10-Q 1 e10-q.txt FORM 10-Q FOR PERIOD ENDED JUNE 30, 2000 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to ___________ Commission file number 333-72245 GOLDEN NORTHWEST ALUMINUM, INC. ------------------------------- (Exact name of registrant as specified in its charter) Oregon 93-1249606 ---------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3313 West Second Street The Dalles, Oregon 97058 ------------------------------------ ------------------------ (Address of principal executive offices) (Zip Code) (541) 296-6161 ------------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: CLASS OUTSTANDING AT AUGUST 4, 2000 ----- ----------------------------- Common Stock 1,000. 2 This quarterly report on Form 10-Q also constitutes a quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the following subsidiaries of Golden Northwest Aluminum, Inc.:

The address of the principal executive offices for each of these entities is 3313 West Second Street, The Dalles, Oregon 97058 and their telephone number is (541) 296-6161. 3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) ASSETS

The accompanying notes to interim consolidated financial statements are an integral part of these statements. 1 4 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes to interim consolidated financial statements are an integral part of these statements. 2 5 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

Supplemental Disclosures of Cash Flow Information (Note 7) The accompanying notes to interim consolidated financial statements are an integral part of these statements. 3 6 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE AMOUNTS) 1. BASIS OF PRESENTATION The foregoing unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 1999. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's (defined below) consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of the Company's consolidated financial position and results of operations. Operating results for the three-month and six-month periods ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. 2. OPERATIONS AND PRINCIPLES OF CONSOLIDATION The operations of Golden Northwest Aluminum, Inc. ("Golden" or the "Company") consist primarily of the smelting conversion of alumina to aluminum, processing of aluminum into primary products, and the sale of those products within one business segment. The Company's operating subsidiaries' smelting operations were under tolling agreements with aluminum suppliers through December 1999. In December 1999, Northwest Aluminum Company's tolling agreement expired. The Company's operations are located in the Pacific Northwest on the Columbia River. The Company was incorporated in the state of Oregon on June 3, 1998 for the purposes of becoming the holding company of Northwest Aluminum Company, Northwest Aluminum Specialties, Inc. (collectively "Northwest"), Goldendale Holding Company and its wholly owned subsidiary, Goldendale Aluminum Company (collectively "Goldendale"), and Northwest Aluminum Technologies, LLC ("Technologies"). The consolidated financial statements include the accounts of Northwest, Goldendale and Technologies. The Company, Goldendale and Technologies report on a December 31 year basis; Northwest reports on a September 30 fiscal year basis. Included in current assets at December 31, 1999 is $13,106 and at 4 7 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE AMOUNTS) June 30, 2000 is $2,623, 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. 3. EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized as income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company is currently analyzing the financial impact (if any) that the adoption of SFAS No. 133 will have on its consolidated financial statements. 4. INVENTORIES Inventories consist of the following:

5 8 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE AMOUNTS) 5. LONG-TERM DEBT Long-term debt consists of the following:

In December 1998, the Company issued $150 million of 12% first mortgage notes due on December 15, 2006. Interest is payable semi-annually on June 15 and December 15, commencing June 15, 1999. Payment of the notes is guaranteed by all of the Company's subsidiaries. The debt is collateralized by substantially all of the real property, plant and equipment of the Company's subsidiaries and by a pledge of all of the issued and outstanding capital stock of the Company's subsidiaries. On or after December 15, 2002 the notes are redeemable at the option of the Company at specified redemption prices. There are no sinking fund requirements. The indenture agreement limits principal payments on subordinated debt, dividends or shareholder distributions, and investments in subsidiaries. In connection with the issuance of the notes, each of the Company's direct and indirect wholly owned subsidiaries has jointly and severally guaranteed the notes on a full and unconditional basis. The Company is a holding company with no independent operations or assets other than those relating to its investments in its subsidiaries. Separate financial statements of the subsidiary guarantors are not included because the guarantees are full and unconditional, the subsidiary guarantors are jointly and severally liable and the separate financial statements and other disclosures concerning the subsidiary guarantors are not deemed material to investors by management of the Company. No restrictions exist on the ability of the subsidiary guarantors to make distributions to the Company, except, however, the obligations of each guarantor under its guarantee are limited to the maximum amount as will result in obligations of such guarantor under its guarantee not constituting a fraudulent conveyance or fraudulent transfer for purposes of bankruptcy law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law (e.g. adequate capital to pay dividends under corporate laws). In December 1998, the Company entered into a $75 million bank revolving credit facility, which matures on December 20, 2003, and is collateralized by inventory, accounts receivable and related intangibles, including a security interest in the Company's tolling agreement. As specified in the credit agreement, borrowings under the credit facility bear interest at a floating base rate plus from 0.50% to 1.00% (10.50% at June 30, 2000) or the LIBOR rate plus from 2.00% to 2.50% (9.15% at June 30, 2000). The additional margin is dependent upon the consolidated ratio of earnings before interest, income taxes, depreciation and amortization to interest expense. The credit facility provides for the payment of a commitment fee of 0.50% per annum based on the unused portion of the credit facility. The credit 6 9 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE AMOUNTS) 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. The Company was in compliance with these covenants at June 30, 2000. Also in December 1998, the Company entered into a subordinated credit agreement with Norsk Hydro USA, Inc. pursuant to which $20 million was borrowed. The debt bears interest at LIBOR plus 2.00% (7.88% at June 30, 2000) and is due in December 2005. The debt is secured by a second lien and a pledge on the collateral securing the first mortgage notes and is guaranteed by the Company's subsidiaries. Except for the collateral security, the guarantees by the Company's subsidiaries are subordinate to the indebtedness under the bank revolving credit facility. The credit agreement provides for additional borrowings of $10 million on or prior to December 31, 2001. On January 25, 1999, the Company terminated at no cost its existing interest rate swap agreements and entered into a new swap agreement that expires in 2003. The fixed interest rate paid on the new swap is 6.4% and covers $20 million of notional principal amount of floating rate (LIBOR) indebtedness of the Company. Although the Company is exposed to credit loss on the interest rate swap in the event of nonperformance by the counterparties, the Company estimates the likelihood of such nonperformance to be remote. At December 31, 1999, the fair value of the interest rate swap was approximately $1,029, which reflects the estimated amount that the Company would pay to terminate the contract. 6. COMMITMENTS AND CONTINGENCIES The Company, in the regular course of business, is involved in investigations and claims by various regulatory agencies. The Company is also engaged in various legal proceedings incidental to its normal business activities. The Company's management does not believe that the ultimate resolution of these investigations, claims and legal proceedings will have a material effect on its financial position, results of operations or cash flows. The Company has agreed to be contingently liable for the debts of a customer amounting to approximately $1,738 at June 30, 2000. Risk arising from this contingent liability is controlled through monitoring procedures. At June 30, 2000, the Company had a liability of approximately $1,867 ($1,825 at December 31, 1999) 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 was estimated at $2,500; however, under a court decree the Company is only responsible for approximately one-half of the total. The remaining cost is the responsibility of prior owners. No accrual has been provided for the Northwest facility as the Company is unaware of any current condition which would give rise to remedial action. 7 10 GOLDEN NORTHWEST ALUMINUM. INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE AMOUNTS) The Company has entered into various agreements for the purchase of power, alumina and aluminum. Future estimated minimum payments under these noncancelable agreements are as follows:

7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Supplemental disclosures of cash flow information are as follows:

8. NORTHWEST ALUMINUM COMPANY AND NORTHWEST ALUMINUM SPECIALTIES, INC. AND GOLDENDALE HOLDING COMPANY AND SUBSIDIARY Financial statements and financial statement schedules for Northwest Aluminum Company and Northwest Aluminum Specialties, Inc. and Goldendale Holding Company and its subsidiary have been omitted because the 12% first mortgage notes issued by the Company and its subsidiaries and registered under the Securities Act of 1933, of which the subsidiaries are guarantors (thus subjecting them to the reporting requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934) are fully and unconditionally guaranteed by the subsidiaries. Financial information relating to these companies is presented herein in accordance with Staff Accounting Bulletin 53 as an addition to the footnotes to the financial statements of Golden Northwest Aluminum, Inc. Summarized unaudited financial information is as follows: 8 11 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE AMOUNTS) Northwest Aluminum Company and Northwest Aluminum Specialties, Inc.

9 12 GOLDEN NORTHWEST ALUMINUM, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE AMOUNTS) Goldendale Holding Company and Subsidiary

10 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section should be read in conjunction with the financial statements in Part I, Item 1 of this report. OVERVIEW The aluminum industry is highly cyclical, with market prices fluctuating widely based on global supply and demand factors, most of which are beyond our control. As shown below, for 1999, the average price per pound of aluminum on the London Metal Exchange was approximately the same as for 1998, which was lower than the average price in any of the three previous years. The average three-month LME prices per pound of aluminum in each of the last five years were as follows:

The timing and magnitude of any increase or decrease in aluminum prices is uncertain. As of June 30, 2000, the three-month LME price per pound of aluminum was $.72, and more recently LME prices have fluctuated around $.71 per pound. Accordingly, we believe our cash flow and earnings in the near term will be somewhat higher than amounts reported for comparable prior periods. Our cash flow and earnings are highly sensitive to aluminum prices because production costs are largely fixed. At low market aluminum prices, we are able to reduce some variable costs, but most of the production costs of primary aluminum are constant in the short term (alumina, labor, carbon, power), and therefore declines in market prices will cause declines in earnings. Conversely, increased market aluminum prices will cause increases in earnings. For these reasons we strive to maintain full plant utilization, which reduces the average cost per pound of aluminum. We do not actively hedge our production. To reduce our reliance on market-priced primary aluminum and to improve overall profitability, we have pursued a strategy of increasing both our "tolled" and "non-tolled" value-added production through specialty casting and processing operations. Through these operations, we are able to realize premiums over market LME prices, the amount of which varies with the degree of value-added content of the product and uniqueness of the product in the marketplace. Our volume of value-added production has increased significantly over the past decade relative to the volume of our primary production. Our continued investment in value-added production operations is designed to further increase our value-added production capabilities. As a consequence of this strategy, our volume of non-tolled value-added production at Northwest has grown from 153.7 million pounds in 1993 to 245.3 million pounds in 1999. 11 14 Northwest chose not to renew its tolling agreement with Glencore after December 1999, and instead use its smelter production to source the majority of its material needs in its value-added business. The effect of this non-renewal is the elimination of revenue and gross margin Northwest derived from tolling aluminum for Glencore. This may be more than offset by an increase in gross margin from the sale of non-tolled products, because the underlying cost for primary aluminum will be Northwest's own production cost rather than the market price. We do not assure you however, that we will be able to realize any such increased gross margin. Power issues in the Pacific Northwest have significantly affected the aluminum industry in this area. The Company is somewhat insolated from the impact of recent high power costs in the region because of our long-term contracts with the Bonneville Power Administration (BPA) for procurement of power. Those contracts obligate BPA to supply 60% of the Company's power requirements for the five-year period ending October 1, 2001 at relatively competitive rates. Of additional benefit is the Company's ability to "shape" that power supplied on an annual basis. The Company shaped the agreements so that BPA supplies approximately 80% of our power requirements in the later years of these contracts. We obtain most of the remaining 20% in the spring and summer months when market power costs are normally low due to the seasonality of power supply and demand. We are currently exploring alternatives for fulfilling our power requirements for the period after October 1, 2001. RESULTS OF OPERATIONS The following table sets forth the combined statement of income data as a percentage of revenues for the three-month and the six-month periods ended June 30, 1999 and 2000.

12 15 THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 Total revenues decreased from $107.5 million to $103.3 million in the three months ended June 30, 1999 and June 30, 2000, respectively, a decrease of $4.2 million, or 3.9%. Total revenues increased from $210.3 million to $229.3 million in the six months ended June 30, 1999 and June 30, 2000, respectively, an increase of $19.0 million, or 9.0%. Revenues were primarily influenced by the cessation of the Glencore tolling agreement, by changes in the market price of aluminum and by production and shipped volumes. The cessation of the Glencore tolling agreement eliminated approximately 0.5 million pounds per day of production billable under tolling arrangements beginning January 1, 2000. Because of Northwest's September 30 year-end, the impact on the Company's consolidated financial statements was not reported until April 1, 2000. For both the three months and six months ended June 30, 2000 compared to the three months and six months ended June 30, 1999, tolling revenues decreased $18.7 million due to the cessation of this agreement. Tolling revenues continued to be earned under the Company's Hydro tolling contract and were $48.5 million and $41.1 million for the three-month periods, and $101.5 million and $77.5 million for the six-month periods, ended June 30, 2000 and June 30, 1999, respectively. Total revenues from tolling agreements decreased from $59.8 million to $48.5 million in the three months ended June 30, 1999 and June 30, 2000, respectively, a decrease of $11.3 million, or 18.9%. Tolling revenues increased from $115.6 million to $122.2 million in the six months ended June 30, 1999 and June 30, 2000, respectively, an increase of $6.6 million, or 5.7%. Volumes produced under tolling contracts decreased from 134.3 million pounds to 86.4 million for the three months ended June 30, 1999 and June 30, 2000, respectively, and decreased from 259.9 million pounds to 223.0 million pounds for the six months ended June 30, 1999 and June 30, 2000, respectively. Beyond the decrease due to the non-renewal of the Glencore tolling agreement, the changes in production level under tolling arrangements were due primarily to the cyclical nature of our cell relining activity. Volume changes, excluding the impact of the cessation of the Glencore tolling agreement, caused revenues from tolling to decrease by $1.6 million for the three months ended June 30, 2000 over the same period ended June 30, 1999 and caused revenues from tolling to increase by $4.5 million for the six months ended June 30, 2000 over the same period ended June 30, 1999. Offsetting the impact of volume changes, increases in average effective LME aluminum prices from $.56 per pound to $.75 per pound for the three months ended June 30, 1999 and June 30, 2000, respectively, pushed revenues from tolling contracts upward by $8.9 million. The average effective LME aluminum prices for the six months ended June 30, 1999 and June 30, 2000 were $.58 per pound and $.71 per pound, respectively, causing a $20.8 million increase in revenues from tolling contracts. 13 16 Sales of non-tolled products increased from $47.8 million to $54.8 million in the three months ended June 30, 1999 and June 30, 2000, respectively, and increased from $94.8 million and $107.1 million for the six months ended June 30, 1999 and June 30, 2000, respectively. The primary factors affecting revenues from sales of non-tolled products were the rise in market prices of aluminum and increased volumes shipped. Shipments of non-tolled aluminum products increased from 68.4 million pounds to 70.0 million pounds in the three months ended June 30, 1999 and June 30, 2000, respectively. For the six-month periods ended June 30, shipments of non-tolled aluminum products were 130.7 million pounds for 1999 and 141.7 million pounds in 2000. These changes in volumes drove revenues upward $1.3 million for the three-month periods and $8.3 million for the six-month periods. The 2.4% increase in shipments for the three-month periods and the 8.4% increase in shipments for the six-month periods ended June 30 were due primarily to the continuing strength of the economy and the Company's pursuit of value-added markets. In addition to the impact from changes in volume, increases in market aluminum prices from the mid-fifties in 1999 to the mid-seventies in 2000 provided increases in non-tolling revenues. For the three-month periods the positive impact from market price was $5.8 million and for the six-month periods $4.0 million. Cost of revenues decreased from $102.6 million to $94.2 million in the three months ended June 30, 1999 and June 30, 2000, respectively, a decrease of $8.4 million, or 8.2%. Cost of revenues increased from $203.5 million to $211.6 million in the six months ended June 30, 1999 and June 30, 2000, respectively, an increase of $8.1 million, or 4.0%. As a percentage of revenues, cost of revenues declined from 95.5% to 91.3% for the three-month periods and declined from 96.7% to 92.3% for the six-month periods ended June 30. The primary influences on cost of revenues were the cessation of the Glencore tolling agreement, changes in market aluminum prices and increases in power costs. Beginning January 1, 2000, the cessation of the Glencore tolling agreement enabled us to utilize our Northwest smelting capacity to provide material for our sales of non-tolled value-added product. This eliminated $18.0 million of costs of revenues related to tolling activities for the three months and the six months ended June 30, 2000. In addition, the cost of materials for approximately 75% of our non-tolled value-added product is now at our internal smelter production cost instead of market aluminum prices, reducing our costs of revenues by $1.4 million for the three months and six months ended June 30, 2000 compared to the same periods in 1999. The market price of aluminum increased from $.60 per pound in 1999 to $.68 per pound in 2000 for the three months ended June 30, resulting in an increase in our purchased metal costs of $1.2 million for the comparative periods. For the six month periods ended June 30, the market price of aluminum increased from $.58 per pound in 1999 to $.72 per pound in 2000, resulting in our purchased metal costs increasing for the comparative periods by $10.5 million. 14 17 Market power prices for the current year have been extraordinarily high relative to historical levels and have significantly impacted our power costs even though the majority of our power requirements were not subject to those prices. For the three-month periods ended June 30, power costs increased $5.7 million from $18.1 million in 1999 to $23.8 million in 2000. For the six-month periods ended June 30, they increased $12.2 million from $37.8 million in 1999 to $50.0 million in 2000. Gross margin increased from $4.9 million in the three months ended June 30, 1999 to $9.0 million in the three months ended June 30, 2000, an increase of 83.7%. Gross margin increased from $6.9 million in the six months ended June 30, 1999 to $17.6 million in the six months ended June 30, 2000, an increase of 155.1%. As a percentage of revenues, gross margin rose from 4.5% to 8.7% for the three month periods, and rose from 3.3% to 7.7% for the six month periods, ended June 30, 1999 and 2000, respectively. The increase in gross margin resulted primarily from the changes in revenues (discussed above), offset by changes in cost of revenues (discussed above). General and administrative expenses decreased slightly from $4.5 million to $4.4 million in the three months ended June 30, 1999 and June 30, 2000, respectively, a decrease of 2.2%. General and administrative expenses decreased from $8.6 million to $8.2 million for the six months ended June 30, 1999 and June 30, 2000, respectively, a decrease of 4.7%. As a percentage of revenues, general and administrative expenses remained relatively constant at 4.2% for the related three-month periods, and decreased slightly from 4.1% to 3.6% for the related six-month periods. Interest expense increased from $5.6 million to $5.8 million in the three months ended June 30, 1999 and June 30, 2000, respectively, an increase of 3.6%. Interest expense remained relatively constant at $11.8 million in the six months ended June 30, 1999 and June 30, 2000. During the six months ended June 30, 2000, $0.3 million of interest expense related to the construction of new fixed assets was capitalized. Income tax benefit decreased from $0.2 million to an income tax expense of $0.2 million in the three months ended June 30, 1999 and June 30, 2000, respectively. Income tax benefit decreased from $2.1 million to an income tax expense of $1.5 million for the six months ended June 30, 1999 and June 30, 2000, respectively. These changes were due primarily to the decrease in net loss before income taxes in the corresponding periods in 1999 and 2000. As a result of the foregoing factors, we reported a net loss of $1.9 million in the three months ended June 30, 2000 versus a net loss of $4.9 million in the three months ended June 30, 1999. For the six months ended June 30, 2000, we reported a net loss of $4.2 million, versus a net loss of $10.9 million for the six months ended June 30, 1999. 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. 15 18 Our credit facility with Fleet Capital (previously BankBoston) is a $75.0 million senior secured revolving credit facility collateralized by all of the inventory, accounts receivable and other rights to payment of our subsidiaries. Availability under the revolving line of credit is controlled by a borrowing base formula based on eligible receivables and inventory, and there must always be at least $15 million of excess borrowing base available at any given time. Based on this formula, the net availability under the revolving line of credit was $64.4 million at June 30, 2000, and we had $43.1 million outstanding under this credit facility at June 30, 2000. More recently at July 31, 2000, the net availability under the revolving line of credit was approximately $71.7 million and we had $43.1 million outstanding. Our liquidity and capital needs relate primarily to payment of principal and interest on borrowings, capital expenditures, including our facilities investment program, and distributions to our sole shareholder to pay income taxes. Subject to reasonable market aluminum prices, we will require approximately $9.9 million in 2000 for our facilities investment program. The first stage of the facilities investment program consisting of an expansion of the Goldendale casthouse and a 34-cell demonstration of new cell line technology should be substantially completed by the end of 2000. Our liquidity and capital needs also relate to working capital and other general corporate requirements, including the incremental working capital needs in connection with the cessation of the Glencore tolling agreement in December 1999. Additionally, the Goldendale preferred stock became redeemable at our discretion after December 31, 1998. We anticipate that the funds necessary to redeem the Goldendale preferred stock would be drawn from our revolving credit facility with Fleet Capital. Furthermore, we are subject to a number of contingencies and uncertainties. Our statement of cash flows for the periods indicated are summarized below:

The net cash used in operating activities was $3.1 million for the six months ended June 30, 2000, and was $20.0 million for the six months ended June 30, 1999. Of the net cash used in operating activities during the six months ended June 30, 2000, $8.8 million was attributable to cash provided by our net income, as adjusted for non-cash charges. In addition, changes in working capital used net cash of $11.8 million. The increase in working capital was primarily due to the transition from the Glencore tolling arrangement with related impacts on trade accounts receivable, inventories and trade accounts payable. Of the net cash used in operating activities during the six months ended June 30, 1999, $1.7 million was attributable to cash provided by our net loss, as adjusted for non-cash charges. In addition, changes in working capital used net cash of $18.3 million. The increase in working capital requirements was due to the normalization of credit terms with a primary supplier. 16 19 Net cash used in investing activities was $15.1 million and $14.8 million in the six months ended June 30, 2000 and June 30, 1999, respectively. Cash used in investing activities in the six months ended June 30, 2000 was primarily attributable to capital expenditures of $15.7 million. Cash used in investing activities in the six months ended June 30, 1999 was primarily attributable to capital expenditures of $16.3 million. Net cash provided by financing activities was $17.6 million in the six months ended June 30, 2000, compared to net cash used in financing activities of $0.8 million in the six months ended June 30, 1999. Net cash provided by financing activities in the six months ended June 30, 2000 was primarily attributable to net borrowings of $17.8 million under our credit facility. We believe cash flow from operations, available borrowings under our revolving credit facility and under our note purchase agreement with Hydro and cash on hand will provide adequate funds for our foreseeable working capital needs, planned capital expenditures and debt service and other obligations through 2001. Our ability to fund operations, make planned capital expenditures, such as our facilities investment program, make principal and interest payments on the notes, and remain in compliance with all of the financial covenants under our debt agreements will be dependent on our future operating performance. Our future operating performance is dependent on a number of factors, including aluminum prices and power costs, many of which are beyond our control. These factors include prevailing economic conditions and financial, competitive, regulatory and other factors affecting our business and operations, and may be dependent on the availability of borrowings under our revolving credit facility or other borrowings. We do not assure you our cash flow from operations, together with other sources of liquidity, will be adequate: - to make required payments of principal and interest on the notes and our other debt; - to finance anticipated capital expenditures; - to fund working capital requirements; or - to fund the possible redemption of all outstanding shares of the Goldendale preferred stock. If we do not have sufficient available resources to repay any of our indebtedness when it becomes due and payable, we may need to refinance the indebtedness. We do not assure you refinancing will be available or available on reasonable terms. SEASONALITY AND INFLATION Our results of operations can be affected by seasonal factors, such as substantial increases in the cost of electricity in the fall and winter. We do not believe inflation has had a material effect on the combined financial statements for the periods presented. EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities. 17 20 SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized as income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. We are currently analyzing the financial impact, if any, that the adoption of SFAS No. 133 will have on our consolidated financial statements. FORWARD-LOOKING STATEMENTS This report contains statements which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report (see, for example, "-Overview," "-Results of Operations," and "-Liquidity and Capital Resources"). Such statements can be identified by the use of forward looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans," or "anticipates" or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These factors include the following: - fluctuations in the price of primary aluminum; - servicing our substantial indebtedness; - the incurrence of future indebtedness; - restrictions on our ability to operate our business imposed by the terms of our indebtedness; - the effects of federal and state environmental laws and regulations; - the continued viability of the technology used in our smelters; - fluctuations in the cost of electricity; - our ability to operate effectively without tolling agreements, including the Glencore tolling agreement; - retaining and recruiting key personnel; and - changes in labor relations with the unions representing our employees. Other factors include the effectiveness of management's strategies and decisions, general economic and business conditions, developments in technology, new or modified statutory or regulatory 18 21 requirements, and changing prices and market conditions. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We manage interest rate risk through the strategic use of fixed and variable interest rate debt and, to a limited extent, interest rate derivatives. At June 30, 2000, our derivative instrument consisted of an interest rate swap agreement which expires in 2003 and effectively fixes our interest rate at 6.4% on a notional principal amount of $20.0 million on our floating rate long-term debt. The agreement requires quarterly cash settlements for interest rate fluctuation outside of the fixed rate. 19 22 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 27.1 Financial Data Schedule. (b) Reports on form 8-K. No reports on Form 8-K were filed during the period. 20 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GOLDEN NORTHWEST ALUMINUM, INC. NORTHWEST ALUMINUM COMPANY NORTHWEST ALUMINUM SPECIALTIES, INC. Date: August 11, 2000 By: /s/ WILLIAM R. REID ----------------------------------- William R. Reid Chief Financial Officer GOLDENDALE HOLDING COMPANY GOLDENDALE ALUMINUM COMPANY NORTHWEST ALUMINUM TECHNOLOGIES, LLC Date: August 11, 2000 By: /s/ JESSIE CASSWELL ----------------------------------- Jessie Casswell Chief Financial Officer 21 24 EXHIBIT INDEX 27.1 Financial Data Schedule.

GOLDEN NORTHWEST ALUMINUM INC 10-Q