<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) November 10, 1999
-----------------
THE LTV CORPORATION
-------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-4368 75-1070950
- ------------------------------------------------------------------------------
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
(Incorporation)
200 Public Square Cleveland Ohio 44114-2308
- ------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (216) 622-5000
--------------
<PAGE> 2
Item 2.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only, giving effect to the acquisitions of
Welded Tube Co. of America ("Welded Tube") and Copperweld Corporation and
Copperweld Canada Inc. ("Copperweld") together the ("Acquisitions") by The LTV
Corporation ("LTV"). The unaudited pro forma condensed combined statements of
operations give effect to the Acquisitions as if they had occurred on January 1,
1999 or January 1, 1998, as applicable, and the unaudited pro forma condensed
combined balance sheet gives effect to the Acquisitions as if they had occurred
on September 30, 1999. The purchases will be accounted for under the purchase
method of accounting whereby the purchase price is allocated based on the fair
value of the assets acquired and the liabilities assumed. The historical
condensed financial statements of the Acquisitions are derived from the
historical combined financial statements of Copperweld Corporation and
Copperweld Canada, Inc., and the historical financial statements of Welded Tube
Company of America appearing elsewhere in this prospectus. The unaudited pro
forma condensed combined statements of operations and balance sheet include the
respective financial statements of LTV, Welded Tube and Copperweld and the
respective pro forma adjustments based on management's assumptions to reflect
the combination. Both the audited and unaudited financial statements, contained
elsewhere in this prospectus, should be read in conjunction with the pro forma
combined financial information. The pro forma results are not necessarily
indicative of the results of operations or financial condition had the
Acquisitions taken place at the beginning of the respective periods nor
indicative of future results of the combined companies. The allocation of the
purchase price is preliminary and final amounts could differ from those
reflected in the pro forma condensed combined financial statements. Upon final
determination, the purchase price will be allocated to the assets and
liabilities acquired based on fair value as of the date of the acquisition.
The principal pro forma adjustments to the condensed combined statements of
operations include (1) elimination of intercompany sales; (2) amortization of
goodwill and other intangibles; (3) elimination of interest on debt not assumed;
(4) interest expense on the new debt issued to finance the Acquisitions; and (5)
incremental tax effects of the pro forma adjustments.
In the table below EBITDA represents income (loss) before taxes on income,
interest expense and depreciation and amortization. LTV believes that EBITDA
provides useful information regarding its ability to service its debt and other
obligations; however, EBITDA does not represent cash flow from operations as
defined by generally accepted accounting principles and should not be considered
as a substitute for net income as an indicator of our operating performance or a
substitute for cash flow as a measure of liquidity. In addition, LTV's
calculation of EBITDA may be different from the calculation used by its
competitors and, therefore, comparability may be affected.
1
<PAGE> 3
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------
HISTORICAL PRO FORMA AS ADJUSTED
----------------------- -----------------------
LTV ACQUISITIONS ADJUSTMENTS COMBINED
-------- ------------ ----------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales.............................. $ 2,985 $651 $(27)(a) $ 3,609
Cost and expenses:
Cost of products sold............ 2,722 550 (27)(a) 3,245
Depreciation and amortization.... 197 25 6(b) 228
Selling, general and
administrative................ 137 37 -- 174
Results of affiliates'
operations.................... 28 -- -- 28
Net interest and other (income)
expense....................... 1 8 43(c) 52
Special charges.................. 39 -- -- 39
-------- ---- ---- --------
Total......................... 3,124 620 22 3,766
-------- ---- ---- --------
Income (loss) before income
taxes............................ (139) 31 (49) (157)
Income taxes....................... (6) (12) 5(d) (13)
-------- ---- ---- --------
Net income (loss).................. (145) 19 (44) (170)
Less: Preferred dividends.......... (2) -- (5)(e) (7)
-------- ---- ---- --------
Net income (loss) available to
common shareholders.............. $ (147) $ 19 $(49) $ (177)
======== ==== ==== ========
Earnings per share -- basic and
fully diluted.................... $ (1.46) $ (1.77)
Average shares outstanding (in
thousands)....................... 100,016 100,016
OTHER FINANCIAL DATA:
Capital expenditures............... $ 156 $ 42 $ -- $ 198
EBITDA............................. 69 64 -- 133
EBITDA before special charges...... 108 64 -- 172
</TABLE>
2
<PAGE> 4
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------
HISTORICAL PRO FORMA AS ADJUSTED
---------------------- ----------------------
LTV ACQUISITIONS ADJUSTMENTS COMBINED
------- ------------ ----------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Sales................................. 4,273 863 (44)(a) 5,092
Cost and expenses:
Cost of products sold............... 3,773 715 (44)(a) 4,444
Depreciation and amortization....... 259 25 8(b) 292
Selling, general and
administrative................... 184 52 -- 236
Results of affiliates' operations... 49 -- -- 49
Net interest and other (income)
expense.......................... (23) 8 60(c) 45
Special charges..................... 55 -- -- 55
------- --- --- -------
Total............................ 4,297 800 24 5,121
------- --- --- -------
Income (loss) before income taxes..... (24) 63 (68) (29)
Income taxes.......................... (3) (25) 19(d) (9)
------- --- --- -------
Net income (loss)..................... (27) 38 (49) (38)
Less: Preferred dividends............. (2) -- (7)(e) (9)
------- --- --- -------
Net income (loss) available to common
shareholders........................ (29) 38 (56) (47)
======= === === =======
Earnings per share -- basic and fully
diluted............................. $ (0.29) $ (0.47)
Average shares outstanding (in
thousands).......................... 99,849 99,849
OTHER FINANCIAL DATA:
Capital expenditures.................. 362 123 -- 485
EBITDA................................ 238 96 -- 334
EBITDA before special charges......... 293 96 -- 389
</TABLE>
- -------------------------
Pro forma adjustments for the nine months ended September 30, 1999 and the year
ended December 31, 1998 were made to reflect the:
(a) Elimination of intercompany sales from LTV to Copperweld.
(b) The excess of acquisition cost over the fair value of net assets acquired
(amortized on a straight-line basis over 35 years) and other intangibles
(amortized over periods ranging from 5 to 30 years) is assumed to aggregate
$259 million. This amount and related amortization will change as the
allocation of the purchase price is finalized, including appraisals of fixed
assets and intangibles.
3
<PAGE> 5
(c) Pro forma adjustments to interest expense (assuming certain principal
amounts and rates shown below) after reflecting the Acquisitions:
<TABLE>
<CAPTION>
NINE
PRINCIPAL RATE MONTHS YEAR
--------- ----- ------ ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Notes..................................... $275 11.75% $24 $32
New Bank Financing........................ 225 9.28 16 21
Receivables and Inventory Facilities...... 215 6.13 10 13
---- ----- --- ---
Total..................................... $715 50 66
====
Amortization of financing fees............ 1 2
Less: interest expense on debt not
assumed................................. (8) (8)
--- ---
Pro forma total interest expense
adjustment.............................. $43 $60
=== ===
</TABLE>
A 0.25% increase in the weighted average cost of this debt would change
interest expense by approximately $1 million for the nine months ended
September 30, 1999 and by approximately $2 million for the year ended
December 31, 1998. Each $25 million increase or decrease in the borrowings
under the existing working capital facilities would change pro forma
interest by approximately $1 million for the nine months ended September 30,
1999 and approximately $2 million for the year ended December 31, 1998.
(d) Reduction of income taxes relating to the application of LTV's net operating
loss carryforwards to the federal tax provisions of the Acquisitions. A full
valuation allowance has been recorded to offset the non-cash tax benefits
arising from the losses in the respective pro forma periods. These
adjustments result in the ending pro forma income tax provision reflecting
only cash taxes that consist of state, foreign and federal taxes including
taxes of a less than 80% owned subsidiary of LTV.
(e) Annual preferred dividends at a rate of 8.25% on $80 million of our New
Preferred Stock.
The principal pro forma adjustments to the condensed combined balance sheet
include the purchase accounting entries for (1) the issuance of $275 million of
Notes; (2) borrowings of $225 million under the New Bank Financing; (3) the
issuance of $80 million of New Preferred Stock; (4) borrowings of $215 million
under our Receivables and Inventory Facilities; (5) reduction of debt not
assumed by LTV; (6) adjustments of the net assets of Welded Tube and Copperweld
to estimated fair values; and (7) excess of acquisition costs over the fair
value of net assets acquired ("goodwill").
4
<PAGE> 6
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------------
HISTORICAL PRO FORMA AS ADJUSTED
---------------------- ----------------------
LTV ACQUISITIONS ADJUSTMENTS COMBINED
------- ------------ ----------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
BALANCE SHEET:
Cash and marketable securities............ $ 167 $ 8 $ (8)(c) $ 167
Accounts receivable....................... 484 107 (4)(a) 587
Inventories
Raw materials........................... 269 71 (1)(b) 339
Work-in-process and finished
goods................................ 595 74 4(b) 673
------- ----- ----- -------
Total................................ 864 145 3 1,012
LIFO reserve............................ (13) (14) 14(b) (13)
------- ----- ----- -------
Net inventory........................ 851 131 17 999
Prepaids and other........................ 19 4 -- 23
------- ----- ----- -------
Total current assets................. 1,521 250 5 1,784
Investments in affiliates................. 382 -- -- 382
Goodwill, intangibles and other
noncurrent assets....................... 233 21 208(c) 462
Property, plant and equipment............. 4,285 633 (240)(b) 4,678
Less: allowance for
depreciation....................... (1,186) (240) 240(b) (1,186)
------- ----- ----- -------
Property, plant and equipment-net.... 3,099 393 -- 3,492
------- ----- ----- -------
$ 5,235 $ 664 $ 213 $ 6,112
======= ===== ===== =======
Liabilities and shareholders' equity
Accounts payable........................ $ 354 $ 83 $ (4)(a) $ 433
Other accruals.......................... 517 31 (2)(b) 546
Lines of credit......................... 9 (9)(d) --
------- ----- ----- -------
Total current liabilities............ 871 123 (15) 979
Long-term debt.......................... 402 206 (206)(d) 1,017
615(e)
Other postemployment employee
benefits 1,523 41 10(b) 1,574
Pensions................................ 561 (8) 8(b) 561
Other................................... 407 46 (20)(b) 433
------- ----- ----- -------
Total noncurrent liabilities......... 2,893 285 407 3,585
Shareholders' equity
Convertible preferred stock............. 1 -- 2(f) 3
Common stock............................ 53 6 (6)(g) 53
Additional paid-in capital.............. 1,031 107 75(f) 1,106
(107)(g)
Retained earnings....................... 466 146 (146)(g) 466
Treasury stock.......................... (67) -- -- (67)
Accumulated other comprehensive loss
and other............................ (13) (3) 3(g) (13)
------- ----- ----- -------
Total shareholders' equity........... 1,471 256 (179) 1,548
------- ----- ----- -------
$ 5,235 $ 664 $ 213 $ 6,112
======= ===== ===== =======
</TABLE>
5
<PAGE> 7
- -------------------------
The pro forma as adjusted September 30, 1999 balance sheet has been prepared to
reflect the acquisitions of Welded Tube and Copperweld by The LTV Corporation
for an aggregate purchase price of $770 million, the associated financings and
the estimated direct costs of the Acquisitions. Pro forma adjustments, based on
the application of the purchase method of accounting, were made to reflect:
(a) Elimination of intercompany receivables and payables between LTV and
Copperweld.
(b) Adjustment of the assets and liabilities of Welded Tube and Copperweld
to estimated fair value at the balance sheet date. The adjustment
amounts will change as appraisals of fixed assets and intangibles are
finalized.
(c) The excess of the purchase price ($770 million) over the fair value of
the assets acquired less liabilities assumed is $267 million.
Additionally, there are capitalized expenses of $22 million related to
the cost of the Acquisitions and financing. Adjustments to estimated
fair market value were made for inventory of $17 million, pensions of
$8 million, other postemployment benefit liabilities of $10 million,
noncurrent deferred tax liabilities of $20 million and elimination of
acquired goodwill of $18 million. The allocation of the purchase price
is preliminary and final amounts could differ from those reflected in
the pro forma adjustments. Property, plant and equipment have not been
adjusted to their estimated fair market value pending completion of an
independent third party appraisal.
(d) Elimination of $206 million of long-term debt and $9 million of current
debt not assumed from the Acquisitions.
(e) Adjustment for the cost of the Acquisitions including the estimated
direct costs of the Acquisitions and the associated financings. The net
sources and uses of cash are:
<TABLE>
<S> <C>
SOURCES:
New Senior Notes.......................................... $275
New Bank Financing........................................ 225
Borrowings under Receivables and Inventory Facilities..... 215
New Preferred Stock....................................... 80
----
Total sources.......................................... $795
====
USES:
Initial purchase price of Copperweld...................... $650
Initial purchase price of Welded Tube..................... 114
Expected purchase price adjustments....................... 6
Estimated transaction costs and expenses.................. 25
----
Total uses............................................. $795
====
</TABLE>
(f) Issuance of $80 million of New Preferred Stock net of $3 million of
estimated direct costs of issuance and financing.
(g) Elimination of the historical shareholders' equity of Welded Tube and
Copperweld.
6
<PAGE> 8
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
SALES.................................................... $ 554.7 $ 552.6
COSTS AND EXPENSES:
Costs of sales......................................... 490.1 479.1
Selling and administrative............................. 30.2 28.6
Interest expense....................................... 7.5 7.2
Other income........................................... (0.9) (0.7)
------- -------
Total costs and expenses....................... 526.9 514.2
INCOME BEFORE PROVISION FOR INCOME TAXES................. 27.8 38.4
Provision for income taxes............................. 10.4 14.7
------- -------
NET INCOME............................................... $ 17.4 $ 23.7
======= =======
</TABLE>
See notes to combined financial statements.
F-1
<PAGE> 9
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
COMBINED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8.0
Accounts receivable, less allowance for doubtful accounts
of $2.0................................................ 94.0
Inventories:
Raw materials.......................................... 51.5
Work-in-process and finished goods..................... 43.3
Supplies............................................... 19.7
LIFO reserve........................................... (10.3)
-------
Net inventories...................................... 104.2
Other current assets...................................... 0.9
-------
Total current assets................................... 207.1
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements................................ 13.0
Buildings and building equipment.......................... 85.0
Machinery and equipment................................... 350.8
Construction in progress.................................. 54.4
-------
503.2
Accumulated depreciation.................................. (207.4)
-------
Net property, plant and equipment...................... 295.8
OTHER ASSETS, net of amortization of $4.9................... 36.5
-------
$ 539.4
=======
</TABLE>
See notes to combined financial statements.
F-2
<PAGE> 10
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
COMBINED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY:
CURRENT LIABILITIES:
Accounts payable.......................................... $ 71.3
Line of credit and current maturities of long-term debt... 4.0
Salaries, wages and vacation pay.......................... 6.6
Income and other taxes.................................... 7.9
Other..................................................... 7.1
-------
Total current liabilities.............................. 96.9
-------
LONG-TERM DEBT.............................................. 150.2
OTHER LIABILITIES:
Postemployment benefit obligations........................ 40.9
Deferred income taxes..................................... 26.6
Other..................................................... 11.6
-------
Total other liabilities................................ 79.1
STOCKHOLDER'S EQUITY:
Common Stock, $.83-1/3 par value, 6,000,000 shares
authorized; 5,757,216 issued and outstanding........... 4.8
Copperweld Canada Inc., no par value, unlimited shares
authorized; 44,000 issued and outstanding.............. --
Additional paid-in capital................................ 94.8
Retained earnings......................................... 116.3
Accumulated other comprehensive loss........................ (2.7)
-------
Total stockholder's equity............................. 213.2
-------
$ 539.4
=======
</TABLE>
See notes to combined financial statements.
F-3
<PAGE> 11
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 17.4 $ 23.7
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............... 22.8 18.1
Changes in assets and liabilities:
Accounts receivable......................... (15.2) (5.0)
Inventory................................... 21.8 1.4
Accounts payable............................ 5.6 8.4
Other....................................... (8.1) 36.4
-------- --------
Cash provided by operating activities..... 44.3 82.9
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions.......................... (0.4) (4.5)
Additions to property, plant and equipment..... (30.7) (52.2)
Other.......................................... 0.1 0.1
-------- --------
Cash used by investing activities........... (31.0) (56.6)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of cash dividends...................... (5.4) (7.7)
Payment of indebtedness........................ (207.0) (97.0)
Proceeds from borrowings....................... 193.8 73.9
Other.......................................... 0.5 (0.3)
-------- --------
Cash provided (used) by financing
activities................................ (18.1) (31.1)
-------- --------
Decrease in cash and cash equivalents....... (4.8) (4.8)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD...................................... 12.8 7.1
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD....... $ 8.0 $ 2.3
======== ========
</TABLE>
See notes to combined financial statements.
F-4
<PAGE> 12
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 1.
The accompanying unaudited combined 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. Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles for complete
financial statements. All adjustments that are, in the opinion of management,
necessary for a fair presentation have been made and are of a recurring nature
unless otherwise disclosed herein. The results of operations for the interim
periods are not necessarily indicative of results of operations for a full year.
For further information, refer to the combined financial statements and the
notes thereto for the year ended December 31, 1998 herein.
NOTE 2.
On November 10, 1999, Imetal, SA sold all of the stock of Copperweld
Corporation and Copperweld Canada, (the Companies) for $650 million in cash
subject to final adjustments based upon the closing of the acquisition. The
potential purchase adjustment is based on the amount of the stockholder's equity
at November 9, 1999. The Companies' accompanying financial statements have not
been adjusted for this proposed transaction with LTV.
NOTE 3. SEGMENT REPORTING
The Companies operate in two reportable segments consisting of Tubing and
Bimetallics. Tubing manufactures and sells a diversified line of steel tubing
products used in the automotive, agricultural and industrial equipment, fluid
power, construction, recreation and office furniture markets. Bimetallics
manufactures and sells copper-clad aluminum and copper-clad steel wire, rod and
strand used in the telecommunications (primarily cable television and telephone)
and utility industries.
Copperweld's reportable segments are strategic business units grouped by
similar products, technologies and manufacturing processes. Segments are managed
separately because each serves a different market and group of customers.
Segment performance is measured on pretax profit of loss from operations
(dollars in millions).
<TABLE>
<CAPTION>
1999
-----------------------------------
TUBING BIMETALLICS TOTAL
-------- ----------- --------
<S> <C> <C> <C>
For the nine months ended September 30:
Trade sales..................................... $ 473.6 $ 81.1 $ 554.7
Segment income before taxes..................... 16.3 11.5 27.8
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------
TUBING BIMETALLICS TOTAL
-------- ----------- --------
<S> <C> <C> <C>
Trade sales....................................... $ 484.9 $ 67.7 $ 552.6
Segment income before taxes..................... 29.3 9.1 38.4
</TABLE>
F-5
<PAGE> 13
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
1999 1998
NINE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
REVENUE REVENUE
------------------ ------------------
<S> <C> <C>
United States................................... $ 306.7 $ 348.7
Canada.......................................... 248.0 203.9
-------- --------
$ 554.7 $ 552.6
======== ========
</TABLE>
NOTE 4. CONTINGENCY
There has been no significant change in status of the Companies'
contingencies described in the footnotes to the 1998 annual Financial Statement
as of September 30, 1999.
NOTE 5. COMPREHENSIVE LOSS
At September 30, 1999, accumulated other comprehensive loss included in the
balance sheet amounted to $2.7 million with no material changes since December
31, 1998. The accumulated other comprehensive loss at September 30, 1998 was
$4.5 million, with no material changes since December 31, 1997.
NOTE 6. EARNINGS PER SHARE
Basic and diluted earnings per share for the nine months ended September
30, 1999 and 1998, were not presented because the information would not be
meaningful to the users of the Combined Financial Statements due to the nature
of the capital structure of the Companies.
NOTE 7. LINE OF CREDIT
During 1996, and amended in 1999, the Corporation entered into an
uncommitted, unsecured revolving credit agreement with a bank that provides for
demand loans, term loans or letters of credit of up to $10,000,000. Demand loans
bear interest at the bank's prime rate and may be repaid at the option of the
Corporation or upon demand of the bank. Term loans bear interest at the bank's
cost of funds rate plus a margin, and can have maturities ranging from overnight
to 90 days. As of September 30, 1999, there was $4,000,000 of term loans
outstanding, at an average interest rate of 6.5%.
NOTE 8. LONG-TERM DEBT.
INTERCOMPANY CREDIT AND INVESTMENT AGREEMENT
During 1999, the Corporation entered into a credit agreement with IMETAL
that provided for loans in the U.S. of up to the equivalent of 100 million
Euros, in U.S. dollars, and for loans in Canada of up to the equivalent of 75
million Euros, in Canadian dollars. Loans under the agreement may be repaid and
re-borrowed subject to the commitment
F-6
<PAGE> 14
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
available. The maturity of the loans is limited to periods which are multiples
of one month, and carry interest rates that equal the base rate of loans made by
IMETAL under its Facility Agreement plus 1.30%. As of September 30, 1999 there
were $150.2 million in loans outstanding under this agreement. The average
interest rate on the loans outstanding as of September 30, 1999 was 6.68% for
loans in the U.S., and 6.075% for loans in Canada.
F-7
<PAGE> 15
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Boards of Directors and Shareholder
of Copperweld Corporation and Copperweld Canada Inc.
We have audited the accompanying balance sheets as of December 31, 1998 and
1997, of the companies listed in Note 1 and the related statements of income,
shareholders equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the companies' managements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position at December 31, 1998 and 1997,
of the companies listed in Note 1, 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 accounting principles generally accepted in the United States.
Ernst & Young LLP
Pittsburgh, Pennsylvania
January 30, 1999, except for
Note 5 as to which the date is
May 31, 1999
F-8
<PAGE> 16
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
SALES............................................ $ 711.0 $ 662.7 $ 427.8
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales.................................. 617.7 566.9 365.9
Selling and administrative..................... 36.7 38.1 28.7
Interest expense............................... 8.0 8.0 4.5
Other income................................... (1.3) (0.8) (0.5)
-------- -------- --------
Total costs and expenses............... 661.1 612.2 398.6
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES......... 49.9 50.5 29.2
Provision for income taxes..................... 19.1 18.6 9.4
-------- -------- --------
NET INCOME....................................... $ 30.8 $ 31.9 $ 19.8
======== ======== ========
</TABLE>
See notes to combined financial statements
F-9
<PAGE> 17
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
ASSETS:
CURRENT ASSETS
Cash and cash equivalents................................. $ 12.8 $ 7.1
-------- --------
Accounts receivable, less allowance for doubtful accounts
of $2.5 in 1998, and $2.0 in 1997...................... 78.1 91.1
Inventories:
Raw materials.......................................... 70.8 55.8
Work-in-process and finished goods..................... 47.8 58.8
Supplies............................................... 19.2 17.6
LIFO reserve........................................... (13.7) (18.5)
-------- --------
Net inventories...................................... 124.1 113.7
Other current assets...................................... 2.6 4.5
-------- --------
Total current assets................................... 217.6 216.4
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements................................ 12.9 9.2
Buildings and building equipment.......................... 84.1 63.0
Machinery and equipment................................... 344.0 302.2
Construction in progress.................................. 29.0 22.3
-------- --------
470.0 396.7
Accumulated depreciation.................................. (187.7) (168.1)
-------- --------
Net property, plant and equipment...................... 282.3 228.6
OTHER ASSETS, net of accumulated amortization of $4.0 in
1998 and $3.4 in 1997..................................... 31.2 27.2
-------- --------
$ 531.1 $ 472.2
======== ========
</TABLE>
See notes to combined financial statements
F-10
<PAGE> 18
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY:
CURRENT LIABILITIES:
Accounts payable.......................................... $ 65.5 $ 62.5
Line of credit and current maturities of long-term debt... 9.2 4.0
Salaries, wages and vacation pay.......................... 7.6 12.9
Income and other taxes.................................... 5.7 7.0
Other..................................................... 12.4 10.8
-------- --------
Total current liabilities.............................. 100.4 97.2
LONG-TERM DEBT.............................................. 154.5 160.6
OTHER LIABILITIES:
Pension benefits.......................................... -- 1.4
Postemployment benefit obligations........................ 39.9 41.7
Deferred income taxes..................................... 25.1 22.9
Other..................................................... 11.8 12.5
-------- --------
Total other liabilities................................ 76.8 78.5
STOCKHOLDER'S EQUITY:
Common stock:
Copperweld Corporation, $.83 1/3 par value, 6,000,000
shares authorized; 5,757,216 issued and
outstanding.......................................... 4.8 4.8
Copperweld Canada Inc., no par value, unlimited shares
authorized; 44,000 issued and outstanding............ -- --
Additional paid-in capital................................ 94.8 51.8
Retained earnings......................................... 104.3 81.2
Accumulated other comprehensive loss:..................... (4.5) (1.9)
-------- --------
Total stockholders equity.............................. 199.4 135.9
-------- --------
$ 531.1 $ 472.2
======== ========
</TABLE>
See notes to combined financial statements
F-11
<PAGE> 19
COPPERWELD CORPORATION AND COPPERWELD CANADA INC
COMBINED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
-------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME/(LOSS) TOTALS
------ ---------- -------- ------------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995.... $ 4.8 $ 26.8 $ 54.3 $ (3.7) $ 82.2
Net income.................... -- -- 19.8 -- 19.8
Minimum pension liability net
of tax (liability of
$.3)....................... -- -- -- 0.3 0.3
------
Comprehensive Income....... 20.1
------
Dividends declared............ -- -- (11.2) -- (11.2)
------ ------ ------ ------ ------
BALANCE AT DECEMBER 31, 1996.... $ 4.8 $ 26.8 $ 62.9 $ (3.4) $ 91.1
Net income.................... -- -- 31.9 -- 31.9
Cumulative translation
adjustment................. -- -- -- (0.9) (0.9)
Minimum pension liability net
of tax liability of $1.6... -- -- -- 2.4 2.4
------
Comprehensive Income....... 33.4
------
Dividends declared............ -- -- (13.6) -- (13.6)
Capital contribution by
parent..................... -- 25.0 -- -- 25.0
------ ------ ------ ------ ------
BALANCE AT DECEMBER 31, 1997.... $ 4.8 $ 51.8 $ 81.2 $ (1.9) $135.9
Net income.................... -- -- 30.8 -- 30.8
Cumulative translation
adjustment................. -- -- -- (2.6) (2.6)
------
Comprehensive Income....... 28.2
------
Dividends declared............ -- -- (7.7) -- (7.7)
Sale of subsidiary stock to
parent net of tax liability
of $1.0.................... -- 43.0 -- -- 43.0
------ ------ ------ ------ ------
BALANCE AT DECEMBER 31, 1998.... $ 4.8 $ 94.8 $104.3 $ (4.5) $199.4
====== ====== ====== ====== ======
</TABLE>
See notes to combined financial statements
F-12
<PAGE> 20
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 30.8 $ 31.9 $ 19.8
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization............... 22.9 19.8 12.8
Provisions for contingent liabilities and
asset write-downs......................... -- -- 4.9
Deferred income taxes....................... 0.6 1.4 (1.0)
Changes in assets and liabilities:
Accounts receivable......................... 11.3 2.0 (2.6)
Inventory................................... (12.9) (6.8) (12.8)
Accounts payable............................ (1.8) (4.8) 8.9
Other....................................... 3.1 (9.1) (1.2)
-------- -------- --------
Cash provided by operating activities..... 54.0 34.4 28.8
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment..... (83.2) (30.8) (10.2)
Business acquisitions.......................... (4.6) (98.3) --
Proceeds from sale of energy business and
other....................................... 0.1 0.5 2.6
-------- -------- --------
Cash used by investing activities......... (87.7) (128.6) (7.6)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of cash dividends...................... (7.7) (13.6) (11.2)
Payment of indebtedness........................ (117.4) (95.1) (30.4)
Proceeds from borrowings....................... 122.2 155.7 17.0
Sale of subsidiary stock to parent, net of
tax......................................... 43.0 -- --
Additional investment -- parent................ -- 25.0 --
Subordinated loan -- parent.................... -- 28.0 --
Other.......................................... (0.7) 0.5
-------- -------- --------
Cash provided (used) by financing
activities............................. 39.4 100.5 (24.6)
-------- -------- --------
Increase in cash and cash equivalents..... 5.7 6.3 (3.4)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR... 7.1 0.8 4.2
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR......... $ 12.8 $ 7.1 $ 0.8
======== ======== ========
</TABLE>
See notes to combined financial statements
F-13
<PAGE> 21
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1. ACCOUNTING POLICIES
ORGANIZATION
The financial statements of Copperweld Corporation (the "Corporation") and
Copperweld Canada Inc. ("Copperweld Canada"), (the "Companies") include the
accounts of the Companies and subsidiaries after elimination of intercompany
transactions. Sales are predominantly derived from the manufacture of mechanical
and structural steel tubing in the United States and Canada, with additional
sales coming from the manufacture of bimetallic wire in the United States and
United Kingdom. The principal markets for tubing products are the service
center, automotive, agricultural, construction and industrial equipment markets,
primarily in the United States and Canada. The bimetallic wire products are sold
to domestic wire fabricators serving the cable television and telephone markets,
and to a lesser degree European and other foreign-based wire fabricators. The
Companies perform credit evaluations of their customers' financial condition and
generally do not require collateral.
The Companies are wholly-owned subsidiaries of Imetal, SA (Imetal), a
French holding company.
The combined financial position and combined results of operation are
presented in U.S. dollars in accordance with generally accepted accounting
principles governed by U.S. accounting rules.
Effective August 31, 1998, the Corporation sold 100% of the capital stock
of Copperweld Canada, which was acquired on April 25, 1997, to Imetal (Note 2),
the Corporation's parent company. The financial statements for 1998 are
presented as "combined" financial statements, since both entities are under
common control of Imetal. The effect of this combined presentation on the 1997
financial statements was not significant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Companies' policy is to treat investments with maturities at
acquisition of three months or less as cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market (net realizable
value). Tubing products and copper inventories of U.S. operations are valued on
the last-in, first-out (LIFO) cost method. Tubing products and bimetallic wire
inventories of Canadian and
F-14
<PAGE> 22
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
United Kingdom operations (Note 2) are valued on a first-in, first-out (FIFO)
basis. Other inventories are valued at average cost, or standard cost which
approximates average cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is calculated
on the straight-line method based upon estimated useful lives of five to forty
years for land improvements, three to forty years for buildings and building
equipment and three to thirty years for machinery and equipment.
INTANGIBLES AND OTHER ASSETS
The long-term other asset balance amounted to $31.2 million in 1998, and
$27.2 million in 1997. Of these balances, Goodwill represents $19.2 million and
$16.2 million net of accumulated amortization of $1.5 million and $.6 million
for fiscal years 1998 and 1997 respectively. Goodwill, representing the excess
of cost over the fair value of net tangible and identifiable intangible assets
of acquired businesses, is stated at cost and amortized to expense on a straight
line basis over a period of 20 years. On an ongoing basis, when there are
indicators of impairment such as recurring losses, the Companies evaluate the
carrying value of intangibles resulting from business acquisitions. There has
been no impairment for the years ended December 31, 1998, 1997 and 1996.
REVENUE RECOGNITION
Product sales are recorded at the time of shipment.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of Copperweld Canada and the Corporation's
United Kingdom operation, Sayton Fine Wire Division are translated into U.S.
dollars at current exchange rates (the functional currencies are the Canadian
dollar and the pound sterling, respectively). Revenue and expense accounts of
these operations are translated at average exchange rates prevailing during the
year. These translation adjustments are accumulated in a separate component of
stockholder's equity and included in other comprehensive loss.
Foreign currency transaction gains and losses are included in determining
net income for the year in which the exchange rate changes.
CHANGE IN ACCOUNTING
During 1998, SOP 98-1, Capitalization of Internal Use Software, was early
adopted. The effect of this accounting change was to increase pretax income by
approximately $1.1 million.
F-15
<PAGE> 23
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 "Accounting for Derivative instruments and Hedging Activities" which
requires all derivatives to be recognized as either assets or liabilities in the
balance sheet and be measured at fair value. Changes in the fair value of
derivatives will be recognized in net income unless specific hedge accounting
criteria are met. The Companies intend to adopt this statement in 2000 and it is
not expected to have a material impact on the Companies' financial statements.
COMPREHENSIVE INCOME
During 1998, the Corporation adopted Financial Accounting Standards Board
Statement No. 130, Reporting Comprehensive Income. This standard changes the
manner in which the elements of comprehensive income (minimum pension liability
and foreign currency translations) are displayed in the financial statements.
The 1997 and 1996 amounts have been restated to comply with this standard.
NOTE 2. ACQUISITIONS AND DIVESTITURE
On April 25, 1997, the Corporation acquired Ferrum Inc., subsequently
renamed Copperweld Canada Inc., a tubing manufacturing operation located in
Canada, and The Tube and Steel Company of America (TASCOA), a related United
States distribution company. This acquisition was accounted for under the
purchase method of accounting; and accordingly, the results of operations of the
acquired company are included in the combined financial statements from the date
of the acquisition. Total consideration amounted to $98.4 million in cash and
liabilities assumed. Assets and liabilities acquired were adjusted to estimated
fair market value. The excess of the purchase price of $16.3 million is
primarily classified as goodwill and is being amortized over 20 years.
A portion of the acquisition cost was financed through a $25.0 million
capital contribution and a $27.8 million convertible unsecured note from Imetal.
The following unaudited pro forma financial information reflects the
acquisitions as if they had occurred on January 1, 1996 (dollars in millions).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Sales and revenues......... $ 764.8 $ 719.1
Net income................. 34.7 22.7
</TABLE>
The above amounts are based upon certain assumptions and estimates which
the Companies believe are reasonable. The pro forma results do not necessarily
represent results which would have occurred if the acquisitions had taken place
at the date and on the basis assumed above.
Effective August 31, 1998, Imetal acquired 100% of the capital stock of
Copperweld Canada for $44.0 million from the Corporation. Since both entities
are under common control, no gain was recognized for financial statement
purposes. Instead, the proceeds
F-16
<PAGE> 24
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
received of ($44 million), net of income taxes $1.0 million were treated as a
contribution of capital. Cash proceeds from the sale were utilized to pay down
debt incurred during the original acquisition of Copperweld Canada by the
Corporation. Although no longer the legal owner, the Corporation retains
management responsibility for Copperweld Canada.
On March 31, 1998, the Corporation purchased the assets of PVH Copperply,
in the United Kingdom, for $1.2 million. This acquisition was accounted for
under the purchase method of accounting; and accordingly, the results of
operations of the acquired company are included in the combined financial
statements from the date of the acquisition. Substantially all of the purchase
was allocated to goodwill ($1.0 million) and is being amortized over 20 years.
On July 1, 1998, the Corporation purchased 90% of the capital stock of
Sayton Fine Wires Limited, located in Telford, England, for $3.3 million. The
90% net assets interest, at the time of purchase was valued at $.7 million. This
acquisition was accounted for under the purchase method of accounting; and
accordingly, the results of operations of the acquired company are included in
the combined financial statements from the date of the acquisition. Goodwill in
the amount of $2.9 million, resulting from the acquisition, is being amortized
over 20 years.
NOTE 3. INVENTORIES
Inventories at December 31, 1998 and 1997, valued on the basis set forth in
Note 1, were as follows (dollars in millions):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
LIFO method.................................... $ 52.2 $ 59.3
FIFO and average cost method................... 71.9 54.4
-------- --------
Net inventories.............................. $ 124.1 $ 113.7
======== ========
</TABLE>
NOTE 4. LINE OF CREDIT
During 1996, the Corporation entered into an uncommitted, unsecured
revolving credit agreement with a bank that provides for demand loans, term
loans or letters of credit of up to $10 million. Demand loans bear interest at
the bank's prime rate and may be repaid at the option of the Corporation or upon
demand of the bank. Term loans bear interest at the bank's cost of funds rate
plus .25%, and can have maturities ranging from overnight to 90 days. As of
December 31, 1998 and 1997, there were $6.0 million and $4.0 million,
respectively, of term loans outstanding.
F-17
<PAGE> 25
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997, excluding the line of credit
and current maturities, is summarized by type of borrowing as follows (dollars
in millions):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Bank Debt Agreement, variable interest rates,
payable 1999 through 2002...................... $ 128.4 $ 132.5
Convertible unsecured subordinated
note-parent.................................. 26.1 28.1
-------- --------
Long-term debt................................. $ 154.5 $ 160.6
======== ========
</TABLE>
PAYMENTS
The annual maturities through the year 2007 on long-term debt outstanding,
including debt classified as current maturities, at December 31, 1998, are as
follows: 1999 -- $9.2 million; 2002 -- $128.4 million; 2007 -- $26.1 million.
BANK DEBT AGREEMENT
On April 25, 1997, in connection with the acquisition of Copperweld Canada
and the related U.S. distribution company, the Companies entered into the
Agreement with a group of banks which provides for loans up to a maximum of
$180.0 million through May 27, 2002. The Agreement provides for a Tranche A
facility and a Tranche B facility.
The Tranche A facility provides for loans of up to $100.0 million, with a
$5.0 million reduction on May 27, 1999, a $5.0 million reduction on May 27,
2000, a $10.0 million reduction on May 27, 2001, and a withdrawal of the
commitment on May 27, 2002. Loans under this facility may be repaid and
re-borrowed subject to the commitment available. As of December 31, 1998, there
were $49.2 million of Tranche A loans outstanding. Under the Tranche A facility,
the Companies may select from various published interest rate indices as defined
by the Agreement, to which a premium of between .45% and .70% is added based
upon the attainment of certain financial ratios. At December 31, 1998, the
average interest rate on outstanding borrowings, including the premium and
reduced by the effect of certain interest exchange agreements, was 5.98%.
The Tranche B facility provides for loans of up to $80.0 million which are
subject to renewal by the banks no later than sixteen months prior to the
Tranche B maturity date then in effect, and a final maturity on May 27, 2002.
Loans under this facility may be repaid and re-borrowed subject to the
commitment available. As of December 31, 1998, there were $79.2 million of
Tranche B loans outstanding. Under the Tranche B facility, the Companies may
select from various published interest rate indices as defined by the Agreement,
to which a premium of between .30% and .55% is added based upon the attainment
of certain financial ratios. At December 31, 1998, the average interest rate on
outstanding borrowings, including the premium and reduced by the effect of
certain interest exchange agreements, was 6.04%.
F-18
<PAGE> 26
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Companies are required to pay commitment fees of .20% per annum on the
unused portion of the Tranche A facility, and .15% per annum on the unused
portion of the Tranche B facility.
The Agreement is not secured by any of the assets of the Companies, but
does prohibit the Companies from pledging their assets to any third party. The
Agreement contains restrictive financial covenants including the maintenance of
fixed charge coverage, minimum net worth and debt-to-net worth ratios.
On January 10, 1999, the Corporation became an Additional Borrower in a
Facility Agreement between Imetal, S.A., Scentcount Limited, Societe Generale
(Paris) and Societe Generale, London Branch. This Facility was used to refinance
existing debt of Tranche A and B. The Facility provides for four separate
Tranches, and the Company is authorized to borrow under the Tranche 2 Facility,
which has a total commitment of 595 million Euros, and which has a final
maturity of January 10, 2004.
Loans under this Facility may be repaid and re-borrowed subject to the
commitment available. Under the Tranche 2 Facility, the Corporation may borrow
at the LIBOR rate plus a margin of between .40% and 1.25%, based on the
attainment by Imetal of certain financial ratios.
The Corporation has irrevocably, unconditionally, jointly and severally
guaranteed the obligations of each other Obligor of the Facility.
During May 1999, Copperweld Canada began to borrow directly from Imetal and
repaid all amounts outstanding, as of May 31, 1999, on Tranche A and B loans.
Copperweld Canada borrows at the LIBOR rate plus a margin of between .45% and
1.30%.
CONVERTIBLE UNSECURED SUBORDINATED NOTE -- PARENT
In connection with the acquisition of the Canadian tube manufacturing
operations (April 25, 1997) by the Corporation, Copperweld Canada entered into a
Convertible Unsecured Subordinated Note Agreement with Imetal for $26.1 million.
The note is due in its entirety on June 30, 2007, bears interest at the rate of
7.80%, is convertible to common stock of Copperweld Canada at any time upon
notice by Imetal, and is subordinated to the Companies' bank debt.
NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS
INTEREST EXCHANGE AGREEMENTS
As of December 31, 1998, the Companies had three interest exchange (swap)
agreements in effect, which fixed the interest rate on certain loans, made under
the Agreement. A fixed rate of 5.19%, before premium, was set on $5.0 million of
loans effective December 15, 1995, and continuing until December 15, 2000. A
fixed rate of 5.135%, before premium, was set on $15.0 million of loans
effective February 2, 1998, and continuing until February 2, 1999. A fixed rate
of 4.98%, before premium, was set on $65 million of loans effective February 11,
1998, and continuing until February 11, 1999.
F-19
<PAGE> 27
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FORWARD CURRENCY SALES CONTRACTS
To protect against the reduction in value of foreign currency cash flows,
Copperweld Canada entered into forward currency sales contracts to hedge a
portion of its anticipated export sales in U.S. dollars over the ensuing twelve
months. At December 31, 1998, there were no forward currency sales contracts
outstanding. At December 31, 1997, the contract value of forward currency sales
contracts was $60.5 million, and a loss of $2.1 million was recorded during 1997
to reflect the change in current market rates. Under the Corporation's current
accounting policies, the forward contracts do not qualify as hedges for
financial reporting purposes and accordingly the net difference between the
contract value and the current market value was recorded in the combined balance
sheets, with gains or losses caused by changes in current market rates reflected
directly in income.
NOTE 7. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PLANS
The Companies adopted Statement of Financial Accounting Standards No. 132,
Employees' Disclosures about Pensions and Other Postretirement Benefits, as of
January 1, 1998. Disclosures for 1997 and 1996 have been restated to conform to
current year presentations.
The Companies have several trusteed defined benefit pension plans covering
substantially all employees. Plan assets primarily include marketable debt and
equity securities. Plans covering union represented and non-represented
personnel generally provide benefits using a formula that is based upon employee
compensation. In addition to providing pension benefits, the Companies provide
certain health care and life insurance benefits for eligible retired employees
and their dependents. The cost of these postretirement benefits is recognized by
the Companies during the employees' years of service.
F-20
<PAGE> 28
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables set forth the change in benefit obligation, the change
in plan assets, funded status and amounts recognized in the combined balance
sheets of the pension and other postretirement benefits as of December 31, 1998
and 1997 (dollars in millions):
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------- ------------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of
year............................ $ 144.9 $ 133.4 $ 38.8 $ 41.6
Service cost.................... 4.2 3.5 .8 .9
Interest cost................... 9.7 8.8 2.6 2.5
Participant contributions....... .1 -- -- --
Plan amendments................. .3 -- -- (1.8)
Exchange rate changes........... (2.6) (.8) (.7) (.4)
Curtailment (gain) or loss...... -- -- -- (3.3)
Benefits paid................... (7.5) (6.8) (1.9) (1.8)
Actuarial (gain) or loss........ 5.5 6.8 1.0 1.1
-------- -------- -------- --------
Benefit obligation at end of
year............................ $ 154.6 $ 144.9 $ 40.6 $ 38.8
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
beginning of year............... $ 138.5 $ 119.9 $ -- $ --
Actual return on plan assets.... 24.1 21.4 -- --
Employer contributions.......... 7.1 5.5 1.9 1.8
Participant contributions....... .1 .1 -- --
Benefits paid................... (7.5) (6.8) (1.9) (1.8)
Administrative expenses......... (1.2) (.6) -- --
Exchange rate changes........... (2.7) (1.0) -- --
-------- -------- -------- --------
Fair value of plan assets at end of
year............................ $ 158.4 $ 138.5 $ -- $ --
RECONCILIATION OF FUNDED STATUS:
Funded status...................... $ 3.8 $ (6.4) $ (40.6) $ (38.8)
Unrecognized actuarial (gain) or
loss............................ (2.0) 3.3 3.3 2.3
Unrecognized transition (asset) or
obligation...................... (1.5) (1.9) -- --
Unrecognized prior service cost.... 5.4 5.7 (2.6) (3.1)
Other.............................. -- .1 -- (2.1)
-------- -------- -------- --------
Net amount recognized at
year-end................. $ 5.7 $ .8 $ (39.9) $ (41.7)
======== ======== ======== ========
</TABLE>
F-21
<PAGE> 29
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------- ------------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
AMOUNTS RECOGNIZED IN THE COMBINED
BALANCE SHEETS CONSIST OF:
Prepaid benefit cost............ $ 8.5 $ 2.0 $ -- $ --
Accrued benefit liability....... (5.0) (7.8) (39.9) (41.7)
Intangible asset................ 0.2 4.7 -- --
Accumulated other comprehensive
income........................ 2.0 1.9 -- --
-------- -------- -------- --------
Net amount recognized at
year-end................. $ 5.7 $ .8 $ (39.9) $ (41.7)
======== ======== ======== ========
Other comprehensive income
attributable to change in
additional minimum liability
recognition........................ $ .1 $ 4.0
</TABLE>
<TABLE>
<CAPTION>
PENSION BENEFITS
--------------------
1998 1997
-------- --------
<S> <C> <C>
ADDITIONAL YEAR-END INFORMATION FOR
PENSION PLANS WITH ACCUMULATED BENEFIT
OBLIGATIONS IN EXCESS OF PLAN ASSETS:
Projected benefit obligation......... $ 36.6 $ 49.0
Accumulated benefit obligation....... 34.0 47.5
Fair value of plan assets............ 30.4 42.3
</TABLE>
The following table summarizes the benefit costs and the assumptions used
in calculating these costs (dollars in millions):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
--------------------------- ------------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC
BENEFIT COST:
Service cost..................... $ 4.2 $ 3.5 $ 2.9 $ 0.8 $ 0.9 $ 0.7
Interest cost.................. 9.7 8.8 6.8 2.6 2.5 2.1
Expected return on plan
assets....................... (12.1) (9.5) (7.2) -- -- --
Amortization of prior service
cost....................... 0.6 0.6 0.6 (0.4) (0.4) (0.3)
Amortization of transitional
(asset) or obligation........ (0.4) (0.4) (0.4) -- -- --
Recognized actuarial (gain) or
loss......................... 0.1 0.2 0.4 (0.1) (0.1) --
------- ------- ------- ------- ------- -------
Net periodic benefit
cost.................. $ 2.1 $ 3.2 $ 3.1 $ 2.9 $ 2.9 $ 2.5
WEIGHTED-AVERAGE ASSUMPTIONS AS
OF DECEMBER 31:
Discount rate.................... 6.25%- 7.00% 7.25% 6.25%- 6.25%- 7.25%
6.75% 6.75% 7.00%
Expected long-term rate of return
on plan assets................. 8.00%- 8.00%- 9.50% N/A N/A 7.25%
9.50% 9.50%
Rate of compensation increase.... 4.00%- 4.50%- 6.00% 6.00% 6.00% 6.00%
5.50% 5.50%
</TABLE>
F-22
<PAGE> 30
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
For measurement purposes, an 8.5% - 9.0% annual rate of increase for
non-medicare eligible employees, and a 6.5% annual rate of increase for Medicare
eligible employees on the per capita cost of covered health care benefits was
assumed for 1998. The rate is assumed to decrease gradually to 4.0% - 5.5% for
2004 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one percentage change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------------------
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
<S> <C> <C>
Effect on total service and interest cost components
for 1998............................................... $ 0.3 $ (0.2)
Effect on year end 1998 postretirement benefit
obligation........................................... 2.7 (2.3)
</TABLE>
NOTE 8. INCOME TAXES
The composition of the Companies' income tax expense and the reconciliation
of the U.S. federal statutory tax rate are presented below (dollars in
millions):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- ----
<S> <C> <C> <C>
Income tax expense (benefit):
Current: Federal........................................ $15.6 $13.3 $8.5
State and provincial.......................... 2.9 3.9 1.8
----- ----- ----
18.5 17.2 10.3
Deferred: Federal, state and provincial................. .6 1.4 (0.9)
----- ----- ----
Provision for income taxes........................... $19.1 $18.6 $9.4
===== ===== ====
U.S. Federal statutory rate............................... 35.0% 35.0% 35.0%
State and Provincial tax, net of federal tax benefit...... 3.1 5.0 4.1
Reduction of excess federal tax accrual................... 0.0 (1.4) (6.8)
Other..................................................... .1 (1.8) (.2)
----- ----- ----
Effective tax rate...................................... 38.2% 36.8% 32.1%
===== ===== ====
</TABLE>
F-23
<PAGE> 31
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Companies' deferred tax liabilities and
assets as of December 31, 1998 and 1997 are summarized as follows (dollars in
millions):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Deferred tax liabilities:
Excess of book basis over tax basis for fixed assets...... $43.5 $44.6
Excess of pension fund contributions over financial
statement expense...................................... 5.4 3.9
----- -----
48.9 48.5
Deferred tax assets:
Financial statement accruals relating to:
Retirement benefits.................................... 14.4 14.6
Deferred compensation.................................. 2.1 2.0
Contingent liabilities and asset write-downs........... 3.8 4.2
Other.................................................. 3.5 4.8
----- -----
23.8 25.6
----- -----
Deferred income taxes....................................... $25.1 $22.9
===== =====
</TABLE>
F-24
<PAGE> 32
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. OPERATING LEASES
The Companies are obligated under terms on noncancelable operating leases
for future minimum rentals on certain operating equipment and buildings. Total
expense recognized under these operating leases was $4.1 million; $3.5 million,
and $4.5 million during the years ended December 31, 1998, 1997 and 1996 and
future commitments were as follows for the years ending on December 31 (dollars
in millions):
<TABLE>
<CAPTION>
1998
-----
<S> <C>
1999.................................................... $ 4.0
2000.................................................... 3.3
2001.................................................... 2.8
2002.................................................... 2.6
2003.................................................... 2.4
Thereafter.............................................. 10.0
</TABLE>
NOTE 10. CONTINGENT LIABILITIES
CSC BANKRUPTCY
On November 22, 1993, CSC Industries, Inc. (CSC) (a former affiliate of the
Corporation) and its wholly-owned subsidiary, Copperweld Steel Company,
announced that they had filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code. CSC emerged from bankruptcy on
September 28, 1995, however, certain claims against the Corporation regarding
workers' compensation continue to be pursued by a third party, as noted below.
The outcome of this matter is not certain at this time, however, management does
not expect that any potential loss would be significant to the Corporation's
financial statements.
CSC WORKERS' COMPENSATION
During the period 1973 to 1987, under the Corporation's ownership of CSC,
CSC workers' compensation claims were covered under a self-insurance program,
for which the Corporation had provided certain financial guarantees. During
1995, CSC ceased making payments for workers' compensation claims incurred
during the period preceding its bankruptcy in 1993. As a result, during 1996,
the Corporation's insurance carriers were requested by the Ohio Bureau of
Workers' Compensation (OBWC) to honor their surety bonds for the continuing
self-insured claims liability. During 1996, the Corporation recorded a liability
of approximately $3.7 million (included in selling and administrative expenses)
to reflect management's estimate of the amount necessary to settle these claims.
During 1997, one insurance carrier filed a Proof of Claim against the bankrupt
estate of CSC in U.S. Bankruptcy Court. This case was disallowed by the Court
upon the finding that the OBWC had settled and released all of its claims
against the Liquidation Trustee as successor to CSC, although the ruling does
not preclude the OBWC from pursuing its claim outside of the Bankruptcy Court's
jurisdiction. At this time no direct claim or threat has been made by OBWC
against the Corporation. Management believes that no additional material
liabilities will be incurred by the Corporation related to this matter, beyond
the amount recorded in 1996.
F-25
<PAGE> 33
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER
In 1987, the Corporation permanently ceased operations at one of its
divisions and sold its assets. In connection with the sale, the Corporation
guaranteed $5.7 million of the acquirer's debt (due in 2012). The principal
portion of this obligation has been defeased through the purchase of a municipal
bond that was placed in an escrow fund. In addition, the Corporation retained a
security interest in the fixed assets of the acquirer in connection with the
guarantee. The amount of loss, if any, in the event that the Corporation's
guarantee is called upon, would be limited to the after-tax amount by which the
loan balance exceeds the related collateral value. In 1993, the Corporation
recorded a reserve in its financial statements of $1.5 million on a pretax basis
as an estimate of its net exposure in the event the Corporation's guarantee is
called upon. The reserve amount continues to be carried in the Corporation's
consolidated balance sheet at December 31, 1998.
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments reported in the combined
balance sheets approximate fair values.
NOTE 12. SEGMENT REPORTING
The Companies operate in two reportable segments consisting of Tubing and
Bimetallics. Tubing manufactures and sells a diversified line of steel tubing
products used in the automotive, agricultural and industrial equipment, fluid
power, construction, recreation and office furniture markets. Bimetallics
manufactures and sells copper-clad aluminum and copper-clad steel wire, rod and
strand used in the telecommunications (primarily cable television and telephone)
and utility industries.
Copperweld's reportable segments are strategic business units grouped by
similar products, technologies and manufacturing processes. Segments are managed
separately because each serves a different market and group of customers. The
accounting policies of the segments are the same as those described in the
summary of significant accounting
F-26
<PAGE> 34
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
policies. Segment performance is measured on pretax profit or loss from
operations (dollars in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------
TUBING BIMETALLICS TOTAL
-------- ----------- --------
<S> <C> <C> <C>
Trade sales....................................... $ 619.4 $ 91.6 $ 711.0
Interest and other income......................... 1.1 0.2 1.3
Interest expense.................................. (7.3) (0.7) (8.0)
Segment income before taxes....................... 37.1 12.8 49.9
Segment assets.................................... 489.9 59.0 548.9
Capital expenditures.............................. 71.0 12.2 83.2
Depreciation and amortization..................... 20.6 2.3 22.9
Assets
Total assets for reportable segments............ 548.9
Intersegment eliminations......................... (17.8)
--------
Consolidated Total.............................. $ 531.1
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------
TUBING BIMETALLICS TOTAL
-------- ----------- --------
<S> <C> <C> <C>
Trade Sales...................................... $ 559.0 $ 103.7 $ 662.7
Interest and other income........................ 0.5 0.3 0.8
Interest expense................................. (7.2) (0.8) (8.0)
Segment income before taxes...................... 33.5 17.0 50.5
Segment assets................................... 431.1 41.2 472.3
Capital expenditures............................. 27.2 3.6 30.8
Depreciation and amortization.................... 18.0 1.8 19.8
Assets
Total assets for reportable segments........... 472.3
Intersegment eliminations........................ (0.1)
--------
Consolidated Total............................. $ 472.2
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------
TUBING BIMETALLICS TOTAL
------ ----------- ------
<S> <C> <C> <C>
Trade sales......................................... $328.4 $99.4 $427.8
Interest and other income........................... 0.2 0.3 0.5
Interest expense.................................... (4.0) (0.5) (4.5)
Segment income before taxes......................... 13.6 15.6 29.2
Segment assets...................................... 228.0 37.1 265.1
Capital expenditures................................ 9.1 1.1 10.2
Depreciation and amortization....................... 11.1 1.7 12.8
Assets
Total assets for reportable segments and
consolidated total............................. $265.1
======
</TABLE>
F-27
<PAGE> 35
COPPERWELD CORPORATION AND COPPERWELD CANADA INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States........ $ 441.4 $ 226.0 $ 498.4 $ 168.2 $ 427.8 $ 144.6
Canada............... 269.6 87.5 164.3 87.6 0 0
-------- -------- -------- -------- -------- --------
$ 711.0 $ 313.5 $ 662.7 $ 255.8 $ 427.8 $ 144.6
======== ======== ======== ======== ======== ========
</TABLE>
NOTE 13. OTHER INFORMATION
SUPPLEMENTAL INCOME
Supplemental income and cash flow information relating to operations for
the years ended December 31, 1998 and 1997 is as follows (dollars in millions):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Capitalized interest....................................... $ 1.7 $ 0.2 $ 0.1
Interest paid.............................................. $ 11.2 $ 7.1 $ 4.3
Income taxes paid.......................................... $ 18.1 $ 15.7 $ 11.4
</TABLE>
NOTE 14. EARNINGS PER SHARE
Basic and diluted earnings per share for the years ended December 31, 1998,
1997 and 1996, were not presented because the information would not be
meaningful to the users of the combined financial statements due to the nature
of the capital structure of the Companies.
F-28
<PAGE> 36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LTV CORPORATION
-----------------------------
By: /s/ George T. Henning
--------------------------
George T. Henning
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: January 24, 2000
<PAGE> 37
Exhibit Index
-------------
Exhibit No Document
- ---------- --------
23.1 Consent of Ernst & Young LLP
<PAGE> 1
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-52543, Form S-8 No. 33-52545, Form S-8 No. 33-54229, Form S-8
No. 33-56857, Form S-8 No. 33-56861, Form S-8 No. 33-61399, Form S-8 No.
33-20431, Form S-8 No. 333-25865, Form S-3 No. 333-93901 and Form S-4 No.
333-93903) pertaining to the Non-Employee Director Stock Option Plan, Management
Incentive Program, LTV Steel Group Employee Stock Ownership Plan, Non-Employee
Directors' Equity Compensation Plan, The Hourly Employee Stock Payment
Alternative Plan, Non-Qualified Stock Option Plan for Certain Key Executives of
Continental Emsco Company, Salaried Employee Stock Option Plan, The LTV
Corporation Amended and Restated Management Incentive Program, Prospectus of
1,600,000 shares of 8-1/4% Series A Cumulative Convertible Preferred Stock and
Prospectus of 11-3/4% Senior Exchange Notes Due 2009, respectively, of The LTV
Corporation of our report dated January 30, 1999 (except for Note 5, to which
the date is May 31, 1999) with respect to the combined financial statements of
Copperweld Corporation and Copperweld Canada Inc. included in this Current
Report (Form 8-K/A).
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
January 24, 2000
