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Filed Pursuant to Rule 424(b)(3)
Commission File Numbers: 333-72245, 333-72245-01,
333-72245-02,333-72245-03,333-72245-04 and 333-72245-05
PROSPECTUS
GOLDEN NORTHWEST ALUMINUM, INC.
EXCHANGE OFFER FOR
$150,000,000
12% FIRST MORTGAGE NOTES DUE 2006
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Guaranteed by
Northwest Aluminum Company Goldendale Holding Company
Northwest Aluminum Specialties, Inc. Goldendale Aluminum Company
Northwest Aluminum Technologies, LLC
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KEY TERMS OF EXCHANGE OFFER
- Expires 5:00 p.m., New York City time, May 20, 1999, unless extended
- Not subject to any conditions other than the exchange offer does not
violate law or any interpretation of the staff of the Securities and
Exchange Commission
- All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged
- Tenders of outstanding notes may be withdrawn any time before the
expiration of the exchange offer
- The exchange of notes will not be a taxable exchange for United States
federal income tax purposes
- The terms of the notes to be issued are identical to the outstanding
notes, except for certain transfer restrictions and registration rights
of the outstanding notes
THIS INVESTMENT INVOLVES RISKS. SEE THE RISK FACTORS SECTION BEGINNING ON PAGE
11.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE NOTES TO BE DISTRIBUTED IN THE EXCHANGE OFFER, NOR
HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
April 20, 1999
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 3
Risk Factors................................................ 11
The Exchange Offer.......................................... 23
Description of Notes........................................ 31
Selected Consolidated Financial Data........................ 74
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 75
Business.................................................... 87
Management.................................................. 100
Executive Compensation...................................... 103
Certain Transactions........................................ 104
Description of Other Indebtedness and Goldendale Preferred
Stock..................................................... 105
Description of Capital Stock................................ 108
United States Federal Income Tax Considerations............. 109
Plan of Distribution........................................ 114
Legal Matters............................................... 114
Experts..................................................... 114
Change of Accountants....................................... 115
Additional Information...................................... 116
Index to Financial Statements............................... F-1
Appendices.................................................. A-1
</TABLE>
We have also included a table of contents in the "Description of Notes"
section because of that section's length. That table of contents can be found on
page 31.
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PROSPECTUS SUMMARY
The following summary contains basic information about this exchange offer.
It may not contain all the information that is important to you. For a more
complete understanding of the exchange offer, we encourage you to read this
entire document.
THE EXCHANGE OFFER
On December 21, 1998, we completed a private offering of 12% First Mortgage
Notes due 2006. The notes were sold for a total purchase price of $150,000,000.
The notes are
- SECURED by a first priority security interest in substantially all of our
and our subsidiaries' real property, plant, equipment and other assets
and a pledge of all of the capital stock of our subsidiaries, and
- GUARANTEED by our subsidiaries Northwest Aluminum Company, Northwest
Aluminum Specialties, Inc., Northwest Aluminum Technologies, LLC,
Goldendale Holding Company and Goldendale Aluminum Company.
We entered into a registration rights agreement with the initial purchasers
in the private offering in which we agreed to deliver to you this prospectus and
to complete the exchange offer by May 20, 1999. This exchange offer entitles you
to exchange your notes for notes with identical terms that are registered with
the Securities and Exchange Commission. If the exchange offer is not completed
by May 20, 1999, the interest rate on the notes will be increased to 12.25% per
year. You should read the discussion under the heading "The Exchange Offer"
beginning on page 23 and "Description of Notes" beginning on page 31 for further
information about the registered notes.
We believe the notes issued in the exchange offer may be resold by you
without compliance with the registration and prospectus delivery requirements of
the Securities Act of 1933, subject to certain conditions. You should read the
discussion under the heading "The Exchange Offer" beginning on page 23 for
further information regarding the exchange offer and resale of notes.
REGISTRATION RIGHTS
AGREEMENT.................... You are entitled to exchange your notes for
registered notes with substantially identical
terms. The exchange offer is intended to satisfy
these rights. After the exchange offer is
complete, you will no longer be entitled to any
exchange or registration rights for your notes.
THE EXCHANGE OFFER........... We are offering to exchange $1,000 principal
amount of 12% First Mortgage Notes due 2006 of
Golden Northwest Aluminum, Inc. that have been
registered under the Securities Act of 1933 for
each $1,000 principal amount of its outstanding
12% First Mortgage Notes due 2006 which were
issued in December 1998 in a private offering.
In order to be exchanged, an outstanding note
must be properly tendered and accepted. All
outstanding notes that are validly tendered
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and not validly withdrawn will be exchanged for
registered notes.
There are $150 million principal amount of notes
outstanding.
We will issue registered notes promptly after
the expiration of the exchange offer.
RESALES...................... We believe the notes issued in the exchange
offer may be offered for resale, resold and
otherwise transferred by you without compliance
with the registration and prospectus delivery
provisions of the Securities Act of 1933
provided that
- the notes received in the exchange offer are
acquired in the ordinary course of your
business
- you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate
in the distribution of the notes issued to
you in the exchange offer, and
- you are not an affiliate of ours.
Each broker-dealer issued notes in the exchange
offer for its own account in exchange for notes
acquired by the broker-dealer as a result of
market-making or other trading activities must
acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act
of 1933 in connection with any resale of the
notes issued in the exchange offer. A
broker-dealer may use this prospectus for an
offer to resell, resale or other retransfer of
the notes issued to it in the exchange offer.
EXPIRATION DATE.............. The exchange offer will expire at 5:00 p.m., New
York City time, May 20, 1999, unless we decide
to extend the expiration date. If we extend the
exchange offer, the longest we could keep the
offer open would be until July 21, 1999, which
is 90 days after the exchange offer is first
made.
CONDITIONS TO THE EXCHANGE
OFFER........................ The exchange offer is not subject to any
condition other than the exchange offer does not
violate law or any interpretation of the staff
of the Securities and Exchange Commission.
PROCEDURES FOR TENDERING
OUTSTANDING NOTES HELD IN THE
FORM OF BOOK-ENTRY
INTERESTS.................... The outstanding notes were issued as global
securities in bearer form without interest
coupons. The outstanding notes were deposited
with U.S. Trust Company,
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National Association when they were issued. U.S.
Trust Company issued a certificateless
depositary interest in each note, which
represents a 100% interest in the note, to The
Depository Trust Company. Beneficial interests
in the notes, which are held by participants in
DTC through the without certificates or
interests that are represented only on records
and not by certificates, which we will refer to
as notes held in book-entry form, are shown on,
and transfers of the notes can be made only
through, records maintained in book-entry form
by DTC and its participants.
If you are a holder of a note held in the form
of a book-entry interest and you wish to tender
your book-entry interest for exchange in the
exchange offer, you must transmit to U.S. Trust
Company, as exchange agent, before the
expiration date of the exchange offer:
EITHER
- a properly completed and executed letter of
transmittal, which accompanies this
prospectus, or a facsimile of the letter of
transmittal, including all other documents
required by the letter of transmittal, to
the exchange agent at the address on the
cover page of the letter of transmittal;
OR
- a computer-generated message transmitted by
means of DTC's Automated Tender Offer
Program system and received by the exchange
agent and forming a part of a confirmation
of book entry transfer in which you
acknowledge and agree to be bound by the
terms of the letter of transmittal;
AND, EITHER
* a timely confirmation of book-entry transfer
of your outstanding notes into the exchange
agent's account at DTC, according to the
procedure for book-entry transfers described
in this prospectus under the heading "The
Exchange Offer -- Book-Entry Transfer"
beginning on page 27, must be received by
the exchange agent on or prior to the
expiration date;
OR
* the documents necessary for compliance with
the guaranteed delivery procedures described
below.
PROCEDURES FOR TENDERING
CERTIFICATED NOTES........... If you are a holder of a beneficial interest in
the outstanding notes, you are entitled to
receive, in exchange
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for your beneficial interest, certificated notes
which are in equal principal amounts to your
beneficial interest. As of this date, however,
no certificated notes were issued and
outstanding. If you acquire certificated notes
before the expiration date of the exchange
offer, you must tender your registered notes
under the procedures described in this
prospectus under the heading "The Exchange
Offer -- Procedures for Tendering Notes"
beginning on page 25.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS............ If you are the owner of a beneficial interest
and your name does not appear on a security
position listing of DTC as the holder of that
interest or if you are a beneficial owner of
certificated notes that are registered in the
name of a broker, dealer, commercial bank, trust
company or other nominee and you wish to tender
that interest or certificated notes in the
exchange offer, you should contact the person in
whose name your interest or certificated notes
are registered promptly and instruct such person
to tender on your behalf.
GUARANTEED DELIVERY
PROCEDURES................... If you wish to tender your notes and time will
not permit your required documents to reach the
exchange agent by the expiration date of the
exchange offer, or the procedure for book-entry
transfer cannot be completed on time or
certificates for registered notes cannot be
delivered on time, you may tender your notes
according to the procedures described in this
prospectus under the heading "The Exchange
Offer -- Guaranteed Delivery Procedures"
beginning on page 28.
WITHDRAWAL RIGHTS............ You may withdraw the tender of your notes at any
time before 5:00 p.m. New York City time on May
20, 1999.
U.S. FEDERAL INCOME TAX
CONSEQUENCES................. The exchange of notes will not be a taxable
exchange for U.S. federal income tax purposes.
You will not recognize any taxable gain or loss
or any interest income as a result of the
exchange.
EXCHANGE AGENT............... U.S. Trust Company, National Association is
serving as exchange agent for the exchange
offer.
SUMMARY OF THE TERMS OF THE EXCHANGE NOTES
The form and terms of the notes to be issued in the exchange offer are the
same as the form and terms of outstanding notes except that the notes to be
issued in the exchange offer will be registered under the Securities Act of 1933
and, accordingly, will not bear legends restricting their transfer. The notes
issued in the exchange offer will evidence the same debt as the outstanding
notes, and both the outstanding notes and the notes to be issued are governed by
the same indenture.
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TOTAL AMOUNT................. $150,000,000 total principal amount of 12% First
Mortgage Notes due 2006 of Golden Northwest
Aluminum, Inc.
MATURITY..................... December 15, 2006.
INTEREST..................... Annual rate -- 12%
Payment frequency -- every six months on June 15
and December 15
First payment -- June 15, 1999.
OPTIONAL REDEMPTION.......... On or after December 15, 2002 we may redeem some
or all of the notes at any time at the
redemption prices listed in the section
"Description of Notes" under the heading
"Optional Redemption."
ASSETS PLEDGED TO
SECURE NOTES................. To secure these notes, we
(1) granted a first priority security interest
in substantially all of our subsidiaries'
real property, plant and equipment and some
other assets, excluding, among other things,
the tolling agreements with Hydro and
Glencore and our subsidiaries' inventory,
accounts receivable and other rights to
payment and related intangibles and
(2) pledged all of the stock we own in our
direct and indirect subsidiaries.
We granted the same security to Hydro under our
note purchase agreement with Hydro. The interest
in assets and stock securing the notes is senior
to the interest in assets and stock securing the
Hydro notes. See "Description of
Notes -- Security" beginning on page 33.
SUBSIDIARY GUARANTORS........ Each of our direct or indirect wholly owned
subsidiaries has jointly and severally
guaranteed the notes. The guarantees are full
and unconditional. If we cannot make payments on
the notes when they are due, the guarantor
subsidiaries must make them.
RANKING...................... These notes and the subsidiary guarantees are
referred to as senior debts because they are
not, by their terms, ranked behind any of our
other indebtedness in right of payment. In other
words, they are not subordinated to any of our
other indebtedness. They rank ahead of all our
current and future indebtedness and the current
and future indebtedness of our subsidiaries if
the indebtedness is expressly subordinated to
the notes.
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These notes and the subsidiary guarantees:
- rank equally with other senior debt
- rank ahead of all of the subordinated debt
with Hydro and
- rank below indebtedness to the extent of any
collateral securing it.
MANDATORY SINKING FUND OR
REDEMPTION................. Generally, we are not required to redeem the
notes or make payments from a fund whose assets
and their earnings are earmarked to repay the
notes.
CHANGE OF CONTROL............ If our ownership structure materially changes,
we must offer to buy any or all the notes you
wish to sell. We must pay you 101% of the total
principal amount of the notes, plus accrued and
unpaid interest, on the date we buy the notes.
BASIC COVENANTS OF THE
INDENTURE.................. We will issue the exchange notes under our
indenture with U.S. Trust Company, National
Association. Among other things, the indenture
restricts our ability and the ability of our
subsidiaries to:
- make some payments and investments
- become liable for additional indebtedness
- create liens
- agree to payment restrictions affecting
subsidiaries
- engage in mergers and asset sales
- conduct our business
- engage in transactions with our affiliates
and some subsidiaries and
- make issuances and sales of capital stock of
our wholly owned subsidiaries.
For more information, see "Description of
Notes -- Material Covenants" beginning on page
38.
WHERE YOU CAN REACH US
Our mailing address is 3313 West Second Street, The Dalles, Oregon 97058.
Our telephone number is (541) 296-6161.
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THE NEW CREDIT FACILITY
In addition to offering the notes, our subsidiaries repaid and terminated
their prior credit facility with BankBoston, N.A. and entered into a new credit
agreement with BankBoston and others. Under the new agreement, our subsidiaries
may borrow up to $75 million on a revolving basis. The obligations under the new
credit agreement are secured by inventory, accounts receivable and other rights
to payment and related intangibles of the subsidiaries. For more information
about this revolving credit facility, see "Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Liquidity and Capital
Resources" on page 80 and "Description of Other Indebtedness and Goldendale
Preferred Stock" on page 106.
RISK FACTORS
You should carefully consider the information under the caption "Risk
Factors" beginning on page 11 and all other information in this document before
tendering your notes in the exchange offer.
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SUMMARY CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
The summary consolidated historical financial information below was derived
from the Consolidated Financial Statements beginning on page F-1. This summary
should be read together with these sections and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 75.
Our summary consolidated historical financial information includes the accounts
of Northwest Aluminum Company and Northwest Aluminum Specialties, Inc., both of
which report on a September 30 fiscal year, and Northwest Aluminum Technologies,
LLC, which reports on a calendar year, for all periods presented. They also
include the accounts of Goldendale Holding Company and Goldendale Aluminum
Company, which report on a calendar year, from May 22, 1996, the date it was
acquired by our sole shareholder.
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YEAR ENDED
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DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
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(DOLLARS IN THOUSANDS)
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CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................ $373,038 $497,872 $470,850
Cost of revenues.................... 329,739 438,299 443,251
General and administrative
expenses......................... 9,746 15,327 15,600
Depreciation and amortization....... 13,584 19,069 20,371
Operating income.................... 33,553 44,246 11,999
Net income (loss)................... 18,905 18,495 (4,853)
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DECEMBER 31, 1998
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 37,633
Working capital........................................... 78,392
Total assets.............................................. 366,128
Total debt................................................ 170,000
Goldendale Holding Company Preferred Stock................ 29,663
Total shareholder's equity................................ 77,516
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RISK FACTORS
You should carefully consider the following risks before making the
decision whether to exchange the notes.
SUBSTANTIAL LEVERAGE -- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES.
We have a significant amount of debt. The following tables show certain
important credit statistics:
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DECEMBER 31, 1998
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Total liabilities........................................... $258,949,000
Shareholders' equity........................................ $ 77,516,000
Debt to equity ratio........................................ 3.34x
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YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
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Ratio of earnings to fixed charges.......... 2.1x 0.8x
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Our substantial indebtedness could have important consequences to you. For
example, it could or will
- make it more difficult for us to satisfy our obligations under these
notes
- increase our vulnerability to general adverse economic and industry
conditions
- limit our ability to fund future working capital, capital expenditures,
research and development and other general corporate requirements
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing our cash
flow available to fund working capital, capital expenditures, research
and development efforts and other general corporate purposes
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate
- place us at a competitive disadvantage compared to our competitors that
have less debt
- with the financial and other restrictive covenants in our indebtedness,
among other things, limit our ability to borrow additional funds. Failing
to comply with those covenants could result in an event of default which,
if not cured or waived, could have a material adverse effect on us.
See "Description of Other Indebtedness and Goldendale Preferred
Stock -- Revolving Credit Facility," "Description of Other Indebtedness and
Goldendale Preferred Stock -- Hydro Subordinated Debt" and "Description of
Notes -- Offer to Purchase the Notes."
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ADDITIONAL BORROWINGS AVAILABLE -- DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND
OUR SUBSIDIARIES MAY STILL BE ABLE TO BORROW MORE MONEY. THIS COULD FURTHER
EXACERBATE THE RISKS DESCRIBED ABOVE.
We and our subsidiaries may be able to take on substantial additional
indebtedness in the future. The indenture does not prohibit us or our
subsidiaries from doing so. Our credit facility permits total borrowings up to
$75 million, and those borrowings would rank equally with the notes and the
subsidiary guarantees. Our subordinated note purchase agreement with Hydro also
allows us to borrow up to an additional $10 million in some circumstances. This
debt would be subordinate to the notes and the subsidiary guarantees. The
indenture also permits us and our subsidiaries to take on other debt. If
aluminum prices remain at the February 28, 1998 level of $0.54 per pound, we
anticipate borrowing approximately $30 million under our revolving credit
facility and no additional funds from Hydro in 1999. If aluminum prices increase
substantially, we anticipate borrowing approximately $10 million under the
revolver and $10 million from Hydro in 1999. If new debt is added to our and our
subsidiaries' current debt levels, the related risks that we and they now face
could intensify.
See "Selected Consolidated Financial Data," "Description of Other
Indebtedness and Goldendale Preferred Stock -- Revolving Credit Facility,"
"Description of Other Indebtedness and Goldendale Preferred Stock -- Hydro
Subordinated Debt" and "Description of Notes -- Offer to Purchase the Notes."
ABILITY TO SERVICE DEBT -- TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS
BEYOND OUR CONTROL.
Our ability to make payments on or to refinance our indebtedness, including
these notes, and to fund planned capital expenditures and research and
development efforts, will depend on our ability to generate cash in the future.
This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
Based on our current level of operations and anticipated cost savings and
operating improvements, we believe our cash flow from operations, available cash
and available borrowings under our credit facility will be adequate to meet our
future liquidity needs for at least the next few years. We do not assure you,
however, that our business will generate sufficient cash flow from operations,
that anticipated cost savings and operating improvements will be realized on
schedule or that future borrowings will be available to us under our credit
facility in an amount sufficient to enable us to pay our indebtedness, including
these notes, or to fund our other liquidity needs. We may need to refinance all
or a portion of our indebtedness, including these notes on or before maturity.
We do not assure you we will be able to refinance any of our indebtedness,
including our credit facility and these notes, on commercially reasonable terms
or at all.
SENSITIVITY TO PRICES -- OUR REVENUES AND EARNINGS ARE HEAVILY AFFECTED BY THE
PRICE OF PRIMARY ALUMINUM.
Low prices for primary aluminum could adversely affect our revenues and
earnings. One of our primary sources of revenue, tolling fees on primary
aluminum products is tied to the price of aluminum on the London Metals
Exchange. Decreases in the LME price have a substantial adverse effect on our
revenues and earnings because we are unable to
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expand our volume of production and the costs of our smelter operations are
largely fixed. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Operations."
Primary aluminum prices historically have been subject to significant
cyclical price fluctuations. We believe the timing of changes in the market
price of aluminum largely are unpredictable. Price fluctuations are affected by
numerous factors beyond our control, including
- the overall demand for, and worldwide supply of, primary aluminum
- the availability and price of competing commodities
- international economic trends
- currency exchange rate fluctuations
- expectations of inflation
- actions of commodity market participants
- consumption and demand patterns and
- political events in major producing countries.
Over the ten year period between January 1, 1988 and December 31, 1997, the
three-month LME price of aluminum has ranged between a low of approximately
$0.47 per pound to a high of approximately $1.26 per pound. During this period
prices averaged $0.73 per pound. From January 1, 1998 through December 31, 1998,
the three-month LME price of aluminum averaged $0.63 per pound. At February 28,
1999, the LME price for primary aluminum was $0.54 per pound.
As a result of the decline in the price for primary aluminum, our 1998
revenue was lower than it was in 1997 and we reported a loss in 1998 as compared
to income in 1997 and we do not assure you revenue or income will return to
historic levels. In addition, because fluctuations in the price for aluminum are
largely unpredictable, we do not assure you future fluctuations or declines will
not be severe or prolonged.
HOLDING COMPANY STRUCTURE -- WE ARE A HOLDING COMPANY. AS A RESULT, WE ARE
DEPENDENT ON OUR OPERATING SUBSIDIARIES FOR THE CASH FLOW NEEDED TO REPAY THE
NOTES.
Our company does not conduct any of its own operations, but rather serves
as a holding company for our operating subsidiaries. As a result, we are
dependent on distributions of the earnings of our subsidiaries through
dividends, advances or payments on account of intercompany obligations to pay
our debts, including the notes. Moreover, in the future, some new or existing
subsidiaries may not be required to repay the notes or make funds available to
us so that we may do so. In addition, a subsidiary's ability to make
distributions to us is subject to state laws and contractual or other
restrictions. Distributions also depend on results of operations of the
subsidiaries and are subject to various business considerations. See
"Description of Other Indebtedness and Goldendale Preferred Stock."
We have been a holding company only since December 1998. Our subsidiaries,
although under common ownership since May 1996, generally have operated as
independent businesses with separate boards of directors, executive management,
opera-
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tions, financing, financial reporting and employees. Our subsidiaries may
continue to operate relatively autonomously for a period of time as we evaluate
and develop appropriate practices and procedures for our consolidated company.
As a result, we can provide you with only limited operating information about
our company as a combined organization. We may experience difficulties in the
implementation of a holding company structure and commencement of operations on
a consolidated basis, including
- staffing and allocation of management resources
- integration of operating and financial functions, systems and reporting
and
- establishment of consolidated practices and procedures.
EFFECTIVE SUBORDINATION -- OUR OBLIGATION TO REPAY YOU IS SUBORDINATE TO OTHER
LENDERS' RIGHTS TO ANY COLLATERAL SECURING THE LENDERS' LOANS TO US. PROCEEDS
FROM THE SALE OF THE COLLATERAL WILL BE USED TO PAY THOSE LENDERS BEFORE THEY
ARE USED TO REPAY YOU.
Although the notes are equal or senior in rank to all of our indebtedness,
a lender's right to any collateral securing its loan ranks ahead of our
obligation to repay you on the notes. The subsidiaries' guarantees are also
effectively subordinated to a lender's right to collateral. Our credit agreement
with BankBoston is secured by our subsidiaries' accounts receivable, inventory
and some related intangibles. As a result, BankBoston will be entitled to any
proceeds of these assets up to the amount of money owed to it before any of
those proceeds can be used to repay you. At December 31, 1998, the notes were
not effectively subordinate to any secured indebtedness. The indenture permits
us and our subsidiaries to place liens on some of our assets. These liens may,
for example, secure purchase money indebtedness. The notes and the guarantees
will be effectively subordinated to this purchase money indebtedness and other
obligations secured by these liens. See "Description of Notes -- Ranking of
Notes and Guarantees."
RESTRICTIONS IMPOSED BY THE TERMS OF OUR INDEBTEDNESS -- THE TERMS OF OUR
INDEBTEDNESS PLACE SEVERAL RESTRICTIONS ON OUR ABILITY TO OPERATE OUR BUSINESS
THAT COULD RESULT IN OUR INABILITY TO REPAY THE NOTES.
The indenture contains restrictions on how we operate our business. These
restrictions limit, among other things, our ability and the ability of our
subsidiaries to
- take on additional indebtedness
- pay dividends
- make certain other restricted payments
- create liens
- issue or sell stock of some of our subsidiaries
- apply net proceeds from certain asset sales
- merge with another person
- sell, assign, transfer, lease, convey or otherwise dispose of
substantially all of our assets or
- enter into transactions with affiliates.
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Our other loan agreements, including our credit agreement with BankBoston, now
contain and will contain in the future similar restrictive covenants and will
require us to satisfy certain financial condition tests. Our ability to meet
these financial tests could be affected by events beyond our control, and we do
not assure you we will meet those tests.
If we fail to comply with a restrictive covenant or a financial test, that
failure could result in an event of default. On the occurrence of an event of
default, the lenders could declare all amounts outstanding to be immediately due
and payable. They also could proceed against the collateral granted to them to
secure that indebtedness. An event of default under other indebtedness may
constitute an event of default under the indenture. If any of our other
indebtedness becomes immediately due and payable, our assets may not be
sufficient to repay all of our indebtedness, including the notes.
Restrictive covenants and financial tests limit our operating and financial
flexibility. As a result, our ability to respond to changing business and
economic conditions and to secure additional financing, if needed, may be
significantly restricted, and we may be prevented from engaging in transactions
that might otherwise be considered beneficial to us. See "Description of
Notes -- Material Covenants."
OTHER SECURED CREDITORS -- THE COLLATERAL SECURING OUR INDEBTEDNESS TO
BANKBOSTON WILL NOT BE AVAILABLE TO YOU UNTIL THAT INDEBTEDNESS HAS BEEN REPAID.
The indenture permits us to borrow up to $90.0 million from other lenders.
Relying on this provision, we entered into a credit agreement with BankBoston,
NA that allows us to borrow up to $75.0 million on a revolving basis. These
borrowings are secured by our and our subsidiaries' accounts receivable,
inventory and related intangibles. Accordingly, these items will not be
available to you if we become the subject of bankruptcy or if we settle the
affairs of the Company by selling and distributing the assets or proceeds from
the assets until the money we owe to BankBoston is paid in full. We could owe
BankBoston up to $75.0 million plus interest and expenses. Our accounts
receivable represented $47.3 million, and our inventory represented $55.1
million, each on December 31, 1998, and are among our most liquid assets.
LIMITATIONS ON THE COLLATERAL AND THE GUARANTEES -- THE VALUE OF THE COLLATERAL
SECURING THE DEBT UNDER THE NOTES IS LIMITED AND MAY BE INSUFFICIENT TO REPAY
THE NOTES IF WE ARE IN BANKRUPTCY.
The pledge of the stock of our subsidiaries and the pledge of the real
property, plant and equipment of our subsidiaries provide only limited security
for the notes, in part because most of these assets are illiquid. Our
subsidiaries' inventory, accounts receivable and related intangibles, including
tolling agreements, are pledged to secure our obligations under our credit
agreement with BankBoston. Any contracts, agreements, licenses and other
instruments related to the real property collateral that by their express terms
prohibit their assignment or the granting of a security interest in them are
excluded from the collateral securing the notes.
The collateral securing the notes was not appraised when the notes were
offered. Accounting for depreciation, the combined book value on December 31,
1998 of our property, plant and equipment serving as collateral for the notes
was approximately $117.5 million. Depending on market and economic conditions
and the availability of buyers, the sale value of the collateral may be
substantially different from its book value. Its value could also be affected if
agreements and licenses necessary to operate our
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property, plant and equipment are not in place after bankruptcy. Some of these
agreements and licenses are not pledged to secure the notes or guarantees of the
subsidiaries and may be not included in the collateral for the notes.
Accordingly, if we default on the notes, we do not assure you the indenture
trustee would receive enough money from the sale of the collateral to repay you.
Once the collateral has been sold, your claims against our remaining assets to
repay any amounts still outstanding under the notes would be unsecured and would
be subject to state fraudulent conveyance laws. See "-- Fraudulent Conveyance
Matters," "-- Holding Company Structure" and "-- Effective Subordination."
At least some of the collateral is illiquid and its market value may not be
easy to ascertain. The collateral may not be saleable. Even if it is saleable,
substantial delays could be encountered in its liquidation. Moreover, some of
the collateral may have liens or rights and easements granted to other parties
attached to it, and these parties could exercise rights and remedies against
those assets. These actions could adversely affect the value of the collateral
and the ability of the trustee to foreclose on it.
The indenture may permit us to release collateral without substituting
other collateral in its place. See "Description of Notes -- Security."
If a bankruptcy case is commenced by or against us before the indenture
trustee has repossessed and disposed of the collateral, the right to
repossession and disposal on a default by us could be significantly impaired. In
the case of real property collateral, state law restrictions also could
significantly impair the trustee's rights. See "-- Material Limitations under
State Law" and "-- Material Bankruptcy Limitations."
The indenture trustee, on your behalf, has entered into an intercreditor
agreement with BankBoston. Among other things, the agreement allows BankBoston
to enter any of our facilities to collect accounts receivable and to remove,
sell or dispose of inventory after the trustee has obtained possession and
control of our facilities that serve as collateral for the notes. BankBoston
also may store its collateral on our premises. BankBoston's right to enter the
premises and use the collateral could delay the liquidation of the collateral.
RELEASE OF SUBSIDIARY GUARANTORS -- WE MAY BE ABLE TO RELEASE SUBSIDIARY
GUARANTORS FROM THE TERMS OF THE INDENTURE, AND IF THAT HAPPENS YOU WOULD NOT BE
ABLE TO LOOK TO THAT SUBSIDIARY FOR PAYMENT IN THE EVENT OF A DEFAULT.
We may be able to release some of our subsidiaries from the guarantees.
This would have the effect of releasing the collateral owned by those
subsidiaries without substituting other collateral in its place. In addition,
you would no longer be able to look to these subsidiaries for repayment on the
notes in the event of a default by us. See "Description of Notes -- The
Subsidiary Guarantees."
MATERIAL LIMITATIONS UNDER STATE LAW -- OREGON AND WASHINGTON STATE LAWS MAY
LIMIT YOUR ABILITY TO PURSUE OUR COMPANY FOR UNPAID AMOUNTS UNDER THE NOTES AND
TO MAKE THE NOTES IMMEDIATELY DUE AND PAYABLE.
Under Oregon and Washington law, a creditor holding a trust deed on real
property, like the mortgage on our real property and improvements securing the
notes, may enforce the lien through a judicial foreclosure or a non-judicial
sale. If the creditor proceeds by nonjudicial sale, the creditor may not enforce
any unpaid portion of the indebtedness as a personal liability of the debtor.
The creditor would, however, be entitled to proceed against any other collateral
pledged as security for the debt. Additionally, a guarantor is not liable
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for a deficiency judgment in Oregon and may limit its liability for a deficiency
judgment in Washington to the difference between the outstanding debt and the
value of the property sold by the trustee. Accordingly, if the trustee elects to
proceed by non-judicial sale of our real property collateral located in Oregon
or Washington, the law of those states could preclude recourse by you or the
trustee against us and may limit or eliminate your recourse against our
guarantor subsidiaries.
With some exceptions, we are generally prohibited under the indenture from
creating liens on (1) the collateral or (2) any other property unless the notes
are also secured by the liens. The indenture also provides that you or the
trustee can declare the notes immediately due and payable if the prohibition
against creating liens is breached and the breach is not remedied within 30 days
after we are given written notice of it. Under some court cases, to do this, you
may need to demonstrate that enforcement is reasonably necessary to protect
against impairment of your security or to protect against an increased risk of
default. Although these court decisions may have been at least partially
preempted by federal laws, the scope of this preemption is uncertain.
Accordingly, an Oregon or Washington court could prevent you or the trustee from
declaring a default and making the notes immediately due and payable because of
a breach of this covenant. Such a decision could have a material adverse effect
on your ability to enforce the covenant. See "Description of Notes -- Material
Covenants -- Limitations on Liens" and "Description of Notes -- Defaults and
Certain Rights on Default."
MATERIAL BANKRUPTCY LIMITATIONS -- THE ABILITY OF THE TRUSTEE TO LIQUIDATE THE
COLLATERAL COULD BE IMPAIRED IF A BANKRUPTCY CASE IS COMMENCED BY OR AGAINST US.
If a bankruptcy case is commenced by or against us or our subsidiaries
before the trustee repossesses and disposes of the collateral, the trustee's
right to do so after we have defaulted on the repayment of the notes will likely
be significantly impaired. Under federal bankruptcy laws, a secured creditor
cannot repossess its security from a debtor in a bankruptcy case or dispose of
security repossessed from the debtor without the bankruptcy court's approval.
Moreover, as long as the secured creditor is given adequate protection, federal
bankruptcy laws permit the debtor to continue to retain and use collateral even
though the debtor is in default under the applicable debt instruments. The
meaning of the term "adequate protection" varies according to circumstances, but
it is intended to protect the value of the secured creditor's interest in the
collateral. If the value of the collateral is diminished by the creditor's
inability to repossess it or dispose of it or by its use by the debtor, adequate
protection may include cash payments or the granting of additional security, as
the court may determine in its discretion. Generally, adequate protection
payments are not required to be paid by a debtor to a secured creditor unless
the bankruptcy court determines that the value of the secured creditor's
interest in the collateral is declining during the pendency of the bankruptcy
case. Given the lack of a precise definition of the term "adequate protection"
and the broad discretionary powers of a bankruptcy court, we do not predict how
long payments under the notes or the guarantees could be delayed following
commencement of a bankruptcy case, nor can we predict whether or when the
trustee could repossess or dispose of the collateral or whether or to what
extent holders of the notes would be compensated for any delay in payment or
loss of value of the collateral through the requirement of adequate protection.
In a federal bankruptcy case, the court has the power to confirm a plan for
the reorganization of the debtor over the objection of creditors. Among other
things, such a plan may change the interest rate and payment terms on
obligations of the debtor. Thus, if
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we were involved in a bankruptcy case, a bankruptcy court could approve a
reorganization plan that modifies the interest rate or payment terms on the
notes.
FRAUDULENT CONVEYANCE MATTERS -- FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER
SPECIFIC CIRCUMSTANCES, TO VOID GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN
PAYMENTS RECEIVED FROM GUARANTORS.
Under federal bankruptcy law and comparable provisions of state fraudulent
transfer laws, a guarantee could be voided if, among other things, the
guarantor, at the time it took on the indebtedness evidenced by its guarantee
- received less than reasonably equivalent value or fair consideration for
the guarantee, and
- was insolvent or rendered insolvent because it made the guarantee, or
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital, or
- intended to become liable for, or believed that it would become liable
for, debts beyond its ability to pay the debts as they mature.
In addition, any payment by that guarantor under its guarantee could be voided
and required to be returned to the guarantor or to a fund for the benefit of the
creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending on the law applied in any proceeding to determine whether a
fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets, or
- the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature, or it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, we believe that each guarantor, after giving effect to its
guarantee of these notes, will not be insolvent, will not have unreasonably
small capital for the business in which it is engaged and will not have become
liable for debts beyond its ability to pay the debts as they mature. We do not
assure you, however, as to what standard a court would apply in making these
determinations or that a court would agree with our conclusions in this regard.
RISK TO SECURED LENDERS UNDER ENVIRONMENTAL LAWS -- FEDERAL AND STATE
ENVIRONMENTAL LAWS MAY DECREASE THE VALUE OF THE COLLATERAL SECURING THE NOTES
AND MAY RESULT IN YOU BEING LIABLE FOR ENVIRONMENTAL CLEAN-UP COSTS AT OUR
FACILITIES.
Our facilities at Goldendale and The Dalles are classified in the same
manner as similar aluminum smelters and casthouses in the industry as generating
hazardous waste materials, and we have been required to undertake actions to
remediate environmental conditions at these facilities. The notes and guarantees
are secured by liens on real
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property that may be subject to known and unforeseen environmental risks, and
these risks may reduce or eliminate the value of the real property as collateral
for the notes. Moreover, under federal environmental laws, a secured lender may
be obligated to remediate or may be liable for the costs of remediating releases
or threatened releases of hazardous substances at a mortgaged property. There
may be similar risks under various state laws and common law theories. The costs
of environmental remediation are often substantial. See "Business --
Environmental and Health Matters."
The state of the law is unclear as to whether and under what circumstances
the obligation to remediate or the liability for remediation costs can be
imposed on a secured lender. Under federal environmental laws, a lender may be
liable if the lender or its agents or employees have participated in the
management of the operations of the debtor, even though the environmental damage
or threat was caused by a third party, a prior owner, a current owner or an
operator other than the lender. A lender would be excluded from liability,
however, if it is a person "who without participating in the management of the
facility, holds indicia of ownership primarily to protect his security
interest." This secured creditor exemption protects a holder of a security
interest, but generally only to the extent the holder is acting to protect its
security interest in the facility or property. If a lender's activities begin to
encroach on the actual management of the facility or property, the lender faces
potential liability under federal environmental laws. Similarly, when a lender
forecloses and takes title to a contaminated facility or property, the lender
becomes liable in various circumstances, including when it
- holds the facility or property as an investment, including leasing the
facility or property to a third party
- fails to market the property in a timely fashion or
- fails to properly address environmental conditions at the property or
facility.
Under the laws of some states, failure to perform required remediation may
give rise to a lien on the property to ensure the reimbursement of the costs of
such remediation. This type of lien is commonly referred to as a superlien. All
subsequent liens on such property are subordinated to a superlien. In some
states, even previously recorded liens are subordinated to a superlien. In these
states, the security interest of a creditor in any collateral that is subject to
a superlien could be adversely affected. While Oregon law provides for a
superlien, the lien does not have priority over previously recorded liens. As
noted above, however, the costs which any purchaser of the property might be
liable for in remediating environmental conditions could reduce or eliminate the
value of the property as security for the notes and the guarantees.
Before taking some actions, the trustee may request that you provide for
its reimbursement for any of its costs, expenses and liabilities. Cleanup costs
could become a liability of the trustee, and, if you agreed to provide for the
trustee's costs, expenses and liabilities, you could be required to help repay
those costs. You may agree to indemnify the trustee for its costs, expenses and
liabilities before you or the trustee knows what those amounts ultimately will
be. These costs could exceed the amount you paid for your notes. If you agreed
to this indemnification, you could be required to pay the trustee an amount that
is greater than the amount you paid for the notes.
In addition, rather than acting through the trustee, you may in some
circumstances act directly to pursue a remedy under the indenture. If you
exercise that right, you could be considered to be a lender and be subject to
the risks discussed above.
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TECHNOLOGICAL IMPROVEMENTS -- OUR SMELTERS ARE BASED ON A TECHNOLOGY WHICH IS
GENERALLY NOT USED IN THE DESIGN OF NEWER SMELTERS AND OUR CONTINUED
COMPETITIVENESS DEPENDS ON OUR ABILITY TO OPERATE EFFICIENTLY.
The design of our smelters is based on a technology that is not generally
used in the design of newer smelters. The newer smelter design has certain
advantages and may permit primary aluminum production at a lower cost. To date,
we have been able to compete because of the implementation of
efficiency-enhancing technology at our smelters, cost-competitive wages and low
power costs. Our ability to compete in the future will depend in part on our
continued ability to rely on these factors. We do not assure you this reliance
will be possible in the future. In addition, we intend to invest approximately
$75.0 million in the facilities investment program. The facilities investment
program may not produce technological improvements or other benefits, and the
additional casthouse capacity may not be fully utilized. See
"Business -- Operations" and "Business -- Facilities Investment Program."
The aluminum industry is increasingly affected by advances in technology.
Our ability to compete successfully may depend on the extent to which we are
able to implement and exploit technological changes. Our failure to develop,
anticipate or respond to these changes could have a material adverse effect on
our company.
ELECTRICITY COSTS -- LARGE INCREASES IN THE COST OF ELECTRICITY COULD HAVE A
MATERIAL ADVERSE EFFECT ON US.
Electricity is one of the largest cost inputs and can vary significantly
from smelter to smelter. Electricity costs, accordingly, can affect
significantly the relative competitiveness of primary aluminum smelters. Large
increases in the cost of electricity could adversely affect our earnings.
Approximately 60% of our electricity requirements for the next two-and-a-half
years will be provided by the BPA at pre-determined prices. The remaining 40% of
our required electricity, however, is provided by direct purchase of bulk
electric power at negotiated rates from various power marketers, including BPA,
Avista Energy, PacifiCorp, Portland General Electric, Illinova Energy, Duke
Energy and Avista Utilities. Accordingly, we are subject to risks associated
with the market price of electricity. Numerous short-term and long-term
developments can affect electricity prices, including
- worldwide demand for fossil fuels
- changing environmental standards
- the overall economic activity in the United States and the Pacific
Northwest and
- weather temperature and precipitation.
As a result of the high percentage of hydroelectric power in the electricity
supply of the Pacific Northwest, electricity prices in the region tend to be
sensitive to drought conditions that reduce the availability of low cost
hydroelectric power. See "Business -- Power Contracts."
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SOURCES OF ALUMINA -- WE HAVE BEEN INSULATED FROM CHANGES IN THE PRICE OF
ALUMINA BECAUSE OF OUR TOLLING AGREEMENTS WITH HYDRO AND GLENCORE. THE LOSS OF
EITHER OF THESE AGREEMENTS WOULD SUBJECT US TO THE RISKS ASSOCIATED WITH BUYING
RAW MATERIALS ON THE OPEN MARKET.
We obtain all of our raw materials from outside suppliers. Our alumina
requirements are met under agreements with our tolling partners, Hydro and
Glencore. Our tolling agreement with Hydro has been extended to December 2011.
Our tolling agreement with Glencore will expire on December 31, 1999, and we do
not intend to renew it. Without either of these tolling agreements, we will be
required to purchase alumina on the open market at prevailing prices. We do not
assure you we will have the financial capacity to finance such open market
purchases. In addition, without a long-term tolling contract, any limitation in
the supply or any increased cost of alumina could have a material adverse effect
on our operations and financial condition. See "Business -- Suppliers."
DEPENDENCE ON KEY PERSONNEL -- OUR MANAGEMENT HAS BEEN A KEY TO OUR PAST SUCCESS
AND THE LOSS OF ANY MEMBER OF OUR MANAGEMENT, ESPECIALLY BRETT WILCOX, COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS.
Our operating subsidiaries are dependent on their senior management and Mr.
Wilcox, our President. We have not entered into employment agreements with any
of our executive officers or key employees and we do not plan to do so. We have
not obtained key-man life insurance on any of our employees. The failure to
retain Mr. Wilcox or a number of our senior management without appropriate
replacements being hired could have a material adverse effect on us. See
"Management."
DEPENDENCE ON KEY CUSTOMERS -- OUR BUSINESS HAS BEEN HIGHLY DEPENDENT ON OUR
TOLLING PARTNERS FOR REVENUE AND ANY CHANGE IN THE STATUS OF THESE CUSTOMERS
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Each of our smelter facilities is dependent on a single customer. Through
their respective tolling agreements, Hydro and Glencore accounted for
approximately 58% of our revenue in fiscal 1997 and approximately 57% of our
revenue in fiscal 1998. We plan to let our tolling agreement with Glencore
expire at the end of 1999. The expiration of the Glencore tolling agreement will
eliminate the revenue and gross margin we derive from tolling aluminum for
Glencore. We do not assure you that we will be able to maintain a strong
relationship with Glencore after the agreement expires. If we lose either of
these customers, either of them decide for any reason to materially decrease the
amount of primary or value-added aluminum products they buy from us or either of
them significantly change their manner of doing business, our business could be
adversely affected. See "Business -- Operations."
CREDIT RISK -- BECAUSE WE DO NOT REQUIRE COLLATERAL TO SECURE CUSTOMER
RECEIVABLES, OUR COMPANY IS SUSCEPTIBLE TO THE RISK THAT OUR CUSTOMERS WILL NOT
PAY SIGNIFICANT BALANCES.
When we sell products, we generally do not require collateral as security
for customer receivables. Our subsidiaries have significant balances owing from
customers that operate in cyclical industries and under leveraged conditions
that may impair the collectibility of these receivables. For example, in the
third quarter of fiscal 1998, we recorded a write-off of a long-term receivable
from a value-added aluminum products customer of approximately $1.5 million. In
other words, we do not expect to receive that money from that
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customer. Failure to collect a significant portion of amounts due on these
receivables could have a material adverse effect on our results of operations or
financial condition.
FINANCING CHANGE OF CONTROL OFFER -- WE MAY NOT HAVE THE ABILITY TO RAISE THE
FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE
INDENTURE.
On the occurrence of certain specific kinds of change of control events we
will be required to offer to repurchase all outstanding notes. However, it is
possible that we will not have sufficient funds at the time of the change of
control to make the required repurchase of notes or that restrictions in our
credit facility will not allow such repurchases. In addition, certain important
corporate events, such as leveraged recapitalizations that would increase the
level of our indebtedness, would not constitute a "Change of Control" under the
indenture. See "Description of Notes -- Offer to Purchase the Notes."
This prospectus includes forward-looking statements including, in
particular, the statements about the Company's plans, strategies and prospects
under the headings "Prospectus Summary," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business." Although we
believe that our plans, intentions and expectations reflected in or suggested by
these forward-looking statements are reasonable, we give no assurance these
plans, intentions or expectations will be achieved. Important factors that could
cause actual results to differ materially from the forward-looking statements we
make in this prospectus are described above and elsewhere in this prospectus.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the preceding cautionary
statements.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING YOUR NOTES
We sold your notes on December 21, 1998 to BancBoston Robertson Stephens
Inc. and Libra Investments, Inc. under a purchase agreement dated December 14,
1998. Upon the terms and subject to the conditions stated in this prospectus and
in the accompanying letter of transmittal, we will accept for exchange any and
all your notes that are properly tendered on or before the expiration date of
the exchange offer and not withdrawn as permitted below. The expiration date
will be at 5:00 p.m., New York City time, on May 20, 1999. If we extend the
period of time for which the exchange offer is open, the expiration date will be
the latest time and date to which the exchange offer is extended. The longest we
could extend the offer would be until July 21, 1999 which is 90 days after the
exchange offer commences.
As of the date of this prospectus, $150,000,000 total principal amount of
the notes was outstanding. We are sending this prospectus, together with the
letter of transmittal, on or about the date stated on the cover page to you at
the addresses listed in the security register in connection with notes
maintained by the trustee. Our obligation to accept notes for exchange in the
exchange offer is subject to certain conditions.
We reserve the right, at any time or from time to time, to extend the
period of time during which the exchange offer is open, and thereby delay
acceptance for exchange of any notes, by mailing written notice of any extension
to you as described below. During any extension, all notes previously tendered
will remain subject to the exchange offer and may be accepted for exchange by
us. Any notes not accepted for exchange for any reason will be returned without
expense to the tendering holder of the notes as promptly as practicable after
the expiration or termination of the exchange offer.
Notes tendered in the exchange offer must be $1,000 in principal amount or
any integral multiple of $1,000.
We will mail written notice of any extension, amendment, non-acceptance or
termination to the holders of the notes as promptly as practicable. Any notice
will be mailed to the holders of record of the notes no later than 9:00 a.m. New
York City time, on the next business day after the previously scheduled
expiration date or other event giving rise to the notice requirement.
REGISTRATION RIGHTS; ADDITIONAL INTEREST
We have agreed with BancBoston Robertson Stephens Inc. and Libra
Investments, Inc., for your benefit and at our cost, to use our best efforts to
cause this registration statement of which this prospectus is a part to be
declared effective under the Securities Act not later than April 20, 1999. Upon
the effectiveness of the registration statement, we will promptly offer the new
notes in exchange for surrender of the notes. We will keep this offer open for
not less than 20 business days after the date notice of the offer is mailed to
you and use our best efforts to cause the offer to be completed no later than
May 20, 1999. For each note surrendered to us in the offer, the holder of the
note will receive a new note having a principal amount equal to that of the
surrendered note. Interest on each new note will accrue from the last interest
payment date on which interest was paid on the note surrendered in exchange for
the new note or, if no interest has been paid on the note, from the date of its
original issue.
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In general, if you wish to exchange the notes for new notes in the offer,
you will be required to represent that any new notes you receive will be
acquired in the ordinary course of your business, that you are not our
affiliate, as defined in Rule 405 of the Securities Act, and that at the time of
the commencement of the offer, you have no arrangement or understanding with any
person to participate in the distribution, within the meaning of the Securities
Act, of the new notes, or if you are participating in a distribution of the new
notes, that you will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
If applicable law or interpretations of the staff of the SEC do not permit
us to effect such an offer, if the offer is not completed by May 20, 1999, or if
any holder of notes notifies us within 20 business days after completion of the
offer that the holder was prohibited by applicable law or SEC policy from
participating in the offer, or that the holder may not resell the new notes
acquired by it in the offer without delivering a prospectus and that the
prospectus contained in the registration statement is not appropriate or
available for such resales or that the holder is a broker-dealer and holds notes
acquired directly from us or one of our affiliates, we will, at our cost,
(1) as promptly as practicable, but no later than 60 days after the
satisfaction of any of those conditions, file a shelf registration
statement covering resales of the notes or the new notes, depending on
which is outstanding,
(2) use our best efforts to cause the shelf registration statement to be
declared effective under the Securities Act as promptly as practicable,
but no later than 120 days after the satisfaction of any of those
conditions, and
(3) keep the shelf registration statement effective for two years after its
effective date or a shorter period that will terminate when all notes
or new notes covered by the shelf registration statement have been sold
under the shelf registration statement.
In some circumstances, we have the right to suspend the effectiveness of the
shelf registration statement for limited periods. If a shelf registration
statement is filed, we will provide to each holder for whom such shelf
registration statement was filed copies of the prospectus which is part of the
shelf registration statement, notify each such holder when the shelf
registration statement has become effective and take certain other actions
required to permit unrestricted resales of the notes or the new notes. A holder
selling these notes or new notes under the shelf registration statement
generally would be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the registration rights
agreement that are applicable to the holder.
If
(1) the registration statement has not been declared effective by April 20,
1999;
(2) the offer has not been completed by May 20, 1999;
(3) a shelf registration statement is required to be filed and is not filed
within the time specified for filing in the registration rights
agreement or is not declared effective within the time specified for
effectiveness in the registration rights agreement; or
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(4) after either the registration statement or the shelf registration
statement has been declared effective, the registration statement
thereafter ceases to be effective or fails to be usable for its
intended purpose in connection with resales of notes or new notes
during the periods specified in the registration rights agreement,
additional interest will accrue on the notes and the new notes from and
including the date on which any registration default occurs but excluding the
date on which all registration defaults have been cured. Additional interest
will accrue at a rate of 0.25% per year during the 90-day period immediately
following the occurrence of any registration default and will increase by 0.25%
per year at the commencement of each subsequent 90-day period, but additional
interest will not accrue at a rate in excess of 1.0% per year. Following the
cure of all registration defaults, the accrual of additional interest will
cease.
PROCEDURE FOR TENDERING NOTES
Your tender of notes to us as described below and our acceptance of the
notes will constitute a binding agreement between you and us upon the terms and
subject to the conditions stated in this document and in the accompanying letter
of transmittal. Except as explained below, a holder who wishes to tender notes
for exchange in the exchange offer must transmit a properly completed and
executed letter of transmittal, together with all other documents required by
the letter of transmittal, to U.S. Trust Company, National Association at the
address listed below under "-- Exchange Agent" on or before the expiration date.
In addition,
(1) certificates for the notes must be received by U.S. Trust along with
the letter of transmittal, or
(2) a timely confirmation of a book-entry transfer of the notes, if this
procedure is available, into U.S. Trust's account at The Depository
Trust Company according to the procedure for book-entry transfer
described below, must be received by U.S. Trust before the expiration
date, or
(3) you must comply with the guaranteed delivery procedures described
below.
THE METHOD OF DELIVERY OF THE NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT YOUR ELECTION AND RISK. IF THE DELIVERY IS BY MAIL, WE
RECOMMEND REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE
USED IN ALL CASES. YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE TIMELY DELIVERY.
NO LETTERS OF TRANSMITTAL OR NOTES SHOULD BE SENT TO US.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed unless the notes surrendered for exchange are tendered
(1) by a registered holder of the notes who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal or
(2) for the account of an eligible institution.
An "eligible institution" is an eligible guarantor institution, such as a bank,
stockbroker, national securities exchange, registered securities association,
savings and loan association or credit union with membership in a signature
medallion program under Rule 17Ad-15 of the Securities Exchange Act of 1934. If
signatures on a letter of transmittal or a notice of
25
<PAGE> 26
withdrawal are required to be guaranteed, the guarantees must be by an eligible
institution. If notes are registered in the name of a person other than the
person signing the letter of transmittal, the notes surrendered for exchange
must be endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by us in our sole
discretion, properly executed by the registered holder, with the signature
guaranteed by an eligible institution.
All questions about the validity, form, eligibility, including time of
receipt, and acceptance of notes tendered will be determined by us in our sole
discretion, which determination shall be final and binding. We reserve the
absolute right to reject any and all tenders of any particular notes not
properly tendered or not to accept any particular notes if acceptance might, in
our judgment or the judgment of our counsel, be unlawful. We also reserve the
absolute right in our sole discretion to waive any defects or irregularities or
conditions of the exchange offer as to any particular notes either before or
after the expiration date. This includes the right to waive the ineligibility of
any holder who seeks to tender notes in the exchange offer. The interpretation
of the terms and conditions of the exchange offer as to any particular notes
either before or after the expiration date by us shall be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of notes for exchange must be cured within a reasonable period of time
that we shall determine. Neither we, U.S. Trust nor any other person shall be
under any duty to give notification of any defect or irregularity in any tender
of notes for exchange, nor will any of us be liable for any reason for failure
to give any notification.
If the letter of transmittal is signed by a person or persons other than
the registered holder or holders of notes, the notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly as
the name or names of the registered holder or holders that appear on the notes.
If the letter of transmittal or any notes or powers of attorney are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
these persons should so indicate when signing, and unless waived by us, proper
evidence satisfactory to us of their authority to so act must be submitted with
the letter of transmittal.
By tendering notes, if you are not a broker-dealer, you must acknowledge
you are not engaged in, and do not intend to engage in, a distribution of new
notes. If you are our affiliate, as defined under Rule 405 of the Securities
Act, or are engaged in or intend to engage in or have any arrangement with any
person to participate in the distribution of the new notes to be acquired in the
exchange offer, you
(1) could not rely on the applicable interpretations of the staff of the
SEC and
(2) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives new notes for its own account in the exchange
offer must acknowledge that it will deliver a prospectus in connection with any
resale of the new notes. The letter of transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
considered to have admitted that it is an underwriter within the meaning of the
Securities Act.
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<PAGE> 27
ACCEPTANCE OF NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
We will accept, promptly after the expiration date, all notes properly
tendered and will issue the new notes promptly after acceptance of the notes.
For each note accepted for exchange, the holder of the note will receive a new
note having a principal amount equal to that of the surrendered note. The new
notes will bear interest from the most recent date to which interest has been
paid on the notes or, if no interest has been paid on the notes, from December
15, 1998. Accordingly, if the relevant record date for interest payment occurs
after the completion of the exchange offer, registered holders of new notes on
the record date will receive interest accruing from the most recent date to
which interest has been paid or, if no interest has been paid, from December 15,
1998. If, however, the relevant record date for interest payment occurs before
the completion of the exchange offer, registered holders of notes on the record
date will receive interest accruing from the most recent date to which interest
has been paid or, if no interest has been paid, from December 15, 1998. Notes
accepted for exchange will cease to accrue interest from and after the date of
completion of the exchange offer, except as explained in the immediately
preceding sentence. If your notes are accepted for exchange, you will not
receive any payment of interest on the notes otherwise payable on any interest
payment date the record date for which occurs on or after completion of the
exchange offer.
In all cases, issuance of new notes for notes that are accepted for
exchange in the exchange offer will be made only after timely receipt by U.S.
Trust of
(1) certificates for the notes or a timely book-entry confirmation of the
notes into U.S. Trust's account at The Depository Trust Company,
(2) a properly completed and executed letter of transmittal and
(3) all other required documents.
If any tendered notes are not accepted for any reason described in the terms and
conditions of the exchange offer or if certificates representing notes are
submitted for a greater principal amount than the holder desires to exchange,
certificates representing the unaccepted or non-exchanged notes will be returned
without expense to the tendering holder of the notes as promptly as practicable
after the expiration or termination of the exchange offer. If notes are tendered
by book-entry transfer into U.S. Trust's account at The Depository Trust Company
according to the book-entry transfer procedures described below, the
non-exchanged notes will be credited to an account maintained with The
Depository Trust Company.
BOOK-ENTRY TRANSFER
U.S. Trust will make a request to establish an account for the notes at The
Depository Trust Company for purposes of the exchange offer within two business
days after the date of this document, and any financial institution that is a
participant in The Depository Trust Company's systems may make book-entry
delivery of notes by causing The Depository Trust Company to transfer the notes
into U.S. Trust's account at The Depository Trust Company. ALTHOUGH DELIVERY OF
NOTES MAY BE EFFECTED THROUGH BOOK-ENTRY TRANSFER AT THE DEPOSITORY TRUST
COMPANY, THE LETTER OF TRANSMITTAL OR A FACSIMILE OF IT, WITH ANY REQUIRED
SIGNATURE GUARANTEES AND ANY OTHER REQUIRED DOCUMENTS, MUST, IN ANY CASE, BE
TRANSMITTED TO AND RECEIVED BY U.S. TRUST AT THE ADDRESS LISTED BELOW UNDER
"-- EXCHANGE AGENT" ON OR PRIOR TO THE EXPIRATION DATE OR YOU MUST COMPLY WITH
THE GUARANTEED DELIVERY PROCEDURES DESCRIBED BELOW.
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<PAGE> 28
GUARANTEED DELIVERY PROCEDURES
If you desire to tender your notes and your notes are not immediately
available, or time will not permit your notes or other required documents to
reach U.S. Trust before the expiration date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if
(1) the tender is made through an eligible institution,
(2) before the expiration date, U.S. Trust receives from the eligible
institution a properly completed and executed letter of transmittal or
a facsimile of it and notice of guaranteed delivery, substantially in
the form provided by us, stating your name and address and the amount
of notes tendered, stating that the tender is being made and
guaranteeing that within five New York Stock Exchange trading days
after the date of execution of the notice of guaranteed delivery, the
certificates for all physically tendered notes, in proper form for
transfer, or a book-entry confirmation, and any other documents
required by the letter of transmittal will be deposited by the eligible
institution with U.S. Trust and
(3) the certificates for all physically tendered notes, in proper form for
transfer, or a book-entry confirmation, and all other documents
required by the letter of transmittal, are received by U.S. Trust
within five New York Stock Exchange trading days after the date of
execution of the notice of guaranteed delivery.
WITHDRAWAL RIGHTS
Tenders of notes may be withdrawn at any time before 5:00 p.m., New York
City time, on the expiration date.
For a withdrawal to be effective, a written or facsimile notice of
withdrawal must be received by U.S. Trust at the address listed below under
"-- Exchange Agent." Any notice of withdrawal must
- specify the name of the person having tendered the notes to be withdrawn,
- identify the notes to be withdrawn, including the principal amounts of
such notes, and
- where certificates for notes have been transmitted, specify the name in
which such notes are registered, if different from that of the
withdrawing holder.
If certificates for notes have been delivered or otherwise identified to U.S.
Trust, then, prior to the release of the certificates, the withdrawing holder
must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
eligible institution unless the holder is an eligible institution. If notes have
been tendered according to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at The Depository Trust Company to be credited with the withdrawn notes and
otherwise comply with the procedures of the facility. All questions about the
validity, form and eligibility of the notices will be determined by us and our
determination will be final and binding on all parties. Certificates for any
notes so withdrawn will not be considered to have been validly tendered for
purposes of the exchange offer. Any notes that have been tendered but which are
not exchanged for any reason will be returned to the holder of the notes without
cost to the holder as soon as practicable after withdrawal, rejection of tender
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<PAGE> 29
or termination of the exchange offer. In the case of notes tendered by
book-entry transfer into U.S. Trust's account at The Depository Trust Company
according to the book-entry transfer procedures described above, the notes will
be credited to an account maintained with The Depository Trust Company for the
notes. Properly withdrawn notes may be retendered by following one of the
procedures described under "-- Procedure for Tendering Notes" above at any time
on or before the expiration date.
EXCHANGE AGENT
U.S. Trust Company, National Association has been appointed as the exchange
agent for the exchange offer. All executed letters of transmittal should be
directed to the exchange agent at the address below. Questions and requests for
assistance, requests for additional copies of this document or of the letter of
transmittal and requests for notices of guaranteed delivery should be directed
to the exchange agent, addressed as follows:
By Hand up to 4:30 P.M.:
U.S. Trust Company of California, N.A.
c/o United States Trust Company of New York
111 Broadway, Lower Level
New York, New York 10006
Attn: Corporate Trust and Agency Services
By Overnight Courier and by Hand after 4:30 P.M.:
U.S. Trust Company of California, N.A.
c/o United States Trust Company of New York
770 Broadway, 13th Floor
New York, New York 10003
Attn: Corporate Trust and Agency Services
By Facsimile:
U.S. Trust Company of California
(212) 420-6155
Confirm Facsimile by Telephone:
(800) 225-2398
DELIVERY OF THE LETTER OF TRANSMITTAL TO A DIFFERENT ADDRESS OR TRANSMISSION OF
INSTRUCTIONS VIA A DIFFERENT FACSIMILE NUMBER DOES NOT CONSTITUTE A VALID
DELIVERY OF THE LETTER OF TRANSMITTAL.
FEES AND EXPENSES
We will not make any payment to brokers, dealers or others soliciting
acceptances of the exchange offer.
TRANSFER TAXES
You will not be obligated to pay any transfer tax in connection with the
exchange, except if you instruct us to register new notes in the name of, or
request that notes not
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<PAGE> 30
tendered or not accepted in the exchange offer be returned to, a person other
than you, you will be responsible for the payment of any applicable transfer
tax.
APPRAISAL RIGHTS
YOU WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN CONNECTION WITH
THE EXCHANGE OFFER.
CONSEQUENCES OF FAILURE TO EXCHANGE NOTES
If you do not exchange their notes for new notes in the exchange offer, you
will continue to be subject to the restrictions on transfer of the notes. In
general, the notes may not be offered or sold unless registered under the
Securities Act, except under an exemption from, or in a transaction not subject
to, the registration requirements of the Securities Act and applicable state
securities laws. We do not anticipate that we will register the existing notes
under the Securities Act. Based on interpretations by the staff of the SEC
issued to third parties, new notes issued in the exchange offer in exchange for
notes may be offered for resale, resold or otherwise transferred by holders of
the new notes, other than any holder that is our affiliate within the meaning of
Rule 405 under the Securities Act, without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the new
notes are acquired in the ordinary course of the holders' business and the
holders have no arrangement with any person to participate in the distribution
of the new notes. If you are not a broker-dealer, you must acknowledge you are
not engaged in, and do not intend to engage in, a distribution of new notes. If
you are our affiliate, are engaged in or intend to engage in or have any
arrangement or understanding related to the distribution of the new notes to be
acquired in the exchange offer, you
(1) could not rely on the applicable interpretations of the staff of the
SEC and
(2) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives new notes for its own account in exchange for
notes must acknowledge that the notes were acquired by the broker-dealer as a
result of market-making activities or other trading activities and that it will
deliver a prospectus in connection with any resale of the new notes. See "Plan
of Distribution." In addition, to comply with the securities laws of certain
jurisdictions, if applicable, it may be necessary to qualify for sale or to
register the new notes prior to offering or selling the new notes. We do not
intend to take any action to register or qualify the new notes for resale in any
of these jurisdictions.
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<PAGE> 31
DESCRIPTION OF NOTES
TABLE OF CONTENTS
This table of contents only covers the "Description of Notes" section. The
table of contents for the entire prospectus is on the inside front cover.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction................................................ 32
Brief Description of the Notes and the Guarantees........... 32
Principal, Maturity and Interest............................ 33
Methods of Receiving Payments on the Notes.................. 33
Paying Agent and Registrar for the Notes.................... 33
Transfer and Exchange....................................... 33
Security.................................................... 33
The Subsidiary Guarantees................................... 34
Ranking of Notes and Guarantees............................. 36
Material Bankruptcy Limitations............................. 36
Optional Redemption......................................... 36
Offer to Purchase the Notes................................. 37
Selection and Notice........................................ 37
Material Covenants.......................................... 38
Limitations on Indebtedness............................... 38
Limitations on Restricted Payments, Restricted Investments
and Unrestricted Subsidiary Investments................ 40
Restrictions on Transactions with Affiliates and
Unrestricted Subsidiaries.............................. 45
Limitations on Liens...................................... 45
Subsidiary Guarantees..................................... 47
Limitations on Dividends and Other Payment Restrictions
Affecting Subsidiaries................................. 47
Limitations on Asset Sales................................ 47
Limitations on Unrestricted Subsidiaries.................. 49
Conduct of Business....................................... 49
Limitations on Issuances and Sales of Capital Stock of
Subsidiaries........................................... 50
Payments for Consent...................................... 50
Maintenance of Corporate Existence........................ 50
Maintenance of Insurance.................................. 50
SEC Reports............................................... 50
Merger.................................................... 51
No Amendment to Subordination Provisions.................. 52
Release of Collateral....................................... 52
Defaults and Certain Rights on Default...................... 52
Modification of Indenture or Security Agreements............ 54
Legal Defeasance and Covenant Defeasance.................... 55
Concerning the Trustee...................................... 57
Governing Law............................................... 57
Definitions................................................. 57
</TABLE>
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<PAGE> 32
INTRODUCTION
You can find the definitions of some of the terms used in this description
under the subheading "Definitions." In this description, the word "Company"
refers only to Golden Northwest Aluminum, Inc. and not to any of its
subsidiaries.
The Company will issue the new notes under an indenture among itself, the
guarantors and U.S. Trust Company, National Association, as trustee. The terms
of the notes include those stated in the indenture and those made part of the
indenture by reference to the Trust Indenture Act of 1939. The security
agreements referred to under the subcaption "Security" also define the terms of
the security interests and pledges that will secure the notes.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
THE NOTES
These notes
- are general obligations of the Company
- are secured by a first priority security interest in substantially all of
the Company's directly and indirectly owned subsidiaries' real property,
plant and equipment and some other assets and by a senior pledge of the
capital stock of the Company's directly and indirectly owned subsidiaries
- have a right to be paid in full before any future subordinated
Indebtedness of the Company and
- are fully and unconditionally guaranteed by the guarantors.
THE GUARANTEES
These notes are guaranteed by the following subsidiaries of the Company:
Goldendale Holding Company
Goldendale Aluminum Company
Northwest Aluminum Company
Northwest Aluminum Specialties, Inc.
Northwest Aluminum Technologies, LLC.
These guarantees
- are general obligations of each guarantor and
- must be paid before any future subordinated Indebtedness of each
guarantor.
As of the date of the indenture, all of our subsidiaries were "Restricted
Subsidiaries." Under the circumstances described below under the subheading
"Subsidiary Guarantees," however, we will be permitted to designate some of our
subsidiaries as "Unrestricted Subsidiaries." Unrestricted Subsidiaries will not
be subject to many of the restrictive covenants in the indenture and will not
guarantee or secure the notes.
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<PAGE> 33
PRINCIPAL, MATURITY AND INTEREST
The Company will issue notes with a maximum total principal amount of $150
million in denominations of $1,000 and integral multiples of $1,000. The notes
will mature on December 15, 2006.
Interest on the notes will accrue at the rate of 12% per year and will be
payable semi-annually in arrears on June 15 and December 15, commencing on June
15, 1999. The Company will make each interest payment to the holders of record
of these notes on the immediately preceding May 30 and November 30.
Interest on these notes will accrue from the date of original issuance or,
if interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a holder has given wire transfer instructions to the Company, the
Company will make all principal, premium and interest payments on those notes
under those instructions. All other payments on these notes will be made at the
office or agency of the paying agent and registrar in New York unless the
Company elects to make interest payments by check mailed to a holder at the
address specified in the register of holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee will initially act as paying agent and registrar. The Company
may change the paying agent or registrar without prior notice to the holders of
the notes, and the Company or any of its Subsidiaries may act as paying agent or
registrar.
TRANSFER AND EXCHANGE
A holder may transfer or exchange notes by following the requirements of
the indenture. The registrar and the trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the indenture. The Company is not required to transfer or exchange
any note selected for redemption or to transfer or exchange any note for a
period of 15 days before a selection of notes to be redeemed. The registered
holder of a note will be treated as the owner of it for all purposes.
SECURITY
Our obligations under the notes and guarantees are secured under the
security agreements by
(1) a first priority security interest in substantially all of the real
property, plant and equipment of our existing Subsidiaries, other than
the Excluded Property, and some of our other assets (collectively, the
"PP&E"); the PP&E excludes, however, the Tolling Agreements, inventory,
accounts receivable and other rights to payment and related intangibles
and proceeds, all of which are security for the revolving credit
agreement and
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<PAGE> 34
(2) a pledge (the "Pledge") of all of the issued and outstanding Capital
Stock of our direct or indirect Subsidiaries, all income, benefits and
rights derived from that Capital Stock and all related proceeds
(collectively, the "Pledged Shares" and together with the PP&E, the
"Collateral").
These security interests and Pledge have been granted to the trustee as
collateral agent on your behalf to secure the payment and performance of our
obligations under the indenture and the notes and the obligations of our
Subsidiaries under the guarantees.
The Indebtedness under the Hydro Agreement is also secured by the
Collateral, but Hydro's security interest and pledge ranks junior to the
security interest and Pledge securing the notes and guarantees. Hydro's right to
exercise remedies on the Collateral is restricted. Upon the occurrence of an
Event of Default and during the time it continues, the trustee may foreclose on
the Collateral and exercise other rights and remedies available against the
Pledged Shares.
If the guarantee of any Subsidiary guarantor is released as described under
"-- The Subsidiary Guarantees," any security interest of the trustee in the
Collateral, including the Pledge of the Pledged Shares issued by the Subsidiary,
also will be released without any further action by us, the trustee, the
Subsidiary, any other Subsidiary or any holder of the notes. The trustee will
deliver appropriate releases of the security agreements and certificates
evidencing the Pledged Shares, together with any related stock powers, to us.
Any Liens on the Collateral securing the Indebtedness under the Hydro agreement
and/or some other Indebtedness, however, must be released. At our request, the
trustee will execute and deliver an instrument evidencing the release.
THE SUBSIDIARY GUARANTEES
The guarantors have jointly and severally guaranteed the Company's
obligations under these notes. The guarantees are full and unconditional. The
guarantees are unconditional because an individual noteholder has the right to
(1) receive payment of principal, premium, Change of Control Purchase
Price, Asset Sale Purchase Price and interest from the guarantors when
due; and
(2) institute a suit against the guarantors for the enforcement of these
payments on or after the date they are due without first instituting a
legal proceeding against any other person or entity and without waiting
for the trustee to take action.
As the representative of all noteholders, the trustee can enforce the
noteholders' remedies under the notes and guarantees. If the Company fails to
make required payments on the notes following a demand for payment by the
trustee, the trustee can proceed against either or both the Company and the
guarantors for payment of the amounts due. To cause the acceleration of the
obligations under the notes and to take other legal actions on behalf of all
noteholders,
(1) a noteholder must give the trustee written notice of a continuing
default;
(2) noteholders holding at least 25% of the outstanding principal amount of
the notes must give the trustee a written request to institute a legal
action;
(3) the noteholders in (2) must offer to indemnify the trustee up to any
reasonable amount requested by the trustee for costs it takes on as
part of the legal action; and
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<PAGE> 35
(4) the trustee must refuse to institute the legal action, or neglect to do
so, for 60 days after it receives the notice in (1), the noteholders'
request in (2) and the noteholders' offer of indemnity in (3).
Even if these requirements are met, if noteholders holding a majority of
the outstanding principal amount of the notes instruct the trustee not to take
the requested action against the Company or the guarantors, no noteholder can
directly institute such a legal action. However, a noteholder may always proceed
directly against the issuer or the guarantors for past due principal, interest
and other required payments. The obligations of each guarantor under its
Subsidiary Guarantee will be limited as necessary to prevent that Subsidiary
Guarantee from constituting a fraudulent conveyance under applicable law. See
"Risk Factors -- Fraudulent Conveyance Matters."
A Subsidiary's guarantee may be released in one of two ways:
(1) If all of the capital stock of the guarantor is sold to a Person other
than the Company, a Subsidiary, an Unrestricted Subsidiary or an
Affiliate or
(2) If the Company designates the guarantor as an Unrestricted Subsidiary.
In either case, any guarantee or other obligation that the guarantor has for
Indebtedness or Refinancing Indebtedness under the Credit Agreement or the Hydro
Agreement must be released either before or at the same time as the release of
the guarantee of the notes. See "-- Material Covenants -- Limitations on Asset
Sales." "Incur" and "Refinancing Indebtedness" are defined on page 38.
Under certain circumstances, the Company will be able to designate
Restricted Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries
will not be "Subsidiaries" for purposes of the indenture and will not be subject
to most of the restrictive covenants in the indenture. The Company currently has
no Unrestricted Subsidiaries. When a Subsidiary is designated as an Unrestricted
Subsidiary in compliance with the terms of the indenture, the obligations of the
Subsidiary under its guarantee will be released without any further action on
the part of the trustee, the Company, the Subsidiary, any other Subsidiary of
the Company or any holder of the notes. For such a release to occur, however,
any obligations of the Subsidiary on Indebtedness under the Credit Agreement,
and/or any Refinancing Indebtedness Incurred in any Refinancing, or successive
Refinancing, of that Indebtedness, and any guarantee by such Subsidiary of the
Indebtedness under the Hydro Agreement, and/or any Refinancing Indebtedness
Incurred in any Refinancing, or successive Refinancing, of that Indebtedness,
must also be released. In addition, upon the designation of a Subsidiary as an
Unrestricted Subsidiary, the Collateral Agent will release any Collateral of the
Unrestricted Subsidiary in the manner contemplated by the security agreements.
Again, this release is only possible if the Collateral is also released from the
Hydro Agreement and all Collateral for the Credit Agreement is also released.
The trustee will deliver written evidence any release of a Subsidiary from
its guarantee at the request of the Company. Upon the release of any Subsidiary,
the other Subsidiaries of the Company not so released will remain liable for the
Company's obligations under the notes and the Subsidiaries' guarantee as and to
the extent provided in the indenture.
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<PAGE> 36
RANKING OF NOTES AND GUARANTEES
The payment of principal, premium and interest, if any, on the notes and
guarantees will rank senior in right and priority of payment to all Indebtedness
of the Company or any of its Subsidiaries that by its terms is expressly
subordinated to the notes. Subordinated debt includes the Indebtedness under the
Hydro Agreement and the related guarantees by the Subsidiaries of the Hydro
debt. The notes and the guarantees will rank equally in right and priority of
payment with all other unsubordinated Indebtedness of the Company or any of its
Subsidiaries, which includes the Indebtedness of the Subsidiaries of the Company
under the Credit Agreement. Holders of secured obligations of the Company and
its Subsidiaries, however, including the financial institutions party to the
Credit Agreement but excluding the holder of the Indebtedness under the Hydro
Agreement, will have claims to the assets securing these obligations that are
prior to the claims of the holders of the notes.
MATERIAL BANKRUPTCY LIMITATIONS
The Company is a holding company. It conducts substantially all of its
business through its guarantor Subsidiaries. Holders of the notes will be
creditors of each Subsidiary guarantor by virtue of its guarantee and the Lien
granted to the holders of the notes on the Subsidiary's assets. Nonetheless, in
the event of the bankruptcy of a Subsidiary guarantor, the Subsidiary's
obligations under its guarantee and any Liens on the Subsidiaries' assets may be
subject to avoidance under state and federal fraudulent transfer and conveyance
laws. Among other things, these obligations may be avoided if a court concludes
that the obligations were acquired for less than fair consideration or
reasonably equivalent value at a time when the Subsidiary
(1) was insolvent,
(2) was rendered insolvent, or
(3) was left with inadequate capital to conduct its business or debts that
were beyond its ability to pay as they matured.
A court could conclude that a Subsidiary guarantor did not receive fair
consideration or reasonably equivalent value to the extent that the total amount
of its liability under its guarantee exceeds the economic benefits it receives
from the offering of the notes. The obligations of each Subsidiary guarantor
under its guarantee and any Liens on the Subsidiaries' assets will be limited in
a manner intended to avoid fraudulent transfer or conveyance concerns under
applicable law. We do not assure you, however, a court would give the holders of
the notes the benefit of these provisions.
If the obligations of a Subsidiary guarantor under its guarantee or any
Lien granted to the holders of the notes are avoided, holders of notes would
have to look to the assets of the Company and any remaining Subsidiaries of the
Company for payment. We do not assure you such assets would be sufficient to pay
the notes.
OPTIONAL REDEMPTION
The Company may not redeem the notes before December 15, 2002. On or after
December 15, 2002, the Company may redeem all or a part of the notes, on not
less than 15 nor more than 60 days notice, at the redemption prices, which are
expressed as a percentage of principal amount below, plus accrued and unpaid
interest, if any, to the
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<PAGE> 37
applicable redemption date, if redeemed during the 12-month period beginning
December 15, of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002................................................ 108.000%
2003................................................ 105.333%
2004................................................ 102.667%
2005 and thereafter................................. 100.000%
</TABLE>
OFFER TO PURCHASE THE NOTES
Under the indenture, if any Change of Control of the Company occurs on or
before maturity, the Company will be required to make an offer to purchase from
each holder all or any part of the holder's notes. If only a part is purchased,
the Company will purchase the notes in multiples of $1,000. To be eligible to
receive this payment, a holder of the notes must deliver and not withdraw a
Change of Control Purchase Notice to the Company as provided in the indenture.
The purchase date will occur 30 business days after the Change of Control (the
"Change of Control Purchase Date"). The purchase price will be paid in cash and
will equal 101% of the principal amount plus accrued and unpaid interest to the
Change of Control Purchase Date (the "Change of Control Purchase Price").
Some of the circumstances that would require the Company to make an offer
to repurchase the notes on a Change of Control would also constitute an event of
default under the Credit Agreement and the Hydro Agreement. In the event of such
a default, the obligations of the Company under those agreements could be
declared due and payable. In addition, the repurchase of the notes on a Change
of Control could result in defaults under the Credit Agreement. See "Risk
Factors -- Financing Change of Control Offer."
Under some circumstances, the indenture will require the Company to make an
offer to purchase specified portions of the notes if the Company has available
Net Cash Proceeds as a result of Asset Sales. See "-- Material
Covenants -- Limitations on Asset Sales." The Company's ability to pay cash to
the holders of notes upon a Change of Control or Asset Sale may be limited by
the Company's then existing financial resources.
The indenture will require the Company to comply with all applicable
federal securities laws, including Rule 14e-1 under the Exchange Act, in
connection with any repurchase of notes upon a Change of Control or Asset Sales.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption on a pro rata basis, by lot or by any method
the trustee decides is fair and appropriate. No notes of $1,000 or less will be
redeemed in part. Notices of redemption will be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each holder of
notes to be redeemed at its registered address. Notices of redemption may not be
conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount to be
redeemed. A new note in principal amount equal to the unredeemed portion of the
original note will be issued in the
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name of the holder of the note upon cancellation of the original note. Notes
called for redemption become due on the date fixed for redemption. On and after
the redemption date, interest ceases to accrue on notes or portions of them
called for redemption.
MATERIAL COVENANTS
LIMITATIONS ON INDEBTEDNESS
The Company will not, and will not permit any of its Subsidiaries to
create, acquire, issue, assume, guarantee or become liable in connection with,
or extend the maturity of or become liable for the payment of, contingently or
otherwise (collectively, "Incur"), any Indebtedness. The Company and the
Subsidiaries, however, Incur Indebtedness, including guarantees, if, after
giving effect to the Incurrence and the receipt and application of the proceeds
from the Incurrence, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than 2.0 to 1, in the case of Indebtedness Incurred before December
15, 2001, and 2.25 to 1, in the case of Indebtedness Incurred on or after
December 15, 2001.
The paragraph above does not prohibit the following:
(1) Indebtedness Incurred by the Company and its Subsidiaries under the
notes;
(2) Indebtedness Incurred by any of the Subsidiaries of the Company under
the Credit Agreement in a total principal amount at any one time
outstanding not to exceed the greater of (a) $90,000,000 or (b) the
then amount of the Borrowing Base; letters of credit and bankers'
acceptances are treated as having a principal amount equal to the
maximum reimbursement obligations under them;
(3) Indebtedness Incurred by the Company under the Hydro Agreement in a
total original principal amount not to exceed $30,000,000, and
guarantees by the Subsidiaries of the Company of this Indebtedness;
(4) Indebtedness Incurred by any of the Subsidiaries of the Company payable
solely to the Company or any Wholly Owned Subsidiary;
(5) Indebtedness Incurred by a Person before the date on which it becomes a
Subsidiary of the Company, other than Indebtedness Incurred by the
Person as part of, or in contemplation of, it becoming a Subsidiary of
the Company, provided that the holders of this Indebtedness do not have
at any time any recourse to any property or assets of the Company and
its Subsidiaries other than the property and assets of the acquired
Person and its Subsidiaries;
(6) Indebtedness ("Refinancing Indebtedness") Incurred by the Company or
any of its Subsidiaries that serves to Refinance, in whole or in part,
any Indebtedness permitted by this paragraph (other than by clause (4)
or (8)) or by the immediately preceding full paragraph (the "Refinanced
Indebtedness"), or any one or more successive Refinancings of any of
the Indebtedness; provided, however, that:
(a) the total Refinancing Indebtedness does not exceed the total
Refinanced Indebtedness, including accrued interest, the amount of
any premium required to be paid as part of the Refinancing under the
terms of the Refinanced Indebtedness or the amount of any reasonable
and customary premium determined by the Company to be necessary to
accomplish the
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Refinancing by means of a redemption, tender offer, privately
negotiated transaction or other similar transaction, and an amount
equal to the reasonable fees and expenses in connection with the
Incurrence of the Refinancing Indebtedness;
(b) neither the Company nor any of its Subsidiaries is an obligor of the
Refinancing Indebtedness, except to the extent that such Person
(I) was an obligor of the Refinanced Indebtedness or
(II) is otherwise permitted, at the time the Refinancing
Indebtedness is Incurred, to be an obligor of the Refinancing
Indebtedness; and
(c) in the case of any Refinanced Indebtedness that is subordinated by
its terms in right and priority of payment to the notes or any
Guarantee, the Refinancing Indebtedness
(I) has a final maturity and weighted average maturity at least as
long as the Refinanced Indebtedness and
(II) is subordinated by its terms in right and priority of payment
to the notes or the guarantee at least to the same extent as
such Refinanced Indebtedness;
(7) Indebtedness in a total original principal amount not to exceed
$15,000,000 Incurred by the Company, Northwest Aluminum Company or
Northwest Aluminum Specialties to fund capital improvements projects at
Northwest or Specialties, and guarantees by the Subsidiaries of the
Company of this Indebtedness, provided that the Indebtedness and the
guarantees are subordinated in right and priority of payment to the
notes and the guarantees on terms no less favorable to the holders of
the notes than those applicable to the Indebtedness under and
guarantees of the Hydro Agreement as in effect on the date of the
indenture, and further provided that this Indebtedness has a final
maturity date no earlier than one year following the stated maturity of
the notes and provides for payments of principal and interest on terms
no less favorable to the holders of the notes than those contained in
the Hydro Agreement;
(8) Indebtedness Incurred by the Company or any of its Subsidiaries under
Aluminum Hedging Obligations entered into in the ordinary course of
business and not for speculative purposes in reasonable relation to the
Company's or the Subsidiary's business; and
(9) other Indebtedness Incurred by the Company in a total combined
principal amount which does not exceed $5,000,000 at any time
outstanding, and guarantees by Subsidiaries of the Company of this
Indebtedness.
The Board of Directors of the Company may designate an Unrestricted
Subsidiary to be a Subsidiary of the Company, provided that the conditions
specified in the definition of "Unrestricted Subsidiary" are met. A
redesignation will be treated as an Incurrence by the Company or its
Subsidiaries of the Indebtedness of the redesignated Subsidiary, to the extent
that the Indebtedness does not already constitute Indebtedness of the Company or
any of its Subsidiaries for purposes of this covenant as of the date of the
redesignation.
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Any Indebtedness of any other Person existing at the time the Person
becomes a Subsidiary of the Company or secured by a Lien on any assets acquired
by the Company or any Subsidiary of the Company will be considered, for purposes
of this covenant, other than clause (5) above, to be Incurred at the time the
Person becomes a Subsidiary or at the time the assets are acquired.
The Company will not, and will not permit any of its Subsidiaries to, Incur
any Indebtedness that is subordinated by its terms in right and priority of
payment to any other Indebtedness of the Company or its Subsidiaries unless the
Indebtedness is also subordinated by its terms in right and priority of payment
to the notes and the guarantees on substantially identical terms. No
Indebtedness of the Company or any Subsidiary of the Company will be considered
to be subordinated in right and priority of payment to any other Indebtedness of
the Company or the Subsidiary solely by virtue of being unsecured or
unguaranteed.
LIMITATIONS ON RESTRICTED PAYMENTS, RESTRICTED INVESTMENTS AND UNRESTRICTED
SUBSIDIARY INVESTMENTS
The Company will not
(1) declare or pay any dividend or make any distribution on, or permit any
of its Subsidiaries to declare or pay any dividend or make any
distribution on, its Capital Stock, other than dividends payable in
Capital Stock of the Company which is not Disqualified Stock, provided
that any Subsidiary of the Company may pay dividends or make
distributions to the Company or any other Wholly Owned Subsidiary,
(2) make or permit any of its Subsidiaries to make any payment on account
of the purchase, redemption or other acquisition or retirement of any
Capital Stock of the Company or any of its Subsidiaries, provided that
any Subsidiary of the Company may purchase Capital Stock of the
Subsidiary from the Company or any Wholly Owned Subsidiary and the
purchase will not be a Restricted Payment or a Restricted Investment,
(3) make or permit any of its Subsidiaries to make any principal payment
on, or any prepayment, purchase, redemption or other acquisition or
retirement for value of, any Indebtedness of the Company or any of its
Subsidiaries that is subordinated by its terms in right and priority of
payment to the notes or any guarantee, provided that any Subsidiary of
the Company may pay, prepay, purchase, redeem or otherwise acquire or
retire any of the Indebtedness of the Subsidiary payable to the Company
or any other Wholly Owned Subsidiary (each of the payments described in
clauses (1), (2) and (3), a "Restricted Payment"),
(4) make or permit any of its Subsidiaries to make any Restricted
Investment, or
(5) make or permit any of its Subsidiaries to make any Unrestricted
Subsidiary Investment, unless at the time of, and immediately after
giving effect to, each
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Restricted Payment, Restricted Investment or Unrestricted Subsidiary
Investment:
(a) there is no existing or pending Event of Default; and
(b) the Consolidated Fixed Charge Coverage Ratio of the Company is
greater than 2.0 to 1 until December 15, 2001, and 2.25 to 1 after
December 15, 2001; and
(c) the sum of:
(I) the total amount expended for all Restricted Payments after
the date of the indenture,
(II) the total amount expended for all Restricted Investments
after the date of the indenture minus (A) to the extent any
Restricted Investment made after the date of the indenture
is sold for or otherwise liquidated or repaid in cash, the
lesser of the cash return of capital for the Restricted
Investment, minus the cost of disposal, if any, and the
initial amount of the Restricted Investment, and (B) the
amount of any guarantee or similar contingent obligation
that constitutes a Restricted Investment made after the date
of the indenture, to the extent it has been released, and
(III) the total amount of Unrestricted Subsidiary Investments
Outstanding
would not exceed the sum of:
(IV) 50% of the Consolidated Net Income of the Company, or, if the
total Consolidated Net Income of the Company for any period
is a deficit, minus 100% of the deficit, accrued on a
cumulative basis for the period, taken as one accounting
period, from January 1, 1999 to the end of the Company's most
recently ended fiscal quarter for which financial statements
are available at the time the Restricted Payment, Restricted
Investment or Unrestricted Subsidiary Investment is being
made,
(V) the total net proceeds, including the Fair Market Value of
property other than cash, received by the Company as capital
contributions to the Company, other than from a Subsidiary or
an Unrestricted Subsidiary of the Company, after the date of
the indenture, or from the issue or sale, other than to a
Subsidiary or an Unrestricted Subsidiary of the Company,
after the date of the indenture, of Capital Stock of the
Company other than Disqualified Stock, excluding any net
proceeds of a Qualified Equity Offering to the extent used to
redeem any part of the notes, or from the issue or sale,
other than to a Subsidiary or an Unrestricted Subsidiary of
the Company, after the date of the indenture, of any debt or
other security of the Company convertible into or exercisable
for such Capital Stock that has been so converted or
exercised, and
(VI) 50% of any dividends or other distributions consisting of
cash received by the Company or a Wholly Owned Subsidiary
after the date of the indenture from any Unrestricted
Subsidiary to the extent that these
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dividends or other distributions are not required to reduce
the amount of the Unrestricted Subsidiary Investments
Outstanding to zero.
In each case, the amount expended for Restricted Payments, Restricted
Investments and Unrestricted Subsidiary Investments, if paid in property other
than in cash or a sum certain guaranteed, will be the Fair Market Value of the
property.
The preceding provisions will not be violated by:
(1) the payment of any dividend or distribution or the redemption of any
securities within 60 days after the date of declaration of the dividend
or distribution or the giving of the formal notice by the Company of
the redemption, if at the date of declaration of the dividend or
distribution or the giving of the formal notice of the redemption, the
dividend, distribution or redemption would have been permitted;
(2) the retirement of any shares of the Company's Capital Stock by exchange
for, or out of the proceeds of, the substantially concurrent sale,
other than to a Subsidiary or an Unrestricted Subsidiary of the
Company, of other shares of its Capital Stock other than Disqualified
Stock or out of the proceeds of a substantially concurrent capital
contribution to the Company, other than by a Subsidiary or an
Unrestricted Subsidiary of the Company; provided, however, that, to the
extent the proceeds are so used, the sale of Capital Stock or capital
contribution will be excluded in determining the total net proceeds
received by the Company referred to under clause 5(c)(V) of the
preceding full paragraph;
(3) the payments provided for by clauses (2) and (3) of the second
paragraph under "-- Restrictions on Transactions with Affiliates and
Unrestricted Subsidiaries";
(4) principal payments on, or any prepayment, purchase, redemption or other
acquisition or retirement for value of, Indebtedness of the Company or
any of its Subsidiaries that is subordinated by its terms in right and
priority of payment to the notes or any guarantee with the proceeds
from the substantially concurrent Incurrence of any Refinancing
Indebtedness permitted by clause (6) of the second paragraph described
under "-- Limitations on Indebtedness," other than Refinancing
Indebtedness payable to the Company or any of its Subsidiaries or
Unrestricted Subsidiaries; provided, however, that, to the extent the
proceeds are so used, the proceeds, upon any conversion of the
Refinancing Indebtedness into Capital Stock, will not be included in
determining the total net proceeds received by the Company referred to
under clause 5(c)(V) of the preceding full paragraph;
(5) principal payments on, or any prepayment, purchase, redemption or other
acquisition or retirement for value of, any Indebtedness of the Company
or any of its Subsidiaries that is subordinated by its terms in right
and priority of payment to the notes or any guarantee by exchange for,
or out of the proceeds of, the substantially concurrent sale, other
than to a Subsidiary or an Unrestricted Subsidiary of the Company, of
Capital Stock of the Company other than Disqualified Stock or out of
the proceeds of a substantially concurrent capital contribution to the
Company, other than by a Subsidiary or an Unrestricted Subsidiary of
the Company; provided, however, that, to the extent the proceeds are so
used, the sale of Capital Stock or capital contribution will be
excluded in
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determining the total net proceeds received by the Company referred to
under clause 5(c)(V) of the preceding full paragraph;
(6) (a) from time to time during or following the end of any fiscal quarter
during which the Company is an "S Corporation" within the meaning
of Section 1361 of the Internal Revenue Code of 1986, a "qualified
subchapter S subsidiary" within the meaning of Section
1361(b)(3)(B) of the Code, or a Person who has elected to be taxed
as a pass-through entity or otherwise ignored for federal income
tax purposes, cash distributions by the Company to its shareholders
in an amount equal to the maximum amount sufficient to cover
payment of the expected federal and state income taxes attributable
to the direct or indirect ownership of the Company's common stock,
based on the highest federal and state income tax rates that could
be applicable to any holder of such common stock, as determined
through the end of the fiscal quarter in question plus any
penalties or interest, and
(b) if, subsequent to any year in which the Company or any Subsidiary of
the Company was an "S Corporation," a "qualified subchapter S
subsidiary" or a Person who has elected to be taxed as a
pass-through entity or otherwise ignored for federal income tax
purposes, any taxing authority or court shall finally determine,
including by way of settlement or stipulation, that additional
federal or state income taxes or any penalties or interest are
payable by the holders of the Company's or the Subsidiary's common
stock for income of the Company or the Subsidiary during that year,
cash distributions to the holders in an additional amount sufficient
to pay the additional federal or state income taxes plus any
penalties or interest;
provided, however, that, in the case of either clause (a) or (b), in no
event shall amounts so distributed after the date of the indenture for
any year exceed the actual amount of federal and state income taxes,
including any penalties or interest, or additional income taxes,
including any penalties or interest, for the year on the income
attributable to the ownership of the Company's or the Subsidiary's
common stock; provided, further, that for purposes of clause 5(c)(IV) in
the full preceding paragraph, Consolidated Net Income of the Company
shall be reduced by an amount equal to any cash distributions made to
pay any penalties or interest in connection with any federal and state
income taxes under these clauses (6)(a) or (b);
(7) the repurchase by Goldendale Holding Company of shares of its preferred
stock outstanding on the date of the indenture; provided, however, that
the total amount paid to repurchase such preferred stock does not
exceed $30,500,000, plus any accrued and unpaid dividends; and
provided, further, that, immediately after giving effect to the
repurchase there is no existing or pending Event of Default, and the
Company could take on $1.00 of Indebtedness under the first paragraph
of the covenant described under "-- Limitations on Indebtedness"; and
(8) the making by the Company or any Subsidiary of the Company of
Restricted Payments in addition to those permitted by any other clause
of this paragraph or by the first full paragraph of this covenant in a
total amount not exceeding $1,000,000.
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No payments and other transfers made under clauses (2) through (7), except
as provided in clause (6), of the preceding paragraph will reduce the amount
available for Restricted Payments, Restricted Investments and Unrestricted
Subsidiary Investments under the first full paragraph of this covenant. Payments
made under clause (1) or (8) and as specified in clause (6) of the preceding
paragraph will reduce the amount available for Restricted Payments, Restricted
Investments and Unrestricted Subsidiary Investments under the first full
paragraph of this covenant.
The Company's board of directors may designate a Subsidiary as an
Unrestricted Subsidiary if
(1) after the designation, no Event of Default exists,
(2) after the designation, the Company could take on $1.00 of Indebtedness
as described in the first paragraph of "-- Material
Covenants -- Limitations on Indebtedness,"
(3) the Subsidiary does not own any stock of the Company or another
Subsidiary of the Company at the time of or after the designation and
(4) the Subsidiary is not a party to any transaction with the Company or
another Subsidiary of the Company at the time of designation unless the
transaction is permitted as described under "-- Material
Covenants -- Restrictions on Transactions with Affiliates and
Unrestricted Subsidiaries."
In addition, the Unrestricted Subsidiary Investments discussed below must be
permitted for the designation to be allowed.
The Company's ability to designate a Subsidiary as an Unrestricted
Subsidiary allows it to more freely pursue additional financing for future
projects. To the extent the Company participates in projects that require
financing in addition to the notes, the Company may need the ability to create
subsidiaries that can pursue such project financing without being subject to the
restrictions of the indenture and the obligations under the guarantees. A
subsidiary that is not subject to the restrictions of the indenture and the
guarantees may be able to procure project financing more easily than a
subsidiary that has guaranteed the notes.
All outstanding Unrestricted Subsidiary Investments in a Subsidiary that
has been designated as an Unrestricted Subsidiary will be Unrestricted
Subsidiary Investments Outstanding at the time of the designation. These
Unrestricted Subsidiary Investments Outstanding will reduce the amounts
available for Restricted Payments, Restricted Investments and Unrestricted
Subsidiary Investments as described under the first full paragraph of this
section. These Unrestricted Subsidiary Investments which will be deemed to have
been made when the designation occurs, will be equal to the greater of
(1) the net book value of the Unrestricted Subsidiary Investments when the
designation occurs and
(2) the Fair Market Value of the Unrestricted Subsidiary Investments when
the designation occurs.
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RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES AND UNRESTRICTED SUBSIDIARIES
The Company will not, and will not permit any of its Subsidiaries to, enter
into any transaction or series of related transactions with any Affiliate or
Unrestricted Subsidiary of the Company, unless
(1) the terms of the transaction are no less favorable to the Company or
the Subsidiary than those that could reasonably be expected to be
obtained in a comparable transaction with an unrelated Person,
(2) if the amount of the transaction or the total amount of a series of
related transactions is greater than $1,000,000, the transaction or
series of related transactions shall have been approved as meeting such
standard, in good faith, by a majority of the disinterested members of
the Board of Directors of the Company, as evidenced by a resolution of
the Board of Directors of the Company, and
(3) if the amount of the transaction or the total amount of a series of
related transactions is greater than $5,000,000, the Company or the
Subsidiary shall have received an opinion that the transaction or
series of related transactions is fair to the Company or the Subsidiary
from a financial point of view, from an independent investment banking,
appraisal or accounting firm of national standing selected by the
Company, which, in the good faith judgment of the Board of Directors of
the Company, is qualified to perform this task.
The provisions contained in the preceding paragraph will not apply to
(1) the making of any Restricted Payments, Restricted Investments and
Unrestricted Subsidiary Investments otherwise permitted by the covenant
described under "-- Limitations on Restricted Payments, Restricted
Investments and Unrestricted Subsidiary Investments,"
(2) compensation in the form of reasonable director's fees and
reimbursement or advancement of reasonable out-of-pocket expenses paid
to any director of the Company or its Subsidiaries for services
rendered in that Person's capacity as a director and indemnification
and directors' and officers' liability insurance provided in connection
with the position of director, and
(3) compensation, reimbursement of expenses and amounts arising from
liabilities related to corporate affairs and other benefits paid or
provided to officers and employees of the Company or its Subsidiaries
for services rendered consistent with the Company's practices on the
date of the indenture or comparable to those generally paid or provided
by entities engaged in the same or similar businesses, including
reimbursement or advancement of reasonable out-of-pocket business
expenses and the provision of directors' and officers' liability
insurance.
LIMITATIONS ON LIENS
The Company will not, and will not permit any of its Subsidiaries to,
create, become liable for, assume or allow to exist any Lien upon any of its
assets, including without limitation the Pledged Shares, to secure any
Indebtedness or obligations other than the notes, unless the notes are equally
and proportionately secured on a senior basis for so long as the secured
Indebtedness or obligations are so secured.
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There will not, however, be any prohibitions against:
(1) Liens on the assets of the Subsidiaries of the Company, other than the
Collateral, securing Indebtedness under the Credit Agreement permitted
by clause (2) of the second paragraph of the covenant described under
"-- Limitations on Indebtedness";
(2) Liens on the Collateral securing Indebtedness under the Hydro Agreement
permitted by clause (3) of the second paragraph of the covenant
described under "-- Limitations on Indebtedness," provided that these
Liens are subordinated to the Liens on the Collateral on terms
substantially identical to those in effect on the date of the
indenture;
(3) Liens in favor of the Company or any Wholly Owned Subsidiary;
(4) Liens on assets of a Person existing at the time the Person is merged
into or with the Company or any Subsidiary of the Company, provided
that these Liens were not created in connection with or in
contemplation of the merger and do not extend to any other assets,
other than Improvements to or on those assets and any proceeds of these
assets, of the Company or any Subsidiary of the Company;
(5) Liens on assets existing at the time of acquisition of the assets by
the Company or any Subsidiary of the Company, provided that these Liens
were not created in connection with or in contemplation of the
acquisition and do not extend to any other assets, other than
Improvements to or on those assets and any proceeds of these assets, of
the Company or any Subsidiary of the Company;
(6) Liens securing Refinancing Indebtedness permitted by clause (6) of the
second paragraph of the covenant described under "-- Limitations on
Indebtedness" and Incurred to Refinance, or successively Refinance, any
Indebtedness secured by Liens permitted by this paragraph, other than
by clause (3) or (8) of this paragraph, provided that the Liens
securing the Refinancing Indebtedness are not attached to any assets,
which may be by category or type. of the Company or any Subsidiary of
the Company other than those securing the Indebtedness so Refinanced;
(7) Permitted Liens; and
(8) Liens on assets of the Company or the Subsidiaries, other than the
Pledged Shares, in addition to those permitted by clauses (1) through
(7), securing Indebtedness or obligations in a total amount at any time
outstanding not exceeding $5,000,000.
The notes will be considered equally and proportionately secured on a senior
basis with any other Lien if the Lien securing the notes is of at least equal
priority and covers the same assets as the other Lien, provided that, if the
Indebtedness or obligations secured by the other Lien are expressly subordinated
in right and priority of payment by their terms to the notes or any guarantee,
the Lien securing the notes shall be senior to the other Lien.
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SUBSIDIARY GUARANTEES
The indenture provides that, if any Person becomes a Subsidiary of the
Company after the date of the indenture, including as a result of any merger or
other acquisition or any designation by the Board of Directors of the Company,
the Company will
(1) execute and deliver to the trustee, and cause each Person, and, in the
event the Company owns any of the Capital Stock of the Person
indirectly through one or more other Subsidiaries of the Company, each
of the other Subsidiaries, to execute and deliver to the trustee, a
supplemental indenture complying with the requirements of the indenture
satisfactory in form to the trustee under which
(a) the Person will be named as an additional Subsidiary of the Company
subject as such to the terms of the indenture, including without
limitation the provisions described under "-- The Subsidiary
Guarantees," and
(b) all of the issued and outstanding Capital Stock of the Person owned
by the Company or any Subsidiary of the Company together with all
income, benefits and rights derived from the Capital Stock and all
proceeds from it will become subject to the Pledge under the
indenture, and
(2) deliver or cause the Subsidiaries to deliver to the trustee all
certificates evidencing the Capital Stock, properly endorsed or
accompanied by properly executed stock powers satisfactory in form to
the trustee.
LIMITATIONS ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Company will not, and will not permit its Subsidiaries to, create or
otherwise allow to exist any consensual restrictions on the ability of any
Subsidiary of the Company to pay dividends or make any other distributions on
its Capital Stock or pay any Indebtedness owed to the Company or any other
Subsidiary of the Company or to make loans or advances or transfer any of its
assets to the Company or any other Subsidiary of the Company; provided, however,
that these restrictions shall not prohibit Permitted Dividend Encumbrances.
LIMITATIONS ON ASSET SALES
The Company will not, and will not permit any of its Subsidiaries to,
consummate any Asset Sale unless the Company or the Subsidiary receives
consideration in connection with the Asset Sale at least equal to the Fair
Market Value of the assets sold, transferred or otherwise disposed of and at
least 75% of the consideration from the Asset Sale received by the Company or
the Subsidiary, exclusive of agreements for reimbursement for loss or liability,
is in the form of cash or Cash Equivalents, provided that this sentence shall
not apply to the sale or disposition of assets as a result of a foreclosure, or
a secured party taking ownership of such assets in lieu of foreclosure, or as a
result of an involuntary proceeding in which the Company cannot, directly or
through its Subsidiaries, direct the type of proceeds received. The amount of
any liabilities of the Company or any Subsidiary of the Company, other than
contingent liabilities and liabilities that are by their terms subordinated in
right and priority of payment to the notes or any guarantee, that are actually
assumed by the transferee in the Asset Sale under a customary agreement that
substitutes the transferee as a party and releases the Company and its
Subsidiaries from
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further liability will be treated as cash for purposes of determining the
percentage of cash consideration received by the Company or its Subsidiaries.
The Company will apply any Net Cash Proceeds received after the date of the
indenture to
(1) the prepayment of any Indebtedness of the Company, other than the notes
or the Indebtedness under the Credit Agreement or any Refinancing
Indebtedness Incurred in any Refinancing or successive Refinancing,
entitled to receive payment under its terms, excluding Indebtedness
that by its terms is subordinated in right and priority of payment to
the notes or any guarantee (the "Specified Pari Passu Indebtedness"),
unless those holders elect not to receive the prepayment; provided
that, in the event any of the Indebtedness was Incurred under a
revolving credit arrangement, the prepayment shall be accompanied by a
permanent reduction of the commitment, and
(2) an offer to purchase (an "Asset Sale Offer") the then outstanding notes
on any business day occurring no later than 305 days after the receipt
by the Company or any of its Subsidiaries of the Net Cash Proceeds (the
"Asset Sale Purchase Date"), which date shall be deferred to the extent
necessary to permit the Asset Sale Offer to remain open for the period
required by applicable law, at a price (the "Asset Sale Purchase
Price") equal to 100% of the principal amount of the outstanding notes
together with accrued and unpaid interest, if any, to the Asset Sale
Purchase Date under the provisions described below.
An Asset Sale Offer for the notes will be in a total principal amount (the
"Asset Sale Offer Amount") equal to the Net Cash Proceeds, rounded down to the
nearest $1,000, from the Asset Sales to which the Asset Sale Offer relates
multiplied by a fraction, the numerator of which is the principal amount of the
notes outstanding, determined as of the close of business on the day immediately
preceding the date notice of the Asset Sale Offer is mailed, and the denominator
of which is the principal amount of the notes outstanding plus the total
principal amount of Specified Pari Passu Indebtedness outstanding, determined as
of the close of business on the day immediately preceding the date notice of the
Asset Sale Offer is mailed. If
(1) no Specified Pari Passu Indebtedness is outstanding or
(2) the holders of this Indebtedness entitled to receive payment elect not
to receive the payments provided for in the previous sentence, or
(3) the application of such Net Cash Proceeds results in the complete
prepayment of this Indebtedness,
then in each case any remaining portion of such Net Cash Proceeds will be
required to be applied to an Asset Sale Offer to purchase the notes.
Notice of an Asset Sale Offer will be mailed by the Company to all holders
at their last registered address within 275 days of the receipt by the Company
or any of its Subsidiaries of any Net Cash Proceeds. The Asset Sale Offer shall
remain open from the
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time of mailing until the last business day before the Asset Sale Purchase Date,
but in no event for a period less than the greater of
(1) 24 days or
(2) that required by applicable law.
The notice shall state, among other things,
(1) that holders will be entitled to withdraw their election if the trustee
receives, not later than one business day before the Asset Sale
Purchase Date, a telegram, telex, facsimile transmission or letter
stating the name of the holder, the principal amount of the notes the
holder delivered for purchase, the certificate number of each note the
holder delivered for purchase and a statement that the holder is
withdrawing his, her or its election to have the notes purchased and
(2) that if notes in a principal amount in excess of the Asset Sale Offer
Amount are surrendered under the Asset Sale Offer, the Company shall
purchase notes on a pro rata basis, with adjustments the Company
considers appropriate so that only notes in denominations of $1,000 or
integral multiples of $1,000 will be acquired.
The Company will not be required to make an Asset Sale Offer until the
total amount of Net Cash Proceeds to be applied under this covenant exceeds
$10,000,000, and then the total amount of such Net Cash Proceeds shall be
required to be applied as required by this covenant. In no event will any Net
Cash Proceeds that are applied to an Asset Sale Offer be required to be applied
to more than one Asset Sale Offer.
The Company will have no obligation to make an Asset Sale Offer if, and to
the extent, the Company or any of its Subsidiaries commits within 270 days of
the receipt of any Net Cash Proceeds to reinvest, whether by acquisition of an
existing business or expansion, including without limitation capital
expenditures, the Net Cash Proceeds in one or more of the lines of business,
including capital expenditures, in which the Company or its Subsidiaries were
engaged on the date of the indenture or any business reasonably related to those
lines of business, provided that the Net Cash Proceeds are substantially used
for those purposes or committed to be used for those purposes no later than 365
days following receipt of the Net Cash Proceeds.
LIMITATIONS ON UNRESTRICTED SUBSIDIARIES
The Company will not permit any of its Unrestricted Subsidiaries to
guarantee or otherwise provide credit support for any Indebtedness of the
Company or any of its Subsidiaries.
CONDUCT OF BUSINESS
The Company will not, and will not permit any of its Subsidiaries to,
engage in any businesses other than lines of business in which the Company or
any of its Subsidiaries is engaged on the date of the indenture and any business
reasonably related to those lines of business, as determined in good faith by
the Company's Board of Directors.
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LIMITATIONS ON ISSUANCES AND SALES OF CAPITAL STOCK OF SUBSIDIARIES
The Company will not, and will not permit any of its Subsidiaries to, sell,
transfer or otherwise dispose of any Capital Stock of any Subsidiary to any
Person if as a result of the sale, transfer or disposition the Subsidiary will
cease to be a Subsidiary, and will provide further that any permitted sale,
transfer or disposition will comply with the terms of the indenture, including
without limitation the covenant described under "-- Limitations on Asset Sales."
PAYMENTS FOR CONSENT
The Company will not, and will not permit any of its Subsidiaries or
Unrestricted Subsidiaries to pay or cause to be paid any consideration, whether
by way of interest, fee or otherwise, to any holder of a note for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the indenture, the notes or any guarantee, unless the consideration is
offered to be paid or is paid to all holders of the notes that so consent, waive
or agree to amend in the time frame described in the solicitation documents
relating to the consent, waiver or amendment.
MAINTENANCE OF CORPORATE EXISTENCE
Except as otherwise provided or permitted in the indenture, the Company
will at all times do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence and the corporate
existence of each Subsidiary of the Company; provided, however, that any Wholly
Owned Subsidiary may liquidate or dissolve as provided by the laws of the state
where it was formed.
MAINTENANCE OF INSURANCE
Until the notes have been paid in full, the Company and the Subsidiary
guarantors will, and will cause their Subsidiaries to, have and maintain in
effect insurance with responsible carriers against risks and in amounts as is
customarily carried by similar businesses with terms and provisions that are
customarily carried by similar businesses of similar size, including, without
limitation, property and casualty.
SEC REPORTS
The Company will file with the trustee, within 15 days after it is required
to file them with the Securities and Exchange Commission, copies of the annual
reports and of the information, documents and other reports, or copies of such
portions of any of these materials as the SEC may by rules and regulations
prescribe, that the Company is required to file with the SEC under Section 13 or
15(d) of the Securities Exchange Act of 1934. If the Company is not subject to
the requirements of Section 13 or 15(d) of the Securities Exchange Act, the
Company shall nonetheless file with the trustee copies of annual reports and
information, documents and other reports that it would file if it were subject
to the requirements of Section 13 or 15(d) of the Securities Exchange Act. In
addition, the Company and its Subsidiaries will agree that, for so long as any
Restricted Securities remain outstanding, they will furnish to the holders of
the notes and to securities analysts and prospective investors, upon request,
the information required to be delivered under Rule 144A(d)(4) under the
Securities Act of 1933.
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MERGER
The Company will not merge with or into any other entity or sell or convey,
or permit any of its Subsidiaries to sell or convey, all or substantially all of
the Company's property, determined on a consolidated basis for the Company and
its Subsidiaries, to any other entity, whether in a single transaction or a
series of related transactions. The entity formed by or surviving any such
merger, or to which such sale or conveyance shall have been made, whether the
Company or such other entity, shall be referred to as the "surviving
corporation." The Company may take these actions if
(1) immediately after giving effect to such merger, sale or conveyance,
there is no existing or pending Event of Default,
(2) the surviving corporation is a corporation organized under the laws of
the United States or any of its individual states,
(3) immediately after giving effect to the merger, sale or conveyance, the
surviving corporation could take on $1.00 of Indebtedness under the
first paragraph of the covenant described under "-- Limitations on
Indebtedness,"
(4) the surviving corporation if other than the Company expressly assumes
the obligations of the Company under the notes and the indenture by
supplemental indenture complying with the requirements of the indenture
satisfactory in form to the trustee,
(5) the surviving corporation if other than the Company expressly assumes
the obligations of the Company under the security agreements and the
registration rights agreement and
(6) immediately after giving effect to the merger, sale or conveyance, the
surviving corporation has a Consolidated Net Worth equal to or greater
than the Consolidated Net Worth of the Company immediately prior to the
transaction.
Except as explained in the immediately succeeding paragraph, no Subsidiary
of the Company, other than a Subsidiary the guarantee of which is to be released
in any transaction complying with the covenant described under "-- Limitations
on Asset Sales," will merge with or into any other entity, unless
(1) immediately after giving effect to the merger, there is no existing or
pending Event of Default,
(2) the surviving corporation is a Subsidiary of the Company organized
under the laws of the United States or any of its individual states,
(3) immediately after giving effect to the merger, the Company could take
on $1.00 of Indebtedness under the first paragraph of the covenant
described under "-- Limitations on Indebtedness,"
(4) the surviving corporation if other than the Subsidiary expressly
assumes the obligations of the Subsidiary under the security agreements
and the indenture, including the obligations of the Subsidiary under
its guarantee, by supplemental indenture complying with the
requirements of the indenture satisfactory in form to the trustee, and
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(5) immediately after giving effect to the merger, the surviving
corporation has a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Subsidiary immediately prior to such
transaction.
Notwithstanding the immediately preceding paragraph,
(1) a Wholly Owned Subsidiary of the Company may merge with or into the
Company, provided that the Company is the surviving corporation, and
(2) a Wholly Owned Subsidiary of the Company may merge with or into any
other Wholly Owned Subsidiary.
NO AMENDMENT TO SUBORDINATION PROVISIONS
Without the consent of the Holders of at least a majority of the total
principal amount of the notes then outstanding, the Company will not amend,
modify or alter the Hydro Agreement in any way that will
(1) increase the rate of or change the time for payment of interest on any
Hydro Subordinated Debt,
(2) increase the principal of, advance the final maturity date of or
shorten the Weighted Average Life to Maturity of any Hydro Subordinated
Debt and
(3) alter the redemption provisions or the price or terms at which the
Company is required to offer to purchase the Hydro Subordinated Debt.
The Company also will not agree or consent to or take any other act to affect
the subordination of the Hydro Subordinated Debt relative to the notes.
RELEASE OF COLLATERAL
Under the security agreements, the Collateral of a Subsidiary may be
released in one of three ways:
(1) If all of the capital stock of the guarantor is sold to a Person other
than the Company, a Subsidiary, an Unrestricted Subsidiary or an
Affiliate,
(2) If the Collateral is sold to a Person other than the Company, a
Subsidiary, an Unrestricted Subsidiary or an Affiliate or
(3) If the Company designates the guarantor as an Unrestricted Subsidiary.
DEFAULTS AND CERTAIN RIGHTS ON DEFAULT
Each of the following is an Event of Default:
(1) a default in the payment of principal, Change of Control Purchase
Price, Asset Sale Purchase Price or premium for the notes when due and
payable,
(2) a default for 30 days in payment of any installment of interest on any
of the notes,
(3) a failure on the part of the Company to observe or perform in any
material respect the provisions described under "-- Material
Covenants -- Limitations on
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Indebtedness," "-- Material Covenants -- Limitations on Restricted
Payments, Restricted Investments and Unrestricted Subsidiary
Investments," "-- Material Covenants -- Limitations on Liens,"
"-- Material Covenants -- Limitations on Asset Sales," "-- Material
Covenants -- Merger," "-- Material Covenants -- No Amendment to
Subordination Provisions" or "-- Offer to Purchase the Notes,"
(4) a failure on the part of the Company to observe or perform in any
material respect any other of the covenants or agreements on the part
of the Company in the notes or in the indenture for a period of 60 days
after the date on which written notice of the failure, which notice
must specify the failure, demand it be remedied and state that the
notice is a "Notice of Default," shall have been given to the Company
by the trustee by registered or certified mail, which notice the
trustee may give at its discretion and will give upon receipt of
requests to do so by the holders of at least 25% of the total principal
amount of the notes at the time outstanding, or to the Company and the
trustee by registered or certified mail by the holders of at least 25%
of the total principal amount of the notes at the time outstanding,
(5) a default under any mortgage, indenture or instrument under which there
may be issued, secured or evidenced any Indebtedness of the Company or
any of its Subsidiaries, whether the Indebtedness now exists or shall
be created after the date of the indenture, which default
(a) in the case of a failure to make payment on any Indebtedness, shall
not have been waived, cured or otherwise ceased to exist before the
expiration of the applicable grace period for the Indebtedness, or
(b) in the case of any default other than a payment default referred to
in clause (a), shall have resulted in the Indebtedness becoming or
being declared due and payable before the date on which it would
otherwise have become due and payable, provided that the total
principal amount of all Indebtedness which is in default exists
exceeds $10,000,000;
(6) a breach by the Company or any guarantor of any material representation
or warranty listed in the security agreements, or, subject to notice
and grace periods provided for in the applicable security agreements, a
default by the Company or any guarantor in the performance of any
covenant in the security agreements, or a repudiation by the Company or
any guarantor of its obligations under the security agreements or the
unenforceability of the security agreements against the Company or any
guarantor for any reason;
(7) a final judgment which, together with other outstanding final judgments
against the Company and its Subsidiaries, exceeds a total of
$10,000,000, to the extent the judgments are not covered by valid and
collectible insurance from solvent unaffiliated insurers or uncontested
reimbursement of the judgment from solvent unaffiliated parties, shall
be entered against the Company and/or its Subsidiaries and, within 60
days after entry of the final judgment, judgments exceeding that amount
shall not have been paid or the execution of the judgments stayed
pending appeal or, within 60 days after the expiration of any stay, the
judgments exceeding such amount shall not have been paid or execution
of those judgments further stayed;
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(8) certain events of bankruptcy, insolvency, receivership or
reorganization of the Company or any of its Subsidiaries and
(9) other than a valid release of a guarantee as described under "-- The
Subsidiary Guarantees," a guarantee having been held unenforceable or
invalid for any Subsidiary of the Company by a final non-appealable
order or judgment issued by a court or having ceased for any reason to
be in full force and effect for any Subsidiary of the Company, or any
Subsidiary of the Company or any Person acting by or on behalf of any
Subsidiary of the Company having denied or refused to abide by its
obligations under a guarantee.
In the case of any Event of Default occurring by reason of any intentional
action or inaction taken or not taken by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have had to
pay if the Company then had elected to redeem the notes under the optional
redemption provisions of the indenture, an equivalent premium will also become
and be immediately due and payable to the extent permitted by law when the notes
become immediately due and payable. If an Event of Default occurs before
December 15, 2002 by reason of any intentional action or inaction taken or not
taken by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the notes prior to December 15, 2002, then the
premium specified in the indenture will also become immediately due and payable
to the extent permitted by law upon the notes becoming immediately due and
payable.
If an Event of Default occurs and continues, either the trustee or the
holders of at least 25% of the total principal amount of the notes then
outstanding may declare the entire principal of and interest on the notes to be
due and payable immediately. Upon the occurrence of certain events of
bankruptcy, insolvency, receivership or reorganization, principal of and
interest on the notes will become due and payable without necessity of action on
the part of the trustee or the holders of the notes. The holders of a majority
of the total principal amount of the notes then outstanding may waive any past
default under the indenture and all of its consequences on behalf of the holders
of all of the notes. This is not the case if the notes become immediately due
and payable automatically as a result of certain events of bankruptcy,
insolvency, receivership or reorganization. Nor is this the case if a default in
the payment of principal of, premium, if any, Change of Control Purchase Price,
Asset Sale Purchase Price or interest on any of the notes, other than solely as
a result of the notes becoming immediately due and payable, or a default under
any covenant or provision of the indenture which under the provisions described
in "-- Modification of the Indenture or Security Agreements" cannot be modified
or amended without the consent of the holder of each outstanding note. In the
case of any waiver, the Company, the trustee and the holders of the notes will
be restored to their former positions and rights under the indenture; but no
waiver shall extend to any subsequent or other default or impair any right
consequent on such default.
MODIFICATION OF INDENTURE OR SECURITY AGREEMENTS
With the consent of the holders of not less than a majority in total
principal amount of the outstanding notes, the trustee and the Company may
execute a supplemental indenture to add provisions to, or change in any manner
or eliminate any provisions of, the indenture or modify in any manner the rights
of the holders of the notes; provided,
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however, that, without the consent of each holder of an outstanding note
affected, no such supplemental indenture will
(1) extend the stated maturity of any note, reduce the rate at which
interest accrues on any note, extend the time or alter the manner of
payment of interest on any note, reduce the principal amount of any
note, alter the timing of or reduce any premium payable upon the
redemption of any note, change the currency in which any payments are
made on or in connection with any note, change the ranking or seniority
of any note, or reduce the amount payable on any note in the event it
becomes immediately due and payable or the amount of any note payable
in bankruptcy, or
(2) reduce the percentage of total principal amount of notes the consent of
the holders of which is required for any supplemental indenture.
The Company and the trustee may, without the consent of any holder of the notes,
amend or supplement the indenture for certain limited purposes, including to
cure any ambiguity or to correct any defect or inconsistency in the indenture or
to comply with any requirements of the Commission in order to effect or maintain
the qualification of the indenture under the Trust Indenture Act. Without the
consent of the holders of not less than 66 2/3% of the total principal amount of
the outstanding notes, the Collateral Agent and the Company cannot
(1) amend the security agreements or
(2) release any of the Collateral from a Lien or the security agreements,
except under the provisions of a Lien or the security agreements.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option, elect to have its obligations arising under
the outstanding notes and the obligations of its Subsidiaries, including under
any guarantees, discharged ("Legal Defeasance"). This Legal Defeasance means
that the Company will be considered to have paid and discharged the entire
indebtedness represented, and the indenture will cease to be of further effect
as to all outstanding notes and guarantees, except as to
(1) rights of holders of the notes to receive payments on the principal of,
premium, if any, and interest on the notes when the payments are due
from the trust funds;
(2) the Company's obligations arising under such notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes, and the maintenance of an office or agency for payment
and money for security payments held in trust;
(3) the rights, powers, trust, duties, and immunities of the trustee, and
the Company's obligations in connection with the trustee; and
(4) the Legal Defeasance provisions of the indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company and its Subsidiaries arising under certain covenants
that are described in the indenture released ("Covenant Defeasance") and
subsequently any omission to comply with these obligations will not constitute
an Event of Default under the terms of the notes.
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If a Covenant Defeasance occurs, certain events, not including non-payment,
guarantees, bankruptcy, receivership, reorganization and insolvency events,
described under "-- Defaults and Certain Rights on Default" will no longer
constitute an Event of Default under the terms of the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(1) the Company must irrevocably deposit with the trustee, in trust, for
the benefit of the holders of the notes, U.S. legal tender, Government
Securities or a combination of all of these, in amounts that will be
sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if
any, and interest on the notes on the stated date for payment or on the
redemption date of the principal or installment of principal of,
premium, if any, or interest on the notes, and the holders of notes
must have a perfected security interest in the trust;
(2) in the case of Legal Defeasance, the Company shall have delivered to
the trustee an opinion of counsel in the United States reasonably
acceptable to the trustee confirming that
(a) the Company has received from, or there has been published by the
Internal Revenue Service, a ruling or
(b) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect
that, and based on that change the opinion of counsel shall confirm
that, the holders of the notes will not recognize income, gain or
loss for federal income tax purposes as a result of the Legal
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if the Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered to
the trustee an opinion of counsel in the United States reasonably
acceptable to such trustee confirming that the holders of the notes
will not recognize income, gain or loss for federal income tax purposes
as a result of the Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if the Covenant Defeasance had not
occurred;
(4) there is no existing or pending Event of Default on the date of the
deposit or, in so far as bankruptcy, insolvency, receivership or
reorganization are concerned, at any time between the date of the
deposit and the 91st day after the date of the deposit and the Company
shall have delivered to the trustee an opinion of counsel, subject to
the qualifications and exceptions as the trustee decides are
appropriate, to the effect that, assuming no intervening bankruptcy of
the Company between the date of deposit and the 91st day following the
deposit and that no holder of the notes is an insider of the Company,
after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors rights generally;
(5) the Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, the indenture or
any other material
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agreement or instrument to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is bound;
(6) the Company shall have delivered to the trustee an Officers'
Certificate stating that the deposit was not made by the Company with
the intent of preferring the holders of the notes over any other
creditors of the Company or any of its Subsidiaries or with the intent
of defeating, hindering, delaying or defrauding any other creditors of
the Company or any of its Subsidiaries or others; and
(7) the Company shall have delivered to the trustee an Officers'
Certificate and an opinion of counsel, each stating that the Company
has complied with the conditions precedent provided for in, in the case
of the Officers' Certificate, (1) through (6) and, in the case of the
opinion of counsel, clauses (1), regarding the validity and perfection
of the security interest, and (5) of this paragraph.
If the funds deposited with the trustee to effect Covenant Defeasance are
insufficient to pay the principal of, premium, if any, and interest on the notes
when due, or if the transfer of the funds to the trustee is avoided as a
preferential transfer, a fraudulent transfer, or otherwise, then the obligations
of the Company and the Subsidiary guarantors under the indenture will be revived
and no Covenant Defeasance will be considered to have occurred.
CONCERNING THE TRUSTEE
U.S. Trust Company, National Association, is the trustee under the
indenture and has been appointed by the Company as registrar and paying agent
with regard to the notes.
The holders of a majority in principal amount of the outstanding notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the trustee, subject to some exceptions.
The indenture provides that if an Event of Default occurs, and is not cured, the
trustee will be required, in the exercise of its power, to use the degree of
care of a prudent person in the conduct of his or her own affairs. Subject to
these provisions, the trustee will be under no obligation to exercise any of its
rights or powers under the indenture at the request of any holder of notes,
unless a holder shall have offered to the trustee security and a promise to
reimburse it against any loss, liability or expense and then only to the extent
required by the terms of the indenture.
GOVERNING LAW
The indenture provides that it and the notes are governed by, and construed
under, the laws of the State of New York without giving effect to applicable
principles of conflicts of law to the extent that the application of the law of
another jurisdiction would be required thereby.
DEFINITIONS
Listed below are defined terms used in the indenture.
"Affiliate" means any other Person in any way controlling or controlled by
or under direct or indirect common control with a specified Person. For the
purpose of this definition, "control" when used in relation to any specified
Person means the possession of the power to direct the management and policies
of that Person, in any way, whether
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through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings similar to and based on this
meaning of "control."
"Aluminum Hedging Obligations" means monetary obligations of a Person under
any options or futures contract, forward contract or other agreement or
arrangement designed to protect that Person or any of its Subsidiaries against
fluctuations in prices of aluminum or raw materials related to the production of
aluminum.
"Asset Sale" means
(1) any sale, transfer or other disposition, such as dispositions as part
of a merger or sale and leaseback transaction, of any assets, other
than cash or Cash Equivalents, on or after the date of the indenture by
the Company or any of its Subsidiaries to any Person other than the
Company or a Wholly Owned Subsidiary, and
(2) the issuance by any Subsidiary of the Company on or after the date of
the indenture of its Capital Stock to any Person other than the Company
or a Wholly Owned Subsidiary;
provided, however, that, solely for the purposes of the definition of
Consolidated Cash Flow Available for Fixed Charges, the term Asset Sale shall
exclude dispositions as part of a sale and leaseback transaction if the lease
under the sale and leaseback transaction is required to be classified and
accounted for as a Capitalized Lease Obligation; and provided, further, that the
following sales, transfers or other dispositions of assets will not be an "Asset
Sale":
(a) sales of inventory in the ordinary course of business of the Company
and its Subsidiaries;
(b) - trade-ins of any used equipment on replacement equipment or
- sales, transfers or other dispositions of property no longer
necessary for or useful in the proper conduct of the business of
the Company and its Subsidiaries, the gross proceeds of which
sales, transfers or other dispositions do not exceed $1,000,000
during any 12-month period; provided that the amount of the
proceeds, to the extent consisting of property other than cash,
to be the Fair Market Value of such property;
(3) transfers or other dispositions resulting from the creation, Incurrence
or assumption of any Lien not prohibited as described under
"-- Material Covenants -- Limitations on Liens";
(4) sales in the ordinary course of business of accounts receivable as to
which collection is doubtful based on past practice;
(5) sales, transfers or other dispositions in connection with any merger of
the Company or any of its Subsidiaries or sale or conveyance of all or
substantially all of the property of the Company, determined on a
consolidated basis, in compliance with the description under
"-- Material Covenants -- Merger";
(6) sales, transfers or other dispositions which are Restricted
Investments, Restricted Payments or Unrestricted Subsidiary Investments
permitted as described under
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"-- Material Covenants -- Limitations on Restricted Payments,
Restricted Investments and Unrestricted Subsidiary Investments";
(7) sales, transfers or other dispositions of the 105 megawatt General
Electric steam turbine generator and related generator power
transformers and other related assets held for sale by Goldendale
Aluminum Company on the date of the indenture; and
(8) the surrender or waiver of contract rights, or settlement, release or
surrender of contract, tort or other claims of any kind.
"Attributable Debt" means, as of the date of completion of a sale and
leaseback transaction, the greater of
(1) the Fair Market Value of the property subject to the sale and leaseback
transaction and
(2) the present value, discounted at the interest rate borne by the notes,
compounded semi-annually, of the total obligations of the lessee for
rental payments during the remaining term of the lease, including
extensions, included in the sale and leaseback transaction.
"Borrowing Base" means, at any time, the sum of
(1) up to 85% of the then book value net of reserves of the eligible
accounts of the Company and its Subsidiaries on a consolidated basis
arising from the sale of inventory in the ordinary course of business,
plus
(2) up to 75% of the then book value of the eligible finished aluminum
inventory of the Company and its Subsidiaries on a consolidated basis,
plus
(3) up to 50% of the eligible other inventory of the Company and its
Subsidiaries on a consolidated basis, all as determined under GAAP.
"Capital Stock" means any and all shares, interests, participations or
other equivalents of capital stock, partnership or member interests or other
undivided ownership interests in a Person, and warrants, options or similar
rights, other than, except for purposes of the description under "-- Material
Covenants -- Subsidiary Guarantees" and "-- Security," debt securities
convertible into Capital Stock, to acquire the Capital Stock, partnership or
member interests or other undivided ownership interests in that Person.
"Capitalized Lease Obligations" means the obligations of a Person to pay
rent or other amounts under any lease of, or other agreement conveying the right
to use, real or personal property, which obligations are required to be
classified and accounted for as a capital lease obligation on a balance sheet of
that Person under GAAP; and, for purposes of the indenture, the amount of these
obligations at any date shall be the amount of the liability at that date,
determined under GAAP.
"Cash Equivalents" means
(1) Government Securities having maturities of not more than one year from
the date of acquisition,
(2) certificates of deposit of any commercial bank incorporated under the
laws of the United States, or any State, territory or commonwealth of
the United States, of
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recognized standing having capital and unimpaired surplus in excess of
$100,000,000 and whose short-term commercial paper rating at the time
of acquisition is at least A-2 or the equivalent by Standard & Poor's
Corporation or at least P-2 or the equivalent by Moody's Investors
Services, Inc. (any such bank, an "Approved Bank"), which certificates
of deposit have maturities of not more than one year from the date of
acquisition,
(3) repurchase obligations with a term of not more than 31 days for
underlying securities of the types described in clauses (1), (2) and
(4) of this definition entered into with any Approved Bank,
(4) commercial paper or finance company paper issued by any Person
incorporated under the laws of the United States, or any State of the
United States, and rated at least A-2 or the equivalent by Standard &
Poor's Corporation or at least P-2 or the equivalent by Moody's
Investors Services, Inc., and in each case maturing not more than one
year from the date of acquisition, and
(5) investments in money market funds that are registered under the
Investment Company Act of 1940 that have net assets of at least
$100,000,000 and at least 85% of whose assets consist of investments or
other obligations of the type described in clauses (1) through (4)
above.
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition, in one or a
series of related transactions, of all substantially all of the assets
of the Company and its Subsidiaries taken as a whole to any "person" as
that term is used in Section 13(d)(3) of the Securities Exchange Act
other than the Company and/or one or more Wholly Owned Subsidiaries,
(2) the adoption of a plan relating to the complete settlement of the
Company's affairs and the end of its legal existence,
(3) the completion of any transaction as a result of which Brett E. Wilcox
is no longer the sole beneficial owner of at least a majority of the
Voting Stock of the Company, provided that an event will not constitute
a "change of control" if Brett E. Wilcox
(a) is the sole beneficial owner of at least 35% of the Voting Stock of
the Company, and
(b) is the Chief Executive Officer of the Company and
(c) has the sole right to elect a majority of the Board of Directors of
the Company which right is not subject to revocation, termination or
expiration prior to the scheduled maturity of the notes;
provided, further, that the immediately preceding exception will not be
available if any other "person," as defined in paragraph (1) above, is
the beneficial owner of 35% or more of the Voting Stock of the Company
or
(4) the first day on which a majority of the members of the Board of
Directors of the Company are not continuing directors. For purposes of
this provision, "continuing
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directors" means, as of any date of determination, any member of the
Board of Directors of the Company who
(a) was a member of the Board of Directors on the date of the indenture
or
(b) was nominated for election or elected or appointed to the Board of
Directors by the Board of Directors of the Company at a time when a
majority of the Board, excluding any member whose service terminated
as result of death, consisted of continuing directors.
"Consolidated Amortization Expense" means, for any Person for any period,
the amortization expense of that Person and its Subsidiaries for the period,
determined on a consolidated basis under GAAP.
"Consolidated Cash Flow Available for Fixed Charges" means, for any Person
for any period, the sum of the amounts for the period of
(1) Consolidated Net Income, including, for this purpose only, the Net
Income of any Unrestricted Subsidiary, to the extent paid or
distributed in cash to the Company or one of its Subsidiaries,
(2) Consolidated Fixed Charges to the extent they have reduced Consolidated
Net Income,
(3) Consolidated Income Tax Expense other than income taxes and credits for
items of Net Income not included in the definition of Consolidated Net
Income,
(4) Consolidated Depreciation Expense,
(5) Consolidated Amortization Expense, and
(6) any other non-cash items reducing Consolidated Net Income except for
any non-cash expense to the extent it represents an accrual of or
reserve for cash expenses in any future period or amortization of a
prepaid cash expense that was paid in a prior period or amortization of
a prepaid cash expense that was paid in a prior period, minus any
non-cash items increasing Consolidated Net Income, all as determined on
a consolidated basis for the Person and its Subsidiaries under GAAP;
provided, however, that
(1) if, during that period or subsequent to the period and on or before the
relevant Transaction Date, as defined below, the Person or any of its
Subsidiaries shall have engaged in any Asset Sale, Consolidated Cash
Flow Available for Fixed Charges of the Person and its Subsidiaries for
the period will be reduced by an amount equal to any positive
Consolidated Cash Flow Available for Fixed Charges directly
attributable to the assets that are the subject of the Asset Sale for
the period, or increased by an amount equal to any negative
Consolidated Cash Flow Available for Fixed Charges directly
attributable to the assets that are the subject of the Asset Sale for
the period and
(2) if, during that period or subsequent to the period and on or before the
relevant Transaction Date, the Person or any of its Subsidiaries shall
have acquired any material assets out of the ordinary course of
business, Consolidated Cash Flow Available for Fixed Charges will be
calculated on a pro forma basis as if the
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asset acquisition and related financing had occurred at the beginning
of the period.
"Consolidated Depreciation Expense" means, for any Person for any period,
the depreciation and depletion expense of that Person and its Subsidiaries for
the period, determined on a consolidated basis under GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, for any Person as of the
date of the transactions giving rise to the need to calculate the Consolidated
Fixed Charge Coverage Ratio (the "Transaction Date"), the ratio of
(1) the total amount of Consolidated Cash Flow Available for Fixed Charges
of that Person for the four fiscal quarters immediately preceding the
Transaction Date for which financial information is available (the
"Four Quarter Period") to
(2) the total Consolidated Fixed Charges of the Person for the Four Quarter
Period.
For purposes of this calculation,
(1) any Indebtedness other than Indebtedness Incurred under a revolving
credit facility in effect on a pro forma basis on the Transaction Date
Incurred, repaid, redeemed, repurchased or otherwise discharged during
the Four Quarter Period or subsequent to the Four Quarter Period and on
or before the Transaction Date, including without limitation
Indebtedness giving rise to the need to make these calculations, will
be considered to have been Incurred or discharged on the first day of
the Four Quarter Period so that there will be considered to have been
outstanding during the entire Four Quarter Period an amount of
Indebtedness equal to the amount outstanding on a pro forma basis on
the Transaction Date and so that no Indebtedness that is not
outstanding on a pro forma basis on the Transaction Date will be
considered to have been outstanding during any part of the Four Quarter
Period,
(2) any Indebtedness under a revolving credit facility in effect on a pro
forma basis on the Transaction Date will be considered to have been
outstanding during the entire Four Quarter Period in an amount equal to
the average daily balance of the Indebtedness during the period
commencing on the first day of the Four Quarter Period and ending on
the Transaction Date, and
(3) Consolidated Fixed Charges attributable to interest accrued at a
variable rate will be computed as if the rate in effect on the
Transaction Date had been the applicable rate for the entire Four
Quarter Period, unless the Person or any of its Subsidiaries is a party
to any Interest Hedging Obligations that will remain in effect for the
12-month period immediately following the Transaction Date and that
have the effect of fixing such rate, in which case the fixed rate shall
be used.
"Consolidated Fixed Charges" means, for any Person for any period, the sum
of:
(1) the interest expense of that Person and its Subsidiaries for the
period, determined on a consolidated basis under GAAP;
(2) all fees, commissions, discounts and other charges of that Person and
its Subsidiaries for the period, determined on a consolidated basis
under GAAP, for letters of credit and bankers' acceptances and the
costs, net of benefits, associated
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with Interest Hedging Obligations of the Person and its Subsidiaries
for the period;
(3) the total amount of dividends or other similar distributions accrued by
that Person and its Subsidiaries during the period related to preferred
stock of the Person or its Subsidiaries determined on a consolidated
basis under GAAP; and
(4) amortization or write-off of the interest represented by the difference
between the price paid for a debt security and its face or maturity
amount for the period in connection with any Indebtedness of that
Person and its Subsidiaries, determined on a consolidated basis under
GAAP.
"Consolidated Income Tax Expense" means, for any Person for any period, the
income tax expense, net of credits, of that Person and its Subsidiaries for the
period, determined on a consolidated basis under GAAP, and, in the case of the
Company, any distributions of income made for the period described under clause
(6) of the second paragraph under "-- Material Covenants -- Limitations on
Restricted Payments, Restricted Investments and Unrestricted Subsidiary
Investments."
"Consolidated Net Income" means, for any Person for any period, the total
of the Net Income of that Person and its Subsidiaries for the period taken as a
single accounting period, all as determined on a consolidated basis under GAAP,
excluding:
(1) the Net Income, but not loss, of any Person that is not a Subsidiary of
the Person or that is accounted for on the equity method of accounting,
except to the extent of the amount of dividends or other distributions
of other than Capital Stock actually paid in cash to the Person or any
of its Subsidiaries by the other Person during such period;
(2) except to the extent included by clause (1), the Net Income of any
Person accrued before the date it becomes a Subsidiary of the Person or
is merged into the Person or any of its Subsidiaries or that Person's
assets are acquired by the Person or any of its Subsidiaries;
(3) the Net Income of any Subsidiary of the Person during the period
(a) to the extent that the declaration or payment of dividends or
similar distributions by the Subsidiary of the Net Income is not at
the time permitted or by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its
shareholders or
(b) in the case of a foreign Subsidiary or a Subsidiary with significant
foreign source income, to the extent the Net Income has not been
distributed to the Person and the distribution would result in a
material tax liability not otherwise deducted from the calculation
of Consolidated Net Income whether or not the deduction is required
by GAAP;
(4) the Net Income of any Unrestricted Subsidiary, whether or not paid or
distributed to the Company or one of its Subsidiaries; and
(5) the cumulative effect of a change in accounting principles.
"Consolidated Net Worth" means, for any Person as of any date, the total
shareholders' equity of that Person as of the date less, to the extent otherwise
included,
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amounts attributable to Disqualified Stock, in each case determined on a
consolidated basis under GAAP.
"Credit Agreement" means the Credit Agreement, dated December 21, 1998, by
and among Northwest Aluminum Company, Northwest Aluminum Specialties, Inc.,
Goldendale Holding Company, Goldendale Aluminum Company, Northwest Aluminum
Technologies, LLC, the financial institutions that are, or from time to time
become, parties, and BankBoston N.A., as administrative agent, providing for
revolving credit borrowings, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection with the Credit
Agreement, and in each case as amended, modified, renewed, refunded, replaced or
refinanced from time to time.
"Disqualified Stock" means
(1) except as explained in clause (2) below, for any Person, Capital Stock
of that Person that by its terms, or by the terms of any security into
which it is convertible or for which it is exercisable or exchangeable,
is, or upon the happening of an event or a passage of time would be,
required to be redeemed or repurchased by the Person or any of its
Subsidiaries, in whole or in part, on or before the scheduled maturity
date that is 91 days after the maturity of the notes, and
(2) for any Subsidiary of a Person, any Capital Stock other than common
stock with no special rights and no preference, privileges, or
redemption or repayment provisions.
"Excluded Property" means the real property at Goldendale, Washington and
The Dallas, Oregon, including improvements, that is not integral to the
Company's operations and not subject to the Liens of the security agreements.
"Fair Market Value" means, for any property other than cash, the fair
market value of the property as determined in good faith by the Board of
Directors of the Company, whose determination shall be evidenced by a
resolution; provided, however, that, if the Company or a Subsidiary of the
Company makes a payment in the form of or otherwise transfers property other
than cash to, or receives property other than cash from, an Affiliate of the
Company or an Unrestricted Subsidiary in an amount in excess of $5,000,000, the
Company or a Subsidiary of the Company, in addition, shall have received an
opinion from an independent investment banking, appraisal or accounting firm of
national standing selected by the Company, which, in the good faith judgment of
the Board of Directors, is qualified to perform this task, to the effect that
the Board of Directors' determination of fair market value is fair.
"GAAP" means generally accepted accounting principles described and
explained in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in other
statements by any other entity as may be approved by a significant segment of
the accounting profession of the United States, as in effect on the date of the
indenture.
"Government Securities" means securities issued or directly and fully
guaranteed or insured by the United States of America or any of its agencies;
provided that the full faith and credit of the United States of America is
pledged in support of the security.
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"Hydro Agreement" means the Subordinated Note Purchase Agreement, dated
December 21, 1998, between the Company and Norsk Hydro USA, Inc., including all
related notes, collateral documents and guarantees.
"Improvements" means any accessories, accessions, additions, attachments,
substitutions, replacements, improvements, parts and other property now or later
affixed to or used in connection with any assets.
"Indebtedness" means, for any Person at any date, any of the following:
(1) all obligations of that Person for borrowed money and all obligations
of the Person evidenced by debentures, notes or other similar
instruments or representing reimbursement or similar obligations
related to Aluminum Hedging Obligations;
(2) all obligations of the Person to pay the deferred purchase price of
property or services, except
(a) accounts payable and other accrued expenses arising in the ordinary
course of business, and
(b) obligations to pay employee compensation or other employee benefits
except as provided in clause (7) below;
(3) Capitalized Lease Obligations of the Person;
(4) all Indebtedness of others secured by a Lien on any asset of the
Person, whether or not the Indebtedness is assumed or guaranteed by the
Person;
(5) all Disqualified Stock of such Person;
(6) all Indebtedness of others guaranteed by such Person;
(7) all pension and other similar obligations of such Person arising from
employee benefits, to the extent unfunded ("Unfunded Pension
Obligations"); and
(8) all obligations under sale and leaseback transactions;
and the amounts of Indebtedness will be, in the case of clauses (1) through (3)
and (6), the outstanding balance of any of the unconditional obligations, or the
accumulated value of the unconditional obligations in the case of Indebtedness
issued with original issue discount, together with any interest that is more
than 30 days past due and the maximum liability of any of the contingent
obligations at that date, and, in the case of clause (4), the lesser of the Fair
Market Value at that date of any asset subject to any Lien securing the
Indebtedness of others and the amount of the Indebtedness secured, and, in the
case of clause (5), the greater of the maximum liquidation value of the
Disqualified Stock and the maximum redemption price of the Disqualified Stock,
and, in the case of clause (7), the amount of the Unfunded Pension Obligations
determined by the Company in good faith as evidenced by a certificate of the
Chief Financial Officer of the Company delivered to the trustee, and, in the
case of clause (8), the Attributable Debt; provided, however, that Indebtedness
shall not include obligations of the Person resulting from the endorsement of
negotiable instruments for collection in the ordinary course of business.
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"Interest" means interest payable on the notes at the rate stated in the
terms of the notes, plus any additional interest payable by the Company and the
Subsidiaries on the notes under the registration rights agreement.
"Interest Hedging Obligations" means for any Person, the monetary
obligations of that Person under any interest rate swap agreement, interest rate
collar agreement, interest rate cap agreement, options or futures contract,
forward contract or other agreement or arrangement designed to protect the
Person or any of its Subsidiaries against fluctuations in interest rates.
"Lien" means any mortgage, lien, pledge, charge, security interest or claim
of any kind on any asset, whether or not filed, recorded or otherwise perfected
under applicable law.
"Net Cash Proceeds" means cash payments received, except that if received
in a currency other than U.S. dollars, these payments will not be treated as if
they have been received until the earliest time at which the currency is, or
could freely be, converted into U.S. dollars, by or on behalf of the Company
and/or any of its Subsidiaries from an Asset Sale, in each case net of:
(1) all legal, title and recording tax expenses, commissions, consulting
fees, investment banking, broker's and accounting fees and expenses,
and all other fees and expenses in obtaining regulatory approvals in
connection with the Asset Sale;
(2) the amounts of any repayments of Indebtedness secured by Liens on the
assets which are the subject of the Asset Sale, other than Indebtedness
under the Credit Agreement or Refinancing Indebtedness Incurred to
Refinance, or successively Refinance, Indebtedness under the Credit
Agreement, and other fees, expenses and other expenditures reasonably
incurred as a consequence of the repayment of Indebtedness, whether or
not the fees, expenses or expenditures are then due and payable or
made;
(3) all foreign, federal, state and local taxes payable in connection with
or as a result of the Asset Sale;
(4) for Asset Sales by any Subsidiary of the Company, the portion of the
cash payments attributable to Persons holding a minority interest in
the Subsidiary; and
(5) any amounts paid on term loans outstanding under the Credit Agreement
or any Refinancing Indebtedness Incurred to Refinance or successively
Refinance the term loans;
provided, in each case, that the fees and expenses and other amounts are not
payable to an Affiliate or an Unrestricted Subsidiary of the Company. Net Cash
Proceeds, however, will not include proceeds received in a foreign jurisdiction
from an Asset Sale of an asset located outside the United States to the extent
(y) the proceeds cannot under applicable law be transferred to the United
States or
(z) the transfer would result, in the good faith determination of the Board
of Directors of the Company stated in a resolution, in a foreign tax
liability that would be materially greater than if the Asset Sale
occurred in the United States;
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provided that if, as, and to the extent that any of the proceeds may lawfully
be, in the case of clause (y), or are, in the case of clause (z), transferred to
the United States, the proceeds will be considered to be cash payments that are
subject to the terms of this definition of Net Cash Proceeds. Subject to the
provisions of the next preceding sentence, Net Cash Proceeds will also include
cash distributions actually received by or on behalf of the Company or any of
its Subsidiaries from any Unrestricted Subsidiary representing the proceeds of a
transaction by the Unrestricted Subsidiary that would constitute an Asset Sale
if the Unrestricted Subsidiary were a Subsidiary of the Company.
"Net Income" means, for any Person for any period, the net income or loss
of that Person for the period determined under GAAP, less, in the case of the
Company, the amount of any distributions of income made for the period under
clause (6) of the second paragraph under "-- Material Covenants -- Limitations
on Restricted Payments, Restricted Investments and Unrestricted Subsidiary
Investments."
"Permitted Dividend Encumbrance" means, for any Person, any consensual
restriction on the ability of that Person to pay dividends or make any other
distributions on its Capital Stock or pay any Indebtedness owed to the Company
or any of its Subsidiaries or to make loans or advances or transfer any of its
assets to the Company or any of its Subsidiaries existing under or by reason of
any of:
(1) the indenture;
(2) the Credit Agreement;
(3) applicable law;
(4) customary provisions in agreements that restrict the assignment of the
agreements or its rights or the subletting of any assets leased under
the agreements;
(5) customary restrictions on the transfer of assets imposed by any
agreement for the sale of a Person or its assets before its completion,
provided that the restrictions apply only to the assets of the Person
or the assets to be sold;
(6) agreements governing Refinancing Indebtedness that is otherwise
permitted in connection with any Refinanced Indebtedness, provided that
no liens or other similar restrictions will be materially less
favorable to the holders of the notes than those contained in the
agreements governing the Refinanced Indebtedness;
(7) customary restrictions on the sale or other disposition of property
subject to a Lien securing Indebtedness, provided that the Lien and the
Indebtedness are otherwise permitted by the indenture, and
(8) the Hydro Agreement to the extent it incorporates provisions of the
indenture.
"Permitted Lien" means
(1) Liens imposed by governmental authorities for taxes, assessments or
other charges not yet subject to penalty or which are being contested
in good faith and by appropriate proceedings, if adequate reserves are
maintained on the books of the Company or its Subsidiary under GAAP;
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(2) statutory liens of carriers, warehousemen, mechanics, material men,
landlords, repairmen or other similar Liens arising by operation of law
in the ordinary course of business provided that
(a) the underlying obligations are not overdue for a period of more
than 60 days, or
(b) the Liens are being contested in good faith and by appropriate
proceedings and adequate reserves are maintained on the books of
the Company or its Subsidiary under GAAP;
(3) Liens securing the performance of bids, trade contracts, other than for
borrowed money, operating leases, statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a similar
nature acquired in the ordinary course of business that do not, singly
or combined, materially detract from the value of the assets of the
Company and its Subsidiaries or interfere with the ordinary conduct of
the business of the Company and its Subsidiaries, taken as a whole;
(4) easements, rights-of-way, zoning, and other similar restrictions or
title defects which, singly or combined, do not in any case materially
detract from the value of the property subject to them or interfere
with the ordinary conduct of the business of the Company or any of its
Subsidiaries;
(5) Liens arising by operation of law in connection with judgments, only to
the extent, for an amount and for a period that will not result in an
Event of Default;
(6) pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security legislation;
(7) leases or subleases granted to other Persons in the ordinary course of
business not materially interfering with the conduct of the business of
the Company or any of its Subsidiaries or materially detracting from
the value of the respective assets of the Company or any of its
Subsidiaries;
(8) Liens arising from precautionary Uniform Commercial Code financing
statement filings regarding operating leases entered into by the
Company or any of its Subsidiaries in the ordinary course of business;
(9) purchase money Liens on assets that
(a) are purchased by the Company or its Subsidiaries after the date of
the indenture and
(b) are used or useful in the Company's or its Subsidiaries'
businesses,
provided that these Liens
(x) secure an amount not exceeding 100% of the purchase price of the
assets acquired,
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(y) secure Indebtedness that is permitted to be Incurred by the
covenant described under "-- Material Covenants -- Limitations on
Indebtedness," and
(z) do not extend, contingently or otherwise, to any property or assets
other than those being purchased on the date in question;
(10) Liens arising solely by virtue of any statutory or common law
provision relating to bankers' liens or other rights and remedies as
to deposit accounts or other funds maintained with the creditor
depository institution, provided that
(a) the deposit account is not a dedicated cash collateral account and
is not subject to restriction against access by the Company or any
of its Subsidiaries in excess of those stated in regulations
published by the Federal Reserve Board and
(b) the deposit is not intended by the Company or any of its
Subsidiaries to provide collateral to the depository institution
and
(11) Liens securing any Indebtedness Incurred under clause (7) under
"-- Material Covenants -- Limitations on Indebtedness;" provided that
the Liens are subordinated in right and priority of payment to the
notes and the guarantees on terms no less favorable to the holders of
the notes than those applicable to the security interests and pledge
under the Hydro Agreement.
"Refinance" means to renew, extend, refund, replace, restructure,
refinance, amend or modify any Indebtedness. The term "Refinancing" shall have a
meaning based on this meaning of "refinance."
"registration rights agreement" means the registration rights agreement
among the Company, its Subsidiaries and the Initial Purchasers, entered into on
December 21, 1998.
"Restricted Investment" means
(1) the acquisition by any Person of, or the investment by the Person in,
any Capital Stock, Indebtedness or other securities of, or the making
by the Person of any capital contribution to, any other Person other
than the Company or any Unrestricted Subsidiary,
(2) any loan or advance by the Person to any other Person, other than the
Company, any Wholly Owned Subsidiary or any Unrestricted Subsidiary,
other than accounts receivable of the Person relating to the purchase
and sale of inventory, goods or services arising in the ordinary course
of business,
(3) any guarantee by the Person of any obligations, contingent or
otherwise, of any other Person, other than the Company, any Wholly
Owned Subsidiary or any Unrestricted Subsidiary,
(4) any provision of credit support by the Persons to or on behalf of any
other Person, other than the Company, any Wholly Owned Subsidiary or
any Unrestricted Subsidiary, and
(5) any obligation or liability of the Person to subscribe for additional
Capital Stock or other securities of any other Person, other than the
Company or any Unrestricted Subsidiary, or to maintain or preserve the
financial condition of any
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other Person, other than the Company or any Unrestricted Subsidiary, or
to cause any such other Person to achieve any specified levels of
operating results;
provided, however, that the following shall not be Restricted Investments:
(a) investments in Cash Equivalents;
(b) investments in or acquisitions of Capital Stock of any Person, other
than a Person in which Affiliates of the Company have an interest other
than through the Company, its Subsidiaries or its Unrestricted
Subsidiaries, that is or becomes, at the time of the acquisition, a
Wholly Owned Subsidiary;
(c) Restricted Investments of the Person existing as of the date of the
indenture and any extension, modification or renewal of the Restricted
Investment, but not increases of the Restricted Investment, other than
as a result of the accrual or accretion of interest or original issue
discount under the terms of the Restricted Investment;
(d) investments in or acquisitions of Capital Stock or other securities of
Persons, other than Affiliates of the Company, received in the
bankruptcy or reorganization of or by the Person or taken in settlement
of or other resolution of claims or disputes against or with the
Person, and extensions, modifications and renewals in each case; and
(e) investments in Persons, other than Affiliates of the Company, received
by the Person as consideration in Asset Sales, including, for the
purposes of this definition, those sales, transfers and other
dispositions described in clause (2)(b) and in clause (5) of such
definition, to the extent not prohibited by the provisions described
under "-- Material Covenants -- Limitations on Asset Sales," and
extensions, modifications and renewals of those investments.
"security agreements" means the Deeds of Trust, Assignment of Rents and
Leases, Security Agreement and Fixture Filing, the Security Agreement, the
Pledge Agreement, the Collateral Assignment of Patents and Trademarks, the
Collateral Assignments of Licenses, Permits, Approvals and Contracts, Uniform
Commercial Code financing statements, and the other agreements, documents and
filings that may be necessary or desirable to evidence or perfect the security
interests and Pledge of the Collateral Agent in the Collateral.
"Subsidiary" means, in relation to any Person, any corporation or other
entity of which more than 50% of the outstanding Voting Stock is at the time
owned, either alone or through its Subsidiaries or together with its
Subsidiaries, by that Person. For purposes of this definition, any directors'
qualifying shares will be disregarded in determining the ownership of a
Subsidiary. Notwithstanding anything to the contrary contained in this document,
no Unrestricted Subsidiary will be considered to be a Subsidiary of the Company
or of any Subsidiary or Subsidiaries of the Company.
"Tolling Agreements" means the Tolling Agreement, dated May 22, 1996, by
and between Goldendale Aluminum Company and Hydro Aluminum Louisville, Inc. and
the Tolling Agreement, dated September 15, 1986, by and between Northwest
Aluminum Company and Glencore, Ltd.
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"Unrestricted Subsidiary" means each of the Subsidiaries of the Company,
other than Northwest Aluminum Company and Goldendale Aluminum Company, the lines
of business currently operated by which will in no event be transferred to or
held by an Unrestricted Subsidiary, or any entity that is to become a Subsidiary
of the Company, designated as an "Unrestricted Subsidiary" by the Board of
Directors of the Company; but only if
(1) immediately after giving effect to the designation, no Event of
Default, or event that, after notice or lapse of time, or both, would
become an Event of Default, shall exist,
(2) immediately after giving effect to the designation, the Company could
Incur $1.00 of Indebtedness as described in the first paragraph under
"-- Material Covenants -- Limitations on Indebtedness,"
(3) the Subsidiary does not own, at the time of the designation or at any
time after the designation, any Capital Stock of the Company or any
other Subsidiary of the Company, and
(4) the Subsidiary is not, at the time of the designation, party to any
transaction or series of related transactions with the Company or any
other Subsidiary of the Company, unless the transaction or series of
related transactions, if entered into immediately after such
designation, would be permitted by the provisions of the covenant
described above under "-- Material Covenants -- Restrictions on
Transactions with Affiliates and Unrestricted Subsidiaries."
The Board of Directors of the Company may designate an Unrestricted Subsidiary
to be a Subsidiary, but only if
(1) immediately after giving effect to the redesignation, no Event of
Default, or event that, after notice or lapse of time, or both, would
become an Event of Default, will exist, and
(2) immediately after giving effect to the such redesignation, the Company
could Incur $1.00 of Indebtedness as described under the first
paragraph under "-- Material Covenants -- Limitations on Indebtedness."
Any designation or redesignation by the Board of Directors of the Company will
be evidenced to the trustee by filing with the trustee a certified copy of the
Board resolution giving effect to the designation or redesignation and an
Officers' Certificate certifying that the designation or redesignation complied
with these conditions.
"Unrestricted Subsidiary Investment" means, for the Company or any
Subsidiary of the Company (each Person being referred to in this definition as
the "Investor"),
(1) the acquisition by the Investor of, or the investment by the Investor
in, any Capital Stock, Indebtedness or other securities of, or the
making by the Investor of any capital contribution to, an Unrestricted
Subsidiary,
(2) any loan or advance by the Investor to an Unrestricted Subsidiary other
than accounts receivable of the Investor relating to the purchase and
sale of inventory, goods or services arising in the ordinary course of
business,
(3) any guarantee by the Investor of any obligations, contingent or
otherwise, of an Unrestricted Subsidiary,
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(4) any provision of credit support by the Investor to or on behalf of an
Unrestricted Subsidiary,
(5) any Incurrence of Indebtedness by an Unrestricted Subsidiary, if a
default on such Indebtedness would permit, upon notice, lapse of time
or both, any holder of any Indebtedness of the Investor, other than the
notes, to declare a default on such Indebtedness of the Investor or
cause the payment of the Indebtedness to become immediately due and
payable before its stated maturity, and
(6) any obligation or liability of the Investor to subscribe for additional
Capital Stock or other securities of an Unrestricted Subsidiary or to
maintain or preserve an Unrestricted Subsidiary's financial condition
or to cause an Unrestricted Subsidiary to achieve any specified levels
of operating results.
"Unrestricted Subsidiary Investments Outstanding" means, at any time of
determination, the amount, if any, by which
(1) the sum of all Unrestricted Subsidiary Investments made by the Company
or any Subsidiary of the Company after the date of the indenture
exceeds
(2) the amount of all dividends and distributions received by the Company
or a Subsidiary of the Company from Unrestricted Subsidiaries in cash
during the period that these Persons were Unrestricted Subsidiaries,
and all repayments in cash from these Unrestricted Subsidiaries to the
Company or one of its Subsidiaries of loans or advances from the
Company or any of its Subsidiaries to the Unrestricted Subsidiaries
during the period that the Persons were Unrestricted Subsidiaries, any
other reduction received by the Company or a Subsidiary of the Company
in cash of Unrestricted Subsidiary Investments in the Unrestricted
Subsidiaries during the period that the Persons were Unrestricted
Subsidiaries, and any reductions of Unrestricted Subsidiary Investments
in such Unrestricted Subsidiaries of the kind referred to in clauses
(3) through (6) of the definition of Unrestricted Subsidiary
Investment;
provided that the amount of Unrestricted Subsidiary Investments Outstanding
shall at no time be a negative amount.
"Voting Stock" means the Capital Stock of any Person having general voting
power under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of the Person, irrespective of whether or not at
the time Capital Stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing
(1) the products obtained by multiplying
(a) the sum of the amounts of each then remaining installment payment,
payment from a fund whose assets and proceeds are earmarked for the
repayment of any Indebtedness, payments on series of Indebtedness as
they come due, or other required payments of principal, including
payment at final maturity, by
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(b) the number of years, calculated to the nearest one-twelfth, that
will elapse between that date and the making of the payment, by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Subsidiary" means a Subsidiary of the Company all of the
outstanding Capital Stock of which is at the time owned, either alone or through
Wholly Owned Subsidiaries or together with Wholly Owned Subsidiaries, by the
Company. For purposes of this definition, any directors' qualifying shares and,
at all times before January 1, 2002, the Series A preferred stock of Goldendale
outstanding on the date of the indenture shall be disregarded in determining the
ownership of a Wholly Owned Subsidiary.
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below includes the
accounts of Northwest Aluminum Company, Northwest Aluminum Technologies and
Northwest Aluminum Specialties for all periods presented. It also includes the
accounts of Goldendale Holding Company and Goldendale Aluminum Company from May
22, 1996, the date Goldendale was acquired by Brett Wilcox, our sole
shareholder.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------
AUG. 28, SEPT. 3, DEC. 31, DEC. 31, DEC. 31,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................... $208,462 $289,693 $373,038 $497,872 $470,850
Cost of revenues............................ 200,284 256,211 329,739 438,299 443,251
General and administrative expenses......... 5,073 8,293 9,746 15,327 15,600
Interest expense............................ (832) (948) (9,454) (16,723) (14,180)
Other income (expense), net................. 76 (545) 1,442 4,246 1,889
Income (loss) before income taxes........... 2,349 23,696 25,541 31,769 (292)
Income tax expense.......................... -- -- 6,636 13,274 3,009
Net income (loss)........................... 2,349 23,696 18,905 18,495 (3,301)
Net income (loss) per share of common
stock -- pro forma........................ 2,349 23,696 16,686 14,847 (8,501)
Ratio of earnings to fixed charges.......... 3.8x 26.0x 2.8x 2.1x 0.8x
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 419 $ 1,066 $ 6,345 $ 1,251 $ 37,633
Working capital............................. 20,861 43,512 61,908 36,398 78,392
Total assets................................ 98,336 113,656 350,815 347,011 366,128
Total long-term debt........................ 17,977 3,000 185,441 134,941 170,000
Goldendale Holding Company Preferred
Stock..................................... 29,663 29,663
Total shareholders' equity.................. 60,629 80,325 103,615 115,680 77,516
OTHER DATA:
EBITDA...................................... $ 11,290 $ 32,900 $ 47,137 $ 63,315 $ 32,370
Net cash provided by (used in) operating
activities................................ (6,502) 24,827 29,854 56,092 28,738
Net cash used in investing activities....... (1,165) (5,203) (19,149) (7,091) (18,718)
Net cash provided by (used in) financing
activities................................ 7,490 (18,977) (4,775) (54,095) 26,362
Increase (decrease) in cash and cash
equivalents............................... (177) 647 5,930 (5,094) 36,382
</TABLE>
EBITDA represents operating income before deductions for depreciation and
amortization. EBITDA has been presented because we believe it is commonly used
by investors to analyze operating performance and to determine a company's
ability to take on additional indebtedness or service indebtedness. EBITDA
should not be considered in isolation or as a substitute for net income, cash
flow from operations or any other measure of income or cash flow that is
prepared as generally accepted accounting principles require, or as a measure of
a company's profitability or liquidity. In addition, our definition of EBITDA
may not be identical to similarly entitled measures used by other companies. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements included elsewhere in this
prospectus.
For purposes of the computation of the ratio of earnings to fixed charges,
fixed charges consist of interest expense, amortization of deferred financing
costs and dividends accrued on the Goldendale preferred stock. Earnings consist
of income before income taxes plus fixed charges.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to reading this section, you should read the Consolidated
Financial Statements that begin on page F-1 of this prospectus. That section
contains all of our detailed financial information including our results of
operations.
BASIS OF PRESENTATION
We were incorporated in the state of Oregon in June 1998 for the purposes
of becoming the holding company of Northwest Aluminum Company, Northwest
Aluminum Specialties, Inc., Northwest Aluminum Technologies, LLC and Goldendale
Holding Company and its wholly owned subsidiary, Goldendale Aluminum Company.
For purposes of this section only, the term "Northwest" refers to Northwest
Aluminum Company, Specialties and Technologies collectively and the term
"Goldendale" refers to Goldendale Holding Company and Goldendale Aluminum
Company. The consolidated financial statements include the accounts of Northwest
for all periods presented and the accounts of Goldendale from May 22, 1996, the
date Goldendale was acquired by Brett Wilcox. We, along with Goldendale and
Technologies, report on a December 31 fiscal year basis. Northwest and
Specialties report on a September 30 fiscal year basis. Included in accrued
expenses at December 31, 1998 is $418, representing the portion of intercompany
advances which do not eliminate due to the differing year ends. All other
significant intercompany accounts and transactions have been eliminated. We do
not believe seasonal or other factors materially affect the consolidation of
these differing fiscal periods.
OVERVIEW
GENERAL
Our revenue comes from two primary sources:
(1) fees received from smelting alumina into aluminum and casting that
aluminum into primary and value-added aluminum products under tolling
contracts with Hydro and Glencore, and
(2) the sale of non-tolled value-added aluminum products to other
customers.
Revenues for the conversion of alumina and processing of aluminum under tolling
arrangements are recognized upon completion of the tolling process. Under the
tolling arrangements, alumina suppliers deliver their alumina to us. The alumina
is converted to aluminum in reduction cells by putting it in liquid form by
dissolving it in an "electrolyte" solution and then passing electric current
through the electrolyte to separate the alumina into its two parts, aluminum and
oxygen. This process is continuous and is nearly instantaneous as the alumina is
dissolved in the electrolyte. The tolling process is considered complete when
the molten aluminum is withdrawn from the cells. Revenues from the sale of
aluminum products are recognized upon shipment.
Because our tolling fees are a fixed percentage of prices of aluminum on
the London Metals Exchange, the amount of revenue from tolling activities varies
depending on market aluminum prices, especially LME prices and gross smelter
production volumes. The amount of revenue from non-tolled value-added sales
varies depending on market aluminum prices, demand for our value-added products
and the pricing premiums we are able to realize for these products. Our revenues
from non-tolled value-added products may
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not be as strongly affected by lower LME prices as is the case with tolling fees
because of increased demand for value-added products at lower prices.
The aluminum industry is highly cyclical, with market prices fluctuating
widely based on global supply and demand factors, most of which are beyond our
control. As shown below, for 1998, the average LME price per pound of aluminum
was lower than the average price in any of the three previous years. The average
three-month LME prices per pound of aluminum over the last four years were as
follows:
<TABLE>
<CAPTION>
PRICE PER
YEAR ENDED DECEMBER 31, POUND
----------------------- ---------
<S> <C>
1995................................................. $0.83
1996................................................. $0.70
1997................................................. $0.74
1998................................................. $0.63
</TABLE>
We believe the current market price for aluminum is depressed due primarily
to the softening in the economies of several Eastern Europe, Pacific Rim and
South American countries, which has cast concern on the prospects for future
demand from these important aluminum consumption regions. Recent LME prices have
fluctuated around $0.53 per pound and the timing of an increase in aluminum
prices is uncertain. As of December 31, 1998, the three-month LME price per
pound of aluminum was $0.56. Accordingly, we believe our cash flow and earnings
in the near term will be significantly lower than amounts reported for
comparable prior periods.
Our cash flow and earnings are highly sensitive to aluminum prices because
production costs are largely fixed. At low market aluminum prices, we are able
to reduce some variable costs, but most of the production costs of primary
aluminum are constant in the short term, and therefore declines in market prices
will cause declines in earnings. Conversely, increased market aluminum prices
will cause increases in earnings. For these reasons we strive to maintain full
plant utilization, which reduces the average cost per pound of aluminum.
To reduce our reliance on market-priced primary aluminum and to improve
overall profitability, we have pursued a strategy of increasing both our
"tolled" and "non-tolled" value-added production through specialty casting and
processing operations. Through these operations, we are able to realize premiums
over market LME prices, the amount of which varies with the degree of
value-added content of the product and uniqueness of the product in the
marketplace. Our volume of value-added production has increased significantly
over the past decade relative to the volume of our primary production. Our
continued investment in value-added production operations is designed to further
increase our value-added production capabilities. As a consequence of this
strategy, the volume of non-tolled value-added production at Northwest has grown
from 153.7 million pounds in 1993 to 270.5 million pounds in 1998. As a result
of this growth, we purchase at market prices more primary aluminum for further
processing by Northwest into non-tolled value-added products than we produce for
Glencore under the tolling contract. The Glencore tolling contract allowed us to
operate our smelter at The Dalles at full capacity while we were developing
value-added products. The success of our non-tolled products, however, has
reduced the importance of this contract, and we will not renew it when it
expires in December 1999. The effect of this non-renewal will be to eliminate
the revenue and gross margin we derive from tolling aluminum for Glencore. This
may be more than offset by an increase in gross margin from the sale of
non-tolled products, because the underlying cost
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for primary aluminum will be our own production cost rather than the market
price. We do not assure you, however, that we will be able to realize any
increased gross margin upon expiration of the Glencore tolling agreement.
FINANCIAL EFFECT OF THE GOLDENDALE ACQUISITION.
On May 22, 1996, Brett Wilcox, our sole shareholder, acquired Goldendale
through a leveraged buyout. The transaction was recorded under the purchase
method of accounting, requiring us to step up the basis of fixed assets acquired
by approximately $46.0 million and record goodwill of approximately $101.0
million. The acquisition of Goldendale affects the comparability of our
historical consolidated results of operations beginning in 1996. As required
under purchase accounting, the results of Goldendale's operations are included
in the historical consolidated financial statements only for periods following
the acquisition date; accordingly, Goldendale's results of operations are
included for only part of 1996. Our reported annual depreciation and
amortization expense increased by approximately $9.0 million as a result of the
step up in the basis in the fixed assets and goodwill. Additionally, interest
expense increased as a result of indebtedness taken on in the acquisition.
Finally, unlike Northwest, Goldendale is subject to corporate income taxes.
Northwest has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code and Technologies is a limited liability company taxed as a
partnership. Accordingly, income tax expense related to Goldendale has been
reflected on our historical combined financial statements for all periods
following the acquisition.
THE BUSINESS COMBINATION
On December 18, 1998, Brett Wilcox contributed to Golden Northwest
Aluminum, Inc. his membership interest in Technologies and all of the
outstanding shares of common stock of Northwest, Specialties and Goldendale.
This business combination is treated for accounting purposes as a combination of
entities under common control in a manner similar to a pooling of interests. The
business combination has not had and we do not expect it to have a significant
impact on our financial position, results of operations or cash flows. In
accordance with generally accepted accounting principles, however, the amount
recorded as Goldendale preferred stock has been reclassified and recorded as a
minority interest of our company.
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RESULTS OF OPERATIONS
The following table sets forth consolidated statement of income data as a
percentage of revenues for 1996, 1997 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenues............................................... 100.0% 100.0% 100.0%
Cost of revenues....................................... 88.4% 88.0% 94.1%
----- ----- -----
Gross margin........................................... 11.6% 12.0% 5.9%
General and administrative expenses.................... 2.6% 3.1% 3.3%
----- ----- -----
Operating income....................................... 9.0% 8.9% 2.6%
Interest expense....................................... (2.5)% (3.4)% (3.0)%
Other income (expense), net............................ 0.3% 0.9% 0.4%
----- ----- -----
Net other expenses..................................... (2.2)% (2.5)% (2.6)%
----- ----- -----
Income before income taxes............................. 6.8% 6.4% 0%
Income tax expense..................................... 1.8% 2.7% 0.7%
----- ----- -----
Income (loss) before extraordinary item................ 5.0% 3.7% (0.7)%
Extraordinary item..................................... 0% 0% (0.3)%
----- ----- -----
Net income (loss)...................................... 5.0% 3.7% (1.0)%
----- ----- -----
</TABLE>
1998 COMPARED TO 1997
Primary and value-added aluminum produced under tolling contracts decreased
less than 1%, from 530.4 million pounds in 1997 to 526.3 million pounds in 1998.
Shipments of non-tolled value-added aluminum products were 263.9 million pounds
and 270.5 million pounds for 1997 and 1998, respectively. The increase in
non-tolled value-added products resulted from an increase in shipments of
value-added billet produced at Northwest.
Revenues decreased from $497.9 million in 1997 to $470.9 million in 1998, a
decrease of 5.4%. Revenues from tolling contracts decreased 8.2% from $290.2
million in 1997 to $266.3 million in 1998, primarily due to the decrease in
market aluminum prices in 1998. Sales of non-tolled value-added products
decreased slightly from $207.7 million in 1997 to $204.6 million in 1998, due to
the decrease in market aluminum prices in 1998, but offset by the increase in
shipments of those products. Tolling revenues earned in 1998 and 1997 under the
Company's Glencore and Hydro tolling contracts were $88.2 million and $88.6
million and $178.1 million and $201.6 million, respectively.
Gross margin decreased from $59.6 million in 1997 to $27.6 million in 1998,
a decrease of 53.7%. As a percentage of revenues, gross margin declined from
12.0% to 5.9%. Gross margin declined due primarily to the decreased market
prices of aluminum. To the extent aluminum prices remain at their current level,
we expect to continue to have lower gross margins and, consequentially,
diminished levels of earnings. In addition, power costs increased as a result of
contractual terms in the power contract with the BPA, which increased the amount
of power required to be purchased at predetermined prices from BPA. Power costs
in 1998 have been at rates we expect to continue through 2001.
General and administrative expenses increased slightly from $15.3 million
in 1997 to $15.6 million in 1998. As a percentage of revenues, general and
administrative expenses increased from 3.1% to 3.3%. The increase resulted
primarily from the $1.5 million write-
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off of a long-term trade receivable. This write-off related to a long-term trade
receivable from a long-standing customer that experienced liquidity problems.
Sales of aluminum to this customer were discontinued when the account aged
beyond reason. However, we continue to utilize this customer for access to the
Texas market through their marketing, warehouse and delivery services. Attempts
in 1998 to obtain a secured interest in the real properties of this customer
proved unsuccessful. The account was written down to $1.5 million, the amount
perceived to be collectable based on a thorough review of the customer's
financial condition. We routinely perform evaluations of the financial condition
of this and other customers as part of our normal credit process. This coupled
with a relatively small number of customers, with whom we are in continuous
contact, enables us to minimize our exposure to credit risk.
Interest expense decreased from $16.7 million in 1997 to $14.2 million in
1998, or 15.0%, primarily as a result of the lower average level of debt
outstanding in 1998. In December 1998, we completed an offering of $150 million
of 12% first mortgage notes. Additionally, we borrowed $20 million under a note
purchase agreement with Hydro. As a result of these borrowings, we anticipate a
significant increase in interest expense in 1999. We used some of the proceeds
from the first mortgage notes to retire our previous credit facilities with
BankBoston. As a result of the debt extinguishment in 1998, we incurred an
extraordinary loss of $1.6 million, which represented the unamortized balance of
deferred finance costs associated with the retired debt.
Income tax expense decreased from $13.3 million in 1997 to $3.0 million in
1998, or 77.4%, primarily as a result of a decrease in Goldendale's taxable
income.
As a result of the foregoing factors, we reported a net loss of $4.9
million in 1998 versus net income of $18.5 million in 1997.
1997 COMPARED TO 1996
The results of operations for 1997 reflect the inclusion of the results of
Goldendale's operations for the entire year of 1997, as compared with an
approximately seven-month period for 1996.
Primary and valued added aluminum produced under tolling contracts
increased from 315.7 million pounds in 1996 to 530.4 million pounds in 1997,
generating $165.3 million in 1996 and $290.2 million in 1997. This increase
resulted primarily from the inclusion of a full year of operations of Goldendale
in 1997 as compared to a partial year in 1996 and the Hydro tolling agreement,
effective January 1, 1997, under which Goldendale agreed to utilize 100% of its
capacity to produce tolled product for Hydro. Shipments of non-tolled
value-added aluminum products decreased from 274.1 million pounds in 1996 to
263.9 million pounds in 1997, as a result of the shift from non-tolled
value-added product to tolled product at Goldendale. This was partially offset
by the increased sales at Northwest of 44.2 million pounds of non-tolled
value-added product. Revenues from these products totaled $207.7 million in both
1997 and 1996.
Revenues increased from $373.0 million in 1996 to $497.9 million in 1997,
an increase of 33.5%. The increase in revenues resulted primarily from the
inclusion of a full year of operations of Goldendale in 1997 and from increased
volumes of tolled and non-tolled product at Goldendale and Northwest. Tolling
revenues earned in 1997 and 1996 under the Company's Glencore and Hydro tolling
contracts were $88.6 million and $98.2 million and $201.6 million and $67.1
million, respectively.
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Gross margin increased from $43.3 million in 1996 to $59.6 million in 1997,
an increase of 37.6%. As a percentage of revenues, gross margin increased
slightly between the two years, from 11.6% in 1996 to 12.0% in 1997. The
increase in gross margin resulted primarily from the inclusion of a full year of
operations of Goldendale in 1997 and from increased volumes of tolled and
non-tolled product at Goldendale and Northwest.
General and administrative expenses increased from $9.7 million in 1996 to
$15.3 million in 1997, an increase of 57.3%. The increase resulted primarily
from the inclusion of Goldendale for the entire year of 1997. As a percentage of
revenues, general and administrative expenses increased slightly from 2.6% to
3.1%.
Interest expense increased from $9.5 million in 1996 to $16.7 million in
1997. This increase of 76.9% was primarily a result of a full year of
indebtedness incurred as a result of the Goldendale acquisition, partially
offset by our continued pay down of our previous credit facility with BankBoston
using cash flow from operations and asset sales.
Other income increased from $1.4 million in 1996 to $4.2 million in 1997
primarily as a result of a $2.6 million gain recognized by us on the sale of two
power generation turbines in 1997.
Income tax expense increased from $6.6 million in 1996 to $13.3 million in
1997 primarily as a result of an increase in taxable income reported by
Goldendale and the inclusion of Goldendale for the entire year in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our cash and capital requirements have been satisfied through
cash generated from operating activities and borrowings under our primary credit
facilities. Before December 21, 1998, Goldendale and Northwest operated under
independent credit facilities which were scheduled to mature in 2001 and
consisted of total borrowings at December 21, 1998 of $125.2 million under term
loans and revolving credit facilities. See Note 5 to the Consolidated Financial
Statements. We repaid these credit facilities with proceeds from the sale of the
notes.
Our new credit facility with BankBoston is a $75.0 million senior secured
revolving credit facility collateralized by all of the inventory, accounts
receivable and other rights to payment of our subsidiaries. Availability under
the revolving line of credit is controlled by a borrowing base formula based on
eligible receivables and inventory, and there must always be at least $15
million available for borrowing at any given time. Based on this formula, the
net availability under the revolving line of credit was approximately $50.5
million at December 31, 1998. We had no amounts outstanding under this credit
facility at December 31, 1998. See "Description of Other Indebtedness and
Goldendale Preferred Stock."
Our liquidity and capital needs relate primarily to payment of principal
and interest on borrowings, capital expenditures, including our facilities
investment program, and distributions to our sole shareholder to pay income
taxes. Subject to reasonable market aluminum prices, we will require
approximately $11.0 million in 1999 for the facilities investment program, most
of which will be used in the third and fourth quarters. The first stage of the
facilities investment program consists of an expansion of the Goldendale
casthouse, and a 30-cell demonstration of new cell line technology. We have
borrowed $20.0 million from Hydro under a note purchase agreement to partially
finance this facilities investment program. Our liquidity and capital needs also
relate to working capital and other general
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corporate requirements, including the incremental working capital needs
anticipated in connection with the potential termination of the Glencore tolling
agreement in December 1999. Additionally, the Goldendale preferred stock became
redeemable at our discretion after December 31, 1998. We anticipate that the
funds necessary to redeem the Goldendale preferred stock would be drawn from our
revolving credit facility with BankBoston. The initial redemption price for the
Goldendale preferred stock will be $30.4 million plus any accrued but unpaid
dividends, which totaled $9.5 million at December 31, 1998. We are also
upgrading our management information systems, including hardware and software,
to a fully integrated enterprise resource planning system. Northwest and
Goldendale are executing a transition to the SAP R/3 enterprise resource
planning system. Costs incurred and capitalized to date have amounted to
approximately $2.0 million and will total approximately $6.0 to $7.5 million at
completion. Furthermore, we are subject to a number of contingencies and
uncertainties, including a potential income tax deficiency.
Our statement of cash flows for the periods indicated is summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by operating activities..... $ 29,854 $ 56,092 $ 28,738
Net cash used in investing activities......... (19,149) (7,091) (18,718)
Net cash provided by (used in) financing
activities.................................. ( 4,775) (54,095) 26,362
Increase (decrease) in cash and cash
equivalents................................. 5,930 (5,094) 36,382
</TABLE>
Net cash provided by operating activities was $29.9 million, $56.1 million
and $28.7 million for 1996, 1997 and 1998. The net cash provided by operating
activities during 1998 of $19.1 million, was primarily attributable to our net
loss, as adjusted for non-cash charges. The decrease in accounts receivable,
inventories and accounts payable was primarily due to the decrease in market
aluminum prices in 1998. The net cash provided by operating activities during
1997 was primarily attributable to net income, as adjusted for non-cash charges,
of $43.1 million, and an increase in accounts payable and accrued expenses of
$26.6 million, offset by an increase in inventories of $9.5 million. The
increase in inventories and accounts payable was due to a temporary modification
of the Glencore metal repurchase terms which allowed us to extend the timing of
payments due Glencore. The net cash provided by operating activities during 1996
was primarily attributable to net income, as adjusted for non-cash charges, of
$36.1 million, and a decrease in inventories of $22.3 million. Offsetting was a
decrease in accounts payable and accrued expenses of $20.7 million and an
increase in accounts receivable and other assets of $8.3 million. The decrease
in inventories and accounts payable was primarily due to Goldendale's
restructuring of its tolling agreement with Hydro whereby Hydro committed to
usage of the entire Goldendale facility, significantly reducing our requirements
to purchase and hold our own inventory.
Net cash used in investing activities was $18.7 million in 1998, compared
to net cash used in investing activities of $7.1 million in 1997 and $19.1
million in 1996. Cash used in investing activities in 1998 was primarily
attributable to capital expenditures of $19.0 million. Cash used in investing
activities in 1997 primarily resulted from proceeds of $12.8 million received by
us through the sale of certain of our power generation assets, offset by capital
expenditures of $14.3 million and combined advances to our shareholder and a
related company of $5.6 million. Cash used in investing activities in 1996 was
primarily attributable to capital expenditures of $19.9 million.
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Net cash provided by financing activities was $26.4 million in 1998,
compared to net cash used in financing activities of $54.1 million in 1997, and
$4.8 million in 1996. Net cash provided from financing activities in 1998 was
primarily attributable to $38.9 million of net proceeds from the first mortgage
notes, offset by $12.6 million in net repayments on our credit facilities and
deferred compensation notes. Net cash used in financing activities in 1997 was
primarily attributable to $50.5 million in net repayments on our credit facility
and $2.9 million paid in dividends. Net cash used in financing activities in
1996 was primarily attributable to $47.1 million in net borrowings under our
credit facility offset by $67.6 million paid in dividends to our shareholder.
Annual dividends paid to our shareholder approximated his personal liability for
federal and state income taxes related to Northwest's operations. In 1996
additional dividends of $44.5 million were paid to our shareholder that were
used in the acquisition of Goldendale.
We believe cash flow from operations, available borrowings under our
revolving credit facility and under our note purchase agreement with Hydro and
cash on hand will provide adequate funds for our foreseeable working capital
needs, planned capital expenditures and debt service and other obligations
through 2000.
Our ability to fund operations, make planned capital expenditures, such as
our facilities investment program, make principal and interest payments on the
notes, and remain in compliance with all of the financial covenants under our
debt agreements will be dependent on our future operating performance. Our
future operating performance is dependent on a number of factors, including
aluminum prices, many of which are beyond our control. These factors include
prevailing economic conditions and financial, competitive, regulatory and other
factors affecting our business and operations, and may be dependent on the
availability of borrowings under our revolving credit facility or other
borrowings. We do not assure you our cash flow from operations, together with
other sources of liquidity, will be adequate.
- to make required payments of principal and interest on the notes and our
other debt
- to finance anticipated capital expenditures
- to fund working capital requirements or
- to fund the possible redemption of all outstanding shares of the
Goldendale preferred stock.
If we do not have sufficient available resources to repay any of our
indebtedness when it becomes due and payable, we may need to refinance the
indebtedness. We do not assure you refinancing would be available or available
on reasonable terms.
SEASONALITY AND INFLATION
Our results of operations can be affected by seasonal factors, such as
substantial increases in the cost of electricity in the fall and winter. We do
not believe inflation has had a material effect on the consolidated financial
statements for the periods presented.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards.
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Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
Reporting Comprehensive Income, establishes standards for reporting and display
of comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Our adoption of SFAS No. 130 on January 1, 1998 had no
impact on our financial position.
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
Disclosures about Segments of an Enterprise and Related Information, which
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, establishes standards for the new way that public enterprises report
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. As we operate within a single aggregated segment,
production of aluminum, our adoption of SFAS No. 131 in 1998 did not have a
significant impact on our financial position.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ("SFAS No. 132"), Employers'
Disclosures about Pensions and other Postretirement Benefits, which standardizes
the disclosure requirements for pension and other postretirement benefits. We do
not expect the adoption of SFAS No. 132 to affect materially our current
disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies
to recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of
(1) the changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or
(2) the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the gain or loss is
recognized as income in the period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Based on our
current and planned future activities relative to derivative instruments, we
believe that the adoption of SFAS No. 133 on January 1, 2000 will not have a
significant effect on our financial statements.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134 ("SFAS No. 134"), Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, which effectively changes the
way mortgage banking firms
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account for certain securities and other interests they retain after
securitizing mortgage loans that were held for sale. The adoption of SFAS No.
134 is not expected to have a material impact on our financial position.
In February 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 135 ("SFAS No. 135"), Rescission of
Financial Accounting Standards Board No. 75 ("SFAS No. 75") and Technical
Corrections. SFAS No. 135 rescinds SFAS No. 75 and amends Statement of Financial
Accounting Standards Board No. 35. SFAS No. 135 also amends other existing
authoritative literature to make various technical corrections, clarify
meanings, or describe applicability under changed conditions. SFAS No. 135 is
effective for financial statements issued for fiscal years ending after February
15, 1999. We believe that the adoption of SFAS No. 135 will not have a
significant effect on our financial statements.
YEAR 2000 COMPLIANCE
The following is a discussion of our year 2000 compliance status.
GOLDENDALE
Goldendale has reviewed its business and processing systems and determined
that the majority of the systems are already year 2000 compliant. Goldendale has
been working with a consultant and an internal committee of managers and
employees to address the scope of the year 2000 issue and implement any
necessary solutions. Although Goldendale believes the majority of its business
and processing systems are already year 2000 compliant, Goldendale is upgrading
its enterprise resource planning system. We have chosen ERP system software, and
we have begun evaluating the best implementation for our specific applications.
Goldendale has made, and will continue to update, inquiries of customers
and suppliers on which the operations of the business are critically dependent
to determine their year 2000 readiness. The analysis of the responses from
customers and suppliers received so far indicates substantial compliance with
year 2000 issues. In our assessment to date, there will not be a material affect
if there is a disruption in our relationships with vendors or suppliers, who are
not year 2000 compliant.
A contingency plan is being developed to deal with the worst case scenario,
and is due to be complete by mid-1999. The worst case scenario would include a
power interruption of more than four hours. Between four and twenty-four hours
of power outage, we would take every measure necessary to keep the cells from
solidifying. After twenty-four hours of power outage, it would be necessary to
make an orderly shut down of the facility. We have no back up, nor is it
feasible to obtain a back up, for our power source.
Goldendale's year 2000 compliance analysis to date has identified its
inventory system as year 2000 deficient. Goldendale is upgrading the ERP system
software and is also developing software upgrades to the present inventory
system, to be completed by mid-1999, in case the ERP system upgrade is delayed
beyond January 1, 2000. Until the upgrade is complete, Goldendale will continue
to gather information and assess the possibilities of disruption to its
operations, liquidity, and financial condition posed by the year 2000 problem.
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In the last year, Goldendale has expended nearly $100,000 on its year 2000
review and has budgeted $3.5 million over the next two years to upgrade and
further integrate its business and process systems to maintain year 2000
compliance.
NORTHWEST
Northwest has retained outside experts to review its year 2000 readiness
and make recommendations on how to become year 2000 compliant. To date,
Northwest's major business systems have been reviewed and tested for year 2000
compliance. The majority of all critical business systems are year 2000
compliant since the latest implementation of an SAP R/3 enterprise resource
planning system. The business systems included are sales, accounting,
purchasing, production, inventory management and plant maintenance. We have
completed about 90% of the testing of Northwest's remaining information
technology systems, including process systems, as well as the non-information
technology systems for year 2000 compliance. We have identified some of
Northwest's non-information technology systems as non-year 2000 compliant. We
have adopted a plan with varying priorities based on how critical the system is
and all critical systems will be in compliance by mid-1999. Some minor systems
may remain non-compliant but are not critical to business operation and will be
completed before year-end.
Northwest is making inquiries of its customers and suppliers to determine
the potential effect of their year 2000 readiness on its operations. To date,
Northwest has contacted all vendors/suppliers and found that most who are
non-compliant plan to be compliant by mid-1999. Quarterly updates have been
conducted and will continue through the remainder of the year. Alternatively,
critical supplies will be acquired to prevent, where possible, relationship
disruption from interfering with business operation. One critical raw material,
electricity, is sole sourced from the Bonneville Power Administration for
delivery and cannot be otherwise obtained. BPA has assured us that it is year
2000 compliant; however BPA does not guarantee an interruption-free supply.
Northwest is also making inquiries of its customers with the initial review to
be completed by mid-year.
Northwest is developing a contingency plan for year 2000 non-compliance by
vendors and customers. The plan completion date is mid-1999. The worst case
scenario would include a power interruption of more than four hours. Between
four and twenty-four hours of power outage, we would take every measure
necessary to keep the cells from solidifying. After twenty-four hours of power
outage, it would be necessary to make an orderly shut down of the facility. We
have no back up, nor is it feasible to obtain a back up, for our power source.
Over the past year, Northwest has spent approximately $2 million on its
year 2000 review and implementation of solutions to identified year 2000
problems. Many of those expenditures have been used to upgrade computer systems
and not solely to resolve potential year 2000 problems. Northwest expects to
spend another $500,000 to $2 million to complete its system upgrade and to
resolve its year 2000 compliance issues. A contingency plan is under development
to deal with a worst case year 2000 problem.
INTEREST RATE RISK MANAGEMENT
We have entered into an interest rate swap agreement, which covers $20.0
million of notional principal amount at January 25, 1999 and which expires in
2003, to manage our exposure to interest rate risk on a portion of our variable
rate borrowings. The fixed interest rate paid by us is 6.4%. Although we are
exposed to loss on the interest rate swap
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in the event of nonperformance by the counterparties, we believe the likelihood
of nonperformance is remote.
EMPLOYEE BENEFIT PLAN MATTERS
The qualified retirement plans of Northwest and Goldendale have been
reviewed by an outside consultant to determine whether those plans meet
discrimination and coverage requirements. The review was based on 1997 data we
supplied to the consultant, and we believe the data was reliable and complete
enough to produce reasonably accurate results. Based on its review, the
consultant concluded that the plans are in compliance by a narrow numerical
margin. The plans must satisfy the requirements each year.
We plan to conduct more testing before the end of 1999. Outcome of the
testing is difficult to predict because the test is complex and includes
employees of entities controlled by Brett Wilcox whose businesses are unrelated
to our business. We believe if the test is failed Northwest or Goldendale may be
able to redesign their plans to pass without material costs or adverse
consequences. Alternatively, the qualified retirement benefits for companies
other than Northwest or Goldendale may need to be enhanced. If those entities
are financially unable to implement such a remedy, the tax qualification under
Section 401(a) of the Internal Revenue Code of 1986 of the plans of Northwest
and Goldendale could be jeopardized. If a plan fails and the enhancement of
benefits of other entities is the necessary remedy, we believe the entities
responsible for those remedies will be able to provide adequate enhanced
benefits.
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BUSINESS
Our company, through its three primary operating subsidiaries, Goldendale
Aluminum Company, Northwest Aluminum Company and Northwest Aluminum Specialties,
Inc., is a leading producer of primary aluminum and selected specialty
engineered high quality value-added aluminum products. Our revenue comes from
two main sources: fees received from tolling alumina into aluminum and sales of
value-added aluminum products. At our two facilities on the Columbia River east
of Portland, Oregon, we operate two primary aluminum smelters with combined
production capacity of 250,000 metric tons, making us one of the five largest
primary aluminum producers in the United States. We produce primary aluminum
under tolling agreements with Hydro Aluminum Louisville, Inc. and Glencore,
Ltd., two large international industrial and trading companies. In conjunction
with our smelter operations, we operate three casthouses that produce a range of
value-added aluminum products, including our proprietary line of direct-cast,
small diameter, alloyed billet products.
We sell value-added billet and related products directly for extrusion for
further processing into final products such as fire extinguishers, automobile
air bag canisters, golf club heads, bicycle frames and a variety of automotive
and aircraft parts. We believe our cost competitive position, strategic
relationships, investment in new smelting and casting technologies and mix of
higher-margin, value-added products are key competitive advantages and have been
primary determinants of our historical profitability.
We believe we rank among the lower cost aluminum producers in the United
States. We attribute our historical profitability to a number of factors
including access to and innovative procurement of low-cost hydroelectric power,
technical innovation at the plant level, good labor relations and low levels of
corporate overhead.
OPERATIONS
We conduct our business and derive revenue through two principal business
activities: the production of primary aluminum under tolling contracts and the
production of value-added specialty aluminum products under tolling contracts
and for direct sales.
PRODUCTION OF PRIMARY ALUMINUM
Our subsidiaries operate two aluminum smelters in The Dalles, Oregon and
Goldendale, Washington. The smelters have the capacity to produce approximately
250,000 metric tons of primary aluminum per year. A metric ton is equal to
2,204.6 pounds. These smelters consist of 826 vertical pin Soderberg technology
reduction cells organized into five pot lines. The smelters use advanced
conservation technology, computer control procedures and environmental control
equipment to enhance their efficiency. Capital investment in the facilities by
us and the smelters' previous owners over the life of the facilities,
competitive wage rates, access to low cost hydroelectric power, low overhead and
tolling agreements that insured full smelter utilization have also contributed
to the smelters' efficiency. The efficiency of the smelters allows us to
maintain a competitive cost position relative to other industry participants,
many of which are significantly larger than we are. Our operating efficiencies
and competitive cost position allowed us to maintain positive operating earnings
through industry cycles in the last dozen years, including the 1992-1993
industry down cycle.
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SMELTING METHODS. Smelting, which involves the reduction of alumina to
aluminum ingot, is an electrolytic process. Raw alumina is dissolved in an
electrolytic bath in large cells, or pots, which are insulated with brick and
lined with carbon. The cell lining acts as the negative cathode, and a carbon
block, which is partially immersed in the electrolytic bath serves as a positive
anode. The carbon anode is composed of petroleum coke and coal tar pitch and is
consumed in the smelting process, as oxygen released from alumina in the
reduction process binds with the carbon to form carbon dioxide. Because of the
high cost of removing metallic impurities from aluminum, careful attention must
be given to avoiding impurity introduction by way of the raw materials used in
the anode manufacturing process. Petroleum coke and coal tar pitch are used as
the carbon and binder sources because of their relatively high purity. Gases and
particulate matter are collected in the hood around the lower rim of the anode
casing and are passed through the smelter's air and water purification systems.
Molten aluminum is drawn from the bottom of the cell, and, typically, poured
into molds as unalloyed metal, or sow, or routed into holding furnaces where
various alloying ingredients may be added before casting into plate, slab, logs
or ingot.
The world's aluminum smelters are evenly split between two basic anode
technologies, Soderberg and pre-bake. The two processes differ only in the
fabrication and connection of the carbon anode. Most recently constructed
smelters use pre-bake technology, which has certain inherent advantages relative
to Soderberg technology and may permit primary aluminum production at a lower
cost, albeit at a higher initial investment.
Soderberg anodes are baked by utilizing waste heat from the smelting cell
and, as such, are referred to as self-baking. A steel casing or mold six to
eight meters by two meters containing the coke aggregate and coal tar pitch
mixture is mounted over the smelting cell and its contents bake as they progress
toward the electrolytic bath. The carbon mass is allowed to slip through the
casing at the rate of its oxidation in the electrolytic bath. In the vertical
spike version of the Soderberg cell, electrical contact is made by steel tipped
aluminum spikes entering from the top. They are pulled by a special tool and
reset as their tips approach the electrolytic bath surface due to consumption of
the anode. In the horizontal spike version of the Soderberg cell the
steel-aluminum spikes enter through the side of the casing instead of through
the top. They must be removed and reset as the anode is consumed.
Pre-bake anodes are formed by blending sized petroleum coke aggregate and
coal tar pitch, molding it into blocks complete with preformed electrical
connection sockets by hydraulic pressing or vibration forming, and firing in
oil- or gas-fired ceramic-lined ring furnace pits. A typical block is 70 cm
wide, 125 cm long and 50 cm high. Electrical contact and physical support is
obtained through aluminum or copper rods welded or bolted to steel stubs. The
stubs are set in the anode sockets and molten cast iron is poured around them to
produce a strong joint with low electrical resistance.
GOLDENDALE SMELTER. The smelter in Goldendale, Washington was built in
1971, making it the most recently constructed aluminum smelter in the Pacific
Northwest, and was expanded in 1981. The total annual production capacity of the
Goldendale smelter is 168,000 metric tons of primary aluminum output. The
Goldendale smelter employs vertical pin Soderberg technology and consists of 526
reduction cells organized into three pot lines. The Goldendale smelter has
undergone a number of technology upgrades during its lifetime. These upgrades
have resulted in a significant improvement in production efficiencies over the
years as measured by energy consumption, carbon consumption and cell life.
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The Goldendale smelter was constructed from engineering plans based on
Hydro's Karmoy, Norway facility, and as such is similar in terms of layout,
smelter design and operating processes. The Goldendale smelter was also designed
to operate in tandem with our smelter located in The Dalles, Oregon.
NORTHWEST SMELTER. Located across the Columbia river and approximately 35
miles west of the Goldendale smelter, our smelter in The Dalles produces primary
aluminum. Built in 1958, The Dalles smelter consists of 300 vertical pin
Soderberg reduction cells organized into two pot lines. The smelter's production
capacity is about 82,000 metric tons of primary aluminum per year.
We also operate a carbon plant at The Dalles facility. The plant produces
approximately 40,000 metric tons of carbon briquettes, which are consumed during
the alumina reduction process. We have surplus capacity in the plant and
recently have begun selling briquettes to a non-affiliated aluminum producer.
CELL RELINING. Each smelter's cells are grouped into series electrical
circuits varying from 150 to 186 cells. Each cell must be relined between every
2,300 and 2,600 days. When a cell is relined, it is removed from the production
process by electrically isolating the cell, allowing the electricity to flow
past the cell to the next cell in the circuit. The cell is allowed to cool and
the lower half of the cell, known as the cathode, is removed and taken from the
cell lines to our cell relining area. The residual cooled and hardened
electrolyte and aluminum and the spent pot liner, which consists of carbon
blocks and insulating brick, are removed from the steel cell casing. The steel
casing is then straightened and patched if necessary. The cell is then relined
with new insulating brick, carbon blocks and other material and supplies,
including ramming paste and collector bars. The total cell relining costs are
approximately $70,000 per cell. The number of cells relined each year varies
based on the quality of materials used, operating conditions and the number of
cells that have been relined over the years.
TOLLING AGREEMENTS. Each of Northwest Aluminum Company and Goldendale
Aluminum Company is party to a tolling agreement relating to the production of
primary aluminum and value-added products.
THE HYDRO TOLLING AGREEMENT. Goldendale and Hydro Aluminum Louisville, Inc.
entered into a ten-year contract effective January 1, 1997. The Hydro tolling
agreement has been extended another five years, until December 2011.
Under the terms of the Hydro tolling agreement, Goldendale must use its
smelter exclusively to produce at least 157,000 metric tons of aluminum annually
from the alumina supplied to it by Hydro, and Hydro is required to supply
sufficient alumina to enable Goldendale to produce that amount of aluminum.
Hydro supplies the alumina at no cost to Goldendale, and at all times the
alumina and aluminum inventory is owned by Hydro. Goldendale bears the entire
cost of unloading and storing the alumina and transporting it to the smelter
from Goldendale's unloading facility. Hydro pays a tolling fee to Goldendale for
converting the alumina to aluminum based on a percentage of the price of
aluminum on the London Metals Exchange. Pursuant to its tolling agreement with
Hydro, Goldendale receives an additional tolling fee for casting the aluminum
into value-added "casthouse products" such as extrusion billet, foundry "T" or
sheet ingot. In addition, Goldendale shares premiums that Hydro is able to
realize on sales of value-added products in the market. Hydro is required to
place orders for at least 70,000 metric tons of value-added products each year.
The tolling agreement also specifies quality and efficiency
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requirements. If the products or production schedules do not meet the required
specifications, the parties have agreed to work together to identify and correct
the problem; however, Hydro may terminate the agreement if Goldendale's
production were to continue to fall below the product or schedule
specifications.
The Hydro agreement also requires Goldendale to use any additional smelter
capacity resulting from the installation of new point feeder technology under
the facilities investment program exclusively to produce aluminum products for
Hydro, subject to some maximum volumes. Hydro is required to supply sufficient
alumina to enable Goldendale to produce the additional volume. However, Hydro's
commitment to place orders for value-added products remains at 70,000 metric
tons and has not been increased to reflect the additional casthouse capacity
expected to result from the facilities investment program. Hydro has informed us
that it will utilize the additional casthouse capacity. Hydro would like to
receive more of the primary aluminum produced at the Goldendale smelter in the
form of billet rather than ingot. In contrast to ingot, billet is a casthouse
product. If Hydro's demand for billet does not use the full capacity of the
Goldendale casthouse, we anticipate using the excess capacity to cast primary
aluminum from the smelter at The Dalles into commodity billet for other
value-added customers.
THE GLENCORE TOLLING AGREEMENT. Northwest entered into a tolling contract
with Glencore, Ltd. in September 1986, which was extended through December 1999.
Under the Glencore tolling agreement, Glencore provides alumina to Northwest for
conversion into primary aluminum. Glencore must supply enough alumina to support
the full production capacity of the Northwest smelter, and Northwest must use
its best efforts to produce 82,000 metric tons of aluminum ingot and other
finished products for Glencore in exchange for a tolling fee based on a certain
percentage of the London Metals Exchange price for aluminum. Northwest bears the
cost of unloading and storing the Glencore alumina and transporting it from
Portland to the Northwest smelter.
Northwest has the right to buy back part of the metal supplied to Glencore,
which Northwest uses in its value-added operations. Due to the growth of its
value-added operations, Northwest has increased its purchases of primary
aluminum from Glencore and now purchases more primary aluminum from Glencore
than the production capacity of the Northwest smelter. Glencore's tolling
contract allowed us to operate The Dalles smelter at full capacity while we had
no developed market for our smelter production. The success of our non-tolled
products, however, has reduced the importance of this contract, and we will not
renew the tolling contract when it expires in December 1999. We have, however,
entered into a letter of intent with Glencore to have Glencore supply the
smelter at The Dalles with all of its alumina requirements from October 1, 1999
to December 31, 2004.
UNLOADING FACILITIES. We receive raw alumina at our Portland, Oregon
unloading facility. The facility is served by a ship channel maintained by the
U.S. Army Corps of Engineers. Three steel silos are located on the property with
the capacity to store 42,000 metric tons of alumina. Alumina is delivered to the
facility by ship and is then transferred into silos for short-term storage and
delivered to our smelters by rail. The unloading facility has sufficient
capacity to handle our unloading and storage requirements.
PRODUCTION OF VALUE-ADDED SPECIALTY ALUMINUM PRODUCTS
We operate a value-added production operation which blends primary aluminum
produced at both our smelters, which is purchased from Hydro and Glencore, and
by other aluminum producers and various alloys into a variety of value-added
products, including
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proprietary small diameter billet ("SDB") and related products. Our SDB products
are cast directly from molten aluminum in a process that eliminates the expense
associated with the extrusion process typically required to manufacture SDB
products. Our SDB products are frequently manufactured to customer
specifications, and, as such, can be priced to provide us with enhanced margins
relative to commodity aluminum products. Since Northwest Aluminum Specialties
began its value-added operations in the early 1990s, the business has grown to
represent a significant percentage of our total revenues. Our SDB products are
typically forged or extruded by our customers into end use forms which include
fire extinguishers, automobile air bag canisters, golf club heads, bicycle
frames and a variety of automotive and aircraft parts.
In late 1996, Specialties added a new billet machining operation which
allows us to manufacture SDB in any diameter between 2 inches and 5 inches,
within extremely tight engineering tolerances. Bar sawing capabilities were also
added that allow us to deliver cut billet "pucks" that meet customer
specifications. These new capabilities have led to additional business and
opportunities that we believe will allow us to continue to increase the size of
our value-added aluminum business and enhance the average premium received.
Our value-added standard extrusion billet and hot molten metal products
that are not produced under tolling arrangements are sold at the Midwest market
price, which includes a premium of $.03 to $.05 per pound over the London Metals
Exchange price, plus a premium of between $.06 and $.13 per pound. Our specialty
extrusion billet, hot closed die forging, cold impact forging and semi-solid
forging are sold at the Midwest market price plus a premium of between $.13 and
$.81 per pound.
FACILITIES INVESTMENT PROGRAM
Both we and previous owners of our facilities periodically have made major
investments in new plant and equipment. From 1978 to 1981, Martin Marietta
Corporation made a major investment in both smelters by implementing new anode
and cathode technology, modernizing electrical and environmental control systems
and adding the third cell line at the Goldendale smelter. In 1991 and 1997
Northwest Aluminum Specialties added new casting capability.
We are undertaking the facilities investment program to expand capacity and
enhance operating efficiency. With the financial and technical support of Hydro,
we plan to expand the casthouse at Goldendale and upgrade the cell lines at
Goldendale and, possibly, at The Dalles. We have borrowed $20.0 million from
Hydro under a note purchase agreement to partially finance the facilities
investment program. We intend to implement the facilities investment program
over the next five years, in two stages.
In the first stage, we plan to modernize the Goldendale casthouse and
complete a demonstration of its new cell line technology. The Goldendale
casthouse expansion is designed to increase the facility's capacity to produce
value-added billet from 13 million pounds per month to an initial capacity of 22
million pounds per month, with the option to expand capacity to over 30 million
pounds per month. The additional value-added production will be sold by Hydro
under the tolling agreement, with the same sharing of market premiums in excess
of costs. As discussed below, our share of any incremental earnings from the
facilities investment program will be used to repay the debt owed to Hydro.
Hydro has informed us that its own U.S. extrusion plants should be able to use
this
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additional capacity. The expansion is underway, and we expect it to take 18
months to complete and to cost approximately $13.0 million.
The first stage will also include a 12 to 18-month demonstration of the
planned cell line improvements in a 30-cell section at Goldendale. Conversion of
this section and the demonstration are budgeted to cost less than $7.0 million.
Cell improvements include pointfeeders to control alumina additions, magnetic
compensation to stabilize cell operations, cathode redesign to optimize heat
balance, new computer controls and other related technologies. The technology
for the cell line improvements has been licensed from Hydro, which already has
implemented these changes at a similar smelter in Norway. Based upon Hydro's
experience, we expect the improvements to increase smelter production, reduce
average unit costs of production, increase production efficiencies and
significantly reduce air emissions.
We plan to begin the second stage of converting the remaining cells at both
smelters when we complete the demonstration of our cell line upgrades and obtain
all necessary permits. The conversion can be performed cell by cell, with
minimal disruption of operations, and can be accelerated or slowed for market or
other reasons. We estimate that conversion of the remaining cells at both
smelters will cost approximately $55 million. Hydro has agreed, subject to
certain conditions, to provide an additional $10.0 million of subordinated
financing if we decide to convert the remaining cells at Goldendale. We expect
the remaining $45 million, and any additional costs of the facilities investment
program, will be funded through cash from operations and borrowings under our
revolving credit facility.
RESEARCH AND DEVELOPMENT AND INTELLECTUAL PROPERTY
We have traditionally placed emphasis on innovation and research and
development. We have laboratory facilities dedicated to environmental
compliance, quality testing and research and development. We engage in several
research and development activities designed to improve earnings by increasing
value-added margins or reducing costs. Expenditures for activities designated as
research and development were $1,194,000 in 1998, $544,000 in 1997 and $898,000
in 1996. We also have received grants from state and federal governments for
certain research and development activities.
Our research and development encompasses five broad initiatives:
- First, we undertake research and development to develop new alloys and
casting and homogenizing practices that improve the characteristics of
metal sold to customers. We endeavor to protect our proprietary interest
in our products and processes by filing patent applications where
appropriate and otherwise by seeking to protect them as trade secrets.
This research has resulted in several proprietary products and an issued
patent for a new alloy.
- Second, we have focused research in the area of semi-solid metalworking
("SSM"). SSM is intended to give automotive and other parts the physical
properties of forgings with the production cost of die castings. We have
obtained a patent for the casting and transformation of aluminum to
produce SSM parts.
- Third, we have undertaken an initiative to develop a process to recycle
Spent Pot Lining ("SPL"). We believe this process may allow SPL to be
recycled into several marketable products rather than being treated and
land filled at a significant cost. We have been notified that a patent
will be granted for this process.
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- Fourth, our subsidiary, Northwest Aluminum Technologies, has acquired and
expects to develop a new technology to smelt aluminum in a low
temperature bath using inert metallic anodes and titanium dioxide
cathodes. In our pursuit of this technology, we have acquired four
patents and intend to file additional patent applications. We also have
received two grants from the U.S. government to fund additional research
to develop new smelting technologies.
- Fifth, we engage in several other research and development projects to
continuously improve our smelting and casting operations.
We have seven patents and two trademarks. We have set out a description and
the termination date of each in the following table.
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------
DESCRIPTION OF PATENT OR TRADEMARK TERMINATION DATE
- --------------------------------------------------------------------------------
A patent for a method and October 25, 2014
apparatus for the electrolytic
reduction of alumina
- --------------------------------------------------------------------------------
A patent for the electrolytic August 31, 2008
reduction of alumina
- --------------------------------------------------------------------------------
A patent for the electrolytic February 13, 2010
reduction of alumina
- --------------------------------------------------------------------------------
A patent for a point feeder and a October 4, 2010
method for Soderberg aluminum
reduction cells
- --------------------------------------------------------------------------------
A patent for non-consumable anode April 17, 2012
and lining for aluminum
electrolytic reduction cell
- --------------------------------------------------------------------------------
A patent for casting, thermal April 14, 2015
transformation and semi-solid
forming of aluminum alloys
- --------------------------------------------------------------------------------
A patent for a high strength September 12, 2014
aluminum alloy
- --------------------------------------------------------------------------------
A trademark for "Direct Forge", December 15, 2002; automatically
the name under which Northwest renewed for subsequent 10 year terms
Aluminum Specialties markets its if still in use
small diameter billet
- --------------------------------------------------------------------------------
A trademark for "Direct Form" April 18, 2007; automatically
renewed for subsequent 10 year terms
if still in use
- --------------------------------------------------------------------------------
</TABLE>
SALES AND MARKETING
Through their tolling agreements, Hydro and Glencore are our largest
customers, accounting for 37% and 19% of our revenues in fiscal 1998 and 40% and
18% of our revenues for 1997. We directly sell value-added aluminum products to
approximately 100 extruders, forgers, casters, traders and other customers
throughout the United States and abroad. Northwest Aluminum Company's Vice
President of Sales and Marketing oversees a small sales and customer service
group that makes and supports these direct sales.
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SUPPLIERS
The major raw materials we use are alumina, petroleum coke and coal tar
pitch, aluminum ingot, scrap aluminum and alloying elements and electricity. We
obtain our raw materials either through annual contracts or on the spot market.
Alumina consumed in the production of aluminum is supplied by Glencore and
Hydro under the tolling agreements. We have entered into a letter of intent with
Glencore to have Glencore supply the smelter at The Dalles with all of its
alumina requirements from October 1, 1999 to December 31, 2004. We do not assure
you as to the timing or the terms of an agreement resulting from the letter of
intent.
The other raw materials involved in the reduction of alumina are petroleum
coke, coal tar pitch and carbon lining. Petroleum coke is used to make anodes
and carbon lining and is sourced locally from a large producer of quality coke,
which is one of several suppliers. Coal tar pitch is available from several
suppliers. Carbon lining, which acts as the cathode in the smelting cells, is
purchased from various suppliers.
We annually purchase aluminum to supplement our smelter production. In
addition to buying back the approximately 82,000 metric tons of our own
production from Glencore, we purchase approximately 45,000 metric tons from
other producers, including Hydro, at market prices in the form of primary ingot,
primary molten metal and scrap metal. Primary suppliers include Hydro, Vanalco
and Alcoa. The other major inputs in the making of aluminum products are
alloying elements, such as magnesium and silicon, which are provided by various
suppliers.
POWER CONTRACTS
Because electricity is both necessary for the manufacturing of aluminum and
the single largest cost of making primary aluminum, the availability and pricing
of electricity and access to transmission is crucial to our operations.
Approximately 80% of all power produced or consumed in the Pacific Northwest is
delivered over the transmission system of the BPA. Both The Dalles smelter and
Goldendale smelter are connected directly to the main high voltage transmission
grid of BPA. Each plant has a 20-year transmission agreement with BPA, expiring
in April 2015, for transmission capacity which we believe is sufficient to meet
both plants' existing and projected energy needs. These transmission agreements
obligate BPA to offer Goldendale Aluminum Company and Northwest Aluminum Company
a new transmission agreement upon the expiration of the current agreements.
Moreover, the transmission agreements also obligate BPA to act as agent for
Goldendale and Northwest to obtain transmission services over other transmission
systems if requested. With the exception of limited rights to restrict
transmission service in the event of certain threats to system stability, the
transmission agreements obligate BPA to provide Goldendale and Northwest with
the same open access transmission available to utilities and power companies
under the rules of the Federal Energy Regulatory Commission.
Goldendale and Northwest are buying energy from BPA under a five-year power
sale agreement through which approximately 60% of each plant's energy needs are
contractually secured at predetermined prices through September 30, 2001. The
published annual average rate for power from BPA is 2.2 cents per kilowatt-hour.
The power sale agreement allows us to schedule our purchases in different months
when power is priced at different rates in such a way that power purchased from
BPA has an actual rate that is lower than
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the published average rate. The remaining 40% of Northwest's and Goldendale's
energy requirements is obtained by purchasing blocks of energy under periodic
contracts from various suppliers, including BPA, PacifiCorp, Enron, Illinova
Energy, Duke Energy, Avista Energy, the Avista Utilities and others. Recently,
power costs have increased as the amount of power required to be purchased at
predetermined prices under the power sale agreement has been greater than in
earlier periods when we purchased more power on the spot market.
Due to our transmission agreements and the smelters' geographical location
on an unconstrained segment of the main transmission network in the region, we
believe we will be able to obtain competitively-priced power in the foreseeable
future. We do face the normal risks associated with the market price of energy,
however. Numerous short-term and long-term developments can affect power prices,
including worldwide demand for fossil fuels, changing environmental standards,
the overall economic activity in the United States and the Pacific Northwest,
weather temperature and precipitation. Due to the high percentage of
hydroelectric generation in the power supply of the Pacific Northwest, energy
prices in the region tend to be sensitive to drought conditions that reduce the
availability of low cost hydroelectric power supply. The hydroelectric system in
the Pacific Northwest, however, has significant flexibility and excess capacity
to meet spikes in demand or short-term thermal plant outages that have caused
large price swings in other regions of the country. For the longer term, we
expect that the geographical proximity to the low-cost Western Canadian natural
gas supply and the operating flexibility and stability of the Federal Columbia
River Hydro System should keep the market price of electricity attractive in the
Pacific Northwest relative to the average market price of power in the United
States. In addition, we are exploring opportunities to develop generating
capability either on our own or in conjunction with BPA, publicly owned local
utilities or other resource developers.
HEDGING ACTIVITIES
Our revenues and earnings are sensitive to changes in the price of primary
aluminum and in the premiums for, and mix of, our value-added products. For
example, the tolling fees and premiums received by us are tied to the London
Metals Exchange price of aluminum.
Primary aluminum prices historically have been subject to significant
cyclical price fluctuations. The timing of changes in the market price of
aluminum largely are unpredictable. Aluminum prices historically have shown long
periods of average, or below average, prices followed by sudden, relatively
short periods of above average prices. These prices have historically fluctuated
widely and are affected by numerous factors beyond our control, including the
overall demand for, and worldwide supply of, primary aluminum, the availability
and price of competing commodities, international economic trends, currency
exchange rate fluctuations, expectations of inflation, actions of commodity
market participants, consumption and demand patterns and political events in
major producing countries. Over the eleven-year period between January 1, 1988
and December 31, 1998, the three month price of aluminum on the London Metals
Exchange has ranged between a low of approximately $0.47 per pound to a high of
approximately $1.26 per pound. During this period prices averaged $0.73 per
pound.
We attempt to mitigate fluctuations in the price of commodity aluminum
through our strategy of minimizing the costs of production and maximizing the
margins of our value-
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added products. When we sell value-added products for future delivery at a fixed
price, we generally purchase metal or otherwise fix the price of the commodity
aluminum required in that period to support the sale. From time to time, we may
leave some quantities for some durations uncovered, or acquire put or call
options. This policy generally leaves us with a fixed margin on our value-added
sales and open prices for our future primary production that will vary with
London Metals Exchange aluminum prices.
BACKLOG
We generally receive the bulk of the orders for value-added specialty
aluminum products in the three months preceding the calendar year in which the
products are to be shipped to customers. At December 31, 1998, our fixed price
backlog was $62.6 million, compared to $67.2 million at December 31, 1997. For a
variety of reasons, including the timing of shipments and product mix, backlog
may not be a reliable measure of future sales for any succeeding period.
COMPETITION
Competition within the aluminum industry is intense. We compete with both
domestic and foreign producers of primary aluminum and with primarily domestic
producers of extrusion billet and other value-added products and with primarily
domestic producers of other products such as copper, steel, glass and plastic.
Many of our competitors have greater financial resources than we do, which may
adversely affect our ability to compete effectively.
Primary aluminum is a commodity with standard qualities. Competition
generally is based upon the ability to produce primary aluminum at a cost below
the market price, which generally is established through trading on the London
Metals Exchange. We also compete with various aluminum producers, casting
companies, extruders and other fabricators in the production of extrusion
billet, sheet ingot, small diameter ingot and other value-added products. In the
extrusion billet market, we compete primarily with Alcan and Alumax, which was
recently acquired by Alcoa. Northwest Aluminum Specialties' major competition in
the small diameter billet segment comes from extrusion companies rather than
primary producers. These companies include Crissonna, a division of Alumax, and
Pimalco, a subsidiary of Alcoa, both of which are large, efficient extruders.
Competition in the sale of these value-added products generally is based upon
price, quality, availability, service and other factors. We concentrate on the
sale of value-added products in which we believe we have production expertise,
cost, quality, geographic or other competitive advantages.
ENVIRONMENTAL AND HEALTH MATTERS
We are subject to federal, state and local environmental laws. From time to
time, these environmental laws are amended and new ones are adopted. These laws
regulate, among other things, air emissions and water discharges; the use,
generation, storage, treatment, transportation and disposal of solid and
hazardous materials and wastes; and the release of hazardous or toxic substances
or other contaminants into the environment. In addition, we are subject to
various federal, state and local workplace health and safety laws and
regulations. The environmental and health laws are administered by the U.S.
Environmental Protection Agency, and various other federal, state and local
agencies.
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To operate our business in compliance with environmental and health laws,
we must obtain and maintain in effect permits for each of our facilities for a
variety of operations. These permits include without limitation permits for
discharges of wastewater, emission of air pollutants and management of hazardous
wastes. As a result, we sometimes are required to make expenditures for
pollution control equipment or for other purposes related to our permits and
compliance with the environmental and health laws. We have been fined or
penalized for breaches or alleged breaches of the environmental and health laws
and subjected to claims and litigation brought by federal, state or local
agencies and by private parties seeking remedial or other enforcement action
under the environmental and health laws or damages related to injuries or
alleged injuries to health or to the environment. The Dalles smelter, the
Goldendale smelter and the Portland, Oregon unloading facility were subject to
an environmental compliance assessment by an independent environmental
consultant in 1996 that was updated in the summer of 1998. In both cases, we
hired and paid the consultant. These assessments were intended to evaluate our
compliance with the environmental laws regulating discharges of wastewater,
emission of air pollutants and the management of hazardous wastes. These
assessments identified no condition of non-compliance that we believe would have
a material adverse effect on our financial condition or results of operations,
nor are we aware of any such material condition.
Our manufacturing facilities have been in operation for several decades,
and these facilities have used substances and generated and disposed of wastes
that are or may be considered hazardous. For example, these facilities have in
the past stored or disposed of wastewater treatment sludge in on-site surface
impoundments such as ponds and lagoons and have handled spent pot liner and
disposed of spent pot liner and other wastes in on-site surface impoundments.
Martin Marietta Corporation, a prior owner of The Dalles smelter, conducted
an investigation of soil and groundwater at the smelter and implemented clean-up
measures at the smelter site, including the removal of hazardous substances from
groundwater and certain areas of the site and the encapsulation of other areas
where hazardous substances were disposed or released. Martin Marietta performed
this work under the supervision of the U.S. Environmental Protection Agency. In
1996 Martin Marietta completed the investigations and clean-up measures required
by the EPA at The Dalles smelter site. Although the purpose of the Martin
Marietta investigation was to identify all areas at the smelter where hazardous
substances had been disposed or released, some affected areas may not have been
identified or the clean-up measures may not perform as expected in the future.
Hazardous substances have also been released at the Goldendale facility,
and the site was listed in the EPA's Comprehensive Environmental Response,
Compensation, and Liability Information System database in 1980. We expect
expenditures will be necessary at the Goldendale smelter to investigate and
clean up releases of hazardous substances disposed or released at the Goldendale
smelter, although we are unable to estimate the amount of these expenditures. We
have requested the State of Washington Department of Ecology to approve a plan
to close an on-site surface impoundment at the Goldendale facility by 2005-2006.
We expect to receive a response from the State of Washington in the second or
third quarter of 1999. As of December 31, 1998, the estimated cost of the
surface impoundment closure and post-closure actions was over $3.0 million. We
have established a trust fund of approximately $560,000, as of December 31,
1998, to help pay these costs, and we have procured insurance coverage to
provide funds to the State of
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Washington for closure if we default. The actual closure costs may exceed our
estimate. Under a contract with the former owners of the Goldendale smelter, the
former owners have agreed to reimburse Goldendale Aluminum Company for certain
anticipated expenditures. We do not assure you the former owners of the
Goldendale smelter will contribute their contractually allocated share of the
costs necessary to investigate and clean-up hazardous substances disposed or
released at the Goldendale smelter site or to obtain regulatory closure of
surface impoundments at the site.
As a result of recent changes in the environmental laws, we have
experienced substantial increases in costs associated with the disposal of spent
pot liner from our smelters. We dispose of spent pot liner under a contract with
a chemical waste treatment company, which expires in December 31, 2000, and
which provides for increased treatment costs as the contract continues. The EPA
has called for proposals from aluminum producers for alternative methods of
disposing of spent pot liner. We are developing a process designed to recycle
spent pot liner into marketable products which we plan to submit to the EPA for
approval. We also expect several other producers to make proposals to the EPA.
We cannot predict, however, whether our process, or any other proposed process,
will be approved by the EPA; whether any such process, if approved, will be cost
efficient; or what additional costs of disposal of spent pot liner, if any, we
may have in the absence of EPA approval of an available, cost efficient disposal
process.
(1) An environmental condition that we do not know about could exist as to
one or more of our properties and could have an adverse effect on our
results of operations or financial condition.
(2) Future environmental or health laws could have an adverse effect on our
results of operation or financial condition.
EMPLOYEES
As of December 31, 1998, we employed 1,217 workers, 568 of which are
members of Local 8147 and 419 of which are members of Local 9170 of the United
Steelworkers of America. Goldendale Aluminum Company is signatory to a
collective bargaining agreement with the USW for the period May 24, 1996 through
May 31, 2001. Northwest Aluminum Company is a signatory to a collective
bargaining agreement with the USW for the period July 1, 1996 through June 30,
2001.
Both labor agreements provide for a 4% wage increase each year of the
contract. During the contract period there is a no strike/no lockout agreement.
We provide profit sharing programs in addition to the base compensation for all
employees, and a fully-paid medical, dental and vision health care plan. We have
a 401(k) plan but no defined benefit plan.
We believe we have a good relationship with the union and an employee
involvement process that encourages creativity, productivity and positive
employer-employee relations.
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PROPERTIES
We own all of our facilities. The following table shows (1) each facility,
(2) its square footage, (3) its annual production capacity and (4) its use.
FACILITIES
<TABLE>
<CAPTION>
SQUARE ANNUAL
FACILITY FOOTAGE CAPACITY OPERATIONS
-------- ------- -------- ----------
<S> <C> <C> <C>
GOLDENDALE
Smelter 1,209,730 168,000 mt Alumina reduction
Casthouse Included in above 168,000 mt Produce sow, billet, sheet
Unloading Facility 7.9 acres 42,000 mt
(Portland) shipments
Paste Plant 37,711 85,000 mt Carbon briquette
production
Laboratory 18,995 Quality control, R & D
Real Property 6,473 acres
NORTHWEST
Smelter 636,000 82,000 mt Alumina reduction
Casthouse 122,000 99,800 mt Produce sow, billet, ingot
Paste Plant 108,000 85,000 mt Carbon briquette
production
Real Property 390 acres
SPECIALTIES
Casthouse 160,000 Up to 54,500 mt Value-added billet
depending on
product mix
Sawing/Turning 100,000 Saw: Semi-fabrication
130,000 mt
Turning:
1,000,000 logs
</TABLE>
We believe these facilities are adequate to meet our current needs. We are
expanding or upgrading some of our facilities as a result of the facilities
investment program. Most of our facilities are subject to mortgages and other
claims held by our creditors to secure the notes and our indebtedness to Hydro.
See "-- Facilities Investment Program."
LEGAL PROCEEDINGS
From time to time, we are involved in various legal proceedings arising
from our normal business activities. We believe these legal proceedings,
individually or combined, will not have a material adverse effect on our
financial condition or results of operations. We are involved in a dispute with
the IRS relating to proposed adjustments to both Northwest Aluminum Company and
Goldendale Aluminum Company's taxable income for prior years. These adjustments
could affect income taxes in future years.
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MANAGEMENT
The following table sets forth information about our directors, executive
officers and certain other key employees as of the date of this document.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
<S> <C> <C>
Brett E. Wilcox...................... 45 Chairman, President and Director
Allen Barkley........................ 43 Vice President and General
Manager -- Northwest
William R. Reid...................... 50 Chief Financial Officer -- Golden Northwest
Aluminum, Inc. and Northwest
Daniel J. Gnall...................... 40 Vice President -- Sales and Marketing --
Northwest
Muhsin (Mac) Seyhanli................ 54 Vice President and General Manager -- Golden
Northwest Aluminum, Inc. and Goldendale
Gerald Miller........................ 57 Vice President, General Counsel and
Secretary -- Golden Northwest Aluminum, Inc.
and Goldendale
Jessie Casswell...................... 49 Chief Financial Officer -- Goldendale
A. Ray Roberts....................... 57 President -- Technologies
Robert Ames.......................... 58 Director
Stephen E. Babson.................... 47 Director
David Bolender....................... 66 Director
Michael G. Psaros.................... 31 Director
</TABLE>
Brett Wilcox has served as our President since our inception in June 1998.
Mr. Wilcox is also the President of Northwest Aluminum Company, which he founded
in 1986, and since 1996 has served as the President of Goldendale Aluminum
Company. Before founding Northwest in 1986, Mr. Wilcox was the Executive
Director of Direct Service Industries, a trade association of ten large aluminum
and other energy-intensive companies that purchase electricity from the
Bonneville Power Administration. Before 1986 Mr. Wilcox was an attorney with
Preston and Gates in Seattle, Washington, concentrating in energy and general
business matters. Mr. Wilcox is chairman of the Oregon Economic Development
Commission, Vice Chair of the Oregon Progress Board and active in various civic
and business organizations.
Allen Barkley joined Northwest in June 1995 as Production Engineering
Manager and became Vice President and General Manager in October 1996. Before
joining Northwest, Mr. Barkley spent 18 years at a primary aluminum smelter
facility in Columbia Falls, Montana where he served in a variety of capacities,
including production, engineering, maintenance and public affairs.
William Reid joined Northwest in 1986, became its Controller in 1993 and
was appointed Chief Financial Officer of Northwest in 1996 and of Golden
Northwest Aluminum in August 1998. Before joining Northwest, Mr. Reid was a
senior auditor with Touche Ross & Co.
Daniel J. Gnall joined Northwest in August 1991 as a metal trader, and in
1992 became Manager -- Sales and Marketing responsible for metal purchasing and
sales. Before joining Northwest, Mr. Gnall was an account executive with Martin
Marietta Corporation and worked for Cassmet International, Inc., a metals
trading company where he served as its General Manager in charge of physical
operations and non-ferrous metal purchasing and sales.
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Muhsin (Mac) Seyhanli became Vice President and General Manager of Golden
Northwest Aluminum in August 1998. He was one of the founders of Columbia
Aluminum Company, the predecessor of Goldendale, and since 1994 has been the
general manager for all operations at Goldendale, becoming its Vice President
and General Manager in 1996. Before his current position, Mr. Seyhanli was a
cell line manager for both Columbia and Commonwealth Aluminum. Mr. Seyhanli has
over 29 years of experience in the aluminum industry.
Gerald Miller became Vice President, General Counsel and Secretary of
Golden Northwest Aluminum in August 1998. He joined Columbia Aluminum Company in
1989 as General Counsel and Corporate Secretary. In 1996, Mr. Miller was named
to the additional post of Vice President -- Energy and Government Affairs of
Goldendale. Before joining Goldendale, Mr. Miller was a trial lawyer in private
practice in the state of Washington. Mr. Miller is a member of the Board of
Directors of the State of Washington Economic Development Finance Authority.
Jessie Casswell has been the Chief Financial Officer of Goldendale since
1998 the Controller since 1984. From 1972 to 1984, Ms. Casswell served as the
Controller of Northwest. Ms. Casswell is also a member of the Executive
Committee of the Goldendale profit sharing plan and is the Chairperson of the
Trustees of the profit sharing plan.
A. Ray Roberts joined Northwest in 1992 as Operations Manager and was
responsible for smelter operations. In 1997, Mr. Roberts was named President of
Northwest Aluminum Technologies. In his over 28 years of experience in the
aluminum industry and before joining Northwest, Mr. Roberts has worked for
several smelting facilities in various engineering and managerial capacities,
including production, marketing manager, technology development and liaison to
government.
Robert Ames became a director of Golden Northwest Aluminum in 1998. Since
1996, he has served as a director of Goldendale. Until his retirement in 1995,
Mr. Ames worked in the banking industry, serving most recently as the Vice
Chairman and President of First Interstate Bank of Oregon. Mr. Ames is a real
estate investor and a member of the boards of directors of a number of Pacific
Northwest companies, including Barrett Business Services, Inc.
Stephen E. Babson became a director of Golden Northwest Aluminum in 1998.
Since 1996, he has served as a director of Goldendale. Mr. Babson has been a
partner in the Portland office of Stoel Rives LLP, which is acting as our
counsel in connection with this exchange offer, since 1984. Mr. Babson is also a
director of Roseburg Forest Products Co. and serves on the advisory boards of
several Pacific Northwest based technology companies. He is the general partner
of Babson Capital Partners, LP, a private investment fund, the secretary and
director of the Oregon Symphony Association and the Chair of the Riverdale
School Foundation. Mr. Babson formerly served as secretary and a director of the
Software Association of Oregon.
David Bolender became a director of Golden Northwest Aluminum in 1998.
Since 1996, he has served as a director of Goldendale. Since 1992, Mr. Bolender
has served as Chairman of the Board of Electro Scientific Industries, Inc., a
manufacturer of machine tools for the electronics industry. In May 1998, Mr.
Bolender became Chief Executive Officer and Chairman of the Board of Protocol
Systems, a manufacturer of medical vital sign monitoring instrumentation. From
1982 to 1991, Mr. Bolender was President of Pacific Power and Light Company and
PacifiCorp Electric Operations Group. Before
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joining PacifiCorp in 1982, Mr. Bolender spent 12 years with Westinghouse
Electric Corporation, where he managed the construction and operation of power
plants around the world. He is a member of the boards of directors of Benson
Industries and Micro Monitors.
Michael G. Psaros became a director of Golden Northwest Aluminum in 1998.
Since 1996, he has served as a director of Goldendale. Since 1991, Mr. Psaros
has been a Principal of Keilin & Co. LLC, a New York investment bank. Mr. Psaros
is also a Principal of KPS (Keilin, Psaros, Shapiro) Special Situations Fund,
L.P., a private equity fund. Before joining Keilin, Mr. Psaros worked in the
investment banking department of Bear, Stearns & Co. Inc. Mr. Psaros was
originally appointed to Goldendale's Board by the President of the United
Steelworkers of America.
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EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In the last fiscal year, our Board of Directors did not have a compensation
committee. Compensation decisions for executive officers were made by Brett
Wilcox.
EXECUTIVE COMPENSATION
Compensation Summary. The following table sets forth compensation
information for the President and our other four most highly compensated
executives, each of whose total annual compensation exceeded $100,000 in 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------
OTHER ANNUAL
YEAR SALARY BONUS COMPENSATION
---- -------- -------- ------------
<S> <C> <C> <C> <C>
Brett Wilcox....................... 1998 $601,806 $903,001 $0
President and Chairman of the
Board
Muhsin (Mac) Seyhanli.............. 1998 150,000 253,380 0
Vice President and General
Manager
Allen Barkley...................... 1998 106,950 100,000 0
Vice President and General
Manager -- Northwest Aluminum
Company
Daniel J. Gnall.................... 1998 106,950 100,000 0
Vice President -- Sales and
Marketing -- Northwest Aluminum
Company
William R. Reid.................... 1998 106,950 100,000 0
Chief Financial Officer
</TABLE>
The salaries of the above-named executive officers will be the same in
fiscal 1999. No material increases in bonuses or other annual compensation are
planned in fiscal 1999.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our articles of incorporation eliminate, to the fullest extent permitted by
Oregon law, liability of our directors for monetary damages for conduct as a
director. Although liability for monetary damages has been eliminated, equitable
remedies such as injunctive relief or rescission remain available. In addition,
a director is not relieved of his responsibilities under any other law,
including the federal securities laws.
Our articles of incorporation require us to reimburse the directors for any
liabilities and related expenses arising from the Company's operations to the
fullest extent not prohibited by law. We believe that the limitation of
liability provisions in our articles of incorporation may enhance our ability to
attract and retain qualified individuals to serve as directors.
DIRECTORS' COMPENSATION
Directors who are not our employees receive a fee of $5,000 per board
meeting attended.
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CERTAIN TRANSACTIONS
We sell semi-solid metalworking and other value-added products to Hot Metal
Technologies, Inc. and Hot Metal Moldings, Inc. under annual purchase orders.
Hot Metal Technologies and Hot Metal Moldings, suppliers of automotive parts,
are each wholly owned by Brett Wilcox, our sole shareholder. Our sales to these
companies under these purchase orders totaled approximately $3.6 million for the
years ended December 31, 1997 and 1998. The terms of these sales were comparable
to similar sales to non-affiliates. We also made advances to Hot Metal
Technologies and Hot Metal Moldings during the years ended December 31, 1997 and
1998 by way of payroll and benefits expenses paid by Northwest Aluminum Company
for Northwest employees on loan to these companies. On December 31, 1997, $4.0
million of the total amount then owed by Hot Metal Technologies and Hot Metal
Moldings to us for accounts receivable and advances was converted to a note
receivable. The note bears interest at 9.25% per year and is payable in
quarterly installments beginning April 1, 1998 through January 2002. As of
December 31, 1998, a combined total of approximately $4.3 million was owed by
these companies to us, consisting of approximately $3.4 million on the note
receivable and accounts receivable of approximately $0.9 million. The highest
amount of total indebtedness of Hot Metal Technologies and Hot Metal Moldings to
us since January 1, 1997 was $6.5 million.
In 1998 the federal government made a grant of $750,000 to Hot Metal
Technologies as contractor, and Northwest Aluminum Specialties as subcontractor,
for semi-solid metalworking research.
In 1997 Northwest Aluminum Company paid $4.9 million to Mr. Wilcox to pay
taxes owed by him as a result of Northwest's status as a Subchapter S
corporation. The amount paid was in excess of actual tax liabilities and, of
this amount, $2.9 million was recorded as a dividend. The remaining $2.0 million
is recorded as a receivable on our combined balance sheet and is outstanding. No
interest is payable upon the receivable.
Mr. Wilcox has entered into an agreement with Northwest, Northwest Aluminum
Specialties and us under which we have agreed not to file any amended income tax
return or change any election or accounting method without the consent of Mr.
Wilcox if the filing or change would increase any tax liability of Mr. Wilcox.
In addition, the companies have agreed to reimburse Mr. Wilcox for any
adjustment for taxes owed for earlier periods, including taxes on any such
payments, and for certain other fees and costs relating to periods before
December 18, 1998.
Under a voting agreement effective May 17, 1996, Mr. Wilcox must cause
Goldendale Holding Company to vote the shares of Goldendale Aluminum Company
common stock held by it to ensure that
(1) the Goldendale Aluminum Company board of directors consists of not more
than five directors,
(2) not less than one director is a nominee designated by the President of
the United Steel Workers of America and
(3) not less than two directors are nominees of Mr. Wilcox who have no
significant continuing business relationship with Mr. Wilcox or any
entity controlled by him.
The voting agreement will remain in force so long as the USW represents the
collective bargaining unit of the Goldendale facility, except that clauses (1)
and (3) of the preceding sentence will continue only until the termination of
the initial term of the Collective Bargaining Agreement dated April 7, 1996
between Goldendale Aluminum Company and the USW.
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DESCRIPTION OF OTHER INDEBTEDNESS
AND GOLDENDALE PREFERRED STOCK
The following describes the material terms of the Goldendale Aluminum
Company preferred stock and all of the material debt instruments to which we and
our subsidiaries are parties.
REVOLVING CREDIT FACILITY
Goldendale Aluminum Company, Northwest Aluminum Company, Northwest Aluminum
Specialties and Northwest Aluminum Technologies, as borrowers, and Goldendale
Holding Company, as guarantor, have entered into an agreement with BankBoston,
N.A. and U.S. Bank, N.A. establishing a revolving credit facility. The following
is a summary of the key terms and provisions of the facility.
The credit facility consists of a $75.0 million senior secured revolving
credit facility, collateralized by all of the inventory, accounts receivable and
other rights to payment and related intangibles and any proceeds of Goldendale
Aluminum Company, Northwest, Specialties and Technologies and maturing on
December 20, 2003. The maximum amount of borrowings that may be outstanding
under the credit facility is limited to the lesser of specified percentages of
eligible accounts receivable and inventory and $75.0 million. Availability under
the credit facility as of December 31, 1998 was approximately $50.5 million.
The credit agreement contains restrictive covenants, including a minimum
net worth requirement, a minimum excess availability requirement and limitations
on capital expenditures, dividends, additional indebtedness, mergers and other
business combinations, asset sales, liens or other similar restrictions on
property, investments and transactions with affiliates. The credit agreement
also contains customary events of default and other provisions, including an
event of default on a change of control of us or our subsidiaries. Upon the
occurrence of an event of default, the lenders may declare all amounts owing
under the credit facility to be immediately due and payable, except that, on the
occurrence of an event of default triggered by certain events of bankruptcy,
insolvency or reorganization, borrowings under the credit facility will
automatically become due and payable, at which time the lenders may initiate
proceedings to realize on the collateral for the credit facility.
Borrowings under the credit facility bear interest at a floating rate based
on the Alternative Base Rate specified in the credit agreement plus from 0.50%
to 1.00% or LIBOR plus from 2.00% to 2.50%, depending on our consolidated ratio
of EBITDA to interest expense. Interest is payable monthly or at the end of
LIBOR interest periods in arrears. The credit facility provides for the payment
of a commitment fee of 0.50% per year based on the unused portion of the credit
facility and other fees. Fees payable in connection with the issuance of letters
of credit are equal to the then applicable LIBOR margin plus a fronting fee of
0.25% calculated on an annualized basis on the face amount of each letter of
credit. During the time that an event of default is continuing, interest will be
payable at rates 2.00% above the interest rate applicable to Base Rate loans
described in the credit agreement.
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HYDRO SUBORDINATED DEBT
We have entered into an agreement with Norsk Hydro USA, Inc. to borrow up
to $30.0 million in the form of subordinated debt secured by a second lien on
and pledge of the collateral securing your notes and subordinated guarantees by
our subsidiaries. Except for Hydro's collateral security, the guarantees by our
subsidiaries of the Hydro debt are also subordinate to the indebtedness under
our revolving credit facility. The proceeds of this indebtedness will be
available to us in two parts -- $20.0 million, which has already been borrowed,
and $10.0 million on our notice, issued on or before December 31, 2001, of the
completion of plans to implement complete point feeder conversion of the
Goldendale smelter, the receipt of all necessary permits and satisfaction of
certain other customary conditions.
Our indebtedness with Hydro matures December 31, 2005. Automatic extensions
of up to a maximum of two years may take effect if we cannot repay principal at
maturity as a result of the limitations imposed by the restricted payments
covenant in the indenture. Borrowings under this indebtedness bear interest at
LIBOR plus 2.00%, payable semi-annually in arrears. Commencing February 15,
2003, we will make semi-annual principal payments based on increased earnings
associated with the facilities investment program at the Goldendale smelter to
the extent permitted by the restricted payments covenant in the indenture. The
subordinated note purchase agreement with Hydro contains customary affirmative
covenants and a covenant to implement the facilities investment program and
incorporates by reference certain of the negative covenants contained in the
indenture.
Under an agreement between the trustee of your notes and Hydro, the Hydro
indebtedness and the related guarantees by our subsidiaries are subordinated in
right of payment to the notes and their guarantees in the following manner:
(1) in the event of a bankruptcy or similar proceeding involving us or any
of our subsidiaries, you will be entitled to receive payment in full
before Hydro will be entitled to receive any payment for the
indebtedness owed to it or under the related guarantees, and
(2) no payment on the indebtedness to Hydro or the related guarantees will
be permitted unless
(a) the payment of principal is permitted under the restricted
payments covenant contained in the indenture,
(b) at the time of and after giving effect to the payment, there is
not an existing or pending default under the indenture, and
(c) no portion of the indebtedness to Hydro shall have been made
immediately due and payable at or before the time of the payment.
In addition, the agreement provides that the trustee's security interest in and
pledge of the collateral for the notes is senior in priority to the security
interest and pledge securing the indebtedness to Hydro, and will limit in some
respects the ability of Hydro to exercise its rights and remedies under the
indebtedness and the guarantees and collateral securing it. See "Description of
Notes -- Material Covenants -- Limitations on Restricted Payments, Restricted
Investments and Unrestricted Subsidiary Investments."
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GOLDENDALE PREFERRED STOCK
Goldendale Holding Company has outstanding 131,836.1 shares of
nonconvertible Series A preferred stock held by the Goldendale Aluminum Company
profit sharing plan. Goldendale Holding Company is the sole owner of all 329,500
outstanding shares of common stock of Goldendale Aluminum Company. The
Goldendale preferred stock pays cumulative dividends and has one vote per share
on all matters submitted to a vote of shareholders of Goldendale Holding Company
and votes together with the common stock as a single class on these matters. We
have the right to redeem the Goldendale preferred stock in cash at any time for
a variable price described in Goldendale Holding Company's certificate of
incorporation. If we do not redeem the Goldendale preferred stock before January
1, 2002, each holder of the Goldendale preferred stock can receive additional
shares of Goldendale preferred stock equal in value to any accrued and unpaid
cash dividends. Although we plan to redeem the Goldendale preferred stock, we do
not assure you we will do so. Because the shares of Goldendale preferred stock
vote as a class with the common stock, such an in-kind payment to the holders of
the Goldendale preferred stock could over time result in a change of voting
control of Goldendale Holding Company, which could result in an event of default
under our revolving credit facility. The liquidation preference on the
Goldendale preferred stock is $225 per share.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 350,000 shares of common stock.
COMMON STOCK
As of the date of this document, 1,000 shares of common stock were
outstanding, held of record by Mr. Wilcox.
Holders of common stock are entitled to receive dividends as may from time
to time be declared by our board of directors out of funds legally available for
that purpose. Holders of common stock are entitled to one vote per share on all
matters on which they are entitled to vote and do not have any cumulative voting
rights. Holders of common stock have no preemptive rights, conversion rights,
redemption rights or rights to a fund whose assets and their earnings are
earmarked to pay for the common stock. If we liquidate, dissolve or wind up,
holders of common stock are entitled to share equally and proportionately in any
of our assets remaining after the payment of all of our liabilities, including
the notes. The outstanding shares of common stock are fully paid and
nonassessable.
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FEDERAL INCOME TAX CONSIDERATIONS
This section discusses the material U.S. federal income tax consequences
associated with the exchange of the notes for the new notes under the exchange
offer and the purchase, ownership and disposition of the new notes. It does not
describe all aspects of U.S. federal income taxation that may be relevant to
particular holders in the context of their specific investment circumstances or
certain types of holders subject to special treatment under these laws, such as
financial institutions and tax-exempt organizations. This section is based upon
the United States federal tax laws and regulations as now in effect and as
currently interpreted and does not take into account possible changes in these
tax laws or these interpretations, any of which may be applied retroactively. It
does not include any description of the tax laws of any state, local or foreign
government that may be applicable to the notes or a holder of the notes.
THE EXCHANGE
The exchange of the notes for the new notes under the exchange offer will
not be treated as an "exchange" for federal income tax purposes because the new
notes do not differ materially either in kind or extent from the notes and
because the exchange will occur by operation of the terms of the notes. Rather,
the new notes received by a holder will be treated as a continuation of the
notes in the hands of the holder. As a result, there generally will be no
federal income tax consequences to holders who exchange notes for the new notes
under the exchange offer. In addition, any "market discount" on the notes should
carry over to the new notes. Holders should consult their tax advisors regarding
the application of the market discount rules to the new notes received in
exchange for the notes under the exchange offer.
U.S. TAXATION OF U.S. HOLDERS
The following is a general discussion of the material U.S. federal income
tax consequences of the ownership and sale or other disposition of the notes by
an initial beneficial owner who is a U.S. holder. As used herein, a U.S. holder
is, for U.S. federal income tax purposes,
(a) a citizen or resident of the United States,
(b) a corporation, limited liability company or partnership created or
organized in or under the laws of the United States or of any
political subdivision thereof,
(c) an estate, the income of which is subject to U.S. federal income
taxation regardless of its source, or
(d) a trust, if a court within the United States is able to exercise
primary supervision over the administration of such trust and one
or more U.S. persons have the authority to control all substantial
decisions of such trust.
INTEREST
Stated interest payable on the notes generally will be included in the
gross income of a U.S. holder as ordinary interest income at the time accrued or
received, in accordance with such U.S. holder's method of accounting for U.S.
federal income tax purposes.
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MARKET DISCOUNT
If a U.S. holder purchases, subsequent to its original issuance, a note for
an amount that is less than its stated redemption price at maturity, the amount
of the difference generally will be treated as a "market discount," unless such
difference is less than a specified de minimis amount. The U.S. holder will be
required to treat any gain recognized on the sale, exchange, redemption,
retirement or other disposition of such a note as ordinary income to the extent
of the accrued market discount that has not previously been included in income.
In addition, the U.S. holder may be required to defer, until the maturity date
of the note or its earlier disposition in a taxable transaction, the deduction
of all or a portion of the interest expense on any indebtedness that is properly
allocable to purchasing or carrying the note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the note, unless the U.S.
holder elects to accrue market discount on a constant interest method. A U.S.
holder of a note may elect to include market discount in income currently as it
accrues under either the ratable or constant interest method. This election to
include currently, once made, applies to all market discount obligations
acquired in or after the first taxable year to which the election applies and
may not be revoked without the consent of the Internal Revenue Service. If a
U.S. holder of a note makes such an election, the foregoing rules with respect
to the recognition of ordinary income on sales and other dispositions of such
instruments, and with respect to the deferral deductions for interest on
indebtedness that is properly allocable to purchasing or carrying such debt
instruments, would not apply.
AMORTIZABLE BOND PREMIUM
A U.S. holder that purchases a note for an amount in excess of its
principal amount will be considered to have purchased the note at a premium and
may elect to amortize such premium, using a constant yield method, over the
remaining term of the note, or, if a smaller amortization allowance would
result, by computing such allowance with reference to the amount payable on an
earlier call date and amortizing such allowance over the shorter period to such
call date. The amount amortized in any year will be treated as a reduction of
the U.S. holder's interest income from the note. Bond premium on a note held by
a U.S. holder that does not make such an election will decrease the gain or
increase the loss otherwise recognized on the disposition of the note. The
election to amortize bond premium on a constant yield method, once made, applies
to all debt obligations held or subsequently acquired by the electing U.S.
holder on or after the first day of the first taxable year in which the election
applies and may not be revoked without the consent of the Internal Revenue
Service.
DISPOSITION OF THE NOTES
Upon the sale, exchange, redemption, or retirement at maturity of a note, a
U.S. holder generally will recognize gain or loss equal to the difference
between the amount realized and the holder's adjusted tax basis in the note.
However, to the extent the amount realized is attributable to accrued but unpaid
interest, it will be treated as ordinary interest income. The gain or loss
generally will be long-term capital gain or loss if the holding period for the
note exceeds one year at the time of disposition. The holding period for the new
notes will include the holding period for the notes exchanged for new notes.
Non-corporate taxpayers may have a lower tax rate on long-term capital gains
than on ordinary
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income or short-term capital gains. Investors should consult their tax advisors
about applicable rates at the time of disposition of the notes.
U.S. TAXATION OF NON-U.S. HOLDERS
The following is a summary of the material U.S. federal income tax
consequences resulting from the ownership of notes by an initial beneficial
owner who is a non-U.S. holder. A non-U.S. holder is any person or entity that
is, as to the United States, a foreign corporation, a nonresident alien
individual, a foreign estate or trust or a foreign partnership. This description
is not intended to reflect the particular tax position of any beneficial owner.
It addresses only initial purchasers who hold the notes as capital assets and
does not address beneficial owners that may be subject to special tax rules,
such as banks, insurance companies, dealers in securities or currencies,
purchasers that hold notes as a hedge against currency risks or as part of a
straddle with other investments or as part of a "synthetic security" or other
integrated investment, including a "conversion transaction," comprised of a note
and one or more investments, purchasers who hold the notes in connection with a
U.S. trade or business or purchasers that have a functional currency other than
the United States dollar. This description is based upon the U.S. federal tax
laws and regulations as now in effect and as currently interpreted and does not
take into account possible changes in such tax laws or such interpretations, any
of which may be applied retroactively. It does not include any description of
the tax laws of any state, local or foreign government that may be applicable to
the notes or any holder. Persons considering the purchase of notes should
consult their own tax advisors concerning the application of the U.S. federal
tax laws to their particular situations as well as any consequences to them
under the laws of any other tax jurisdiction.
INTEREST
In general, payments of interest to a non-U.S. holder will not be subject
to U.S. federal income or withholding tax, provided that
(a) the holder is not
(1) an actual or constructive owner of 10% or more of the total
voting power of all voting stock of our company,
(2) a controlled foreign corporation related to us through stock
ownership or
(3) a bank whose receipt of interest on a note is described in
section 881(c)(3)(A) of the Internal Revenue Code,
(b) such interest payments are not effectively connected with the
conduct of the non-United States holder of a trade or business within the
United States, and
(c) we or our paying agent receives documentation satisfying the
requirements of section 871(h)(5) of the Internal Revenue Code.
In general, these requirements may be satisfied by the receipt (1) from the
non-U.S. holder of a properly completed Internal Revenue Service Form W-8, or
substitute Form W-8, which provides under penalties of perjury the non-U.S.
holder's name and address and certifies that the non-U.S. holder is a non-U.S.
holder or (2) from a financial institution such as a securities clearing
organization, bank or other financial institution that holds the notes in the
ordinary course of its trade or business on behalf of the non-U.S.
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holder, certification under penalties of perjury that such a Form W-8 has been
received by it or by another such financial institution from the non-U.S.
holder, and the name and address of the beneficial owner and a copy of the Form
W-8 is furnished to the payor. New regulations, effective for payments after
December 31, 1999, include additional certification procedures and special rules
for payments to foreign partnerships.
A non-U.S. holder that does not qualify for the exemption from withholding
under the preceding paragraph generally will be subject to withholding of U.S.
federal income tax at the rate of 30% on payments of interest on the notes.
Non-U.S. holders should consult any applicable income tax treaties, which may
provide for an exemption from or a lower rate of tax on interest, or other rules
different from those described above. A non-U.S. holder who qualifies for a
reduced rate of tax under a treaty may be subject to a reduced rate of
withholding, if applicable certification requirements are satisfied.
GAIN ON DISPOSITION
Except as described below and subject to the discussion concerning backup
withholding below, any gain realized by a non-U.S. holder on the sale, exchange,
retirement or other disposition of a note generally will not be subject to U.S.
federal income tax unless
(a) such gain is effectively connected with the conduct by such
non-U.S. holder of a trade or business within the United States,
(b) the non-U.S. holder is present in the United States for 183 days
or more in the taxable year of the disposition and certain other conditions
are satisfied, or
(c) the non-U.S. holder is subject to tax pursuant to the provisions
of United States tax law applicable to certain United States expatriates.
FEDERAL ESTATE TAXES
A note held by an individual who is a non-U.S. holder at the time of his or
her death will not be subject to U.S. federal estate tax, provided that any
interest received on the note, if received by the holder at the time of the
holder's death, would not be effectively connected with the conduct of a trade
or business in the United States and the individual does not own, actually or
constructively at the date of death, 10% or more of the total voting power of
all voting stock of our company.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under current United States federal income tax law, a 31% backup
withholding tax requirement may apply to certain payments of interest on, and
the proceeds of a sale, exchange or redemption of, the notes. The backup
withholding rules will apply to a U.S. holder if:
(1) the holder fails to furnish or certify a taxpayer identification
number, or TIN, in the prescribed manner,
(2) the IRS notifies the payor that the TIN furnished by the holder is
incorrect,
(3) the IRS has notified the payor that withholding is required, or
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(4) the holder fails to properly certify that it is exempt from
withholding.
Corporations generally are exempt from backup withholding.
In the case of a non-United States holder, under current Treasury
regulations, backup withholding will not apply to payments made by us, or any
paying agent acting on our behalf, on a note if such holder has provided the
required certification under penalties of perjury that it is a non-U.S. holder
or has otherwise established an exemption, provided in each case that we or our
paying agent do not have actual knowledge that the payee is not a non-U.S.
holder. Special rules may apply with respect to the payment of the proceeds from
the sale of a note to or through foreign offices of certain brokers. New
regulations may alter the details of the certification procedures. Any amounts
withheld from payment under the backup withholding rules will be allowed as a
credit against a holder's United States federal income tax liability and may
entitle such holder to a refund, provided that the required information is
furnished to the Internal Revenue Service.
THIS SECTION DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME TAXATION
THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF THE NOTES IN LIGHT OF HIS, HER OR
ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. EACH HOLDER OF THE NOTES
SHOULD CONSULT HIS, HER OR ITS TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES
TO THE HOLDER OF THE EXCHANGE OF NOTES FOR NEW NOTES AND THE OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS OR CHANGES TO THOSE LAWS.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account in
connection with the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of the new notes. This prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of new notes received in exchange for
notes where the notes were acquired as a result of market-making activities or
other trading activities. We have agreed that for a period ending on the earlier
of
(1) 180 days after the date of this prospectus and
(2) the date on which a broker-dealer is no longer required to deliver a
prospectus in connection with market-making or other trading
activities,
we will make available and provide promptly upon reasonable request this
prospectus, in a form meeting the requirements of the Securities Act, to any
broker-dealer for use in connection with any such resale.
We will receive no proceeds in connection with the exchange offer. New
notes received by broker-dealers for their own account in the exchange offer may
be sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the new
notes or a combination of these methods of resale, at market prices prevailing
at the time of resale, at prices related to the prevailing market prices or
negotiated prices. A resale may be made directly to purchasers or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from the broker-dealer and/or the purchasers of new notes. Any
broker-dealer that resells new notes that were received by it for its own
account in the exchange offer and any broker or dealer that participates in a
distribution of the new notes may be an underwriter within the meaning of the
Securities Act, and any profit on the resale of new notes and any commissions or
concessions received by these persons may be underwriting compensation under the
Securities Act. The letter of transmittal states that by acknowledging that it
will deliver, and by delivering, a prospectus, a broker-dealer will not be
considered to admit that it is an underwriter. We have agreed to reimburse these
broker-dealers for any amounts arising as a result of certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the issuance of the new notes will be passed upon for us by
Stoel Rives LLP, Portland, Oregon.
EXPERTS
The consolidated financial statements of Golden Northwest Aluminum, Inc.
and Affiliates as of December 31, 1997 and 1998 and for each of the three years
in the period ended December 31, 1998 included in this prospectus have been
audited by BDO Seidman, LLP, independent certified public accountants, as stated
in their report appearing in this prospectus.
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The statements of income and cash flows of Goldendale Smelter Division of
Columbia Aluminum Company for the year ended December 31, 1995 and the period
from January 1, 1996 through May 21, 1996 included in this prospectus have been
audited by BDO Seidman, LLP, independent certified public accountants, as stated
in their report appearing in this prospectus.
The combined financial statements of Northwest Aluminum Company and
Northwest Aluminum Specialities, Inc. as of September 30, 1997 and 1998 and for
each of the three years in the period ended September 30, 1998 included in this
prospectus have been audited by BDO Seidman, LLP, independent certified public
accountants, as stated in their report appearing in this prospectus.
The consolidated financial statements of Goldendale Holding Company and
Subsidiary as of and for the years ended December 31, 1997 and 1998 and the
period from acquisition (May 22, 1996) through December 31, 1996 included in
this prospectus have been audited by BDO Seidman, LLP, independent certified
public accountants, as stated in their report appearing in this prospectus.
CHANGE OF ACCOUNTANTS
On June 15, 1998, we engaged BDO Seidman, LLP as our independent public
accountants. BDO's engagement was approved by our Board of Directors. Under this
engagement, BDO audited our consolidated financial statements for the years
ended December 31, 1997 and 1996, which consolidated financial statements are
included in this document. Prior to this engagement, we had not consulted with
BDO on issues relating to our accounting principles or the type of audit opinion
to be issued for our financial statements.
Perkins & Company, P.C. were the prior auditors and audited the combined
financial statements of Northwest Aluminum Company and Northwest Aluminum
Specialties, Inc. for the year ended September 3, 1995. Perkins resigned on May
22, 1998, and referred us to BDO Seidman. Perkins is a member of the BDO Seidman
Alliance. The report of Perkins on those financial statements did not contain an
adverse opinion or a disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope, or accounting principles. In connection with the
audit by Perkins for the year ended September 3, 1995, there was no disagreement
between us and Perkins on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which, if not
resolved to the satisfaction of Perkins, would have caused them to make
reference to the matter in their report.
Arthur Andersen LLP had previously audited Goldendale Aluminum Company's
financial statements as of December 31, 1996 and 1997. In connection with the
audit by Arthur Andersen for these periods, there was no disagreement between us
and Arthur Andersen on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures, which, if not
resolved to the satisfaction of Arthur Andersen would have caused them to make
reference to the matter in their report.
115
<PAGE> 116
ADDITIONAL INFORMATION
As required by the Securities Act, we have filed a registration statement
on Form S-4 with the SEC to register the new notes to be exchanged for existing
notes in the exchange offer. This document omits some information contained in
the registration statement and the exhibits and schedules attached to the
registration statement. For further information about us and the exchange offer,
you should review the registration statement and its exhibits and schedules.
Statements in this document that summarize the contents of any contract or other
document are not necessarily complete and you should review every contract or
document that is filed as an exhibit to the registration statement. The
registration statement and its exhibits and schedules may be inspected without
charge at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the SEC located at Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of these materials may be obtained from the Public
Reference Section of the SEC, Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates and from the SEC's Internet Web site at
http://www.sec.gov. You may obtain information on the operations of the Public
Reference Room by calling the SEC at 1-800-SEC-0300.
116
<PAGE> 117
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.......................... F-4
Consolidated Statements of Shareholder's Equity for the
years ended December 31, 1996, 1997 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-6
Summary of Significant Accounting Policies.................. F-7 to F-12
Notes to Consolidated Financial Statements.................. F-13 to F-23
GOLDENDALE SMELTER DIVISION OF COLUMBIA ALUMINUM COMPANY
Report of Independent Certified Public Accountants.......... F-24
Statements of Income for the year ended December 31, 1995
and for the period from January 1, 1996 through May 21,
1996...................................................... F-25
Statements of Cash Flows for the year ended December 31,
1995 and for the period from January 1, 1996 through May
21, 1996.................................................. F-26
Summary of Significant Accounting Policies.................. F-27 to F-29
Notes to Financial Statements............................... F-30 to F-32
</TABLE>
F-1
<PAGE> 118
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Golden Northwest Aluminum, Inc. and Subsidiaries
The Dalles, Oregon
We have audited the accompanying consolidated balance sheets of Golden
Northwest Aluminum, Inc. and Subsidiaries as of December 31, 1997 and 1998 and
the related consolidated statements of operations, shareholder's equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Golden
Northwest Aluminum, Inc. and Subsidiaries as of December 31, 1997 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Spokane, Washington
March 16, 1999
F-2
<PAGE> 119
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS (Note 5)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,251 $ 37,633
Trade accounts receivable, less allowance for doubtful
accounts of $1,000 (Note 14)........................... 61,862 47,264
Current portion of receivable due from related company
(Note 13).............................................. -- 2,126
Inventories (Note 2)...................................... 60,892 55,083
Prepaid expenses.......................................... 527 786
Deferred income taxes (Note 10)........................... 1,339 1,494
-------- --------
Total current assets.............................. 125,871 144,386
-------- --------
Property, plant and equipment, net (Notes 1 and 3).......... 113,812 117,761
Power project assets held for sale.......................... 1,630 543
Goodwill, net of accumulated amortization of $7,785 and
$12,531 (Note 1).......................................... 92,886 88,140
Advances to shareholder..................................... 2,000 2,000
Receivable due from related company, less current portion
(Note 13)................................................. 4,034 2,826
Other assets, net (Note 4).................................. 6,778 10,472
-------- --------
$347,011 $366,128
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt (Note 5)................ $ 13,500 $ --
Trade accounts payable.................................... 50,496 41,035
Accrued expenses (Note 8)................................. 19,161 19,598
Income taxes payable (Note 10)............................ 6,316 5,361
-------- --------
Total current liabilities......................... 89,473 65,994
-------- --------
Long-term debt, less current portion (Note 5)............. 121,441 170,000
Deferred income taxes (Note 10)........................... 9,323 9,965
Deferred compensation (Note 7)............................ 2,915 1,734
Other long-term liabilities (Note 9)...................... 2,312 1,741
Dividends payable (Note 11)............................... 5,867 9,515
-------- --------
Total liabilities................................. 231,331 258,949
-------- --------
Commitments and Contingencies (Notes 6, 7, 9 and 10)
Preferred stock of subsidiary (Note 11)..................... 29,663 29,663
Shareholder's Equity (Note 1):
Common stock, $0.10 par value; 350,000 shares authorized;
1,000 shares issued and outstanding.................... -- --
Additional paid-in capital................................ 65,504 65,504
Retained earnings......................................... 20,513 12,012
-------- --------
Total shareholder's equity........................ 86,017 77,516
-------- --------
$347,011 $366,128
======== ========
</TABLE>
See accompanying summary of significant accounting policies and notes
to the consolidated financial statements.
F-3
<PAGE> 120
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues (Notes 1, 6 and 13).................. $373,038 $497,872 $470,850
Cost of revenues.............................. 329,739 438,299 443,251
-------- -------- --------
Gross margin.................................. 43,299 59,573 27,599
General and administrative expenses........... 9,746 15,327 15,600
-------- -------- --------
Operating income.............................. 33,553 44,246 11,999
-------- -------- --------
Other income (expense):
Interest expense (Note 5)................... (9,454) (16,723) (14,180)
Other income, net........................... 1,442 4,246 1,889
-------- -------- --------
Net other expense............................. (8,012) (12,477) (12,291)
-------- -------- --------
Income (loss) before income taxes............. 25,541 31,769 (292)
Income tax expense (Note 10).................. 6,636 13,274 3,009
-------- -------- --------
Income (loss) before extraordinary item....... 18,905 18,495 (3,301)
Extraordinary item -- loss on extinguishment
of debt (net of income tax benefit of $513)
(Note 5).................................... -- -- (1,552)
-------- -------- --------
Net income (loss)............................. $ 18,905 $ 18,495 (4,853)
======== ======== ========
Income (loss) before extraordinary item....... $ 18,905 $ 18,495 $ (3,301)
Dividends accrued on preferred stock of
subsidiary.................................. (2,219) (3,648) (3,648)
-------- -------- --------
Income (loss) available to common
shareholder................................. 16,686 14,847 (6,949)
Extraordinary item............................ -- -- (1,552)
-------- -------- --------
Net income (loss) available to common
shareholder................................. $ 16,686 $ 14,847 $ (8,501)
======== ======== ========
Earnings (loss) per share -- basic and
diluted:
Income (loss) before extraordinary item....... $ 16,686 $ 14,847 $ (6,949)
Extraordinary item............................ -- -- (1,552)
-------- -------- --------
Net income (loss) per share of common stock... $ 16,686 $ 14,847 $ (8,501)
======== ======== ========
Weighted average shares of common stock
outstanding................................. 1,000 1,000 1,000
======== ======== ========
</TABLE>
(The Consolidated Statements of Operations include the results of operations of
Goldendale Holding Company since May 22, 1996. See Note 1.)
See accompanying summary of significant accounting policies and notes
to the consolidated financial statements.
F-4
<PAGE> 121
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996...... 1,000 $-- $20,774 $ 59,599 $ 80,273
Acquisition of Goldendale
(Note 1)...................... -- -- 44,480 -- 44,480
Cash contributed to capital..... -- -- 100 -- 100
Dividends accrued on
preferred stock............... -- -- -- (2,219) (2,219)
Dividends paid on common
stock......................... -- -- -- (67,587) (67,587)
Net income...................... -- -- -- 18,905 18,905
----- --- ------- -------- --------
Balance at December 31, 1996.... 1,000 -- 65,354 8,598 73,952
Cash contributed to capital..... -- -- 150 -- 150
Dividends accrued on
preferred stock............... -- -- -- (3,648) (3,648)
Dividends paid on common
stock......................... -- -- -- (2,932) (2,932)
Net income...................... -- -- -- 18,495 18,495
----- --- ------- -------- --------
Balance at December 31, 1997.... 1,000 -- 65,504 20,513 86,017
Dividends accrued on
preferred stock............... -- -- -- (3,648) (3,648)
Net loss........................ -- -- -- (4,853) (4,853)
----- --- ------- -------- --------
Balance at December 31, 1998.... 1,000 $-- $65,504 $ 12,012 $ 77,516
===== === ======= ======== ========
</TABLE>
See accompanying summary of significant accounting policies and notes
to the consolidated financial statements.
F-5
<PAGE> 122
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 18,905 $ 18,495 $ (4,853)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 13,584 19,069 20,371
Gain on disposal of assets................................ -- (2,600) (38)
Provision for bad debts................................... 296 -- 1,500
Extraordinary loss........................................ -- -- 2,065
Deferred income taxes..................................... 3,573 8,136 487
Change in assets and liabilities, net of effect of
acquisition:
Trade accounts receivable............................... (3,256) (1,372) 13,098
Inventories............................................. 22,299 (9,503) 5,809
Prepaid expenses........................................ (43) 150 (259)
Other assets............................................ (5,298) 2,850 627
Trade accounts payable.................................. (3,586) 22,914 (6,878)
Accrued expenses........................................ (17,074) 3,641 (2,739)
Intercompany payable.................................... -- -- 418
Income taxes payable.................................... 450 (4,886) (955)
Other liabilities....................................... 4 (802) 85
--------- --------- ---------
Net cash provided by operating activities................... 29,854 56,092 28,738
--------- --------- ---------
Cash flows from investing activities:
Proceeds from disposal of assets.......................... -- 12,821 1,210
Acquisition of property, plant and equipment.............. (19,852) (14,281) (19,010)
Advances to shareholder................................... -- (2,000) --
Advances to related company............................... (403) (3,631) (918)
Cash acquired in business acquisition..................... 1,106 -- --
--------- --------- ---------
Net cash used in investing activities....................... (19,149) (7,091) (18,718)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under revolving credit facilities.............. 259,122 319,219 300,772
Repayments under revolving credit facilities.............. (212,029) (326,793) (299,762)
Contribution of capital................................... 100 150 --
Principal repayments of term loan facilities.............. (7,750) (42,926) (11,904)
Proceeds from term loan facilities........................ 25,000 -- --
Proceeds from long-term borrowings........................ -- -- 45,953
Deferred finance costs.................................... -- -- (7,035)
Principal payments on deferred compensation notes......... (1,631) (813) (1,662)
Dividends paid............................................ (67,587) (2,932) --
--------- --------- ---------
Net cash provided by (used in) financing activities......... (4,775) (54,095) 26,362
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 5,930 (5,094) 36,382
Cash and cash equivalents, beginning of year................ 415 6,345 1,251
--------- --------- ---------
Cash and cash equivalents, end of year...................... $ 6,345 $ 1,251 $ 37,633
========= ========= =========
</TABLE>
Supplemental Disclosures of Cash Flow Information (Note 12)
See accompanying summary of significant accounting policies and notes
to the consolidated financial statements.
F-6
<PAGE> 123
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(DOLLARS IN THOUSANDS)
OPERATIONS, PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The operations of Golden Northwest Aluminum, Inc. ("Golden" or the
"Company") consist primarily of the smelting conversion of alumina to aluminum
under tolling arrangements with alumina suppliers, processing of aluminum into
primary products, and the sale of those products. The operations are located in
the Pacific Northwest on the Columbia River.
The Company was incorporated in the state of Oregon on June 3, 1998 for the
purposes of becoming the holding company of Northwest Aluminum Company,
Northwest Aluminum Specialties, Inc., Northwest Aluminum Technologies, LLC
(collectively "Northwest") and Goldendale Holding Company and its wholly owned
subsidiary, Goldendale Aluminum Company (collectively "Goldendale"). The sole
shareholder of the Company also owned all of the outstanding shares of common
stock of Northwest and Goldendale. On December 18, 1998, the sole shareholder of
Golden contributed all of the issued and outstanding shares of common stock of
Goldendale and Northwest to the Company. The transaction was accounted for as a
merger of entities under common control in a manner similar to a pooling of
interests. Accordingly, the financial statements give retroactive effect to this
transaction. The consolidated financial statements include the accounts of
Northwest for all periods presented and the accounts of Goldendale from May 22,
1996, the date of acquisition by the sole shareholder (See Note 1).
The Company and Goldendale report on a December 31 year basis; Northwest
reports on a September 30 fiscal year basis. Within this consolidated financial
statement, adjustments were made to the September 30, 1998 Northwest financial
statement to reflect the retirement of long term debt made in December 1998
which is discussed in Note 5. Included in accrued expenses at December 31, 1998
is $418, representing the portion of intercompany advances which do not
eliminate due to the differing year ends. All other significant intercompany
accounts and transactions have been eliminated.
Consolidated and separate results of Northwest and Goldendale are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Northwest................................... $244,839 $296,271 $293,596
Goldendale.................................. 128,199 201,601 177,254
-------- -------- --------
$373,038 $497,872 $470,850
======== ======== ========
Net income (loss)
Northwest................................... $ 9,730 $ 205 $ (4,742)
Goldendale.................................. 9,175 $ 18,290 $ (111)
-------- -------- --------
$ 18,905 $ 18,495 $ (4,853)
======== ======== ========
</TABLE>
F-7
<PAGE> 124
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(DOLLARS IN THOUSANDS)
REVENUE RECOGNITION
Revenues for the conversion of alumina and processing of aluminum under
tolling arrangements are recognized upon completion of the tolling process.
Under the tolling arrangements, alumina suppliers deliver their alumina to the
Company. The alumina is converted to aluminum in reduction cells by putting it
in liquid form by dissolving it in an "electrolyte" solution and then passing
electric current through the "electrolyte" to separate the alumina into its two
parts, aluminum and oxygen. This process is continuous and is nearly
instantaneous as the alumina is dissolved in the "electrolyte". The tolling
process is considered complete when the molten aluminum is withdrawn from the
cells. Revenues from the processing and sale of aluminum products are recognized
upon shipment.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method, except for certain supply inventories, which
are based upon the weighted-average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment including cell relining costs are stated at
cost, less accumulated depreciation. For financial reporting purposes, the costs
of plant and equipment are depreciated over the estimated useful lives of the
assets, which range from three to forty years, using the straight-line method.
ASSETS HELD FOR SALE
Power project assets represent idle assets, which are being held for sale.
These assets are recorded at their estimated net realizable value.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is being amortized on a straight-line basis over twenty
years. The Company monthly evaluates the recoverability of goodwill. The
measurement of possible impairment is based primarily on the Company's ability
to recover the unamortized balance of the goodwill from expected future
operating cash flows on an undiscounted basis and without interest charges.
ASSET IMPAIRMENT
The Company evaluates its long-lived assets for financial impairment, and
continues to evaluate them as events or changes in circumstances indicate that
the carrying amount of such assets may not be fully recoverable. The Company
evaluates the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such evaluations indicate
F-8
<PAGE> 125
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(DOLLARS IN THOUSANDS)
that the future undiscounted cash flows of certain long-lived assets are not
sufficient to recover the carrying value of such assets, the assets are adjusted
to their fair values.
INTEREST COSTS
The Company follows the policy of capitalizing interest as a component of
the cost of property, plant and equipment constructed for its own use. Interest
costs of $147, $0 and $44 were capitalized during the year ended December 31,
1996, 1997 and 1998, respectively.
INCOME TAXES
Both the Company and its Northwest subsidiary have elected to be taxed
under the provisions of Subchapter S of the Internal Revenue Code. Under those
provisions, the Company, including its Northwest subsidiary, does not pay
federal or state corporate income taxes on its taxable income. Instead, the
Company's shareholder is liable for individual federal and state income taxes on
its taxable income. It is the Company's intention to pay dividends to the
shareholder in an amount no less than the sum of these federal and state income
taxes.
The Company's other subsidiary, Goldendale, accounts for income taxes under
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 uses the liability method so
that deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of enacted tax laws and tax rates. Deferred
income tax expense or benefit is based on the changes in the financial statement
bases versus the tax bases in Goldendale's assets or liabilities from period to
period.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Those estimates and assumptions affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist of cash and cash equivalents and trade
accounts receivable. The Company places its cash and cash equivalents with
various high quality financial institutions; these deposits may exceed federally
insured limits at various times throughout the year. Northwest sells its
products to various customers involved in the manufacturing of aluminum products
located throughout the United States. Credit risk arising from these receivables
is controlled through credit approval, credit limit and monitoring procedures.
F-9
<PAGE> 126
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(DOLLARS IN THOUSANDS)
Receivables due from the Company's two primary tolling customers comprise 40%
and 39% of the Company's total trade accounts receivable at December 31, 1997
and 1998, respectively.
FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
The fair values of financial instruments have been determined through
information obtained from quoted market sources and management estimates. It is
management's belief that financial instruments held by the Company approximate
fair market value. The Company does not hold or issue financial instruments or
derivative financial instruments for trading purposes.
Both Goldendale and Northwest have entered into interest rate swap
agreements for purposes of minimizing exposure to interest rate risk. The
differential between the floating interest rate and the fixed interest rate,
which is to be paid or received, is recognized in interest expense as the
floating interest rate changes over the life of the agreement.
RESEARCH AND DEVELOPMENT COSTS
Expenditures associated with research and development for existing product
process improvements are expensed as incurred. These costs amounted to $898,
$544 and $1,194 during the years ended December 31, 1996, 1997 and 1998,
respectively.
CASH AND CASH EQUIVALENTS
For purposes of balance sheet classification and the statements of cash
flows, the Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
ENVIRONMENTAL MATTERS
The Company expenses environmental expenditures related to existing
conditions resulting from past or current operations and from which no current
or future benefit is discernible. Expenditures that extend the life of the
related property or mitigate or prevent future environmental contamination are
capitalized. The Company records a liability for an environmental matter when it
is probable and can be reasonably estimated. The liability is adjusted as
further information develops or circumstances change. The Company's estimated
liability is reduced to reflect the anticipated participation of other
potentially responsible parties in those instances where it is probable that
such parties are legally responsible and financially capable of paying their
respective shares of the relevant costs. The estimated liability of the Company
is not discounted or reduced for possible recoveries from insurance carriers.
DEBT ISSUE COSTS
Costs and fees incurred to obtain financing are capitalized and amortized
over the term of the related debt.
F-10
<PAGE> 127
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(DOLLARS IN THOUSANDS)
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), Disclosures about
Segments of an Enterprise and Related Information, which supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise, establishes standards
for the new way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS No. 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. As the Company operates within a single aggregated segment,
production of aluminum, the adoption of SFAS No. 131 by the Company in 1998, did
not have a significant impact on the Company's financial position.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ("SFAS No. 132"), Employers'
Disclosures about Pensions and other Post-retirement Benefits, which
standardizes the disclosure requirements for pension and other post-retirement
benefits. The adoption of SFAS No. 132 did not materially impact the Company's
current disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies
to recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Based on its current and planned future
activities relative to derivative instruments, the Company believes that the
adoption of SFAS No. 133 on January 1, 2000 will not have a significant effect
on its financial statements.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134, ("SFAS No. 134") Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. This statement effectively
changes the way mortgage banking firms account for certain securities and other
interests they retain after securitizing mortgage loans that were held for sale.
The adoption of SFAS No. 134 is not expected to have a material impact on the
Company's financial position.
In February 1999 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 135 ("SFAS No. 135"), Rescission of
Financial
F-11
<PAGE> 128
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(DOLLARS IN THOUSANDS)
Accounting Standards Board No. 75 ("SFAS No. 75") and Technical Corrections.
SFAS No. 135 rescinds SFAS No. 75 and amends Statement of Financial Accounting
Standards Board No. 35. SFAS No. 135 also amends other existing authoritative
literature to make various technical corrections, clarify meanings, or describe
applicability under changed conditions. SFAS No. 135 is effective for financial
statements issued for fiscal years ending after February 15, 1999. The Company
believes that the adoption of SFAS No. 135 will not have a significant effect on
its financial statements.
EARNINGS PER SHARE
Basic earnings per share includes no dilution and is calculated by dividing
income available to common shareholders by the average number of shares actually
outstanding during the period. Diluted earnings per share reflect the potential
dilution of securities (such as stock options, warrants and securities
convertible into common stock) that could share in the earnings of an entity.
The Company has no dilutive securities.
F-12
<PAGE> 129
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ACQUISITION
On May 22, 1996, the sole shareholder of the Company purchased 137,314.82
shares of outstanding common stock of Columbia Aluminum Corporation ("CAC"),
including 120,000 shares held by the Columbia Aluminum Corporation Employee
Stock ownership Trust (the "ESOT") and 17,314.82 shares held by various
individuals, for approximately $30,895. On that same date the shareholder
purchased all of the issued and outstanding common stock of KCE Enterprises,
Inc. ("KCE"), which owned 60,374 shares of common stock of CAC, for
approximately $13,585.
Immediately before the purchase of CAC and KCE stock described above,
pursuant to a plan of corporate reorganization and separation, CAC redeemed
564,626 shares of common stock of CAC owned by an unrelated party in exchange
for stock of a wholly-owned subsidiary of CAC, Columbia Ventures Corporation
("CVC"). CAC operated the Goldendale smelter; CVC and its subsidiaries were
engaged in a diversified array of businesses, primarily related to the aluminum
industry. Pursuant to the plan of reorganization and separation, CAC contributed
to CVC certain non-smelter related assets, intercompany receivables and $54,141
in cash; CAC also purchased certain power generation assets from CVC for
$21,321. The funds contributed to CVC and used to acquire the power generation
assets were obtained by CAC through the term loans described in Note 5.
Following the corporate reorganization and immediately prior to the acquisition
of the shares of CAC by the shareholder of the Company, the shareholders of CAC
(and the total shares of CAC held by them) were as follows:
<TABLE>
<CAPTION>
SHARES OWNED
------------
<S> <C>
ESOT...................................... 251,836.10
KCE....................................... 60,374.00
Others.................................... 17,314.82
----------
Total outstanding......................... 329,524.92
==========
</TABLE>
Following the separation of CVC from CAC and the purchases of common stock
on that same date, the shareholders of CAC were KCE (owned by the Company's
shareholder), the Company's shareholder, and the ESOT, which, after selling
120,000 shares of CAC common stock to the Company's shareholder, owned
131,836.10 shares of CAC common stock. Goldendale Holding Company then issued
197,688.82 shares of its common stock in aggregate to KCE and the Company's
shareholder and 131,836.10 shares of Series A Preferred Stock, valued at $29,663
($225/share), to the ESOT in exchange for the remaining shares of common stock
of CAC held by them. CAC was renamed Goldendale Aluminum Company ("GAC").
The acquisition of GAC was recorded under the purchase method of
accounting; accordingly, the results of operations of GAC are included in the
consolidated statements of income from the date of acquisition. The total
purchase price of CAC was $79,643 and consisted of $44,480 in cash, Series A
preferred stock valued at $29,663 and acquisition costs of approximately $5,500.
The excess of the purchase price over the fair value of the net tangible assets
acquired was approximately $98,000 and is being amortized over twenty
F-13
<PAGE> 130
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
years. During 1997, an adjustment of approximately $2,700 was made to the
intangible asset relating to contingent tax liabilities existing at the date of
acquisition.
As of May 22, 1996, the fair values of assets acquired and liabilities
assumed, exclusive of cash acquired of $1,106, were as follows:
<TABLE>
<S> <C>
Trade accounts receivable................... $ 27,309
Inventories................................. 30,813
Property, plant and equipment............... 64,681
Power project assets........................ 12,000
Other assets................................ 9,214
Goodwill.................................... 97,971
Accounts payable............................ (15,007)
Other liabilities........................... (27,975)
Long-term debt.............................. (119,363)
---------
$ 79,643
=========
</TABLE>
The following unaudited pro forma consolidated results of operations have
been prepared as if the acquisition of GAC had occurred at the beginning of
1996, after giving effect to certain adjustments, including amortization of the
intangible asset, increased depreciation on the step-up in the basis of fixed
assets, increased interest expense on acquisition debt, and related income tax
effects. They do not purport to be indicative of the results of operations which
actually would have resulted had the acquisition occurred at the beginning of
1996.
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Revenues..................................... $456,568
Net Income................................... $ 20,621
Earnings per share........................... $ 16,973
</TABLE>
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Purchased metals and tolling in
process.......................... $37,932 $33,047
Supplies and alloys................ 14,137 12,558
Carbon plant materials............. 5,296 5,793
Alumina............................ 3,527 3,685
------- -------
$60,892 $55,083
======= =======
</TABLE>
F-14
<PAGE> 131
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. PROPERTY, PLANT AND EQUIPMENT AND RESTATEMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Land and improvements............ $ 5,562 $ 7,378
Machinery and equipment.......... 105,134 124,797
Buildings and improvements....... 39,283 38,298
Capital projects in process...... 4,582 8,435
-------- --------
154,561 178,908
Less accumulated depreciation.... 40,749 61,147
-------- --------
$113,812 $117,761
======== ========
</TABLE>
During 1998, in connection with the preparation of its financial statements
to be used in the registration of debt securities discussed in Note 5, the
Company changed its method of accounting for cell relining costs from expensing
such costs as incurred to capitalizing and amortizing these costs over future
periods. As a result of relining the cells with improved materials, the useful
life of the individual cells has increased. In addition, the cell relining
activity and related expenditures vary each year. The Company believes that the
new method improves the matching of revenues and costs as technological
improvements have extended the estimated period of economic benefit realized
from cell relining. The change has been applied by retroactively restating the
accompanying consolidated financial statements. The effect of this change was to
increase net income for the years ended December 31, 1996 and 1997 and by
$1,223, and $2,067 respectively.
4. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------ -------
<S> <C> <C>
Long-term trade receivable.......... $2,465 $ 1,714
Debt issue costs, net of accumulated
amortization of $1,226 and $50.... 2,826 6,985
Restricted cash..................... 1,239 1,300
Other............................... 248 473
------ -------
$6,778 $10,472
====== =======
</TABLE>
Restricted cash consists of cash held in trust and committed for
environmental cleanup and workers compensation self-insurance as required by the
state of Washington. These monies will be disbursed at a future date as required
by the state.
F-15
<PAGE> 132
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
First mortgage notes............. $ -- $150,000
Subordinated credit agreement.... -- 20,000
Revolving Credit Facilities...... 65,617 --
Term Loans....................... 69,324 --
-------- --------
Long-term debt................... 134,941 170,000
Less current portion............. 13,500 --
-------- --------
Long-term debt less current
portion..................... $121,441 $170,000
======== ========
</TABLE>
The Revolving Credit Facilities and Term Loans were made pursuant to credit
agreements between each of Northwest and Goldendale and a bank. Borrowings under
the credit agreements were secured by substantially all assets of the respective
companies. The Revolving Credit Facilities, which were due to mature in 2001,
provided for borrowings up to $65 million for Northwest and up to $30 million
for Goldendale. Revolving loan advances bore interest at either the bank's Base
Rate plus an applicable margin as defined in the credit agreement or the
Eurodollar Rate plus an applicable margin as defined in the credit agreement.
Term Loans, with maturity dates ranging from 2001 to 2002, bore interest at
either the bank's Base Rate plus an applicable margin as defined in the credit
agreement or the Eurodollar Rate plus an applicable margin as defined in the
credit agreement. The lending agreements contained covenants related to minimum
net worth, interest coverage ratio, fixed charge coverage ratio and debt to
income ratio. In addition, the credit agreements limited capital spending,
investments and dividends. Amounts outstanding under the Revolving Credit
Facilities and Term Loans were repaid in December 1998 with the proceeds from
the first mortgage notes discussed below. In connection with the extinguishment
of the Revolving Credit Facilities and Term Loans, the Company recognized an
extraordinary loss, net of income taxes, of $1,552.
In December 1998, the Company issued $150 million of 12% first mortgage
notes due on December 15, 2006. Interest is payable semi-annually on June 15 and
December 15, commencing June 15, 1999. Payment of the notes is guaranteed by the
Company. The debt is collateralized by substantially all of the real property,
plant and equipment of the Company and by a pledge of all of the issued and
outstanding capital stock of the Company's subsidiaries. On or after December
15, 2002 the notes are redeemable at the option of the Company at specified
redemption prices. There are no sinking fund requirements. The indenture
agreement limits principal payments on subordinated debt, dividends or
shareholder distributions, and investments in subsidiaries.
In December 1998, the Company entered into a $75 million bank revolving
credit facility, collateralized by inventory, accounts receivable and related
intangibles, including a security interest in the Company's tolling agreements,
which mature on December 20, 2003. Borrowings under the credit facility bear
interest at a floating base rate specified in
F-16
<PAGE> 133
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
the credit agreement plus from 0.50% to 1.00% or the LIBOR rate plus from 2.00%
to 2.50%, depending on the consolidated ratio of earnings before interest,
income taxes, depreciation and amortization to interest expense. The credit
facility provides for the payment of a commitment fee of 0.50% per annum based
on the unused portion of the credit facility. The credit agreement contains
restrictive covenants, including a minimum net worth requirement, a minimum
excess availability requirement and limitations on capital expenditures,
dividends, additional indebtedness, mergers and other business combinations,
assets sales, encumbrances, investments and transactions with affiliates. The
Company was in compliance with these covenants at December 31, 1998. No amounts
were outstanding under this credit facility at December 31, 1998.
Also in December 1998, the Company entered into a subordinated credit
agreement with Hydro pursuant to which $20 million was advanced. The debt bears
interest at LIBOR plus two percent (7.13% at December 31, 1998) and is due in
December 2005. The debt is secured by a second lien and a pledge on the
collateral securing the first mortgage notes and is guaranteed by the Company.
Except for the collateral security, the guarantees by the Company are
subordinate to the indebtedness under the bank revolving credit facility. The
credit agreement provides for additional borrowings of $10 million on or prior
to December 31, 2001.
During 1996, both Goldendale and Northwest entered into interest rate swap
agreements, as required by the credit agreements, which expire in 2001. The
fixed interest rate paid on the interest rate swaps is 6.83%, covering, at
December 31, 1998, $30 million notional principal amount of floating rate
indebtedness of Goldendale and 6.25% covering $13.75 million notional principal
amount of floating rate indebtedness of Northwest. Although the Company is
exposed to credit loss on the interest rate swap in the event of nonperformance
by the counterparties, the Company estimates the likelihood of such
nonperformance to be remote. At December 31, 1998 and 1997, the fair value of
the interest rate swaps was approximately $1,029 and $800, respectively, which
reflects the estimated amount that the Company would pay to terminate the
contracts. Subsequent to year-end, on January 25, 1999 the Company terminated at
no cost its existing interest rate swap agreements and entered into a new swap
agreement that expires in 2003. The fixed interest rate paid on the new swap is
6.4% and covers $20 million of notional principal amount of floating rate
(LIBOR) indebtedness of the Company.
6. ALUMINA TOLLING CONVERSION AGREEMENTS
Both Goldendale and Northwest have agreements with alumina suppliers for
the conversion of alumina to aluminum for a tolling charge under which the
entire production capacity of the smelting facilities is dedicated to the
tolling of its supplier's alumina. The supplier is obligated to supply, without
charge, alumina sufficient to meet the requirements for full operation. The
tolling fees set forth in the contracts are a percentage of the price of
aluminum quoted on the London Metals Exchange. Goldendale's agreement continues
through December 31, 2006, and Northwest's continues through December 31, 1999.
These two tolling customers accounted for 26% and 31% of the Company's
consolidated revenue in 1996, 18% and 40% of the Company's consolidated revenues
in 1997, and 19% and 37% of the Company's consolidated revenue in 1998.
F-17
<PAGE> 134
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. EMPLOYEE BENEFIT PLANS
Profit Sharing Bonus Plans
Northwest has entered into agreements, which continue through 2001, with
the United Steelworkers of America, AFL-CIO, to pay annually as additional
compensation 20% of the combined net income of Northwest, as adjusted in
accordance with the agreements. Northwest's total additional compensation
bonuses under these agreements amounted to approximately $2,100, $1,300 and $829
during the years ended December 31, 1996, 1997 and 1998, respectively.
Goldendale has a profit sharing plan for its hourly and salaried employees.
All Goldendale employees are eligible participants in this plan upon completion
of a probationary period. The plan provides for payments equal to a percentage
of Goldendale's profits, as defined. These amounts are to be distributed to
eligible participants on or before March 31 following Goldendale's year-end. For
the years ended December 31, 1996, 1997 and 1998, Goldendale recorded
approximately $1,200, $1,900 and $380, respectively, of expense related to this
plan.
Goldendale also has an additional profit sharing plan ("PSP") which is
available to all Goldendale employees as of their first day of employment.
Employer contributions to the PSP are discretionary as approved by the Board of
Directors. No employee contributions will be made to the PSP. Participants, who
have one hour of service after July 31, 1996, are vested in the assets of the
PSP at 100%. Upon termination of employment, plan participants will be paid in
cash, based on their account balance as of the last regular or special valuation
on or before distribution, subject to the plan provisions of the PSP. No
contributions were made to the PSP in 1996, 1997 and 1998.
Retirement Benefit Plans
Northwest has a defined contribution 401(k) profit sharing plan (the "401k
Plan") covering substantially all Northwest employees under which employees may
elect to defer pay subject to statutory limits. Northwest is committed to
contribute the greater of $.25 per eligible hour worked or 5% of the combined
adjusted net income of Northwest. Northwest may also make discretionary
contributions to the 401k Plan. Total required and discretionary contributions
by Northwest to the 401(k) Plan amounted to approximately $520, $560 and $341
during the years ended December 31, 1996, 1997 and 1998, respectively.
Goldendale also has a 401(k) profit sharing plan under which employees may
elect to defer pay, subject to statutory limits; Goldendale also makes matching
contributions for non-bargaining on the basis of percentages specified in the
plan. Goldendale maintains a separate profit sharing retirement plan (the "DC
Plan") which provides retirement benefits for substantially all of its
employees. The DC Plan allows for discretionary contributions by Goldendale as
determined on an annual basis. For the years ended December 31, 1996, 1997 and
1998, Goldendale recorded approximately $240, $730 and $290 of expense for plan
contributions.
F-18
<PAGE> 135
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Deferred Compensation
In connection with the acquisition described in Note 1, the Company entered
into deferred compensation agreements with certain employees in exchange for the
employees waiving their rights under stock-based compensation and other
employment agreements which existed at the acquisition date. The liability is
payable in monthly installments of approximately $115, including interest at
8.75%, through 2001.
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Bonuses............................ $ 4,797 $ 5,023
Salaries and related expenses...... 7,741 3,782
Interest........................... 4,100 4,538
Intercompany payable............... -- 418
Other.............................. 2,523 5,837
------- -------
$19,161 $19,598
======= =======
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company, in the regular course of business, is involved in
investigations and claims by various regulatory agencies. The Company is also
engaged in various legal proceedings incidental to its normal business
activities. The Company's management does not believe that the ultimate
resolution of these investigations, claims and legal proceedings will have a
material effect on its financial position, results of operations or cash flows.
As of December 31, 1997 and 1998, the Company had recorded a liability of
approximately $1,656 and $1,741 respectively, for estimated environmental
remediation activities at Goldendale's facility. The Company's estimate of this
liability is based on a remediation study conducted by independent engineering
consultants. The total cost of remediation is estimated at $2.5 million;
however, under a court decree the Company is only responsible for 57% of the
total. The remaining cost is the responsibility of prior owners. No accrual has
been provided for the Northwest facility as the Company is unaware of any
current condition which would give rise to remedial action.
F-19
<PAGE> 136
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The Company has entered into various agreements for the purchase of power
and aluminum. Future estimated minimum payments under these noncancellable
agreements are as follows
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------
<S> <C>
1999....................................... $177,677
2000....................................... 83,887
2001....................................... 68,699
--------
$330,263
========
</TABLE>
10. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997 1998
------ ------- ------
<S> <C> <C> <C>
Current.................... $3,063 $10,204 $2,009
Deferred................... 3,573 3,070 487
------ ------- ------
Income tax expense......... $6,636 $13,274 $2,496
====== ======= ======
</TABLE>
The difference between the federal statutory tax rate and the effective tax
rate resulted from the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997 1998
----- ---- -------
<S> <C> <C> <C>
Federal statutory tax rate.... 35.0% 35.0% 35.0%
Loss (earnings) from entities
not subject to income
taxes....................... (18.0) (3.1) (417.5)
Amortization of goodwill...... 4.2 5.3 (568.9)
Other items, net.............. 4.8 4.6 (79.2)
----- ---- -------
Effective tax rate............ 26.0% 41.8% (1030.5)%
===== ==== =======
</TABLE>
F-20
<PAGE> 137
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Current:
Accrued expenses............... $ 1,143 $ 1,353
Inventory...................... 145 140
Other.......................... 51 1
-------- --------
$ 1,339 $ 1,494
======== ========
Non-current:
Property, plant and
equipment................... $(13,968) $(13,507)
Power project assets........... 3,262 404
Deferred compensation.......... 1,164 607
Other.......................... 219 2,531
-------- --------
$ (9,323) $ (9,965)
======== ========
</TABLE>
The Internal Revenue Service ("IRS") has audited the Company's income tax
returns and has proposed to change the Company's method of accounting for
certain expenditures that were deducted when incurred. The IRS has proposed to
capitalize and depreciate these expenditures over an estimated useful life. The
Company is currently appealing the proposed change in accounting method
initiated by the IRS and believes it has various meritorious defenses. However,
at December 31, 1998, the Company has recorded a liability associated with the
proposed change in accounting method that is effective for all tax years
subsequent to 1989, of approximately $11.5 million, which includes interest of
$4.0 million. The sole shareholder of the Company will also incur additional
taxes and interest associated with this proposed change. It is the Company's
intention to reimburse the shareholder for any such amounts in the form of a
dividend. The Company estimates that this dividend distribution will range from
$2.7 to $5.3 million. Because the Company has recorded a liability associated
with the proposed change, ultimate resolution is not expected to have a material
impact on the Company's results of operations. The Company intends to use funds
available under its current financing arrangements and funds generated from
operations to pay any amounts ultimately assessed.
11. PREFERRED STOCK OF SUBSIDIARY
Goldendale has authorized 150,000 shares of $.01 par value Series A
cumulative, nonconvertible preferred stock. At December 31, 1998 and 1997,
131,836.10 shares were issued and outstanding. The shares were issued in
connection with the acquisition of Goldendale in 1996 and are stated at their
per share fair value when issued of $225. The liquidation preference on the
preferred stock is $225 per share.
F-21
<PAGE> 138
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Terms of the Goldendale preferred stock provide for dividends accruing
quarterly and payable in cash as declared by the Board of Directors according to
the following schedule:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ------------
<S> <C>
Through 2001........................... $27.68/share
2002................................... 29.93/share
2003................................... 32.18/share
Thereafter............................. 34.43/share
</TABLE>
Commencing on January 1, 2002, the preferred shareholders have the option
of receiving additional shares of preferred stock in satisfaction of any
cumulative dividend in arrears that may exist at that time.
The Company may redeem any or all outstanding shares of Series A Preferred
Stock at the following redemption prices at any time after December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ -------
<S> <C>
Through 1999................................ $230.63
2000........................................ 228.38
2001........................................ 227.25
Thereafter.................................. 225.00
</TABLE>
The shares of preferred stock and shares of common stock vote together as a
single class on all matters submitted to a vote of shareholders of Goldendale.
The holders of shares of preferred stock are entitled to one vote per share and
have full voting rights and power equal to those of the holders of common stock.
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997 1998
-------- ------- -------
<S> <C> <C> <C>
Cash paid during the period for:
Interest...................................... $ 8,869 $14,346 $13,273
Income taxes.................................. 2,600 10,545 2,900
Non-cash investing and financing activities:
Principal balance of debt refinanced.......... -- -- 124,047
Acquisition contingency accrual:
Goodwill...................................... -- 2,699 --
Deferred income taxes......................... -- 6,742 --
Dividends accrued on preferred stock.......... 2,219 3,648 3,648
Business acquisition:
Fair value of assets acquired................. 144,017 -- --
Purchase price in excess of net assets
acquired................................... 97,971 -- --
Liabilities assumed........................... 168,951 -- --
Common and preferred stock issued............. 74,143 -- --
</TABLE>
F-22
<PAGE> 139
GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
13. RELATED PARTY TRANSACTIONS
Sales to a company related by common ownership amounted to $157, $3,613,
and $6,406 for the years ended December 31, 1996, 1997 and 1998, respectively.
Receivable due from the related company includes the balance due from those
sales, together with cash advances, of which $4,000 was converted to a note
receivable on December 31, 1997. The note bears interest at 9.25% and is payable
in quarterly installments through January 2002.
14. VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts activity was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of year.......................... $1,000 $1,296 $1,000
Charged to expense.................................. 296 -- 1,500
Write-offs, net of recoveries....................... -- (296) (1,500)
------ ------ ------
Balance, end of year................................ $1,296 $1,000 $1,000
====== ====== ======
</TABLE>
F-23
<PAGE> 140
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Goldendale Holding Company and
Goldendale Smelter Division of Columbia Aluminum Company
Goldendale, Washington
We have audited the accompanying statements of income and cash flows of
Goldendale Smelter Division of Columbia Aluminum Company for the year ended
December 31, 1995 and the period from January 1, 1996 through May 21, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the statements of income and cash flows referred to above
present fairly, in all material respects, the results of operations and cash
flows of Goldendale Smelter Division of Columbia Aluminum Company for the year
ended December 31, 1995 and the period from January 1, 1996 through May 21,
1996, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Spokane, Washington
July 31, 1998
F-24
<PAGE> 141
GOLDENDALE SMELTER DIVISION OF
COLUMBIA ALUMINUM COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1996
DECEMBER 31, THROUGH
1995 MAY 21, 1996
------------ ---------------
(IN THOUSANDS)
<S> <C> <C>
Revenues (Notes 1 and 4)........................... $214,730 $83,530
Cost of revenues................................... 190,832 73,270
-------- -------
Gross margin..................................... 23,898 10,260
General and administrative expenses................ 2,296 718
-------- -------
Operating income................................... 21,602 9,542
-------- -------
Other income (expense):
Interest expense................................. (1,070) (398)
Other income, net................................ 1,250 339
-------- -------
Net other income (expense)....................... 180 (59)
-------- -------
Income before income taxes......................... 21,782 9,483
Income tax expense................................. (8,277) (3,335)
-------- -------
Net income....................................... $ 13,505 $ 6,148
======== =======
</TABLE>
See accompanying summary of significant accounting policies and
notes to financial statements.
F-25
<PAGE> 142
GOLDENDALE SMELTER DIVISION OF
COLUMBIA ALUMINUM COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1996
DECEMBER 31, THROUGH
1995 MAY 21, 1996
------------ ---------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income....................................... $13,505 $ 6,148
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 1,978 854
Loss on disposal of assets.................... 1 12
Change in assets and liabilities:
Trade accounts receivable................... (3,175) (247)
Inventories................................. (7,514) 248
Prepaid expenses and other assets........... 488 133
Trade accounts payable...................... 3,715 (3,850)
Accrued expenses............................ (17) (1,935)
------- -------
Net cash provided by operating activities.......... 8,981 1,363
------- -------
Cash flows from investing activities:
Acquisition of property, plant and equipment..... (3,994) (1,402)
Proceeds from sale of assets..................... 3 --
Net advances from (to) related companies......... (3,513) 60
------- -------
Net cash used in investing activities.............. (7,504) (1,342)
------- -------
Cash flows from financing activities:
Cash paid for treasury stock..................... (1,424) (56)
------- -------
Net cash used in financing activities.............. (1,424) (56)
------- -------
Net increase (decrease) in cash and cash
equivalents...................................... 53 (35)
Cash and cash equivalents, beginning of period..... 519 572
------- -------
Cash and cash equivalents, end of period........... $ 572 $ 537
======= =======
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest......................................... $ 1,070 $ 398
Income taxes..................................... 5,700 5,700
</TABLE>
See accompanying summary of significant accounting policies and
notes to financial statements.
F-26
<PAGE> 143
GOLDENDALE SMELTER DIVISION OF COLUMBIA ALUMINUM COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(DOLLARS IN THOUSANDS)
BASIS OF PRESENTATION
Columbia Aluminum Corporation ("CAC") owned and operated an aluminum
smelter in Goldendale, Washington ("Goldendale" or the "Smelter") and, through
its wholly-owned subsidiary, Columbia Ventures Corporation ("CVC"), was engaged
in a diversified array of other businesses, primarily related to the aluminum
industry. Pursuant to a plan of corporate reorganization and separation (the
"Plan"), CAC redeemed 564,626 shares of its common stock held by CAC's
controlling shareholder in exchange for all of the issued and outstanding shares
of common stock of CVC. Pursuant to terms of the Plan, CAC contributed to CVC
certain non-smelter-related assets, intercompany receivables and $54,141 in
cash; CAC also purchased certain power generation assets from CVC for $21,321.
Immediately following the separation of CVC, the sole shareholder of Goldendale
Holding Company ("GHC") acquired 197,688.82 shares of common stock of CAC for
approximately $44,480.
Following the separation of CVC from CAC and the purchase of common stock,
the shareholders of CAC were the shareholder of GHC and the Columbia Aluminum
Corporation Employee Stock Ownership Trust (the "ESOT"), which held 131,836.10
shares of CAC common stock. GHC then issued 197,688.82 shares of its common
stock to the sole shareholder and 131,836.10 shares of Series A Preferred Stock,
valued at $29,663, to the ESOT in exchange for the shares of common stock of CAC
held by them. CAC was then renamed Goldendale Aluminum Company.
During the periods presented in these financial statements, the Smelter was
an integral part of CAC's overall operations and separate financial statements
were not prepared for the Smelter. The accompanying financial statements have
been prepared from the historical accounting records of CAC and present the
results of operations and cash flows of the Smelter. The statements of income
include allocations of certain CVC corporate administrative expenses in the
amount of approximately $270 for the year ended December 31, 1995 and $120 for
the period from January 1, 1996 through May 21, 1996. Management and
administrative salaries were allocated based upon estimated time devoted to the
Smelter; all other corporate overhead was based upon specific identification or
the relationship of the Smelter operations to total operations of CAC. Interest
expense was charged to the Smelter based on prime rate and changes in its
working capital position. Income taxes are provided as if the Smelter filed a
separate tax return.
These allocated costs and expenses, which management believes are
reasonable, may not necessarily be indicative of the results that would have
been attained if the Smelter had been operated as a separate legal entity.
OPERATIONS
The operations of Goldendale consist primarily of the smelting conversion
of alumina to aluminum under tolling arrangements with alumina suppliers,
processing of aluminum into primary products, and the sale of those products.
The operations are located in the Pacific Northwest on the Columbia River.
F-27
<PAGE> 144
GOLDENDALE SMELTER DIVISION OF COLUMBIA ALUMINUM COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(DOLLARS IN THOUSANDS)
REVENUE RECOGNITION
Revenues for the conversion of alumina and processing of aluminum under
tolling arrangements are recognized upon the completion of the tolling process.
Revenues from sales of aluminum products are recognized upon shipment.
COST OF SALES
Inventory costs are determined by the first-in, first-out method, except
for certain supply inventories, which are based upon the weighted average cost
method.
PROPERTY, PLANT AND EQUIPMENT
For financial reporting purposes, the costs of plant and equipment are
depreciated over the estimated useful lives of the assets, which range from
three to forty years, using the straight-line method.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, Goldendale considers all
highly liquid instruments purchased with an original maturity of three months or
less to be cash equivalents.
ENVIRONMENTAL MATTERS
The Smelter expenses environmental expenditures related to existing
conditions resulting from past or current operations and from which no current
or future benefit is discernible. Expenditures that extend the life of the
related property or mitigate or prevent future environmental contamination are
capitalized. The Smelter records a liability for environmental matters at the
time when it is probable and can be reasonably estimated. The Smelter's
estimated liability is reduced to reflect the anticipated participation of other
potentially responsible parties in those instances where it is probable that
such parties are legally responsible and financially capable of paying their
respective shares of the relevant costs. The estimated liability of the Smelter
is not discounted or reduced for possible recoveries from insurance carriers.
F-28
<PAGE> 145
GOLDENDALE SMELTER DIVISION OF COLUMBIA ALUMINUM COMPANY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(DOLLARS IN THOUSANDS)
FUTURES AND OPTIONS CONTRACTS
Goldendale utilized certain financial instruments, primarily futures and
options contracts, to hedge the effect of price changes of aluminum that the
Smelter produced and sold. Gains and losses, and the related costs paid or
premium received for contracts which hedged the sales prices of aluminum and
purchase prices of raw materials were deferred and included in earnings
concurrently with the hedged revenues. Premiums paid for the purchase of put
options classified as hedges were amortized over the life of the options.
Future sales contracts require the future delivery of aluminum at a
specified price. Certain futures sales contracts were made on a rollover basis
which allowed Goldendale to defer the delivery of aluminum to a later date at a
renegotiated market price. Gains and losses on contracts rolled over were
deferred until the positions were closed and included in earnings concurrently
with the hedged revenues. Cash flows from futures and options contracts are
reported in the statements of cash flows in the same category as the cash flows
from the hedged items.
Contracts open at May 21, 1996 were closed out by GHC as they came due.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
("SFAS 130") and Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," ("SFAS 131"). SFAS No. 130
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from non-owner sources. SFAS No.
131 establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas and major customers. Adoption of these statements will not
materially effect Goldendale's results of operations or cash flows; any effect
will be limited to the form of its disclosures. Both statements are effective
for years beginning after December 15, 1997, although they may be applied
earlier.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and other Post-retirement Benefits", ("SFAS No. 132"), which
standardizes the disclosure requirements for pension and other postretirement
benefits. The adoption of SFAS No. 132 is not expected to materially impact
Goldendale's current disclosures.
F-29
<PAGE> 146
GOLDENDALE SMELTER DIVISION OF COLUMBIA ALUMINUM COMPANY
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. TOLLING CONTRACT
During 1987, Goldendale entered into a tolling contract for a ten-year
period. Under the contract, the customer owns all of the primary raw materials
and all of the finished goods. Goldendale receives tolling fees for converting
the primary raw materials into finished aluminum products specified by the
customer. The contract specifies standard usage rates of the primary raw
materials based upon actual production. Variations of actual usage from such
standard usage may result in additional amounts due to or due from the customer.
Sales under the tolling agreement totaled approximately $135 million and $46
million for the year ended December 31, 1995 and the period from January 1, 1996
through May 21, 1996, respectively. On May 22, 1996, Goldendale renegotiated the
contract. Pursuant to terms of the new contract, which expires in December 2006,
the entire production capacity of the Smelter is dedicated to the tolling of the
customer's alumina.
2. EMPLOYEE BENEFIT PLANS
Goldendale has a profit sharing plan for its hourly and salaried employees.
All Goldendale employees are eligible participants in this plan upon completion
of a probationary period. The plan provides for payments equal to a percentage
of Goldendale's profits, as defined. These amounts are to be distributed to
eligible participants on or before March 31 following the Company's year-end.
For the years ended December 31, 1995 and the period from January 1, 1996
through May 21, 1996, the Company recorded approximately $1,480 and $570,
respectively, of expense related to this plan.
Goldendale also has a 401(k) profit sharing plan under which employees may
elect to defer pay, subject to statutory limits; Goldendale also makes matching
contributions for non-bargaining employees on the basis of percentages specified
in the plan. Goldendale maintains a separate profit sharing retirement plan (the
"DC Plan") which provides retirement benefits for substantially all of its
employees. The DC Plan allows for discretionary contributions by Goldendale as
determined on an annual basis. For the year ended December 31, 1995 and the
period from January 1, 1996, Goldendale recorded approximately $490 and $290 of
expense for plan contributions.
Goldendale had various stock based compensation agreements (the
"Agreements") with certain key employees. The Agreements include stock
appreciation rights, "phantom" shares of the Company's common stock and stock
options. The value of the compensation paid under the Agreements is a function
of the amount by which the fair market value of Goldendale's common stock
increases during the performance period. During the year ended December 31, 1995
and the period from January 1, 1996 through May 21, 1996, Goldendale incurred
expense related to the Agreements of $2,512 and $2,298. On May 22, 1996, the
employees covered by the Agreements waived their rights thereto in exchange for
a five-year pay-out of amounts then owing under the Agreements.
F-30
<PAGE> 147
GOLDENDALE SMELTER DIVISION OF COLUMBIA ALUMINUM COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The Columbia Aluminum Corporation Employee Stock Ownership Plan (ESOP) was
originally available to substantially all Goldendale employees upon completion
of 1,000 hours of service. Employer contributions to the ESOP were discretionary
as approved by the Board of Directors. No employee contributions were made to
the ESOP. Participants vest in the assets of the ESOP at 25% per year. Upon
termination, plan participants that receive stock are granted an option to sell
the stock to the ESOP in accordance with the ESOP agreement. All stock owned by
the ESOP was allocated to plan participant accounts. On May 22, 1996, all CAC
common stock owned by plan participants was exchanged for cash and GHC Series A
Preferred Stock.
3. COMMITMENTS AND CONTINGENCIES
Goldendale, in the regular course of business, is involved in
investigations and claims by various regulatory agencies. Goldendale is also
engaged in various legal proceedings incidental to its normal business
activities. Management does not believe that the ultimate resolution of these
investigations, claims and legal proceedings will have a material effect on
Goldendale's financial position, results of operations or cash flows.
At December 31, 1995, Goldendale had entered into contracts for the annual
purchase of 70,000 to 150,000 tons of certain raw materials for delivery through
December 1998. The purchase price is to be adjusted monthly throughout the term
of the contracts based upon the average market price of aluminum. During 1995,
Goldendale entered into an agreement pursuant to which it committed to purchase
a minimum amount of power on an annual basis through September 2001. The
estimated minimum future commitment under this agreement is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ -------
<S> <C>
1997.......................................... $20,000
1998.......................................... 33,000
1999.......................................... 33,000
2000.......................................... 40,000
2001.......................................... 40,000
</TABLE>
During the year ended December 31, 1995, Goldendale accrued a liability of
approximately $1,036 for environmental remediation activities. Goldendale's
estimate of this liability was based on a remediation study conducted by
independent engineering consultants. The total cost of remediation is estimated
at $2.5 million, however, under a court decree Goldendale is responsible for
only a portion of the total. The remaining cost is the responsibility of prior
owners of the Smelter.
During 1995, the Internal Revenue Service (IRS) completed audits of CAC's
1990 and 1991 federal income tax returns. Based upon its audits, the IRS
indicated proposed adjustments to these returns resulting in additional taxes
due of approximately $2.8 million for tax year 1990 and approximately $1.6
million for tax year 1991. The adjustments proposed relate primarily to
differences between the Company and the IRS as to the tax year when certain
deductions may be taken. The Company is currently appealing the results of the
audits. Management of the Company does not believe that the ultimate
F-31
<PAGE> 148
GOLDENDALE SMELTER DIVISION OF COLUMBIA ALUMINUM COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
resolution of these audits will have a material effect upon its financial
position or results of operations.
4. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1995 and the period from January 1, 1996
through May 21, 1996, the Smelter paid commissions of $2,467 and $1,034 to a
related party.
F-32
<PAGE> 149
APPENDICES
SELECTED FINANCIAL DATA OF NORTHWEST ALUMINUM COMPANY
AND GOLDENDALE HOLDING COMPANY
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NORTHWEST
Revenues....................... $208,462 $289,693 $244,839 $296,271 $294,698
Net income (loss) from
continuing operations........ 2,349 23,696 9,778 367 (3,483)
Total assets................... 98,336 113,656 109,203 131,735 118,768
Total long-term debt........... 17,977 3,000 63,606 64,040 102,352
Cash dividends................. 2,750 4,000 67,587 2,932 --
GOLDENDALE(1)
Revenues....................... 128,199 201,601 177,456
Net income from continuing
operations................... 9,175 18,290 842
Total assets................... 241,560 215,236 204,171
Total long-term debt........... 119,960 67,401 61,719
Goldendale Holding Company
Preferred Stock.............. 29,663 29,663 29,663
GOLDENDALE SMELTER DIVISION OF
COLUMBIA COMPANY(1)
Revenues....................... 138,361 214,730 83,530
Net income from continuing
operations................... 3,641 13,505 6,148
Total assets................... 151,358 144,618
Total long-term debt........... 3,563 967
</TABLE>
- -------------------------
(1) On May 22, 1996, Brett Wilcox acquired all of the issued and outstanding
shares of Columbia Aluminum Corporation (CAC) in a transaction accounted for
as a purchase. Subsequent to the acquisition, CAC's name was changed to
Goldendale Aluminum Company. Information presented above for the Goldendale
Smelter Division of Columbia Aluminum Company represents the assets and
operations of the Goldendale Smelter as if it operated as a stand-alone
business and contains, in management's judgment, all necessary adjustments
required for a fair presentation. Due to the acquisition on May 22, 1996, a
new basis of accounting was established for the acquired entity.
Accordingly, amounts on a postacquisition basis are not comparable to those
on a preacquisition basis. See Note 1 to the Consolidated Financial
Statements of Golden Northwest Aluminum and Subsidiaries.
A-1
<PAGE> 150
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For an overview of the consolidated company and information about
seasonality and inflation, effect of recently issued accounting standards and
year 2000 compliance, see Management's Discussion and Analysis of Financial
Conditions and Results of Operations beginning on page 75 of the prospectus.
NORTHWEST ALUMINUM COMPANY
RESULTS OF OPERATIONS
The following table sets forth combined statement of income data as a
percentage of revenues for 1996, 1997 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0%
Cost of revenues................................... 93.1% 95.3% 95.9%
----- ----- -----
Gross margin....................................... 6.9% 4.7% 4.1%
General and administrative expenses................ 2.2% 2.6% 2.8%
----- ----- -----
Operating income................................... 4.7% 2.1% 1.3%
Interest expense................................... (1.0)% (2.2)% (2.5)%
Other income (expense), net........................ 0.3% 0.3% 0.0%
----- ----- -----
Net other expenses................................. (0.7)% (1.9)% (2.5)%
----- ----- -----
Income before extraordinary item................... 4.0% 0.2% 1.2%
----- ----- -----
Extraordinary item................................. 0.0% 0.0% 0.0%
Net income (loss).................................. 4.0% 0.2% (1.2)%
----- ----- -----
</TABLE>
1998 COMPARED TO 1997
Primary aluminum production under our tolling contract remained relatively
level at 182.0 million pounds in 1997 and 181.2 million pounds in 1998.
Shipments of non-tolled value-added aluminum products were 263.9 million pounds
and 270.5 million pounds for 1997 and 1998, respectively. The increase in
non-tolled value-added products resulted from an increase in shipments of
value-added billet.
Revenues decreased slightly from $296.3 million in 1997 to $294.7 million
in 1998. Revenues from our tolling contract remained relatively level at $88.6
million in 1997 and $88.2 million in 1998. Sales of non-tolled value-added
products decreased slightly from $207.7 million in 1997 to $206.5 million in
1998, due to the decrease in market aluminum prices in 1998, but offset by the
increase in shipments of those products.
Gross margin decreased from $13.8 million in 1997 to $12.0 million in 1998,
a decrease of 13.0%. As a percentage of revenues, gross margin declined from
4.7% to 4.1%. Gross margin declined primarily due to the decrease in market
prices of aluminum.
General and administrative expenses increased slightly from $7.8 million in
1997 to $8.3 million in 1998. As a percentage of revenues, general and
administrative expenses increased from 2.6% to 2.8%. The increase resulted
primarily from the $1.5 million write-off of a long-term trade receivable. This
write-off related to a long-term trade receivable
B-1
<PAGE> 151
from a long-standing customer that experienced liquidity problems. Sales of
aluminum to this customer were discontinued when the account aged beyond reason.
However, we continue to utilize this customer for access to the Texas market
through their marketing, warehouse and delivery services. Attempts in 1998 to
obtain a secured interest in the real properties of this customer proved
unsuccessful. The account was written down to $1.5 million, the amount perceived
to be collectable based on a thorough review of the customer's financial
condition. We perform ongoing evaluations of the financial condition of this and
other customers as part of our normal credit function. This coupled with a
relatively small number of customers, with whom we are in continuous contact,
enables us to minimize our exposure to credit risk.
Interest expense increased from $6.4 million in 1997 to $7.5 million in
1998, or 17.2%, primarily as a result of higher levels of indebtedness in 1998.
In December 1998, our parent company, Golden Northwest Aluminum, completed an
offering of $150 million of 12% first mortgage notes, on which we are a
guarantor. Additionally, they received a $20 million loan under a credit
arrangement with Hydro, of which we are also a guarantor. Among other things,
the proceeds from the first mortgage notes were used to retire our credit
facility debt in December 1998. As a result of these borrowings, we anticipate a
significant increase in interest expense in 1999.
As a result of the foregoing factors, we reported a net loss of $3.5
million in 1998 versus net income of $0.4 million in 1997.
1997 COMPARED TO 1996
Primary aluminum production under our tolling contract remained relatively
level at 183.3 million pounds in 1996 and 182.0 million pounds in 1997,
generating $98.2 million in 1996 and $88.6 million in 1997. The decrease of 9.8%
was primarily due to a decrease in the average toll charge in 1997. Shipments of
non-tolled value-added aluminum products increased from 211.6 million pounds in
1996 to 263.9 million pounds in 1997, or 24.7%. This was primarily due to
increased sales. Revenues from these products totaled $146.6 million in 1996 and
$207.7 million in 1997, an increase of 41.7%, primarily stemming from increased
volumes and from attaining higher premiums on those products.
Revenues increased from $244.8 million in 1996 to $296.3 million in 1997,
an increase of 21.0%. The increase in revenues resulted primarily from the
increased volumes of non-tolled product and higher premiums on those products.
Gross margin decreased from $17.0 million in 1996 to $13.8 million in 1997,
a decrease of 18.8%. As a percentage of revenues, gross margin decreased from
6.9% in 1996 to 4.7% in 1997. The decrease in gross margin resulted primarily
from a $9.6 million decrease in tolling revenue, partially offset by a decrease
in process power costs of $6.9 million.
General and administrative expenses increased from $5.3 million in 1996 to
$7.8 million in 1997, an increase of 47.2%. The increase resulted primarily from
increased employee costs. As a percentage of revenues, general and
administrative expenses increased slightly from 2.2% to 2.6%.
Interest expense increased from $2.5 million in 1996 to $6.4 million in
1997. This increase of 156.0% was primarily as a result of a full year of
indebtedness incurred as a result of a dividend distribution to our shareholder
to accommodate his acquisition of Goldendale Holding Company.
B-2
<PAGE> 152
As a result of the foregoing factors, we reported net income of $0.4
million in 1997 versus net income of $9.8 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our cash and capital requirements have been satisfied through
cash generated from operating activities and borrowings under our primary credit
facilities. Before December 21, 1998, we operated under a credit agreement
between us and other companies owned by Brett Wilcox and a bank. It consisted of
term loans and a revolving credit facility, was scheduled to mature in 2001, and
was secured by substantially all of our assets. See Note 4 to the Financial
Statements. Our credit facilities were refinanced in December 1998 with proceeds
from the sale of first mortgage notes of our parent company, Golden Northwest
Aluminum.
Our liquidity and capital needs relate primarily to payment of principal
and interest on outstanding borrowings, the funding of capital expenditures, and
the funding of distributions to our sole shareholder to pay income taxes. These
needs also relate to working capital and other general corporate requirements,
including the incremental working capital needs anticipated in connection with
the potential termination of the Glencore tolling agreement in December 1999. We
are upgrading our management information systems, including hardware and
software, to a fully integrated enterprise resource planning system. We are
executing a transition to the SAP R/3 enterprise resource planning system.
Furthermore, we are subject to a number of contingencies and uncertainties,
including a potential income tax deficiency.
Out statement of cash flows for the periods indicated are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1996 1997 1998
------- ------ -------
<S> <C> <C> <C>
Net cash provided by operating activities......... $18,160 $8,755 $11,619
Net cash used in investing activities............. (12,833) (9,235) (8,563)
Net cash used in financing activities............. (3,841) (873) (2,990)
Increase (decrease) in cash....................... 1,486 (1,353) 66
</TABLE>
Net cash provided by operating activities was $18.2 million, $8.8 million
and $11.6 million for 1996, 1997 and 1998, respectively. Of the net cash
provided by operating activities during 1998, $5.0 million was attributable to
our net loss, as adjusted for non-cash charges. Also attributing was a decrease
in accounts receivable and inventories of $12.3 million, offset by a decrease in
accounts payable and accrued expenses of $6.5 million. The decrease in accounts
receivable, inventories and accounts payable was primarily due to the decrease
in market aluminum prices in 1998. The net cash provided by operating activities
during 1997 was primarily attributable to net income, as adjusted for non-cash
charges, of $7.2 million, and an increase in accounts payable and accrued
expenses of $23.0 million, offset by an increase in accounts receivable and
inventories of $23.7 million. The increase in inventories and accounts payable
was due to a temporary modification of the Glencore metal repurchase terms which
allowed us to extend the timing of payments due Glencore. The net cash provided
by operating activities during 1996 was primarily attributable to net income, as
adjusted for non-cash charges, of $16.7 million, and a decrease in inventories
of $12.4 million. Offsetting was a decrease in accounts payable and accrued
expenses of $5.7 million and an increase in other assets of $5.3 million.
B-3
<PAGE> 153
Net cash used in investing activities was $8.5 million in 1998, compared to
net cash used in investing activities of $9.2 million in 1997 and $12.8 million
in 1996. Cash used in investing activities in 1998 was primarily attributable to
capital expenditures of $7.7 million. Cash used in investing activities in 1997
was primarily to capital expenditures of $3.8 million, and combined advances to
our shareholder and a related company of $5.6 million. Cash used in investing
activities in 1996 was primarily attributable to capital expenditures of $12.4
million.
Net cash used in financing activities was $3.0 million in 1998, $0.9
million in 1997, and $3.8 million in 1996. Net cash used in financing activities
in 1998 was primarily attributable to $2.9 million in net repayments on our
credit facilities. Net cash used in financing activities in 1997 was primarily
attributable to $2.9 million paid in dividends, offset by $2.1 million provided
from net borrowings on our credit facility. Net cash used in financing
activities in 1996 was primarily attributable to $63.7 million in net borrowings
provided under our credit facility, offset by $67.6 million paid in dividends
primarily for the acquisition by our shareholder of Goldendale Holding Company.
Annual dividends paid to our shareholder approximated his personal liability for
federal and state income taxes related to our operations. In 1996 additional
dividends of $44.5 million were paid to our shareholder that were used in his
acquisition of Goldendale Holding Company.
We believe cash flow from operations, available borrowings under our
revolving credit facility and cash on hand will provide adequate funds for our
foreseeable working capital needs, planned capital expenditures and debt service
and other obligations through 2000.
Our ability to fund operations, make planned capital expenditures, make
principal and interest payments on indebtedness, and remain in compliance with
all of the financial covenants under our debt agreements will be dependent on
our future operating performance. Our future operating performance is dependent
on a number of factors, including aluminum prices, many of which are beyond our
control. These factors include prevailing economic conditions and financial,
competitive, regulatory and other factors affecting our business and operations,
and may be dependent on the availability of borrowings under our revolving
credit facility or other borrowings. We do not assure you our cash flow from
operations, together with other sources of liquidity, will be adequate
- to make required payments of principal and interest on our debt
- to finance anticipated capital expenditures or
- to fund working capital requirements.
If we do not have sufficient available resources to repay any of our
indebtedness when it becomes due and payable, we may need to refinance the
indebtedness. We do not assure you refinancing would be available or available
on reasonable terms.
B-4
<PAGE> 154
GOLDENDALE HOLDING COMPANY
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of income data as a
percentage of revenues for 1996, 1997 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0%
Cost of revenues................................... 79.5% 77.3% 91.2%
----- ----- -----
Gross margin....................................... 20.5% 22.7% 8.8%
General and administrative expenses................ 3.4% 3.7% 4.1%
----- ----- -----
Operating income................................... 17.1% 19.0% 4.7%
Interest expense................................... (5.4)% (5.1)% (3.6)%
Other income (expense), net........................ 0.6% 1.8% 1.1%
----- ----- -----
Net other expenses................................. (4.8)% (3.3)% (2.5)%
----- ----- -----
Income before income taxes......................... 12.3% 15.7% 2.2%
Income tax expense................................. 5.2% 6.6% 1.7%
----- ----- -----
Income (loss) before extraordinary item............ 7.2% 9.1% 0.5%
Extraordinary item................................. 0.0 0.0 (0.5)%
----- ----- -----
Net income (loss).................................. 7.2% 9.1% (0.1)%
----- ----- -----
</TABLE>
1998 COMPARED TO 1997
Primary and value-added aluminum produced under our tolling contract
decreased less than 1%, from 348.4 million pounds in 1997 to 345.1 million
pounds in 1998. Revenues decreased from $201.6 million in 1997 to $177.5 million
in 1998, a decrease of 12.0% primarily due to the decrease in market aluminum
prices in 1998.
Gross margin decreased from $45.7 million in 1997 to $15.6 million in 1998,
a decrease of 65.9%. As a percentage of revenues, gross margin declined from
22.7% to 8.8%. Gross margin declined due primarily to the decreased market
prices of aluminum. In addition, power costs increased as a result of
contractual terms in the power contract with the BPA which increased the amount
of power required to be purchased at predetermined prices from BPA. Power costs
in 1998 have been at rates we expect to continue through 2001.
General and administrative expenses decreased slightly from $7.5 million in
1997 to $7.3 million in 1998.
Interest expense decreased from $10.3 million in 1997 to $6.4 million in
1998, or 37.9%, primarily as a result of the lower average level of debt
outstanding in 1998. In December 1998, our parent company, Golden Northwest
Aluminum, completed an offering of $150 million of 12% first mortgage notes, on
which we are a guarantor. Additionally, they received a $20 million loan under a
credit arrangement with Hydro, of which we are also a guarantor. Among other
things, we used the proceeds from the first mortgage notes to retire our
then-existing indebtedness under our prior credit facility. As a result of the
debt extinguishment in 1998, we incurred an extraordinary loss of $1.5 million,
which represented the unamortized balance of deferred finance costs associated
with the retired
B-5
<PAGE> 155
debt. As a result of these borrowings, we anticipate a significant increase in
interest expense in 1999.
Income tax expense decreased from $13.3 million in 1997 to $3.0 million in
1998, or 77.4%, primarily as a result of a decrease in taxable income.
As a result of the foregoing factors, we reported a net loss of $0.1
million in 1998 versus net income of $18.3 million in 1997.
1997 COMPARED TO 1996
The results of operations for 1997 reflect the inclusion of the results of
operations for the entire year of 1997, as compared with an approximately
seven-month period for 1996.
Primary and valued added aluminum produced under our tolling contract
increased from 132.4 million pounds in 1996 to 348.4 million pounds in 1997,
generating $67.1 million in 1996 and $201.6 million in 1997. This increase
resulted primarily from the inclusion of a full year of operations in 1997 as
compared to a partial year in 1996 and the Hydro tolling agreement, effective
January 1, 1997, under which we agreed to utilize 100% of our capacity to
produce tolled product for Hydro. Shipments of non-tolled value-added aluminum
products decreased from 62.5 million pounds in 1996 to zero pounds in 1997, as a
result of the shift from non-tolled value-added product to tolled product.
Revenues from these products totaled $61.1 million in 1996.
Revenues increased from $128.2 million in 1996 to $201.6 million in 1997,
an increase of 57.3%. The increase in revenues resulted primarily from the
inclusion of a full year of operations in 1997.
Gross margin increased from $26.3 million in 1996 to $45.7 million in 1997,
an increase of 73.8%. As a percentage of revenues, gross margin increased 10.7%
between the two years, from 20.5% in 1996 to 22.7% in 1997. The increase in
gross margin expressed in dollars resulted primarily from the inclusion of a
full year of operations in 1997.
General and administrative expenses increased from $4.4 million in 1996 to
$7.5 million in 1997, an increase of 70.5%. The increase resulted primarily from
the inclusion of the entire year of 1997. As a percentage of revenues, general
and administrative expenses increased slightly from 3.4% to 3.7%.
Interest expense increased from $6.9 million in 1996 to $10.3 million in
1997. This increase of 49.3%, was primarily as a result of a full year of
indebtedness incurred as a result of the recapitalization necessary for our
present shareholder to acquire us. This was partially offset by our continued
pay down of our previous credit facility using cash flow from operations and
asset sales.
Other income increased from $0.8 million in 1996 to $3.7 million in 1997
primarily as a result of a $2.6 million gain recognized by us on the sale of two
power generation turbines in 1997.
Income tax expense increased from $6.6 million in 1996 to $13.3 million in
1997 primarily as a result of an increase in taxable income and the inclusion of
the entire year in 1997. As a result of the foregoing factors, we reported net
income of $9.2 million in 1996 versus $18.3 million in 1997.
B-6
<PAGE> 156
As a result of the foregoing factors, we reported net income of $9.2
million in 1996 versus $18.3 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our cash and capital requirements have been satisfied through
cash generated from operating activities and borrowings under our primary credit
facilities. Before December 21, 1998, we operated under credit facilities that
were scheduled to mature in 2001 and consisted of total borrowings at December
21, 1998 of $61.7 million under term loans and revolving credit facilities. See
Note 5 to the our Financial Statements. We refinanced these credit facilities
with proceeds from the sale by our parent company of first mortgage notes in
December 1998.
Our new credit facility with BankBoston consists of a $75.0 million senior
secured revolving credit facility collateralized by all of the inventory,
accounts receivable and other rights to payment. Availability under the
revolving line of credit is controlled by a borrowing base formula based on
eligible receivables and inventory, and is further limited by a minimum excess
availability of $15 million. We had no amounts outstanding under this credit
facility at December 31, 1998.
Our liquidity and capital needs relate primarily to payment of principal
and interest on outstanding borrowings, and the funding of capital expenditures,
including our facilities investment program. Subject to reasonable market
aluminum prices, we will require approximately $11.0 million in 1999 for the
facilities investment program, most of which will be used in the third and
fourth quarters. The first stage of the facilities investment program consists
of an expansion of the casthouse, and a 30-cell demonstration of new cell line
technology. We have borrowed $20.0 million from Hydro under a note purchase
agreement to partially finance this facilities investment program. Our liquidity
and capital needs also relate to working capital and other general corporate
requirements. Additionally, our preferred stock became redeemable at our
discretion after December 31, 1998. We anticipate that the funds necessary to
redeem the preferred stock, if we so elect, would be drawn from our revolving
credit facility with BankBoston. The initial redemption price for the preferred
stock will be $30.4 million plus any accrued but unpaid dividends, which totaled
$9.5 million at December 31, 1998. We are also upgrading our management
information systems, including hardware and software, to a fully integrated
enterprise resource planning system. We are executing a transition to the SAP
R/3 enterprise resource planning system. Furthermore, we are subject to a number
of contingencies and uncertainties, including a potential income tax deficiency.
Out statement of cash flows for the periods indicated are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1997
------- ------- -------
<S> <C> <C> <C>
Net cash provided by operating activities........ $11,742 $47,495 $16,953
Net cash provided by (used in) investing
activities..................................... (6,302) 2,144 (9,940)
Net cash used in financing activities............ (1,034) (53,372) (7,344)
Increase (decrease) in cash...................... 4,406 (3,733) (331)
</TABLE>
Net cash provided by operating activities was $11.7 million, $47.5 million
and $17.0 million for 1996, 1997 and 1998, respectively. The net cash provided
by operating activities during 1998 was primarily attributable to our net loss,
as adjusted for non-cash charges, of $15.2 million, and a decrease in accounts
receivable and inventories of
B-7
<PAGE> 157
$6.5 million. This was offset by a decrease in accounts payable, accrued
expenses and income taxes payable of $4.3 million. The decrease in accounts
receivable, inventories and accounts payable was primarily due to the decrease
in market aluminum prices in 1998. The net cash provided by operating activities
during 1997 was primarily attributable to net income, as adjusted for non-cash
charges, of $29.3 million, and a decrease in accounts receivable and an increase
in accrued expenses of $20.5 million. This was offset by an increase in
inventories and a decrease in accounts payable of $1.5 million. The net cash
provided by operating activities during 1996 was primarily attributable to net
income, as adjusted for non-cash charges, of $19.7 million, and a decrease in
inventories of $10.4 million. Offsetting was a decrease in accounts payable and
accrued expenses of $14.9 million and an increase in accounts receivable,
prepaids and other assets of $3.9 million. The decrease in inventories and
accounts payable was primarily due to the restructuring of the tolling agreement
with Hydro whereby Hydro committed to use our entire facility, thereby
significantly reducing our requirements to purchase and hold our own inventory.
Net cash used in investing activities was $9.9 million in 1998, compared to
net cash provided by investing activities of $2.1 million in 1997 and net cash
used in investing activities of $6.3 million in 1996. Cash used in investing
activities in 1998 was primarily attributable to capital expenditures of $11.1
million. Cash used in investing activities in 1997 primarily resulted from
proceeds of $12.6 million received by us through the sale of certain of our
power generation assets, offset by capital expenditures of $10.4 million. Cash
used in investing activities in 1996 was primarily attributable to capital
expenditures of $7.4 million.
Net cash used in financing activities was $7.3 million in 1998, compared to
$53.4 million in 1997, and $1.0 million in 1996. Net cash used in financing
activities in 1998 was primarily attributable to $11.5 million in net repayments
on our credit facilities and deferred compensation notes, offset by $4.1 million
of net borrowings from our parent company. Net cash used in financing activities
in 1997 was primarily attributable to $52.6 million in net repayments on our
credit facility. Net cash used in financing activities in 1996 was primarily
attributable to $0.6 million in net borrowings under our credit facilities.
We believe cash flow from operations, available borrowings under our
revolving credit facility and under our note purchase agreement with Hydro and
cash on hand will provide adequate funds for our foreseeable working capital
needs, planned capital expenditures and debt service and other obligations
through 2000.
Our ability to fund operations, make planned capital expenditures, such as
our facilities investment program, make principal and interest payments on the
notes, and remain in compliance with all of the financial covenants under our
debt agreements will be dependent on our future operating performance. Our
future operating performance is dependent on a number of factors, including
aluminum prices, many of which are beyond our control. These factors include
prevailing economic conditions and financial, competitive, regulatory and other
factors affecting our business and operations, and may be dependent on the
availability of borrowings under our revolving credit facility or other
B-8
<PAGE> 158
borrowings. We do not assure you our cash flow from operations, together with
other sources of liquidity, will be adequate
- to make required payments of principal and interest on the notes and our
other debt
- to finance anticipated capital expenditures
- to fund working capital requirements or
- to fund the possible redemption of all outstanding shares of the
preferred stock.
If we do not have sufficient available resources to repay any of our
indebtedness when it becomes due and payable, we may need to refinance the
indebtedness. We do not assure you refinancing would be available or available
on reasonable terms.
B-9
<PAGE> 159
INDEX TO FINANCIAL STATEMENTS OF SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC.
Report of Independent Certified Public Accountants.......... C-2
Balance Sheets.............................................. C-3
Statements of Operations.................................... C-4
Statements of Shareholder's Equity.......................... C-5
Statements of Cash Flows.................................... C-6
Summary of Significant Accounting Policies.................. C-7 to C-10
Notes to Combined Financial Statements...................... C-11 to C-16
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
Report of Independent Certified Public Accountants.......... C-17
Consolidated Balance Sheets................................. C-18
Consolidated Statements of Operations....................... C-19
Consolidated Statements of Shareholders' Equity............. C-20
Consolidated Statements of Cash Flows....................... C-21
Summary of Significant Accounting Policies.................. C-22 to C-25
Notes to Consolidated Financial Statements.................. C-26 to C-34
</TABLE>
C-1
<PAGE> 160
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Northwest Aluminum Company
And Northwest Aluminum Specialties, Inc.
The Dalles, Oregon
We have audited the accompanying combined balance sheets of Northwest
Aluminum Company and Northwest Aluminum Specialties, Inc. as of September 30,
1997 and 1998, and the related combined statements of operations, shareholder's
equity, and cash flows for each of the three years in the period ended September
30, 1998. These combined financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Northwest Aluminum
Company and Northwest Aluminum Specialties, Inc. as of September 30, 1997 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended September 30, 1998 in conformity with generally
accepted accounting principles.
BDO Seidman, LLP
Spokane, Washington
February 8, 1999
C-2
<PAGE> 161
NORTHWEST ALUMINUM COMPANY AND
NORTHWEST ALUMINUM SPECIALTIES, INC.
COMBINED BALANCE SHEETS
ASSETS (Note 4)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 548 $ 614
Trade accounts receivable, less allowance for doubtful
accounts of $1,000.................................. 43,784 34,865
Current portion of receivable due from related company
(Note 10)........................................... -- 2,126
Inventories (Note 1)................................... 40,071 35,146
Prepaid expenses....................................... 270 363
-------- --------
Total current assets..................................... 84,673 73,114
-------- --------
Property, plant and equipment, net (Notes 2 and 4)....... 37,577 38,515
Advances to shareholder (Note 10)........................ 2,000 2,000
Receivable due from related company, less current portion
(Note 10).............................................. 4,034 2,826
Other assets, net (Note 3)............................... 3,451 2,313
-------- --------
$131,735 $118,768
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current portion of long-term debt (Note 4)............. $ 3,500 $ --
Trade accounts payable................................. 39,515 32,525
Accrued expenses (Note 7).............................. 4,781 5,227
-------- --------
Total current liabilities................................ 47,796 37,752
Long-term debt less current portion (Note 4)............. 64,040 64,600
Total liabilities........................................ 111,836 102,352
-------- --------
Commitments and Contingencies (Notes 5, 6 and 8)
Shareholder's Equity:
Common stock, no par value; 2,000 shares authorized,
issued and outstanding.............................. 38 38
Additional paid-in capital............................. 20,736 20,736
Accumulated deficit.................................... (875) (4,358)
-------- --------
Total shareholder's equity............................... 19,899 16,416
-------- --------
$131,735 $118,768
======== ========
</TABLE>
See accompanying summary of significant accounting policies
and notes to the combined financial statements.
C-3
<PAGE> 162
NORTHWEST ALUMINUM COMPANY AND
NORTHWEST ALUMINUM SPECIALTIES, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1997 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues (Notes 5 and 10)..................... $244,839 $296,271 $294,698
Cost of revenues.............................. 227,858 282,439 282,707
-------- -------- --------
Gross margin.................................. 16,981 13,832 11,991
General and administrative expenses........... 5,345 7,814 8,293
-------- -------- --------
Operating income.............................. 11,636 6,018 3,698
-------- -------- --------
Other income (expense):
Interest expense (Note 4)................... (2,516) (6,406) (7,463)
Other income, net........................... 658 755 282
-------- -------- --------
Other income (expense), net................... (1,858) 5,651 7,181
-------- -------- --------
Net income (loss)............................. $ 9,778 $ 367 $ (3,483)
======== ======== ========
</TABLE>
See accompanying summary of significant accounting policies
and notes to the combined financial statements.
C-4
<PAGE> 163
NORTHWEST ALUMINUM COMPANY AND
NORTHWEST ALUMINUM SPECIALTIES, INC.
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK ADDITIONAL EARNINGS SHARE-
--------------- PAID-IN (ACCUMULATED HOLDER'S
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
------ ------ ---------- ------------ --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1995, as
adjusted (Note 2)............. 2,000 $38 $20,736 $ 59,499 $ 80,273
Dividends paid on common
stock......................... -- -- -- (67,587) (67,587)
Net income...................... -- -- -- 9,778 9,778
----- --- ------- -------- --------
Balance at September 30, 1996... 2,000 38 20,736 1,690 22,464
Dividends paid on common
stock......................... -- -- -- (2,932) (2,932)
Net income...................... -- -- -- 367 367
----- --- ------- -------- --------
Balance at September 30, 1997... 2,000 38 20,736 (875) 19,899
Net loss........................ -- -- -- (3,483) (3,483)
----- --- ------- -------- --------
Balance at September 30, 1998... 2,000 $38 $20,736 $ (4,358) $ 16,416
===== === ======= ======== ========
</TABLE>
See accompanying summary of significant accounting policies
and notes to combined financial statements.
C-5
<PAGE> 164
NORTHWEST ALUMINUM COMPANY AND
NORTHWEST ALUMINUM SPECIALTIES, INC.
COMBINED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $ 9,778 $ 367 $ (3,483)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization......... 6,952 7,188 6,865
Loss (gain) on disposal of assets..... -- (382) 68
Provision for bad debts............... -- -- 1,500
Change in assets and liabilities:
Trade accounts receivable............. 405 (14,595) 7,419
Inventories........................... 11,880 (9,076) 4,925
Prepaid expenses...................... 151 (65) (93)
Other assets.......................... (5,293) 2,280 962
Trade accounts payable................ (1,192) 23,976 (6,990)
Accrued expenses...................... (4,521) (938) 446
--------- --------- ---------
Net cash provided by (used in) operating
activities............................... 18,160 8,755 11,619
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of assets............. -- 233 10
Acquisition of property, plant and
equipment............................. (12,430) (3,837) (7,655)
Advances to shareholder.................. -- (2,000) --
Receivable due from related company...... (403) (3,631) (918)
--------- --------- ---------
Net cash used in investing activities.... (12,833) (9,235) (8,563)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under revolving credit
facilities............................ 183,208 169,438 191,166
Repayments under revolving credit
facilities............................ (143,212) (165,504) (189,702)
Principal repayments of term loan
facilities............................ (1,250) (1,875) (4,404)
Borrowings under term loan facilities.... 25,000 -- --
Dividends paid........................... (67,587) (2,932) --
Loan fees paid........................... -- -- (50)
--------- --------- ---------
Net cash used in financing activities...... (3,841) (873) (2,990)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.............................. 1,486 (1,353) 66
Cash and cash equivalents, beginning of
period................................... 415 1,901 548
--------- --------- ---------
Cash and cash equivalents, end of period... $ 1,901 $ 548 $ 614
========= ========= =========
Supplemental Disclosures of Cash Flow Information (Note 9)
</TABLE>
See accompanying summary of significant accounting policies
and notes to combined financial statements.
C-6
<PAGE> 165
NORTHWEST ALUMINUM COMPANY AND
NORTHWEST ALUMINUM SPECIALTIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(DOLLARS IN THOUSANDS)
PRINCIPLES OF COMBINATION, BASIS OF PRESENTATION, AND OPERATIONS
The financial statements are presented on a combined basis as Northwest
Aluminum Company and Northwest Aluminum Specialties, Inc. (the "Companies") are
under common ownership and common management. All intercompany transactions have
been eliminated in combination. Approximately 79% of the Companies' labor force
is subject to collective bargaining agreements.
The operations of the Companies consist primarily of the smelting
conversion of alumina to aluminum under a tolling arrangement with an alumina
supplier, processing of aluminum into primary products, and the sale of those
products. The operations are located in the Pacific Northwest on the Columbia
River.
REVENUE RECOGNITION
Revenues for the conversion of alumina and processing of aluminum under
tolling arrangements are recognized upon completion of the tolling process.
Revenues from the sale of aluminum products are recognized upon shipment.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method, except for certain supply inventories that
are based upon the weighted average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. For financial reporting purposes, the costs of
plant and equipment are depreciated over the estimated useful lives of the
assets, which range from five to twenty-five years, using the straight-line
method.
ASSET IMPAIRMENT
The Companies evaluate their long-lived assets for financial impairment and
continue to evaluate them as events or changes in circumstances indicate that
the carrying amount of such assets may not be fully recoverable. The Companies
evaluate the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such evaluations indicate that the future
undiscounted cash flows of certain long-lived assets are not sufficient to
recover the carrying value of such assets, the assets are adjusted to their fair
values.
C-7
<PAGE> 166
NORTHWEST ALUMINUM COMPANY AND
NORTHWEST ALUMINUM SPECIALTIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(DOLLARS IN THOUSANDS)
INTEREST COSTS
The Companies follow the policy of capitalizing interest as a component of
the cost of property, plant and equipment constructed for its own use. Interest
costs of $147, $0 and $44 were capitalized during the years ended September 30,
1996, 1997 and 1998.
INCOME TAX
The Companies have elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code. Under those provisions, the Companies do not pay
federal or state corporate income taxes on their taxable income. Instead, the
shareholder is liable for individual federal and state income taxes on the
Companies' taxable income. It is the Companies' intention to pay dividends to
the shareholder in an amount no less than the sum of these federal and state
income taxes.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Companies to a
concentration of credit risk consist of cash and cash equivalents and trade
accounts receivable. The Companies place their cash and cash equivalents with
various high quality financial institutions; these deposits may exceed federally
insured limits at various times throughout the year. The Companies sell their
products to various customers involved in the manufacturing of aluminum products
located throughout the United States. Credit risk arising from these receivables
is controlled through credit approval, credit limit and monitoring procedures.
Receivables due from the Companies' primary tolling customer comprised 19% and
18% of the Companies' total trade accounts receivable at September 30, 1997 and
1998, respectively.
FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
The fair values of financial instruments have been determined through
information obtained from quoted market sources and management estimates. It is
management's belief that financial instruments held by the Companies approximate
fair market value. The Companies do not hold or issue financial instruments or
derivative financial instruments for trading purposes.
C-8
<PAGE> 167
NORTHWEST ALUMINUM COMPANY AND
NORTHWEST ALUMINUM SPECIALTIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(DOLLARS IN THOUSANDS)
The Companies have entered into an interest rate swap agreement for
purposes of minimizing exposure to interest rate risk. The differential between
the floating interest rate and the fixed interest rate, that is to be paid or
received, is recognized in interest expense as the floating interest rate
changes over the life of the agreement.
RESEARCH AND DEVELOPMENT COSTS
Expenditures associated with research and development for existing product
process improvements are expensed as incurred. These costs amounted to $898, $85
and $71 during the years ended September 30, 1996, 1997 and 1998, respectively.
CASH AND CASH EQUIVALENTS
For purposes of balance sheet classification and the statements of cash
flows, the Companies consider all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
ENVIRONMENTAL MATTERS
The Companies expense environmental expenditures related to existing
conditions resulting from past or current operations and from which no current
or future benefit is discernible. Expenditures which extend the life of the
related property or mitigate or prevent future environmental contamination are
capitalized. The Companies record a liability for an environmental matter when
it is probable and can be reasonably estimated.
DEBT ISSUE COSTS
Costs and fees incurred to obtain financing are capitalized and amortized
over the term of the related debt.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), Disclosures about
Segments of an Enterprise and Related Information, which supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise, establishes standards
for the new way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS No. 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The adoption of SFAS No. 131 by the Companies on October 1, 1997
had no impact on the Companies' financial position.
C-9
<PAGE> 168
NORTHWEST ALUMINUM COMPANY AND
NORTHWEST ALUMINUM SPECIALTIES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(DOLLARS IN THOUSANDS)
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ("SFAS No. 132"), Employers'
Disclosures about Pensions and other Postretirement Benefits, which standardizes
the disclosure requirements for pension and other postretirement benefits. The
adoption of SFAS No. 132 is not expected to materially impact the Companies'
current disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies
to recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Based on its current and planned future
activities relative to derivative instruments, the Companies believe that the
adoption of SFAS No. 133 on January 1, 2000 will not have a significant effect
on its financial statements.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134, ("SFAS No. 134") Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. This statement effectively
changes the way mortgage banking firms account for certain securities and other
interests they retain after securitizing mortgage loans that were held for sale.
The adoption of SFAS No. 134 is not expected to have a material impact on the
Companies' financial position.
In February 1999 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 135 ("SFAS No. 135"), Rescission of
Financial Accounting Standards Board No. 75 ("SFAS No. 75") and Technical
Corrections. SFAS No. 135 rescinds SFAS No. 75 and amends Statement of Financial
Accounting Standards Board No. 35. SFAS No. 135 also amends other existing
authoritative literature to make various technical corrections, clarify
meanings, or describe applicability under changed conditions. SFAS No. 135 is
effective for financial statements issued for fiscal years ending after February
15, 1999. The Companies believe that the adoption of SFAS No. 135 will not have
a significant effect on its financial statements.
C-10
<PAGE> 169
NORTHWEST ALUMINUM COMPANY AND
NORTHWEST ALUMINUM SPECIALTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Purchased metals and tolling in process.... $32,353 $27,343
Supplies and alloys........................ 4,887 4,943
Carbon plant materials..................... 2,441 2,470
Alumina.................................... 390 390
------- -------
$40,071 $35,146
======= =======
</TABLE>
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Land and improvements...................... $ 2,974 $ 2,974
Machinery and equipment.................... 51,059 54,331
Buildings and improvements................. 20,405 21,180
Capital projects in process................ 2,188 3,286
------- -------
76,626 81,771
Less accumulated depreciation.............. 39,049 43,256
------- -------
Property, plant and equipment, net......... $37,577 $38,515
======= =======
</TABLE>
During 1998, in connection with the preparation of financial statements to
be used by their parent company in a registration of debt securities, the
Companies changed their method of accounting for cell relining costs from
expensing such costs as incurred to capitalizing and amortizing these costs over
future periods. The Companies believe that the new method is preferable since it
improves the matching of revenues and costs as technological improvements have
extended the estimated period of economic benefit realized from cell relining.
The change has been applied by retroactively restating the accompanying combined
financial statements. The effect of this change was to decrease net income for
the years ended September 30, 1996 and 1997 by $1,695 and $1,271, respectively,
decrease net loss for the year ended September 30, 1998 by $191 and increase
retained earnings at October 1, 1995 by $8,580.
C-11
<PAGE> 170
NORTHWEST ALUMINUM COMPANY AND
NORTHWEST ALUMINUM SPECIALTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Long-term trade receivable................... $2,465 $1,714
Debt issue costs (net of accumulated
amortization of $294 and $520)............. 776 599
Other........................................ 210 --
------ ------
$3,451 $2,313
====== ======
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Revolving Credit Facility.................. $45,665 $47,129
Term Loan.................................. 21,875 17,471
------- -------
Long-term debt............................. 67,540 64,600
Less current portion....................... 3,500 --
------- -------
Long-term debt less current portion........ $64,040 $64,600
======= =======
</TABLE>
The Revolving Credit Facility and Term Loan are made pursuant to a credit
agreement between the Companies and a bank. Borrowings under the credit
agreement are secured by substantially all assets of the Companies. The
Revolving Credit Facility, which matures in 2001, provides for borrowings up to
$65 million. Revolving loan advances bear interest at either the bank's Base
Rate plus an applicable margin as defined in the credit agreement or the
Eurodollar Rate plus an applicable margin as defined in the credit agreement; at
September 30, 1998, interest rates on the Revolving Credit Facility were 9% on
the Base Rate portions and ranged from 7.4% to 8.5% on the Eurodollar rate
portions.
The Companies are subject to a quarterly commitment fee, ranging from 3/8%
to 1/2% per annum, on the unused portion of the Revolving Credit Facility.
The Term Loan, with a maturity date in 2001, bears interest at either the
bank's Base Rate plus an applicable margin as defined in the credit agreement or
the Eurodollar Rate plus an applicable margin as defined in the credit
agreement. At September 30, 1998, the interest rates on the Term Loan were 9.0%
on the Base Rate portion and ranged from 8.1% to 8.4% on the Eurodollar portion.
The lending agreement contains covenants related to minimum net worth,
interest coverage ratio, fixed charge coverage ratio and debt to income ratio.
In addition, the credit agreement limits capital spending, investments and
dividends. At September 30, 1998, the Companies were not in compliance with
their debt covenants. The Companies obtained a waiver for noncompliance. On
December 21, 1998, the Companies completed a refinance
C-12
<PAGE> 171
NORTHWEST ALUMINUM COMPANY AND
NORTHWEST ALUMINUM SPECIALTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
of the Revolving Credit Facility and Term Loan and, accordingly, the $5,000 of
principal due in 1999 has been classified as long-term debt. See Note 11.
During 1996, the Companies entered into an interest rate swap agreement, as
required by the credit agreement, which expires in 2001. The fixed interest rate
paid on the interest rate swap is 6.25%, covering, at September 30, 1998, $13.75
million notional principal amount of floating rate (Eurodollar) indebtedness of
the Companies. Although the Companies are exposed to credit loss on the interest
rate swap in the event of nonperformance by the counterparties, the Companies
estimate the likelihood of such nonperformance to be remote. At September 30,
1997 and 1998, the fair value of the interest rate swaps was approximately $117
and $268, respectively, which reflects the estimated amount that the Companies
would pay to terminate the contract. See Note 11.
5. ALUMINA TOLLING CONVERSION AGREEMENT
Northwest Aluminum Company has an agreement with Glencore, Ltd. (Glencore),
which continues through December 31, 1999, for the conversion of alumina to
aluminum for a tolling charge under which the entire production capacity of the
smelting facility is dedicated to the tolling of its supplier's alumina. The
supplier is obligated to supply, without charge, alumina sufficient to meet the
requirements for full operation. The tolling fee set forth in the contract is a
percentage of the price of aluminum quoted on the London Metals Exchange. This
tolling customer accounted for 40%, 30% and 30% of the Companies combined
revenues in 1996, 1997 and 1998, respectively.
6. EMPLOYEE BENEFIT PLANS
Profit Sharing Bonus Plan
The Companies have entered into a contractual agreement, which continues
through 2001, with the United Steelworkers of America, AFL-CIO, to pay annually
as additional compensation 20% of the combined net income of the Companies, as
adjusted in accordance with the agreement. The Companies total additional
compensation bonuses under this agreement amounted to approximately $2,100,
$1,300 and $829 in 1996, 1997 and 1998, respectively.
Retirement Benefit Plan
The Companies have also established a defined contribution 401(k) profit
sharing plan (the "401(k) Plan") covering substantially all employees under
which employees may elect to defer pay subject to statutory limits. The
Companies are committed to contribute the greater of $.25 per eligible hour
worked or 5% of the combined adjusted net income of the Companies. The Companies
may also make discretionary contributions to the 401(k) Plan. Total required and
discretionary contributions by the Companies to the 401(k) Plan amounted
approximately to $520, $560 and $341 in 1996, 1997 and 1998, respectively.
C-13
<PAGE> 172
NORTHWEST ALUMINUM COMPANY AND
NORTHWEST ALUMINUM SPECIALTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Profit sharing and bonuses................... $2,305 $1,351
Salaries and related expenses................ 1,851 1,346
Interest..................................... 150 709
Other........................................ 475 1,821
------ ------
$4,781 $5,227
====== ======
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Internal Revenue Service ("IRS") has audited the Companies' income tax
returns and has proposed to change the Companies' method of accounting for
certain expenditures that were deducted when incurred. The IRS has proposed to
capitalize and depreciate these expenditures over an estimated useful life. The
Companies are currently appealing the proposed change in accounting method
initiated by the IRS and believes it has various meritorious defenses. The sole
shareholder of the Companies has a potential personal liability of approximately
$2.7 to $5.3 million related to this IRS proposal. It is the Companies'
intention to reimburse the shareholder for any amount ultimately paid as a
result of the IRS proposal. The Companies' management does not believe that the
ultimate resolution of this tax dispute will have a material effect on the
Companies' results of operations.
The Companies, in the regular course of business, are involved in
investigations and claims by various regulatory agencies. The Companies are
engaged in various legal proceedings incidental to its normal business
activities. The Companies management does not believe that the ultimate
resolution of these investigations, claims and legal proceedings will have a
material effect on its financial position, results of operations or cash flows.
The Companies have entered into various agreements for the purchase of
power and aluminum. Future estimated minimum payments under these non-cancelable
agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, AMOUNT
------------------------- --------
<S> <C>
1999......................................... $144,284
2000......................................... 43,953
2001......................................... 20,612
2002......................................... 4,411
--------
$213,260
========
</TABLE>
C-14
<PAGE> 173
NORTHWEST ALUMINUM COMPANY AND
NORTHWEST ALUMINUM SPECIALTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Cash paid during the period for:
Interest.......................... $1,477 $6,536 $6,904
====== ====== ======
</TABLE>
10. RELATED PARTY TRANSACTIONS
Sales to a company related by common ownership amounted to $157, $3,613 and
$6,406 for the years ended September 30, 1996, 1997 and 1998, respectively.
Receivable due from the related company includes the balance due from those
sales, together with cash advances, of which $4,000 was converted to a note
receivable on December 31, 1997. The note bears interest at 9.25% and is payable
in quarterly installments beginning April 1, 1998 through January 2002. On
October 1, 1998, the promissory note was restated to eliminate the quarterly
payment due on October 1, 1998 and to increase the amount of the remaining
quarterly payments.
Sales to another company related by common ownership amounted to $246, $348
and $294, for the years ended September 30, 1996, 1997 and 1998, respectively.
Purchases from this company amounted to $231, $1,041 and $1,181 for the years
ended September 30, 1996, 1997 and 1998, respectively.
11. SUBSEQUENT EVENTS
On December 18, 1998, the sole shareholder of the Companies transferred all
of the issued and outstanding shares of common stock of the Companies to Golden
Northwest Aluminum, Inc. (GNA), a company also wholly-owned by the shareholder.
On December 21, 1998, GNA issued $150 million of 12% first mortgage notes
due on December 15, 2006. Interest is payable semi-annually on June 15 and
December 15, commencing June 15, 1999. Payment of the notes is guaranteed by the
Companies and by other subsidiaries of GNA. The debt is collateralized by
substantially all of the real property, plant and equipment of the Companies and
by a pledge of all of the issued and outstanding capital stock of GNA. Other
subsidiaries of GNA have provided similar collateral, pledges and security
interests. On or after December 15, 2002 the notes are redeemable at the option
of GNA at specified redemption prices. There are no sinking fund requirements.
The net proceeds from the sale of the notes were used to repay all amounts
outstanding under the existing credit facilities of the Companies and other
subsidiaries of GNA, to fund capital expenditures and for working capital and
other general corporate purposes. The indenture agreement limits principal
payments on subordinated debt, dividends or shareholder distributions, and
investments in subsidiaries.
C-15
<PAGE> 174
NORTHWEST ALUMINUM COMPANY AND
NORTHWEST ALUMINUM SPECIALTIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
On December 21, 1998, the Companies, along with other subsidiaries of GNA,
entered into a $75 million bank revolving credit facility, collateralized by
inventory, accounts receivable and related intangibles, including a security
interest in the Companies' tolling agreement with Glencore, which matures on
December 20, 2003. Borrowings under the credit facility bear interest at a
floating base rate specified in the credit agreement plus from 0.50% to 1.00% or
LIBOR plus from 2.00% to 2.50%, depending on the consolidated ratio of earnings
before interest, income taxes, depreciation and amortization to interest
expense. The credit facility provides for the payment of a commitment fee of
0.50% per annum based on the unused portion of the credit facility. The credit
agreement contains restrictive covenants, including a minimum net worth
requirement, a minimum excess availability requirement and limitations on
capital expenditures, dividends, additional indebtedness, mergers and other
business combinations, asset sales, encumbrances, investments and transactions
with affiliates.
Also on December 21, 1998, GNA entered into a subordinated credit agreement
for $20 million. The debt bears interest at LIBOR plus two percent and is due in
December 2005. The debt is secured by a second lien and a pledge on the
collateral securing the first mortgage notes and is guaranteed by the Companies
and other subsidiaries of GNA. Except for the collateral security, the
guarantees by the Companies are subordinate to the indebtedness under the bank
revolving credit facility. The credit agreement provides for additional
borrowings of $10 million on or prior to December 31, 2001.
As a part of the refinance of the Companies long-term debt, the interest
rate swap agreement was terminated at no cost to the Companies.
C-16
<PAGE> 175
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Goldendale Holding Company and Subsidiary
Goldendale, Washington
We have audited the accompanying consolidated balance sheets of Goldendale
Holding Company and Subsidiary as of December 31, 1997 and 1998 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the period from acquisition (May 22, 1996) through December 31, 1996 and for the
years ended December 31, 1997 and 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Goldendale
Holding Company and Subsidiary as of December 31, 1997 and 1998, and the results
of their operations and their cash flows for the period from acquisition (May
22, 1996) through December 31, 1996 and for the years ended December 31, 1997
and 1998 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Spokane, Washington
January 29, 1999
C-17
<PAGE> 176
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS (NOTE 5)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 673 $ 342
Trade accounts receivable, net......................... 18,078 12,490
Inventories (Note 2)................................... 20,821 19,937
Prepaid expenses....................................... 257 423
Deferred income taxes (Note 8)......................... 1,339 1,494
-------- --------
Total current assets.............................. 41,168 34,686
Property, plant and equipment, net (Note 3).............. 76,225 79,240
Power project assets held for sale....................... 1,630 543
Goodwill, net of accumulated amortization of $6,793 and
$2,047................................................. 92,886 88,140
Other assets, net (Note 4)............................... 3,327 1,562
-------- --------
$215,236 $204,171
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt (Note 5)............. $ 10,000 $ --
Trade accounts payable................................. 8,398 7,819
Accrued expenses (Note 8).............................. 16,963 14,335
Income taxes payable (Note 10)......................... 6,316 5,361
-------- --------
Total current liabilities......................... 41,677 27,515
Long-term debt, less current portion (Note 5)............ 57,401 --
Long-term debt due to parent (Note 5).................... -- 61,719
Deferred income taxes (Note 10).......................... 9,323 9,965
Deferred compensation (Note 7)........................... 2,915 1,734
Other long-term liabilities (Note 9)..................... 2,312 1,741
Dividends payable (Note 11).............................. 5,867 9,515
-------- --------
Total liabilities................................. 119,495 112,189
Commitments and Contingencies (Notes 6, 7, 9 and 10)
Shareholders' Equity (Note 11):
Preferred stock, cumulative, nonconvertible, $.01 par
value; 150,000 shares authorized, 131,836.10 issued
and outstanding..................................... 29,663 29,663
Common stock, $.01 par value, 350,000 shares
authorized, 197,688.82 issued and outstanding....... 2 2
Additional paid-in capital............................... 44,478 44,478
Retained earnings........................................ 21,598 17,839
-------- --------
Total shareholders' equity........................ 95,741 91,982
-------- --------
$215,236 $204,171
======== ========
</TABLE>
See accompanying summary of significant accounting policies
and notes to the consolidated financial statements.
C-18
<PAGE> 177
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
ACQUISITION
(MAY 22, 1996)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------
1996 1997 1998
-------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues (Notes 6 and 13)............... $128,199 $201,601 $177,456
Cost of revenues........................ 101,881 155,860 161,848
-------- -------- --------
Gross margin............................ 26,318 45,741 15,608
General and administrative expenses..... 4,401 7,513 7,257
-------- -------- --------
Operating income........................ 21,917 38,228 8,351
-------- -------- --------
Other income (expense):
Interest expense (Note 5)............. (6,938) (10,317) (6,386)
Other income, net..................... 832 3,653 1,886
-------- -------- --------
Net other expense....................... (6,106) (6,664) (4,500)
Income before income taxes.............. 15,811 31,564 3,851
Income tax expense (Note 10)............ 6,636 13,274 3,009
-------- -------- --------
Income before extraordinary item........ 9,175 18,290 842
Extraordinary item -- loss on
extinguishment of debt (net of income
tax benefit of $513) (Notes 4 and
5).................................... -- -- (953)
-------- -------- --------
Net income (loss)....................... $ 9,175 $ 18,290 $ (111)
======== ======== ========
</TABLE>
See accompanying summary of significant accounting policies
and notes to the consolidated financial statements.
C-19
<PAGE> 178
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED COMMON
STOCK STOCK ADDITIONAL TOTAL
-------------------- ------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ------- ---------- ------ ---------- -------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at acquisition
(May 22, 1996)...... 131,836.10 $29,663 197,688.82 $ 2 $44,478 $ -- $74,143
Dividends accrued on
preferred stock..... -- -- -- -- -- (2,219) (2,219)
Net income............ -- -- -- -- -- 9,175 9,175
---------- ------- ---------- --- ------- ------- -------
Balance at December
31, 1996............ 131,836.10 29,663 197,688.82 2 44,478 6,956 81,099
Dividends accrued on
preferred stock..... -- -- -- -- -- (3,648) (3,648)
Net income............ -- -- -- -- -- 18,290 18,290
---------- ------- ---------- --- ------- ------- -------
Balance at December
31, 1997............ 131,836.10 29,663 197,688.82 2 44,478 21,598 95,741
Dividends accrued on
preferred stock..... -- -- -- -- -- (3,648) (3,648)
Net loss.............. -- -- -- -- -- (111) (111)
---------- ------- ---------- --- ------- ------- -------
Balance at December
31, 1998............ 131,836.10 $29,663 197,688.82 $ 2 $44,478 $17,839 $91,982
========== ======= ========== === ======= ======= =======
</TABLE>
See accompanying summary of significant accounting policies
and notes to the consolidated financial statements.
C-20
<PAGE> 179
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
PERIOD FROM
ACQUISITION
(MAY 22, 1996) YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, ---------------------
1996 1997 1998
-------------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $ 9,175 $ 18,290 $ (111)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization............. 6,632 11,877 13,448
Gain on disposal of assets................ -- (2,218) (106)
Provision for bad debts................... 296 -- --
Extraordinary loss........................ -- -- 1,466
Deferred income taxes..................... 3,573 1,394 487
Change in assets and liabilities:
Trade accounts receivable................. (3,661) 13,223 5,588
Inventories............................... 10,419 (427) 884
Prepaid expenses.......................... (194) 215 (166)
Other assets.............................. (5) 570 (285)
Trade accounts payable.................... (2,394) (1,062) (579)
Accrued expenses.......................... (12,553) 7,278 (2,803)
Income taxes payable...................... 450 (843) (955)
Other liabilities......................... 4 (802) 85
-------- --------- --------
Net cash provided by operating activities... 11,742 47,495 16,953
-------- --------- --------
Cash flows from investing activities:
Proceeds from sale of assets.............. -- 12,588 1,200
Cash acquired in business acquisition..... 1,106 -- --
Acquisition of property, plant and
equipment.............................. (7,408) (10,444) (11,140)
-------- --------- --------
Net cash provided by (used in) investing
activities............................. (6,302) 2,144 (9,940)
-------- --------- --------
Cash flows from financing activities:
Borrowings under revolving credit
facility............................... 75,914 149,781 107,747
Repayments under revolving credit
facility............................... (68,817) (161,289) (110,060)
Principal repayments of term loan......... 6,500 (41,051) (7,500)
Net borrowings from parent................ -- -- 4,131
Principal payments on deferred
compensation notes..................... (1,631) (813) (1,662)
-------- --------- --------
Net cash used in financing activities....... (1,034) (53,372) (7,344)
-------- --------- --------
Net increase (decrease) in cash and cash
equivalents............................... 4,406 (3,733) (331)
Cash and cash equivalents, beginning of
period.................................... -- 4,406 673
-------- --------- --------
Cash and cash equivalents, end of period.... $ 4,406 $ 673 $ 342
======== ========= ========
</TABLE>
Supplemental Disclosures of Cash Flow Information (Note 12)
See accompanying summary of significant accounting policies
and notes to the consolidated financial statements.
C-21
<PAGE> 180
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(DOLLARS IN THOUSANDS)
OPERATIONS, PRINCIPLES OF COMBINATION AND BASIS OF PRESENTATION
The operations of the Company consist primarily of the smelting conversion
of alumina to aluminum under a tolling arrangement with an alumina supplier. In
addition, the Company operates an alumina unloading facility. The operations are
located in the Pacific Northwest on the Columbia River.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Goldendale Aluminum Company. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Approximately 79% of the Companies' labor force is subject to collective
bargaining agreements.
REVENUE RECOGNITION
Revenues for the conversion of alumina and processing of aluminum under
tolling arrangements are recognized upon completion of the tolling process.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method, except for certain supply inventories that
are based upon the weighted average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. For financial reporting purposes, the costs of
plant and equipment are depreciated over the estimated useful lives of the
assets, which range from three to thirty years, using the straight-line method.
ASSETS HELD FOR SALE
Power project assets represent idle assets which are being held for sale.
These assets are recorded at their estimated net realizable value.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is being amortized on a straight-line basis over twenty
years. The Company monthly evaluates the recoverability of goodwill. The
measurement of possible impairment is based primarily on the Company's ability
to recover the unamortized balance of the goodwill for expected future operating
cash flows on an undiscounted basis and without interest charges.
C-22
<PAGE> 181
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(DOLLARS IN THOUSANDS)
ASSET IMPAIRMENT
The Company evaluates its long-lived assets for financial impairment, and
continues to evaluate them as events or changes in circumstances indicate that
the carrying amount of such assets may not be fully recoverable. The Company
evaluates the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such evaluations indicate that the future
undiscounted cash flows of certain long-lived assets are not sufficient to
recover the carrying value of such assets, the assets are adjusted to their fair
values.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 uses the liability method so that deferred taxes are determined
based on the estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities given the provisions of
enacted tax laws and tax rates. Deferred income tax expense or benefit is based
on the changes in the financial statement bases versus the tax bases in assets
or liabilities from period to period.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and trade
accounts receivable. The Company places its cash and cash equivalents with
various high quality financial institutions; these deposits may exceed federally
insured limits at various times throughout the year. Receivables due from the
Company's primary tolling customer comprised 95% and 96% of the Company's total
trade accounts receivable at December 31, 1997 and 1998, respectively.
FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
The fair values of financial instruments have been determined through
information obtained from quoted market sources and management estimates. It is
management's belief that financial instruments held by the Company approximate
fair market value. The Company does not hold or issue financial instruments or
derivative financial instruments for trading purposes.
C-23
<PAGE> 182
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(DOLLARS IN THOUSANDS)
The Company has entered into an interest rate swap agreement for purposes
of minimizing exposure to interest rate risk. The differential between the
floating interest rate and the fixed interest rate which is to be paid or
received is recognized in interest expense as the floating interest rate changes
over the life of the agreement.
RESEARCH AND DEVELOPMENT COSTS
Expenditures associated with research and development for existing product
process improvements are expensed as incurred. These costs amounted to $780,
$297 and $789 during the periods ended December 31, 1996, 1997 and 1998,
respectively.
CASH AND CASH EQUIVALENTS
For purposes of balance sheet classification and the statements of cash
flows, the Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
ENVIRONMENTAL MATTERS
The Company expenses environmental expenditures related to existing
conditions resulting from past or current operations and from which no current
or future benefit is discernible. Expenditures which extend the life of the
related property or mitigate or prevent future environmental contamination are
capitalized. The Company records a liability for an environmental matter when it
is probable and can be reasonably estimated. The Company's estimated liability
is reduced to reflect the anticipated participation of other potentially
responsible parties in those instances where it is probable that such parties
are legally responsible and financially capable of paying their respective
shares of the relevant costs. The estimated liability of the Company is not
discounted or reduced for possible recoveries from insurance carriers.
DEBT ISSUE COSTS
Costs and fees incurred to obtain financing are capitalized and amortized
over the term of the related debt.
RECLASSIFICATIONS
Certain reclassification of 1996 and 1997 amounts have been made to conform
to classifications used in 1998.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), Disclosures about
Segments of an Enterprise and Related Information, which supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise, establishes standards
for the new way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in
C-24
<PAGE> 183
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(DOLLARS IN THOUSANDS)
interim financial statements issued to the public. It also establishes standards
for disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The adoption of SFAS No. 131 by
the Company on January 1, 1998 had no impact on the Company's financial
position.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ("SFAS No. 132"), Employers'
Disclosures about Pensions and other Postretirement Benefits, which standardizes
the disclosure requirements for pension and other postretirement benefits. The
adoption of SFAS No. 132 is not expected to materially impact the Company's
current disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies
to recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Based on its current and planned future
activities relative to derivative instruments, the Company believes that the
adoption of SFAS No. 133 on January 1, 2000 will not have a significant effect
on its financial statements.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134, ("SFAS No. 134") Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. This statement effectively
changes the way mortgage banking firms account for certain securities and other
interests they retain after securitizing mortgage loans that were held for sale.
The adoption of SFAS No. 134 is not expected to have a material impact on the
Company's financial position.
In February 1999 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 135 ("SFAS No. 135"), Rescission of
Financial Accounting Standards Board No. 75 ("SFAS No. 75") and Technical
Corrections. SFAS No. 135 rescinds SFAS No. 75 and amends Statement of Financial
Accounting Standards Board No. 35. SFAS No. 135 also amends other existing
authoritative literature to make various technical corrections, clarify
meanings, or describe applicability under changed conditions. SFAS No. 135 is
effective for financial statements issued for fiscal years ending after February
15, 1999. The Company believes that the adoption of SFAS No. 135 will not have a
significant effect on its financial statements.
C-25
<PAGE> 184
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS ACQUISITION
On May 22, 1996, the sole common shareholder of the Company purchased
137,314.82 shares of outstanding common stock of Columbia Aluminum Corporation
("CAC"), including 120,000 shares held by the Columbia Aluminum Corporation
Employee Stockownership Trust (the "ESOT") and 17,314.82 shares held by various
individuals, for approximately $30,895. On that same date the shareholder
purchased all of the issued and outstanding common stock of KCE Enterprises,
Inc. ("KCE"), which owned 60,374 shares of common stock of CAC, for
approximately $13,585.
Immediately before the purchase of CAC and KCE stock described above,
pursuant to a plan of corporate reorganization and separation, CAC redeemed
564,626 shares of common stock of CAC owned by an unrelated party in exchange
for stock of a wholly-owned subsidiary of CAC, Columbia Ventures Corporation
("CVC"). CAC operated the Goldendale smelter; CVC and its subsidiaries were
engaged in a diversified array of businesses, primarily related to the aluminum
industry. Pursuant to the plan of reorganization and separation, CAC contributed
to CVC certain non-smelter related assets, intercompany receivables and $54,141
in cash; CAC also purchased certain power generation assets from CVC for
$21,321. The funds contributed to CVC and used to acquire the power generation
assets were obtained by CAC through the term loans described in Note 5.
Following the corporate reorganization and immediately prior to the acquisition
of the shares of CAC by the shareholder of the Company, the shareholders of CAC
(and the total shares of CAC held by them) were as follows:
<TABLE>
<CAPTION>
SHARES OWNED
------------
<S> <C>
ESOT.................................... 251,836.10
KCE..................................... 60,374.00
Others.................................. 17,314.82
Total outstanding....................... 329,524.92
</TABLE>
Following the separation of CVC from CAC and the purchases of common stock
on that same date, the shareholders of CAC were KCE (owned by the Company's
shareholder), the Company's shareholder, and the ESOT, which, after selling
120,000 shares of CAC common stock to the Company's shareholder, owned
131,836.10 shares of CAC common stock. Goldendale Holding Company then issued
197,688.82 shares of its common stock to the Company's shareholder and
131,836.10 shares of Series A Preferred Stock, valued at $29,663 ($225/share),
to the ESOT in exchange for the remaining shares of common stock of CAC held by
them. CAC was renamed Goldendale Aluminum Company ("GAC").
The acquisition of GAC was recorded under the purchase method of
accounting. The total purchase price of CAC was $79,643 and consisted of $44,480
in cash, Series A preferred stock valued at $29,663 and acquisition costs of
approximately $5,500. The excess of the purchase price over the fair value of
the net tangible assets acquired was approximately $98,000 and is being
amortized over twenty years. During 1997, an adjustment of approximately $2,700
was made to the intangible asset relating to contingent tax liabilities existing
at the date of acquisition.
C-26
<PAGE> 185
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
As of May 22, 1996, the fair values of assets acquired and liabilities
assumed, exclusive of cash acquired of $1,106, were as follows:
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
Trade accounts receivable................ $ 27,309
Inventories.............................. 30,813
Property, plant and equipment............ 64,681
Power project assets..................... 12,000
Other assets............................. 9,214
Goodwill................................. 97,971
Accounts payable......................... (15,007)
Other liabilities........................ (27,975)
Long-term debt........................... (119,363)
---------
$ 79,643
=========
</TABLE>
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Purchased metals and tolling in
process.......................... $ 5,579 $ 5,704
Supplies and alloys................ 9,250 7,615
Carbon plant materials............. 2,855 3,323
Alumina............................ 3,137 3,295
------- -------
$20,821 $19,937
======= =======
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Land and improvements.............. $ 4,347 $ 4,404
Machinery and equipment............ 62,141 70,450
Buildings and improvements......... 17,118 17,118
Capital projects in process........ 2,394 5,149
------- -------
86,000 97,121
Less accumulated depreciation...... 9,775 17,881
------- -------
$76,225 $79,240
======= =======
</TABLE>
During 1998, in connection with the preparation of financial statements to
be used by its parent company in a registration of debt securities, the Company
changed its method of accounting for cell reline costs from expensing such costs
as incurred to deferring and amortizing these costs over future periods. The
Company believes that the new method is
C-27
<PAGE> 186
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
preferable since it improves the matching of revenues and costs as technological
improvements have extended the estimated period of economic benefit realized
from cell relining. The change has been applied by retroactively restating the
accompanying consolidated financial statements. The effect of this change was to
increase net income for the periods ended December 31, 1996 and 1997 by $2,918
and $3,339, respectively, and decrease net loss for the year ended December 31,
1998 by $2,829.
4. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ ------
<S> <C> <C>
Debt issue costs (net of accumulated
amortization of $950).............. $2,050 $ --
Restricted cash...................... 1,239 1,300
Other................................ 38 262
------ ------
$3,327 $1,562
====== ======
</TABLE>
Restricted cash consists of cash held in trust and committed for
environmental cleanup and workers compensation self-insurance as required by the
state of Washington. These monies will be disbursed at a future date as required
by the state.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Revolving Credit Facility.......... $19,952 $ --
Term Loan.......................... 47,449 --
------- -------
Long-term debt..................... 67,401 --
Less current portion............... 10,000 --
------- -------
Long-term debt less current
portion.......................... $57,401 $ --
======= =======
</TABLE>
On December 18, 1998, the sole shareholder of the Company transferred all
of the issued and outstanding shares of common stock of the Company to Golden
Northwest Aluminum, Inc. (GNA), a company also wholly-owned by the shareholder.
The Revolving Credit Facility and Term Loans were made pursuant to credit
agreements with a bank. Borrowings under the credit agreements were secured by
substantially all assets of the Company. The Revolving Credit Facility and Term
Loans were set to mature in 2001 to 2002, and contained certain financial
covenants in addition to certain limitations on capital spending, investments
and dividends. Amounts outstanding under the Revolving Credit Facility and Term
Loans were repaid in December 1998 with the proceeds from the first mortgage
notes discussed below. In connection with the
C-28
<PAGE> 187
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
extinguishment of its existing debt, the Company recognized an extraordinary
loss, net of income taxes, of $953 in 1998.
On December 21, 1998, GNA issued $150 million of 12% first mortgage notes
due on December 15, 2006. Interest is payable semi-annually on June 15 and
December 15, commencing June 15, 1999. Payment of the notes is guaranteed by the
Company and by other subsidiaries of GNA. The debt is collateralized by
substantially all of the real property, plant and equipment of the Company and
by a pledge of all of the issued and outstanding capital stock of GNA. On or
after December 15, 2002 the notes are redeemable at the option of GNA at
specified redemption prices. There are no sinking fund requirements. The net
proceeds from the sale of the notes were used to repay all amounts then
outstanding under the Company's existing credit facility and term loans, to fund
capital expenditures and for working capital and other general corporate
purposes. The indenture agreement limits principal payments on subordinated
debt, dividends or shareholder distributions, and investments in subsidiaries.
On December 21, 1998, the Company, together with GNA and its subsidiaries,
entered into a $75 million bank revolving credit facility, collateralized by
inventory, accounts receivable and related intangibles, including a security
interest in the Company's tolling agreement with Hydro, which matures on
December 20, 2003. Borrowings under the credit facility bear interest at a
floating base rate specified in the credit agreement plus from 0.50% to 1.00% or
LIBOR plus from 2.00% to 2.50%, depending on the consolidated ratio of earnings
before interest, income taxes, depreciation and amortization to interest
expense. The credit facility provides for the payment of a commitment fee of
0.50% per annum based on the unused portion of the credit facility. The credit
agreement contains restrictive covenants, including a minimum net worth
requirement, a minimum excess availability requirement and limitations on
capital expenditures, dividends, additional indebtedness, mergers and other
business combinations, assets sales, encumbrances, investments and transactions
with affiliates.
Also on December 21, 1998, GNA entered into a subordinated credit agreement
for $20 million. The debt bears interest at LIBOR plus two percent (7.13% at
December 31, 1998) and is due in December 2005. The debt is secured by a second
lien and pledge on the collateral securing the first mortgage notes and is
guaranteed by the Company. Except for the collateral security, the guarantees by
the Company are subordinate to the indebtedness under the bank revolving credit
facility. The credit agreement provides for additional borrowings of $10 million
on or prior to December 31, 2001.
The long-term payable due to parent represents the Company's allocable
share of the proceeds from the first mortgage notes and a portion of the
proceeds from the subordinated credit agreement and is repayable to GNA under
the same terms and conditions as the first mortgage notes described above.
During 1996, the Company entered into an interest rate swap agreement,
which expires in 2001. The fixed interest rate paid on the interest rate swap is
6.83%, covering, at December 31, 1998, $40 million notional principal amount of
floating rate (Eurodollar) indebtedness. Although the Company is exposed to
credit loss on the interest rate swap in the event of nonperformance by the
counterparties, the Company estimates the likelihood
C-29
<PAGE> 188
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
of such nonperformance to be remote. At December 31, 1998 and 1997, the fair
value of the interest rate swaps was approximately $761 and $683, respectively,
which reflects the estimated amount that the Company would pay to terminate the
contracts. Subsequent to year-end, on January 25, 1999 the Company terminated at
no cost its existing interest rate swap agreement and entered into a new swap
agreement that expires in 2003. The fixed interest rate paid on the new swap is
6.4% and covers $20 million of notional principal amount of floating rate
(LIBOR) indebtedness of the Company.
6. ALUMINA TOLLING CONVERSION AGREEMENT
The Company has an agreement with an alumina supplier for the conversion of
alumina to aluminum for a tolling charge under which the entire production
capacity of the smelting facilities is dedicated to the tolling of the
supplier's alumina. The supplier is obligated to supply, without charge, alumina
sufficient to meet the requirements for full operation. The tolling fees set
forth in the contract is a percentage of the price of aluminum quoted on the
London Metals Exchange. The agreement continues through December 31, 2006. This
tolling customer accounted for 89%, 99% and 99% of the Company's consolidated
revenue in 1996, 1997 and 1998, respectively.
7. EMPLOYEE BENEFIT PLANS
Profit Sharing Bonus Plans
The Company has a profit sharing plan for its hourly and salaried
employees. All employees are eligible participants in this plan upon completion
of a probationary period. The plan provides for payments equal to a percentage
of profits, as defined. These amounts are to be distributed to eligible
participants on or before March 31 following the Company's year-end. For the
periods ended December 31, 1996, 1997 and 1998, the Company recorded
approximately $1,200, $1,900 and $380, respectively, of expense related to this
plan.
The Company also has an additional profit sharing plan ("PSP") which is
available to all employees as of their first day of employment. Employer
contributions to the PSP are discretionary as approved by the Board of
Directors. No employee contributions will be made to the PSP. Participants, who
have one hour of service after July 31, 1996, are vested in the assets of the
PSP at 100%. Upon termination of employment, plan participants will be paid in
cash, based on their account balance as of the last regular or special valuation
on or before distribution, subject to the plan provisions of the PSP. No
contributions were made to the PSP in 1996, 1997 and 1998.
Retirement Benefit Plans
The Company has a 401(k) profit sharing plan under which employees may
elect to defer pay, subject to statutory limits; the Company also makes matching
contributions for nonbargaining on the basis of percentages specified in the
plan. The Company also maintains a separate profit sharing retirement plan (the
"DC Plan") which provides retirement benefits for substantially all of its
employees. The DC Plan allows for
C-30
<PAGE> 189
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
discretionary contributions by the Company as determined on an annual basis. For
the periods ended December 31, 1996, 1997 and 1998, the Company recorded
approximately $240, $730 and $290 of expense for plan contributions.
Deferred Compensation
In connection with the acquisition of the Company in 1996, the Company
entered into deferred compensation agreements with certain employees in exchange
for the employees waiving their rights under stock-based compensation and other
employment agreements which existed at the acquisition date. The liability is
payable in monthly installments of approximately $115, including interest at
8.75%, through 2001.
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Bonuses and employee benefits...... $ 6,619 $ 3,672
Salaries and related expenses...... 2,279 2,436
Interest payable................... 4,229 4,211
Other.............................. 3,836 4,016
------- -------
$16,963 $14,335
======= =======
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company, in the regular course of business, is involved in
investigations and claims by various regulatory agencies. The Company is engaged
in various legal proceedings incidental to its normal business activities. The
Company's management does not believe that the ultimate resolution of these
investigations, claims and legal proceedings will have a material effect on its
financial position, results of operations or cash flows.
As of December 31, 1997 and 1998, the Company had a liability of
approximately $1,656 and $1,741, respectively, for estimated environmental
remediation activities. The Company's estimate of this liability is based on a
remediation study conducted by independent engineering consultants. The total
cost of remediation is estimated at $3 million; however, under a court decree
the Company is only responsible for 57% of the total. The remaining cost is the
responsibility of prior owners.
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<PAGE> 190
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The Company has entered into various agreements for the purchase of power
and aluminum. Future estimated minimum payments under these noncancelable
agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------
<S> <C>
1999......................................... $ 33,393
2000......................................... 39,934
2001......................................... 43,676
--------
$117,003
========
</TABLE>
10. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
---------------------------
1996 1997 1998
------ ------- ------
<S> <C> <C> <C>
Current.................... $3,063 $10,204 $2,009
Deferred................... 3,573 3,070 487
------ ------- ------
Income tax expense......... $6,636 $13,274 $2,496
====== ======= ======
</TABLE>
The difference between the federal statutory tax rate and the effective tax
rate resulted from the following:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate........ 35.0% 35.0% 35.0%
Amortization of goodwill.......... 6.7 5.3 37.0
Other items, net.................. 0.3 1.8 --
---- ---- ----
Effective tax rate................ 42.0% 42.1% 72.0%
==== ==== ====
</TABLE>
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<PAGE> 191
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Current:
Accrued expenses............... $ 1,143 $ 1,353
Inventory...................... 145 140
Other.......................... 51 1
-------- --------
$ 1,339 $ 1,494
======== ========
Noncurrent:
Property, plant and
equipment................... $(13,968) $(13,507)
Power project assets........... 3,262 404
Deferred compensation.......... 1,164 607
Other.......................... 219 2,531
-------- --------
$ (9,323) $ (9,965)
======== ========
</TABLE>
The Internal Revenue Service ("IRS") has audited the Company's income tax
returns and has proposed to change the Company's method of accounting for
certain expenditures that were deducted when incurred. The IRS has proposed to
capitalize and depreciate these expenditures over an estimated useful life. The
Company is currently appealing the proposed change in accounting method
initiated by the IRS and believes it has various meritorious defenses. However,
at December 31, 1998, the Company has recorded a liability associated with the
proposed change in accounting method which is effective for all tax years
subsequent to 1989, of approximately $11.5 million, which includes interest of
$4.0 million. Because the Company has recorded a liability associated with the
proposed change, ultimate resolution is not expected to have a material impact
on the Company's results of operations.
11. SHAREHOLDERS' EQUITY
Terms of the Company's preferred stock provide for dividends accruing
quarterly and payable in cash as declared by the Board of Directors according to
the following schedule:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ------------
<S> <C>
Through 2001..................................... $27.68/share
2002............................................. 29.93/share
2003............................................. 32.18/share
Thereafter....................................... 34.43/share
</TABLE>
Commencing on January 1, 2002, the preferred shareholders have the option
of receiving additional shares of preferred stock in satisfaction of any
cumulative dividend in arrears which may exist at that time.
C-33
<PAGE> 192
GOLDENDALE HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The Company may redeem any or all outstanding shares of Series A Preferred
Stock at the following redemption prices at any time after December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ -------
<S> <C>
Through 1999........................................ $230.63
2000................................................ 228.38
2001................................................ 227.25
Thereafter.......................................... 225.00
</TABLE>
The shares of preferred stock and shares of common stock vote together as a
single class on all matters submitted to a vote of the shareholders of the
Company. The holders of shares of preferred stock are entitled to one vote per
share and have full voting rights and power equal to those of the holders of
common stock.
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
-------- ------ ------
<S> <C> <C> <C>
Cash paid during the period for:
Interest........................................ $ 6,776 $7,810 $6,369
Income taxes.................................... 2,600 10,545 2,900
Noncash investing and financing activities:
Debt refinanced with borrowings from parent..... -- -- 57,588
Dividends accrued on preferred stock............ -- 3,648 3,648
Acquisition contingency accrual:
Goodwill........................................ -- 2,699 --
Deferred income taxes........................... -- 6,742 --
Business acquisition:
Fair value of assets acquired................... 144,017 -- --
Purchase price in excess of net assets
acquired..................................... 97,971 -- --
Liabilities assumed............................. 168,951 -- --
Stock issued.................................... 74,143 -- --
</TABLE>
13. RELATED PARTY TRANSACTIONS
Sales to a company related by common ownership amounted to $467, $1,069 and
$1,102 for the periods ended December 31, 1996, 1997 and 1998, respectively.
Purchases from this company amounted to $195, $336 and $202 for the periods
ended December 31, 1996, 1997 and 1998, respectively.
C-34
<PAGE> 193
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
THE INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY US. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN THE NOTES TO WHICH
IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE UNDER THIS PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN OUR
AFFAIRS OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
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$150,000,000
GOLDEN NORTHWEST
ALUMINUM, INC.
12% FIRST MORTGAGE NOTES
DUE 2006
------------------------
PROSPECTUS
------------------------
APRIL 20, 1999
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