, including restrictions on capital expenditures, additional indebtedness, liens, guarantees, mergers and acquisitions, dividends, distributions, capital redemptions and investments. The Company's obligations under the Revolving Credit Facility are unconditionally guaranteed by its domestic subsidiaries (other than Century Aluminum of Kentucky, LLC ("LLC")) and secured by a first priority security interest in all accounts receivable and inventory belonging to the Company and its 5 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) subsidiary borrowers. Amounts outstanding under the Revolving Credit Facility bear interest, at the Company's option, at either a floating LIBOR rate or Fleet National Bank's base rate, in each case plus an applicable interest margin. The applicable interest margin ranges from 2.25% to 3.0% over the LIBOR rate and 0.75% to 1.5% over the base rate and is determined by certain financial measurements of the Company. The Revolving Credit Facility will mature on April 2, 2006. There were no outstanding borrowings under the Revolving Credit Facility as of September 30, 2002. Effective April 1, 2001, in connection with its acquisition of the Hawesville facility, the Company assumed industrial revenue bonds ("IRBs") in the aggregate principal amount of $7,815. An affiliate of Glencore International AG, the Company's largest shareholder (together with its subsidiaries, "Glencore"), effectively purchased a 20% interest in the Hawesville facility from the Company on April 1, 2001. Under the terms of the agreement governing the sale, Glencore agreed to assume a pro rata portion of that debt and will pay a pro rata portion of service costs of the IRBs through its investment in the Hawesville facility. The IRBs mature on April 1, 2028, are secured by a Glencore letter of credit and bear interest at a variable rate not to exceed 12% per annum determined weekly based on prevailing rates for similar bonds in the bond market. The interest rate on the IRBs at September 30, 2002 was 2.00%. Interest is paid quarterly. The IRBs are classified as current liabilities because they are remarketed weekly and could be required to be repaid upon demand if there is a failed remarketing, as provided in the indenture governing the IRBs. 5. Contingencies and Commitments Environmental Contingencies The Company spends significant amounts to comply with environmental laws and to assure compliance with known and anticipated requirements. The Company believes it does not have environmental liabilities that are likely to have a material adverse effect on the Company. However, there can be no assurance that future requirements at currently or formerly owned properties will not result in liabilities which may have a material adverse effect on the Company's financial condition, results of operations or liquidity. Century of West Virginia is performing certain remedial measures at its Ravenswood Facility pursuant to a RCRA 3008(h) order issued by the Environmental Protection Agency ("EPA") in 1994 (the "3008(h) Order"). Century of West Virginia also conducted a RCRA facility investigation ("RFI") evaluating other areas at Ravenswood that may have contamination requiring remediation. The RFI was submitted to the EPA in December 1999. Century of West Virginia, in consultation with the EPA, has completed interim remediation measures at two sites identified in the RFI. The Company expects that the EPA will not require further work as a result of the RFI. The Company believes a significant portion of the contamination on the two identified sites is attributable to the operations of Kaiser Aluminum and Chemical ("Kaiser"), the prior owner, and will be the financial responsibility of that owner, as discussed below. Kaiser owned and operated the Ravenswood Facility for approximately 30 years prior to its acquisition by Century of West Virginia. Many of the conditions that Century of West Virginia is 6 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) remedying exist because of activities that occurred during Kaiser's ownership and operation. Under the terms of the agreement to purchase the Ravenswood Facility ("Kaiser Purchase Agreement"), Kaiser retained the responsibility to pay the costs of cleanup of those conditions. In addition, Kaiser retained title to certain land within the Ravenswood premises and is responsible for those areas. On February 12, 2002, Kaiser and certain wholly owned subsidiaries filed voluntary petitions under Chapter 11 of the Federal Bankruptcy Code ("Kaiser Bankruptcy"). While the Company believes the Kaiser Bankruptcy will not relieve Kaiser of its obligations to do remediation work under government orders, the ultimate outcome of the Kaiser Bankruptcy is uncertain. Nevertheless, the Company does not expect the Kaiser Bankruptcy to have a material adverse effect on the Company's financial condition, results of operations or liquidity. Under the terms of the agreement to sell its fabricating businesses to Pechiney (the "Pechiney Agreement"), the Company and Century of West Virginia provided Pechiney with certain indemnifications. Those include the assignment of certain of Century of West Virginia's indemnification rights under the Kaiser Purchase Agreement (with respect to the real property transferred to Pechiney) and the Company's indemnification rights under its stock purchase agreement with Alcoa relating to the Company's purchase of Century Cast Plate, Inc. The Pechiney Agreement provides further indemnifications, which are limited, in general, to pre-closing conditions that were not disclosed to Pechiney and to off-site migration of hazardous substances from pre-closing acts or omissions of Century of West Virginia. Environmental indemnifications under the Pechiney Agreement expire September 20, 2005 and are payable only to the extent they exceed $2,000. The Hawesville Facility has been listed on the National Priorities List under the federal Comprehensive Environmental Response, Compensation and Liability Act. On July 6, 2000, the EPA issued a final Record of Decision ("ROD") which details response actions to be implemented at several locations at the Hawesville site to address actual or threatened releases of hazardous substances. Those actions include: o removal and off-site disposal at approved landfills of certain soils contaminated by polychlorinated biphenyls ("PCBs"); o management and containment of soils and sediments with low PCB contamination in certain areas on-site; and o the continued extraction and treatment of cyanide contaminated ground water using the existing ground water treatment system. The total costs for the remedial actions to be undertaken and paid for by Southwire relative to this site are estimated under the ROD to be $12,600 and the forecast of annual operating and maintenance costs is $1,200. Under the Company's agreement with Southwire to purchase the Hawesville facility, Southwire indemnified the Company against all on-site environmental liabilities known to exist prior to the closing of the acquisition, including all remediation, operation and maintenance obligations under the ROD. On behalf of Southwire, Century will operate and maintain the ground water treatment system required under the ROD. Southwire will reimburse Century for any such expense that exceeds $400 annually. Under the terms of the Company's agreements with Glencore relating to the Company's 7 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) ownership and operation of the Hawesville Facility, Glencore will share pro rata in any environmental costs (net of any amounts available under the indemnity provisions in the Company's stock purchase agreement with Southwire) associated with the Hawesville Facility. If on-site environmental liabilities relating to Southwire's pre-closing activities at the Hawesville facility that were not known to exist as of the date of the closing of the acquisition, become known within six years after the closing, the Company and Glencore, based on each company's respective percentage interests in the Hawesville Facility, will share the costs of remedial action with Southwire on a sliding scale depending on the year the claim is brought. Any on-site environmental liabilities arising from pre-closing activities which do not become known until on or after the sixth anniversary of the closing of the Hawesville acquisition will be the responsibility of Glencore and the Company. In addition, the Company and Glencore will be responsible for a pro rata portion of any post-closing environmental costs which result from a change in environmental laws after the closing or from their own activities, including a change in the use of the facility. The Company acquired the Hawesville facility by purchasing all of the outstanding equity securities of Metalsco Ltd., which owns a direct 1% partnership interest in NSA Ltd. ("NSA") and an indirect 99% partnership interest in NSA through its wholly-owned subsidiary, Skyliner, Inc. NSA is the Kentucky limited partnership which owns the assets comprising the Hawesville facility. Metalsco previously owned certain assets which are unrelated to NSA, including the stock of Gaston Copper Recycling Corporation ("Gaston"), a secondary metals reduction facility in South Carolina. Gaston has numerous liabilities related to environmental conditions at its reduction facility. Gaston and all other non-NSA assets owned at any time by Metalsco were identified in the Company's agreement with Southwire as unwanted property and were distributed to Southwire prior to the closing of the Hawesville acquisition. Southwire indemnified the Company for all liabilities related to the unwanted property. Southwire also retained ownership of certain land adjacent to the Hawesville Facility containing NSA's former potliner disposal areas, which are the sources of cyanide contamination in the facility's groundwater. Southwire retained full responsibility for this land, which was never owned by Metalsco and is located on the north boundary of the Hawesville site. In addition, Southwire indemnified the Company against all risks associated with off-site hazardous material disposals by NSA which pre-date the closing of the acquisition. Under the terms of the Company's agreement to purchase the Hawesville facility, Southwire secured its indemnity obligations for environmental liabilities for seven years after the closing by posting a $15,000 letter of credit issued in the Company's favor, with an additional $15,000 to be posted if Southwire's net worth drops below a pre-determined level during that period. The Company's indemnity rights under the agreement are shared pro rata with Glencore. The amount of security Southwire provides may increase (but not above $15,000 or $30,000, as applicable) or decrease (but not below $3,000) if certain specified conditions are met. The Company cannot be certain that Southwire will be able to meet its indemnity obligations. In that event, under certain environmental laws which impose liability regardless of fault, the Company may be liable for any outstanding remedial measures required under the ROD and for certain liabilities related to the unwanted properties. If Southwire fails to meet its indemnity obligations or if the Company's shared or assumed liability is significantly greater 8 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) than anticipated, the Company's financial condition, results of operations and liquidity could be materially adversely affected. The Company, together with all other past and present owners of an alumina facility at St. Croix, Virgin Islands, has entered into an Administrative Order on Consent with the Environmental Protection Agency (the "Order") pursuant to which the signatories have agreed to carry out a Hydrocarbon Recovery Plan to remove and manage oil floating on top of groundwater underlying the facility. Recovered hydrocarbons and groundwater will be delivered to the adjacent petroleum refinery where they will be received and managed. The owner of the petroleum refinery will compensate the other signatories by paying them the fair market value for the petroleum recovered. Lockheed Martin Corporation ("Lockheed"), which sold the facility to one of the Company's affiliates, Virgin Islands Alumina Corporation ("Vialco"), in 1989, has tendered indemnity and defense of this matter to Vialco pursuant to terms of the Lockheed-Vialco Asset Purchase Agreement. The Company also gave certain environmental indemnity rights to St. Croix Alumina, LLC ("St. Croix"), an indirect affiliate of Alcoa, Inc., when it sold the facility to St. Croix. Those rights extend only to environmental conditions arising from Vialco's operation of the facility and then only after St. Croix has spent $300 on such conditions. Vialco's indemnification obligation to St. Croix expired on July 24, 2001. Management does not believe Vialco's liability under this Order or its indemnification obligation to St. Croix, if any, will have a material adverse effect on the Company's financial condition, results of operations, or liquidity. It is the Company's policy to accrue for costs associated with environmental assessments and remedial efforts when it becomes probable that a liability has been incurred and the costs can be reasonably estimated. The aggregate environmental related accrued liabilities were $1,566 and $1,800 at September 30, 2002 and December 31, 2001, respectively. All accruals have been recorded without giving effect to any possible recoveries. With respect to ongoing environmental compliance costs, including maintenance and monitoring, such costs are expensed as incurred. Because of the issues and uncertainties described above, and the Company's inability to predict the requirements of the future environmental laws, there can be no assurance that future capital expenditures and costs for environmental compliance will not have a material adverse effect on the Company's future financial condition, results of operations, or liquidity. Based upon all available information, management does not believe that the outcome of these environmental matters, or environmental matters concerning Mt. Holly, will have a material adverse effect on the Company's financial condition, results of operations, or liquidity. Legal Contingencies The Company has pending against it or may be subject to various other lawsuits, claims and proceedings related primarily to employment, commercial, environmental and safety and health matters. Although it is not presently possible to determine the outcome of these matters, management believes their ultimate disposition will not have a material adverse effect on the Company's financial condition, results of operations, or liquidity. 9 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) Other Contingency Pechiney Rolled Products, Inc., Century of West Virginia's principal customer, has publicly announced it is experiencing financial losses and that it is considering various alternatives to address its losses, including restructuring. If a restructuring should be undertaken, it could have a material adverse effect on the Company. Pechiney purchases between 23.0 and 27.0 million pounds of molten aluminum each month from Century of West Virginia on 30 day terms. No provision for loss has been made because a loss is not probable. Based on current market conditions and the performance of the equity markets, it appears likely that the Company's accumulated pension benefit obligation will exceed the fair value of the pension plan assets at year end. Under current accounting guidance, the Company would be required to record a minimum pension liability at year end. The amount of the minimum pension liability will vary depending on changes in market conditions, performance of pension investments for the remainder of the year, and the level of company contributions to the pension plans. Based on current market conditions and fair values of plan assets, Century expects a charge to shareholders' equity of approximately $7 to 10 million. Power Commitments The Company purchases all of the electricity requirements for the Ravenswood Facility from Ohio Power Company, a unit of American Electric Power Company, pursuant to a fixed price power supply agreement. That agreement expires on July 31, 2003. On May 3, 2002, the Company signed a new contract to purchase electric power for its Ravenswood facility from Ohio Power. The new agreement is effective August 1, 2003, when the Company's current power contract with Ohio Power expires. The new contract will provide power for the Ravenswood facility at competitive rates under a GS-4 schedule approved by the Public Utilities Commission of Ohio. The GS-4 schedule is due to expire on December 31, 2005. The Hawesville facility currently purchases all of its power from Kenergy Corporation at fixed prices. Approximately 14% of the Hawesville facility's power requirements were unpriced in calendar year 2003 through 2005. The unpriced portion of the contract increases to approximately 26% in 2006. On June 26, 2002, the Company entered into a fixed price power supply agreement for the 14% of the power that was unpriced for calendar year 2003. The Company is subject to losses associated with equipment shutdowns, caused by the loss or interruption of electrical power, as well as by labor shortages and catastrophic events. Power interruptions may have a material adverse effect on the Company's business because it uses large amounts of electricity in the primary aluminum production process. Any loss of power which causes an equipment shutdown can result in the hardening or "freezing" of molten aluminum in the pots where it is produced. If this occurs, significant losses can occur if the pots are damaged and require repair or replacement, a process that could limit or shut down the Company's production operations for a significant period of time. Certain shutdowns not covered by insurance could be a default under the 10 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) revolving credit facility. No assurance can be given that a material shutdown will not occur in the future or that such a shutdown would not have a material adverse effect on the Company. Although the Company maintains property damage insurance to provide for the repair or replacement of damaged equipment or property, as well as business interruption insurance to mitigate losses resulting from any equipment failure or production shutdown caused by a catastrophic event, the Company may still be required to pay significant amounts under the deductible provisions of those insurance policies. In addition, coverage may not be sufficient to cover all losses which result from a catastrophic event. Furthermore, Century maintains insurance to cover losses resulting from damage to the Company's power suppliers' facilities, or transmission lines that would cause an interruption of the power supply to the Company's facilities. This insurance contains large deductibles and self-insured amounts and does not cover losses resulting from a power loss due solely to lack of sufficient electrical power resulting from unusually high usage in the regions. Century renewed its property and business interruption insurance policies in April 2002 for one year. As expected, premiums increased significantly in the aftermath of September 11 and the policies contain much higher deductibles and self-insured amounts. Labor Commitments Century of West Virginia's hourly employees, which comprise 39% of the Company's workforce, are represented by the USWA and are currently working under a four-year labor agreement that would have expired May 31, 2003. On March 8, 2002, the labor agreement was extended through May 31, 2006. The Hawesville LLC's hourly employees, which comprise 41% of the Company's workforce, are represented by the USWA and are currently working under a five-year labor agreement effective April 1, 2001. 6. Forward Delivery Contracts and Financial Instruments As a producer of primary aluminum products, the Company is exposed to fluctuating raw material and primary aluminum prices. The Company routinely enters into fixed and market priced contracts for the sale of primary aluminum and the purchase of raw materials in future periods. In connection with the sale of its aluminum fabricating businesses to Pechiney in September 1999, the Company entered into a Molten Aluminum Purchase Agreement (the "Pechiney Metal Agreement") with Pechiney that expires December 31, 2005. This contract will be automatically extended through July 31, 2007 provided that the Company's power contract is extended through that date. Pursuant to the Pechiney Metal Agreement, Pechiney purchases, on a monthly basis, at least 23.0 million pounds and no more than 27.0 million pounds of molten aluminum at a variable price determined by reference to the U.S. Midwest Market Price. After July 31, 2003, Pechiney will have the right, upon 12 months notice, to reduce its purchase obligations under the contract by 50%. Concurrent with the Company's purchase of an additional 23% interest in the Mt. Holly facility from Xstrata, effective April 1, 2000, the Company entered into a ten-year agreement with Glencore (the "Glencore Metal Agreement") to sell approximately 110.0 million pounds of primary aluminum 11 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) products per year. Selling prices under the Glencore Metal Agreement through December 31, 2001 were determined by a market-based formula while the remaining eight years are at a fixed price as defined in the agreement. In connection with the acquisition of the Hawesville facility in April 2001, the Company entered into a 10-year contract with Southwire (the "Southwire Metal Agreement") to supply 240 million pounds of high-purity molten aluminum annually to Southwire's wire and cable manufacturing facility located adjacent to the Hawesville facility. Under this contract, Southwire will also purchase 60 million pounds of standard grade molten aluminum each year for the first five years of the contract, with an option to purchase an equal amount in each of the remaining five years. The Company and Glencore will each be responsible for providing a pro rata portion of the aluminum supplied to Southwire under this contract. The price for the molten aluminum to be delivered to Southwire from the Hawesville facility is variable and will be determined by reference to the U.S. Midwest Market Price. This agreement expires on December 31, 2010, and will automatically renew for additional five-year terms, unless either party provides 12 months notice that it has elected not to renew. Apart from the Pechiney Metal Agreement, Glencore Metal Agreement and Southwire Metal Agreement, the Company had forward delivery contracts to sell 219.8 million pounds and 377.1 million pounds of primary aluminum at September 30, 2002 and December 31, 2001, respectively. Of these forward delivery contracts, 5.0 million pounds and 25.5 million pounds at September 30, 2002 and December 31, 2001, respectively, were with the Glencore Group. The Company was party to a long-term supply agreement with Alcoa to purchase alumina through the end of 2006. The contract was unpriced from 2002 through 2006. The Company negotiated pricing with both Alcoa and Glencore which resulted in a more competitive agreement with Glencore. The new long-term supply agreements with Glencore, which replaced the Alcoa alumina agreement, will extend through 2006. These new agreements provide that Glencore will supply a fixed quantity of alumina at prices determined by a market-based formula. In addition, as part of its acquisition of an additional 23% interest in the Mt. Holly facility, the Company assumed an alumina supply agreement with Glencore for its alumina requirements relative to the additional interest. This agreement terminates in 2008 and is priced with a market-based formula. As part of its acquisition of the Hawesville facility, the Company assumed a market based alumina supply agreement (the "Supply Agreement") with Kaiser Aluminum & Chemical Corporation ("Kaiser") which expires in 2005. In connection with its ongoing Chapter 11 bankruptcy proceedings, Kaiser filed a Motion for an Order Authorizing the Assumption of Certain Critical Customer Supply Contracts (the "Motion"). The Motion was granted by the Bankruptcy Court on August 27, 2002. As a result, Kaiser has assumed the Supply Agreement and cured all existing defaults thereunder. All of Kaiser's continuing obligations under the Supply Agreement are to be performed in the ordinary course of its business and any claims the Company has under the Supply Agreement will be afforded administrative expense claim status pursuant to Seciton 503 of the Bankruptcy Code. To mitigate the volatility in its market priced forward delivery contracts, the Company enters into fixed price financial sales contracts, which settle in cash in the period corresponding to the intended delivery dates of the forward delivery contracts. At September 30, 2002 and December 31, 2001, the Company had financial instruments, primarily with the Glencore Group, for 194.2 million pounds and 248.8 million pounds, respectively. These financial instruments are scheduled for settlement at various dates in 2002 through 2003. The Company had no fixed price financial purchase contracts to purchase aluminum at September 30, 2002. Additionally, to mitigate the volatility of the natural gas markets, the Company enters into fixed price financial purchase contracts, which settle in cash in the period 12 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) corresponding to the intended usage of natural gas. At September 30, 2002 and December 31, 2001, the Company had financial instruments for 1.9 million and 3.1 million DTH (one decatherm is equivalent to one million British Thermal Units), respectively. These financial instruments are scheduled for settlement at various dates in 2002 through 2005. Based on the fair value of the Company's financial instruments as of September 30, 2002, accumulated other comprehensive income of $8,331 is expected to be reclassified to earnings over the next twelve month period. The forward financial sales and purchase contracts are subject to the risk of non-performance by the counterparties. However, the Company only enters into forward financial contracts with counterparties it determines to be creditworthy. If any counterparty failed to perform according to the terms of the contract, the accounting impact would be limited to the difference between the nominal value of the contract and the market value on the date of settlement. 7. Supplemental Cash Flow Information Nine months Ended September 30, --------------------- 2002 2001 -------- -------- Cash paid for: Interest .................... $18,534 $ 48 Income taxes ................ -- 466 Cash received for: Interest .................... 240 784 Income tax refunds .......... $17,574 $ 31 8. Acquisitions Effective April 1, 2001, the Company completed the acquisition of the Hawesville facility. The following table represents the unaudited pro forma results of operations for the nine months ended September 30, 2001 assuming the acquisition occurred on January 1, 2001. The unaudited pro forma amounts may not be indicative of the results that actually would have occurred if the transactions described above had been completed and in effect for the periods indicated or the results that may be obtained in the future. Nine months ended September 30, 2001 ----------------- (unaudited) Net sales .................................... $ 568,903 Net income ................................... (76) Net income available to common shareholders .. (1,576) Earnings per share ........................... $ (0.08) 13 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) 9. New Accounting Standards In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which became effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, SFAS No. 142 includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. There was no impact on the Company's Balance Sheet or Statement of Operations from the adoption of SFAS No. 142. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This Statement establishes standards for accounting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard is required to be adopted by the Company beginning January 1, 2003. The Company is currently assessing the details of this standard. The adoption of SFAS No. 143 is not expected to have a material impact on the company's consolidated statements of income or financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long Lived Assets." Effective January 1, 2002, the Company adopted SFAS No. 144. This statement addresses financial accounting and reporting for the impairment and disposal of long-lived assets. The provisions of this standard are generally to be applied prospectively. Adoption of the standard had no impact on the Company's consolidated statements of income or financial position. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement establishes standards for accounting for costs associated with disposal activities, or with exit (or restructuring) activities. The standard is required to be adopted by the Company beginning January 1, 2003. The Company is currently assessing the details of this standard. The adoption of SFAS No. 146 is not expected to have a material impact on the company's consolidated statements of income or financial position. 14 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) 10. Comprehensive Income
Nine months ended September 30, 2002 2001 --------------------- Net Income (Loss) ..................................... $(15,832) $ 652 Other Comprehensive Income (Loss): Net unrealized gain on financial instruments, net of tax of $(3,581) and $(6,130), respectively ..... 6,304 11,093 Net amount reclassified as income, net of tax of $1,105 and $0, respectively .................... (1,826) -- -------- ------- Comprehensive Income (Loss) ........................... $(11,354) $11,745 ======== =======
11. Consolidating Condensed Financial Information The Company's 11 3/4% Senior Secured First Mortgage Notes due 2008 are jointly and severally and fully and unconditionally guaranteed by all of the Company's material wholly owned direct and indirect subsidiaries (the "Guarantor Subsidiaries"). Condensed consolidating financial information was not provided for the periods prior to the acquisition because: (i) Century Aluminum Company has no independent assets or operations, (ii) the guarantees are full and unconditional and joint and several, and (iii) for those periods, any subsidiaries of the Company other than the subsidiary guarantors were minor. As of September 30, 2002, as a result of the acquisition of the Hawesville facility, the Company indirectly holds an 80% equity interest in Century Aluminum of Kentucky, LLC ("LLC") and as such consolidates 100% of the assets, liabilities and operations of the LLC into its financial statements, showing the interest of the 20% owners as "Minority Interest". LLC (the "Non-Guarantor Subsidiary") has not guaranteed the Exchange Notes, and the Company has not caused its indirect equity interests in the LLC to be pledged as collateral for the Exchange Notes. The Company's interest in the Mt. Holly facility's property, plant and equipment has not been pledged as collateral. Other subsidiaries of the Company which are immaterial will not guarantee the Exchange Notes (collectively, the "Non-Guarantor Subsidiaries"). During 2001, the Company adopted a policy for financial reporting purposes of allocating expenses to subsidiaries. For the nine months ended September 30, 2002 and 2001, the Company allocated total corporate expenses of $3.8 and $3.4 million to its subsidiaries, respectively. Additionally, the Company charges interest on certain intercompany balances. Because the LLC is not a minor subsidiary, the Company is providing condensed consolidating financial information for the periods following the Company's acquisition of the Hawesville facility. The Exchange Notes contain customary covenants limiting the ability of both the Company and the Guarantor Subsidiaries to pay dividends, incur additional debt, make investments, sell assets or stock of certain subsidiaries and purchase or redeem capital stock. 15 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) The following summarized condensed consolidating balance sheets as of September 30, 2002, and December 31, 2001, condensed consolidating statements of operations for the three and nine months ended September 30, 2002 and 2001 (reflecting six months of activity at the Non-guarantor and recently acquired Guarantor subsidiaries for 2001), and the condensed consolidating statements of cash flows for the nine months ended September 30, 2002 and 2001 present separate results for Century Aluminum Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiary. This summarized condensed consolidating financial information may not necessarily be indicative of the results of operations or financial position had the Company, the Guarantor Subsidiaries or the Non-Guarantor Subsidiary operated as independent entities. 16 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) CONDENSED CONSOLIDATING BALANCE SHEET As of December 31, 2001
Combined Combined Guarantor Non-Guarantor The Reclassifications Subsidiaries Subsidiaries Company and Eliminations Consolidated ------------ ------------ ------- ---------------- ------------ Assets: Cash and cash equivalents ........................... $ 1,020 $ -- $ 12,368 $ -- $ 13,388 Accounts receivables, net ........................... 48,365 -- -- -- 48,365 Due from affiliates ................................. 56,711 838 366,855 (408,705) 15,699 Inventory ........................................... 46,649 28,568 -- -- 75,217 Other current assets ................................ 7,395 98 1,674 (5,249) 3,918 --------- --------- -------- --------- -------- Total current assets ........................ 160,140 29,504 380,897 (413,954) 156,587 Investment in subsidiaries .......................... 95,670 -- 208,419 (304,089) -- Property, plant and equipment, net .................. 428,721 878 475 -- 430,074 Intangible asset .................................... -- 146,002 -- -- 146,002 Due from affiliates - Less current portion .......... 8,364 -- -- -- 8,364 Other non-current assets ............................ 20,467 1,674 16,784 (3,246) 35,679 --------- --------- -------- --------- -------- Total assets ............................... $ 713,362 $ 178,058 $606,575 $(721,289) $776,706 ========= ========= ======== ========= ======== Liabilities and shareholders' equity: Accounts payable, trade ............................. $ 19,922 $ 22,472 $ -- $ -- $ 42,394 Due to affiliates ................................... -- 1,998 47,089 (46,886) 2,201 Industrial revenue bonds ............................ -- 7,815 -- -- 7,815 Accrued and other current liabilities ............... 16,437 5,269 17,680 (5,321) 34,065 Accrued employee benefits costs - current portion ............................................. 7,653 147 -- -- 7,800 --------- --------- -------- --------- -------- Total current liabilities ................... 44,012 37,701 64,769 (52,207) 94,275 --------- --------- -------- --------- -------- Long term debt - net ................................ -- -- 321,446 -- 321,446 Accrued Pension benefits Costs - less current portion ............................................. 1,555 -- 2,462 -- 4,017 Accrued Postretirement Benefits Costs - less current portion ..................................... 45,008 20,619 -- -- 65,627 Other liabilities/Intercompany Loan ................. 371,580 151 713 (361,747) 10,697 Deferred taxes ...................................... 42,788 -- -- (3,246) 39,542 --------- --------- -------- --------- -------- Total non-current liabilities ............... 460,931 20,770 324,621 (364,993) 441,329 --------- --------- -------- --------- -------- Minority interest ................................... -- -- -- 23,917 23,917 Shareholders' Equity: Convertible preferred stock ......................... -- -- 25,000 -- 25,000 Common stock ........................................ 59 -- 205 (59) 205 Additional paid-in capital .......................... 226,996 139,281 168,414 (366,277) 168,414 Accumulated other comprehensive income .............. 6,752 -- 6,752 (6,752) 6,752 Retained earnings (deficit) ......................... (25,388) (19,694) 16,814 45,082 16,814 --------- --------- -------- --------- -------- Total shareholders' equity .................. 208,419 119,587 217,185 (328,006) 217,185 --------- --------- -------- --------- -------- Total liabilities and equity ...................................... $ 713,362 $ 178,058 $606,575 $(721,289) $776,706 ========= ========= ======== ========= ========
17 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) CONDENSED CONSOLIDATING BALANCE SHEET As of September 30, 2002
Combined Combined Guarantor Non-Guarantor The Reclassifications Subsidiaries Subsidiaries Company and Eliminations Consolidated ------------ ------------ ------- ---------------- ------------ Assets: Cash and cash equivalents ................................. $ 620 $ -- $ 49,448 $ -- $ 50,068 Accounts receivables, net ................................. 49,192 26 -- -- 49,218 Due from affiliates ....................................... 76,976 4,696 341,291 (400,675) 22,288 Inventory ................................................. 52,059 21,488 -- -- 73,547 Other current assets ...................................... 4,095 520 4,544 (2,329) 6,830 --------- --------- --------- --------- --------- Total current assets ........................... 182,942 26,730 395,283 (403,004) 201,951 Investment in subsidiaries ................................ 79,915 -- 197,065 (276,980) -- Property, plant and equipment, net ........................ 415,598 3,442 307 -- 419,347 Intangible asset .......................................... -- 126,309 -- -- 126,309 Due from affiliates - Less current portion ................ 4,661 -- -- -- 4,661 Other non-current assets .................................. 18,414 -- 16,216 (1,571) 33,059 --------- --------- --------- --------- --------- Total assets ................................... $ 701,530 $ 156,481 $ 608,871 $(681,555) $ 785,327 ========= ========= ========= ========= ========= Liabilities and shareholders' equity: Accounts payable, trade ................................... $ 12,133 $ 22,032 $ -- $ -- $ 34,165 Due to affiliates ......................................... 23,478 -- 55,376 (60,441) 18,413 Industrial revenue bonds .................................. -- 7,815 -- -- 7,815 Accrued and other current liabilities ..................... 15,364 5,236 25,482 (2,397) 43,685 Accrued employee benefits costs - current portion ......... 7,653 888 -- -- 8,541 --------- --------- --------- --------- --------- Total current liabilities ...................... 58,628 35,971 80,858 (62,838) 112,619 --------- --------- --------- --------- --------- Long term debt - net ...................................... -- -- 321,746 -- 321,746 Accrued Pension benefits Costs - less current portion ..... 594 634 4,027 -- 5,255 Accrued Postretirement Benefits Costs - less current portion ................................................... 47,540 21,827 454 -- 69,821 Other liabilities/Intercompany loan ....................... 350,594 (1,845) -- (340,166) 8,583 Deferred taxes ............................................ 47,109 -- -- (1,571) 45,538 --------- --------- --------- --------- --------- Total non-current liabilities .................. 445,837 20,616 326,227 (341,737) 450,943 --------- --------- --------- --------- --------- Minority interest ......................................... -- -- -- 19,979 19,979 Shareholders' Equity: Convertible preferred stock ............................... -- -- 25,000 -- 25,000 Common stock .............................................. 59 -- 206 (59) 206 Additional paid-in capital ................................ 226,997 139,281 168,958 (366,278) 168,958 Accumulated other comprehensive income .................... 11,230 -- 11,230 (11,230) 11,230 Retained earnings (deficit) ............................... (41,221) (39,387) (3,608) 80,608 (3,608) --------- --------- --------- --------- --------- Total shareholders' equity ..................... 197,065 99,894 201,786 (296,959) 201,786 --------- --------- --------- --------- --------- Total liabilities and equity ................... $ 701,530 $ 156,481 $ 608,871 $(681,555) $ 785,327 ========= ========= ========= ========= =========
18 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Three months Ended September 30, 2002
Combined Combined Reclassifications Guarantor Non-Guarantor The and Subsidiaries Subsidiaries Company Eliminations Consolidated ------------ ------------ ------- ------------ ------------ Net sales: Third-party customers ....................... $ 149,412 $ -- $ -- $ -- $ 149,412 Related parties ............................. 27,580 -- -- -- 27,580 --------- -------- ------- --------- --------- 176,992 -- -- -- 176,992 Cost of goods sold ............................... 170,180 64,391 -- (57,826) 176,745 Reimbursement from owners ........................ -- (57,870) -- 57,870 -- --------- -------- ------- --------- --------- Gross profit (loss) .............................. 6,812 (6,521) -- (44) 247 Selling, general and administrative expenses ...................................... 4,282 -- -- -- 4,282 --------- -------- ------- --------- --------- Operating income (loss) .......................... 2,530 (6,521) -- (44) (4,035) Interest income (expense), net ................... (10,249) (33) -- 33 (10,249) Other income (expense), net ...................... (1,872) (11) -- 11 (1,872) --------- -------- ------- --------- --------- Income (loss) before taxes and minority interest ............................. (9,591) (6,565) -- -- (16,156) Income tax benefit ............................... 5,083 -- -- 1,996 7,079 --------- -------- ------- --------- --------- Net income (loss) before minority interest ...................................... (4,508) (6,565) -- 1,996 (9,077) Minority interest ................................ -- -- -- 1,313 1,313 Equity earnings (loss) of subsidiaries ........... (3,256) -- (7,764) 11,020 -- --------- -------- ------- --------- --------- Net income (loss) ................................ $ (7,764) $ (6,565) $(7,764) $ 14,329 $ (7,764) ========= ======== ======= ========= =========
19 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Three Months Ended September 30, 2001
Combined Recently Acquired and Combined Newly Formed Other Combined Reclassifications Guarantor Guarantor Non-guarantor The and Subsidiaries Subsidiaries Subsidiaries Company Eliminations Consolidated ------------ ------------ ------------ ------- ------------ ------------ Net sales: Third-party customers .................. $ 75,132 $ 81,506 $ -- $ -- $ -- $ 156,638 Related parties ........................ 148 26,585 -- -- -- 26,733 --------- --------- -------- ------- --------- --------- 75,280 108,091 -- -- -- 183,371 Cost of goods sold .......................... 69,521 104,491 87,863 -- (81,774) 180,101 Reimbursements from owners .................. -- -- (82,190) -- 82,190 -- --------- --------- -------- ------- --------- --------- Gross profit (loss) ......................... 5,759 3,600 (5,673) -- (416) 3,270 Selling, general and administrative expenses ................................. 2,909 590 971 -- (527) 3,943 --------- --------- -------- ------- --------- --------- Operating income (loss) ..................... 2,850 3,010 (6,644) -- 111 (673) Interest income (expense), net .............. (10,095) -- (52) -- (111) (10,258) Other income (expense), net ................. (119) 3,221 162 -- -- 3,264 --------- --------- -------- ------- --------- --------- Income (loss) before taxes and minority interest ........................ (7,364) 6,231 (6,534) -- -- (7,667) Income tax (expense) benefit ................ 2,776 (2,244) -- -- 1,987 2,519 --------- --------- -------- ------- --------- --------- Net income (loss) before minority interest ................................. (4,588) 3,987 (6,534) -- 1,987 (5,148) Minority interest ........................... -- -- -- -- 1,306 1,306 Equity earnings (loss) of subsidiaries ...... (3,241) -- -- (3,842) 7,083 -- --------- --------- -------- ------- --------- --------- Net income (loss) ........................... $ (7,829) $ 3,987 $ (6,534) $(3,842) $ 10,376 $ (3,842) ========= ========= ======== ======= ========= =========
20 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Nine months Ended September 30, 2002
Combined Combined Reclassifications Guarantor Non-Guarantor The and Subsidiaries Subsidiaries Company Eliminations Consolidated ------------ ------------ ------- ------------ ------------ Net sales: Third-party customers .................... $ 451,989 $ -- $ -- $ -- $ 451,989 Related parties .......................... 84,440 -- -- -- 84,440 --------- --------- -------- --------- --------- 536,429 -- -- -- 536,429 Cost of goods sold ............................ 504,222 190,432 -- (170,738) 523,916 Reimbursement from owners ..................... -- (170,876) -- 170,876 -- --------- --------- -------- --------- --------- Gross profit (loss) ........................... 32,207 (19,556) -- (138) 12,513 Selling, general and administrative expenses ................................... 12,221 -- -- -- 12,221 --------- --------- -------- --------- --------- Operating income (loss) ....................... 19,986 (19,556) -- (138) 292 Interest income (expense), net ................ (30,275) (99) -- 99 (30,275) Other income (expense), net ................... (1,975) (39) -- 39 (1,975) --------- --------- -------- --------- --------- Income (loss) before taxes and minority interest .......................... (12,264) (19,694) -- -- (31,958) Income tax benefit ............................ 6,200 -- -- 5,987 12,187 --------- --------- -------- --------- --------- Net income (loss) before minority interest ................................... (6,064) (19,694) -- 5,987 (19,771) Minority interest ............................. -- -- -- 3,939 3,939 Equity earnings (loss) of subsidiaries ........ (9,768) -- (15,832) 25,600 -- --------- --------- -------- --------- --------- Net income (loss) ............................. $ (15,832) $ (19,694) $(15,832) $ 35,526 $ (15,832) ========= ========= ======== ========= =========
21 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Nine Months Ended September 30, 2001
Combined Recently Acquired and Newly Formed Combined Combined Reclassifications Guarantor Other Guarantor Non-guarantor The and Subsidiaries Subsidiaries Subsidiaries Company Eliminations Consolidated ------------ ------------ ------------ ------- ------------ ------------ Net sales: Third-party customers ............. $ 153,863 $ 245,993 $ -- $ -- $ -- $ 399,856 Related parties ................... 177 82,947 -- -- -- 83,124 --------- --------- --------- ------- --------- --------- 154,040 328,940 -- -- -- 482,980 Cost of goods sold ..................... 135,675 309,203 168,839 -- (156,192) 457,525 Reimbursements from owners ............. -- -- (157,243) -- 157,243 -- --------- --------- --------- ------- --------- --------- Gross profit (loss) .................... 18,365 19,737 (11,596) -- (1,051) 25,455 Selling, general and administrative expenses ............................ 8,082 1,854 1,518 -- (1,149) 10,305 --------- --------- --------- ------- --------- --------- Operating income (loss) ................ 10,283 17,883 (13,114) -- 98 15,150 Interest income (expense), net ......... (20,028) -- (123) -- (98) (20,249) Other income (expense), net ............ (11) 2,868 170 -- -- 3,027 --------- --------- --------- ------- --------- --------- Income (loss) before taxes and minority interest ................... (9,756) 20,751 (13,067) -- -- (2,072) Income tax (expense) benefit ........... 3,609 (7,471) -- -- 3,973 111 --------- --------- --------- ------- --------- --------- Net income (loss) before minority interest ............................ (6,147) 13,280 (13,067) -- 3,973 (1,961) Minority interest ...................... -- -- -- -- 2,613 2,613 Equity earnings (loss) of subsidiaries ........................ (6,481) -- -- 652 5,829 -- --------- --------- --------- ------- --------- --------- Net income (loss) ...................... $ (12,628) $ 13,280 $ (13,067) $ 652 $ 12,415 $ 652 ========= ========= ========= ======= ========= =========
22 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS For the Nine months Ended September 30, 2002
Combined Combined Guarantor Non-guarantor The Reclassifications Subsidiaries Subsidiaries Company and Eliminations Consolidated ------------ ------------ ------- ---------------- ------------ Net cash provided by operating activities ........... $ 53,476 $ 360 $ -- $ -- $ 53,836 -------- ------- -------- --------- -------- Investing activities: Purchase of property, plant and equipment, net .................................. (9,788) (2,782) -- -- (12,570) -------- ------- -------- --------- -------- Net cash used in investing activities ............ (9,788) (2,782) -- -- (12,570) -------- ------- -------- --------- -------- Financing activities: Dividends ........................................ -- -- (4,591) -- (4,591) Intercompany transactions ........................ (44,088) 2,422 41,666 -- -- Issuance of common or preferred stock ............ -- -- 5 -- 5 -------- ------- -------- --------- -------- Net cash provided by (used in) financing activities ......................................... (44,088) 2,422 37,080 -- (4,586) -------- ------- -------- --------- -------- Net increase (decrease) in cash ..................... (400) -- 37,080 -- 36,680 Cash, beginning of period ........................... 1,020 -- 12,368 -- 13,388 -------- ------- -------- --------- -------- Cash, end of period ................................. $ 620 $ -- $ 49,448 $ -- $ 50,068 ======== ======= ======== ========= ========
23 CENTURY ALUMINUM COMPANY Notes to Consolidated Financial Statements Nine Month Periods Ended September 30, 2002 and 2001 (Dollars in Thousands) (Unaudited) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS For the Nine Months Ended September 30, 2001
Combined Recently Acquired and Newly Formed Combined Combined Guarantor Other Guarantor Non-guarantor The Reclassifications Subsidiaries Subsidiaries Subsidiaries Company and Eliminations Consolidated ------------ ------------ ------------ ------- ---------------- ------------ Net cash provided by (used in) operating activities ................... $ 37,109 $ 12,832 $(3,080) $ -- $ -- $ 46,861 --------- -------- ------- --------- --------- --------- Investing activities: Purchase of property, plant and equipment, net ...................... -- (9,133) (150) 48 -- (9,235) Divestitures ......................... 98,971 -- -- -- -- 98,971 Acquisition of the Hawesville Facility, net ....................... (464,176) -- -- -- -- (464,176) --------- -------- ------- --------- --------- --------- Net cash provided by (used in) investing activities ................ (365,205) (9,133) (150) 48 -- (374,440) --------- -------- ------- --------- --------- --------- Financing activities: Borrowings, third party .............. -- -- -- 321,352 -- 321,352 Financing fees ....................... -- -- -- (15,440) -- (15,440) Dividends ............................ -- -- -- (4,210) -- (4,210) Intercompany transactions ............ 328,096 (36,661) 3,230 (294,665) -- -- Issuance of preferred stock .......... -- -- -- 25,000 -- 25,000 --------- -------- ------- --------- --------- --------- Net cash provided by (used in) financing activities ................... 328,096 (36,661) 3,230 32,037 -- 326,702 --------- -------- ------- --------- --------- --------- Net increase (decrease) in cash ......... -- (32,962) -- 32,085 -- (877) Cash, beginning of period ............... -- 32,962 -- -- -- 32,962 --------- -------- ------- --------- --------- --------- Cash, end of period ..................... $ -- $ -- $ -- $ 32,085 $ -- $ 32,085 ========= ======== ======= ========= ========= =========
24 FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995. This quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as "expects," "anticipates," "forecasts," "intends," "plans," "believes," "projects," and "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements include, but are not limited to, statements regarding new business and customers, contingencies, environmental matters and liquidity under "Part I, Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations," "Part I, Item 3 - Quantitative and Qualitative Disclosures About Market Risk" and "Part II, Item 1 Legal Proceedings." These statements are not guarantees of future performance and involve risks and uncertainties and are based on a number of assumptions that could ultimately prove to be wrong. Actual results and outcomes may vary materially from what is expressed or forecast in such statements. Among the factors that could cause actual results to differ materially are general economic and business conditions, changes in demand for the Company's products and services or the products of the Company's customers, fixed asset utilization, competition, the risk of technological changes and the Company's competitors developing more competitive technologies, the Company's dependence on certain important customers, the availability and terms of needed capital, risks of loss from environmental liabilities, and other risks detailed in this report. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. The following information should be read in conjunction with the Company's 2001 Form 10-K along with the consolidated financial statements and related footnotes included within the Form 10-K. 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following discussion reflects Century's historical results of operations, which do not include results for the Company's 80% interest in the Hawesville facility until it was acquired in April 2001. Century's financial highlights include (in thousands, except per share data):
Three months ended Nine months ended September 30, September 30, ------------------------ ------------------------ 2002 2001 2002 2001 --------- --------- --------- --------- Net sales Third-party customers .............. $ 149,412 $ 156,638 $ 451,989 $ 399,856 Related party customers ............ 27,580 26,733 84,440 83,124 --------- --------- --------- --------- Total ................................. $ 176,992 $ 183,371 $ 536,429 $ 482,980 ========= ========= ========= ========= Net income (loss) ..................... $ (7,764) $ (3,842) $ (15,832) $ 652 Net loss available to common shareholders ....................... $ (8,264) $ (4,342) $ (17,332) $ (348) Loss per share - basic ................ $ (0.40) $ (0.21) $ (0.84) $ (0.02)
Net sales. Net sales for the three months ended September 30, 2002 decreased $6.4 million or 3.5% to $177.0 million from $183.4 million for the same period in 2001. The decrease of $8.4 million was primarily the result of a lower market price of aluminum, which was partially offset by $2.0 million due to higher shipment volume. Net Sales for the nine months ended September 30, 2002 increased $53.4 million or 11.1% to $536.4 million from $483.0 million for the nine months ended September 30, 2001. The increase was primarily the result of increased shipment volume due to the acquisition of the Hawesville facility on April 1, 2001. Increased shipment volume accounted for $90.2 million, which was partially offset by a $36.8 million decrease due to lower market prices for primary aluminum. Gross profit. Gross profit for the three months ended September 30, 2002 decreased $3.1 million to $0.2 million from $3.3 million for the three months ended September 30, 2001. The decrease was primarily the result of lower market prices for primary aluminum. Cost of goods sold increased slightly due to increased sales volume, an unfavorable LCM adjustment, higher depreciation and insurance expense for the period, offset by reduced raw material costs. For the nine months ended September 30, 2002, gross profit decreased $13.0 million to $12.5 million from $25.5 million for the same period in 2001. This decrease is primarily the result of additional depreciation and amortization expense related to the Hawesville facility. In addition, a portion of the decrease is due to lower gross margins on increased sales volume, primarily due to lower market prices for primary aluminum. 26 Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended September 30, 2002 increased $0.4 million to $4.3 million from $3.9 million for the three months ended September 30, 2001. Selling, general and administrative expenses increased primarily due to increased insurance expenses in 2002. For the nine months ended September 30, 2002, selling, general, and administrative expenses increased $1.9 million to $12.2 million from $10.3 million for the nine months ended September 30, 2001. Selling, general and administrative expenses as a percentage of revenue increased slightly to 2.3% for the nine months ended September 30, 2002 from 2.1% for the nine months ended September 30, 2001. Operating income or loss. Operating loss for the three months ended September 30, 2002 increased $3.3 million to a $4.0 million loss from a $0.7 million loss for the three months ended September 30, 2001. Operating loss increased for the reasons discussed above. For the nine months ended September 30, 2002 operating income decreased $14.9 million to $0.3 million from $15.2 million for the nine months ended September 30, 2001. The decrease is due to the reasons discussed above. Interest Expense. Interest expense during the three months ended September 30, 2002 did not change materially from the three months ended September 30, 2001. For the nine months ended September 30, 2002 interest expense increased $9.5 million to $30.5 million from $21.0 million for the nine months ended September 30, 2001 reflecting the additional three months of borrowing in 2002 required to fund the acquisition of the Hawesville facility in April 2001. Interest Income. Interest income during the three months ended September 30, 2002 decreased $0.1 million to $0.1 million from $0.2 million for the three months ended September 30, 2001. For the nine months ended September 30, 2002 interest income decreased $0.5 million to $0.3 million from $0.8 million for the nine months ended September 30, 2001. The change in interest income was a result of using available cash to fund the Hawesville acquisition in April 2001. Tax Provision/Benefit. Income tax benefit for the three months ended September 30, 2002 increased $4.6 million to $7.1 million from $2.5 million for the three months ended September 30, 2001. For the nine months ended September 30, 2002 income tax benefit increased $12.1 million to an income tax benefit of $12.2 million from an income tax benefit of $0.1 million for the nine months ended September 30, 2001. The change in income taxes was primarily the result of a larger pre-tax loss in the three and nine months ended September 30, 2002 compared to pre-tax loss in the three and nine months ended September 30, 2001. Additionally, a portion of the increase in benefit is due to a reduction in estimated income taxes of $1.5 million in September 2002. Minority Interest. Minority interest reflects Glencore's interest in the net operating results of Century Aluminum of Kentucky, LLC, which consists of amortization of the power contract. The limited liability company holds the power contract for the Hawesville facility, among other assets. 27 Net Income or loss. The Company had a net loss of $7.8 million and $15.8 million during the three and nine months ended September 30, 2002, respectively, compared to a net loss of $3.8 million for the three months ended September 30, 2001 and net income of $0.7 million for the nine months ended September 30, 2001. The reasons for the change in profitability are discussed above. Liquidity and Capital Resources Revolving Credit Facility The availability of funds under the revolving credit facility is subject to a $30.0 million reserve and limited by a specified borrowing base consisting of certain eligible accounts receivable and inventory. The Company expects the borrowing base, less the reserve, will permit the Company to borrow approximately $45.0 to $50.0 million under the revolving credit facility. Working Capital Working capital was $89.3 million at September 30, 2002. The Company believes that its working capital will be consistent with past experience and that borrowing availability under the revolving credit facility should be sufficient to meet working capital needs. Historical The Company's statements of cash flows for the nine months ended September 30, 2002 and 2001 are summarized below (dollars in thousands):
Nine months ended September 30, 2002 2001 --------- --------- Net cash provided by operating activities ............ $ 53,836 $ 46,861 Net cash used in investing activities ................ (12,570) (374,440) Net cash provided by (used in) financing activities .. (4,586) 326,702 --------- --------- Increase (decrease) in cash .......................... $ 36,680 $ (877) ========= =========
Operating activities generated $53.8 million in net cash during the first nine months of 2002 primarily as a result of operating cash flow from the Hawesville and Berkeley operations and tax refunds of $17.6 million received during the year. Operating activities generated $46.9 million in net cash during the first nine months of 2001 as a result of operating income, reductions in inventory and increases in accrued liabilities which were partially offset by increases in accounts receivable and reductions in trade payables. The Company's net cash used for investing activities was $12.6 million during the first nine months of 2002. The cash was used for capital expenditures to purchase, modernize, and/or upgrade production equipment, maintain facilities and comply with environmental 28 regulations. The Company's net cash used in investing activities was $374.4 million during the first nine months of 2001. The cash was used primarily for the acquisition of the Hawesville facility and was partially offset by the proceeds from the sale to Glencore of the minority interest in the Hawesville facility. Net cash used in financing activities during the first nine months of 2002 was used to fund common and preferred stock dividend payments. Century will suspend its common and preferred stock dividends beginning in the fourth quarter of 2002. This action is being taken because the company is near the limits on allowable dividend payments under the covenants in its bond indenture. The Company's net cash provided from financing activities during the first nine months of 2001 was $326.7 million. The cash from financing activities was primarily from borrowing and issuance of preferred stock related to the acquisition of the Hawesville facility. Environmental Expenditures and Other Contingencies The Company has incurred and in the future will continue to incur capital expenditures and operating expenses for matters relating to environmental control, remediation, monitoring and compliance. The aggregate environmental related accrued liabilities were $1.6 million and $1.8 million at September 30, 2002 and December 31, 2001, respectively. The Company believes that compliance with current environmental laws and regulations is not likely to have a material adverse effect on the Company's financial condition, results of operations or liquidity; however, environmental laws and regulations may change, and the Company may become subject to more stringent environmental laws and regulations in the future. There can be no assurance that compliance with more stringent environmental laws and regulations that may be enacted in the future, or future remediation costs, would not have a material adverse effect on the Company's financial condition, results of operations or liquidity. The Company is a defendant in several actions relating to various aspects of its business. While it is impossible to predict the ultimate disposition of any litigation, the Company does not believe that any of these lawsuits, either individually or in the aggregate, will have a material adverse effect on the Company's financial condition, results of operations or liquidity. See Note 5 of the financial statements contained herein. Pechiney Rolled Products, Inc., Century of West Virginia's principal customer, has publicly announced it is experiencing financial losses and that it is considering various alternatives to address its losses, including restructuring. If a restructuring should be undertaken, it could have a material adverse effect on the Company. Pechiney purchases between 23.0 and 27.0 million pounds of molten aluminum each month from Century of West Virginia on 30 day terms. No provision for loss has been made because a loss is not probable. 29 Critical Accounting Policies The Company's critical accounting policies are disclosed in Footnote 1 of the audited consolidated financial statements contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2001. As of September 30, 2002, there were no material changes to the significant accounting policies for the Company. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Based on current market conditions and the performance of the equity markets, it appears likely that the Company's accumulated pension benefit obligation will exceed the fair value of the pension plan assets at year end. Under current accounting guidance, the Company would be required to record a minimum pension liability at year end. The amount of the minimum pension liability will vary depending on changes in market conditions, performance of pension investments for the remainder of the year, and the level of company contributions to the pension plans. Based on current market conditions and fair values of plan assets, Century expects a charge to shareholders' equity of approximately $7 to 10 million. New Accounting Standards In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which became effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, SFAS No. 142 includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. There was no impact on the Company's Balance Sheet or Statement of Operations from the adoption of SFAS No. 142. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This Statement establishes standards for accounting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard is required to be adopted by the Company beginning January 1, 2003. The Company is currently assessing the details of this standard. The adoption of SFAS No. 143 is not expected to have a material impact on the company's consolidated statements of income or financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long Lived Assets." Effective January 1, 2002, the Company adopted SFAS No. 144. This statement addresses financial accounting and reporting for the impairment and disposal of 30 long-lived assets. The provisions of this standard are generally to be applied prospectively. Adoption of the standard had no impact on the Company's consolidated statements of income or financial position. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement establishes standards for accounting for costs associated with disposal activities, or with exit (or restructuring) activities. The standard is required to be adopted by the Company beginning January 1, 2003. The Company is currently assessing the details of this standard. The adoption of SFAS No. 146 is not expected to have a material impact on the company's consolidated statements of income or financial position. Item 3. Quantitative and Qualitative Disclosures About Market Risk Commodity Prices The Company manages its exposure to fluctuations in the price of primary aluminum by selling aluminum at fixed prices for future delivery and through financial instruments as well as by purchasing alumina under supply contracts with prices tied to the same indices as the Company's market-based aluminum sales contracts. The Company's risk management activities do not include trading or speculative transactions. Although the Company has not materially participated in the purchase of call or put options, in cases where Century sells forward primary aluminum, it may purchase call options to benefit from price increases, which are significantly above forward sales prices. In addition, it may purchase put options to protect itself from price decreases. The Company was party to a long-term supply agreement with Alcoa to purchase alumina through the end of 2006. The contract was unpriced from 2002 through 2006. The Company negotiated pricing with both Alcoa and Glencore which resulted in a more competitive agreement with Glencore. The new long-term supply agreements with Glencore, which replaced the Alcoa alumina agreement, will extend through 2006. These new agreements provide for a fixed quantity of alumina at prices determined by a market-based formula. In addition, as part of its acquisition of an additional 23% interest in the Mt. Holly Facility, the Company assumed a supply agreement with Glencore for the alumina raw material requirements relative to the additional interest. This alumina supply agreement terminates in 2008 and is priced with a market-based formula. As part of its acquisition of the Hawesville facility, the Company assumed an alumina supply agreement with Kaiser. That agreement will terminate in 2005 and is a market-based contract. The Company has received assurances from Kaiser Management that, despite the Kaiser bankruptcy, Kaiser will continue to perform under this alumina supply agreement. The contract has been assumed in the bankruptcy process. At September 30, 2002, the Company had entered into 194.2 million pounds of fixed priced forward primary aluminum financial sales contracts primarily with the Glencore Group to mitigate the risk of commodity price fluctuations inherent in its business. These contracts will be settled in cash at various dates during 2002 and 2003. Additionally, in order to mitigate the volatility of the natural gas markets, the Company enters into fixed price forward financial purchase contracts, which settle in cash in the period corresponding to the intended usage of 31 natural gas. At September 30, 2002, the Company had financial instruments for 1.9 million DTH (one decatherm, or DTH, is equivalent to one million British Thermal Units). These financial instruments are scheduled for settlement at various dates in 2002 through 2005. On a hypothetical basis a $0.01 per pound increase or decrease in the market price of primary aluminum is estimated to have an unfavorable or favorable impact of $1.2 million after tax, respectively, on accumulated other comprehensive income for the nine months ended September 30, 2002 as a result of the forward primary aluminum financial sale contracts entered into by the Company at September 30, 2002. On a hypothetical basis, a $0.50 per DTH decrease or increase in the market price of natural gas is estimated to have an unfavorable or favorable impact of $0.6 million after tax, respectively, on accumulated other comprehensive income for the nine months ended September 30, 2002 as a result of the forward natural gas financial purchase contracts entered into by the Company at September 30, 2002. Century monitors its overall position, and its metals and natural gas risk management activities are subject to the management, control and direction of senior management. Risk management activities are regularly reported to the Board of Directors of Century. This quantification of the Company's exposure to the commodity price of aluminum is necessarily limited, as it does not take into consideration the Company's inventory or forward delivery contracts, or the offsetting impact upon the sales price of primary aluminum products. Because all of the Company's alumina contracts are indexed to the LME price for aluminum beginning in 2002, they act as a natural hedge for approximately 25% of the Company's production. Entering the year 2002, approximately 48% and 55% of the Company's production for the years 2002 and 2003, respectively, was either hedged by the alumina contracts or by fixed price forward delivery and financial sales contracts. Interest Rates Interest Rate Risk. The Company's primary debt obligations are the outstanding Exchange Notes, borrowings under its revolving credit facility and the industrial revenue bonds the Company assumed in connection with the Hawesville acquisition. Because the Exchange Notes bear a fixed rate of interest, changes in interest rates do not subject the Company to changes in future interest expense with respect to the outstanding notes. Borrowings under the Company's revolving credit facility, if any, are at variable rates at a margin over LIBOR or the Fleet National Bank base rate, as defined in the revolving credit facility. The industrial revenue bonds bear interest at variable rates determined by reference to the interest rate of similar instruments in the industrial revenue bond market. At September 30, 2002, the Company had $7.8 million of variable rate borrowings. A hypothetical 1% increase in the interest rate would increase the Company's annual interest expense by $0.1 million, assuming no debt reduction. 32 Item 4. Controls and Procedures a. Within the 90 days prior to the date of filing of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chairman and Chief Executive Officer along with Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)) pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company's Chairman and Chief Executive Officer along with the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information to be included in the Company's reports required to be filed under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission. b. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out this evaluation. 33 Part II. OTHER INFORMATION Item 5. Other Information The Company's chief executive officer and chief financial officer have furnished to the SEC the certification with respect to this Form 10-Q that is required by Section 906 of the Sarbanes-Oxley Act of 2002. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits - None. (b) Reports on Form 8-K - The Company filed no reports on Form 8-K during the quarter ended September 30, 2002. 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Century Aluminum Company Date: November 14, 2002 By: /s/ Craig A. Davis ------------------------------------- Craig A. Davis Chairman/Chief Executive Officer Date: November 14, 2002 By: /s/ David W. Beckley ------------------------------------- David W. Beckley Executive Vice-President/ Chief Financial Officer 35 CERTIFICATION I, Craig A. Davis, Chairman of the Board and Chief Executive Officer of Century Aluminum Company (Century), certify that: 1. I have reviewed this quarterly report on Form 10-Q of Century; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Century as of, and for, the periods presented in this quarterly report; 4. Century's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Century and we have: a) designed such disclosure controls and procedures to ensure that material information relating to Century, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of Century's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Century's other certifying officer and I have disclosed, based on our most recent evaluation, to Century's auditors and the audit committee of Century's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect Century's ability to record, process, summarize and report financial data and have identified for Century's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Century's internal controls; and 6. Century's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ CRAIG A. DAVIS -------------------------------- Title: Chairman of the Board and Chief Executive Officer I, David W. Beckley, Executive Vice President and Chief Financial Officer of Century Aluminum Company (Century), certify that: 1. I have reviewed this quarterly report on Form 10-Q of Century; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Century as of, and for, the periods presented in this quarterly report; 4. Century's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Century and we have: a) designed such disclosure controls and procedures to ensure that material information relating to Century, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of Century's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Century's other certifying officer and I have disclosed, based on our most recent evaluation, to Century's auditors and the audit committee of Century's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect Century's ability to record, process, summarize and report financial data and have identified for Century's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Century's internal controls; and 6. Century's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses Date: November 14, 2002 /s/ DAVID W. BECKLEY ---------------------------------- Title: Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----