- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 333-31071
Wells Aluminum Corporation
(Exact name of Registrant as Specified in Its Charter)
Maryland 35-1139550
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
809 Gleneagles Court, Suite 300 21286
Baltimore, Maryland (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (410) 494-4500
-----------
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
As of August 11, 1999, the registrant had 729,892.5 shares of Common
Stock outstanding.
<PAGE>
WELLS ALUMINUM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements (Unaudited): Page
Balance Sheets as of June 27, 1999 and December 31, 1998
(audited) 1
Statements of Operations for the three months and the six
months ended June 27, 1999 and June 28, 1998 2
Statements of Cash Flows for the six months ended June 27,
1999 and June 28, 1998 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
WELLS ALUMINUM CORPORATION
BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Jun. 27, Dec. 31,
1999 1998
--------- ---------
(Unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................................... $ 6,269 $ 7,619
Accounts receivable, principally trade, less allowances of $442 and $442....... 33,276 26,213
Inventories ................................................................... 19,910 20,394
Other current assets .......................................................... 1,889 2,319
--------- ---------
Total current assets ...................................................... 61,344 56,545
Property, plant and equipment, at cost less accumulated depreciation .............. 29,540 28,276
Debt issuance costs, net of accumulated amortization of $1,294 and $984 .......... 3,455 3,765
Goodwill, net of accumulated amortization of $14,256 and $13,662 .................. 32,768 33,362
Other assets ...................................................................... 2,530 2,530
--------- ---------
Total assets .............................................................. $ 129,637 $ 124,478
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, principally trade ........................................... $ 17,722 $ 14,186
Accrued expenses .............................................................. 7,898 10,053
--------- ---------
Total current liabilities ................................................. 25,620 24,239
Long-term debt .................................................................... 105,000 105,000
Deferred income taxes ............................................................. 5,187 5,446
Deferred benefit plan obligations ................................................. 2,833 2,572
--------- ---------
Total liabilities ......................................................... 138,640 137,257
--------- ---------
Stockholders' equity:
Common stock, Class A, par value $0.01 per share, 1,100,000 shares
authorized and 729,892.5 and 728,642.5 shares issued ...................... 7 7
Additional paid-in capital .................................................... 10 --
Accumulated deficit ........................................................... (8,045) (11,811)
Additional minimum pension liability .......................................... (975) (975)
--------- ---------
Total stockholders' equity ................................................ (9,003) (12,779)
--------- ---------
Total liabilities and stockholders' equity ................................ $ 129,637 $ 124,478
========= =========
</TABLE>
See accompanying notes.
1
<PAGE>
WELLS ALUMINUM CORPORATION
STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
Jun. 27, Jun. 28, Jun. 27, Jun. 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales .................................. $ 60,780 $ 66,855 $116,936 $130,674
Cost of sales .............................. 49,377 55,580 95,247 109,275
-------- -------- -------- --------
Gross profit ............................... 11,403 11,275 21,689 21,399
Selling, general and administrative expenses 5,229 4,140 9,736 8,037
-------- -------- -------- --------
Operating profit ........................... 6,174 7,135 11,953 13,362
Interest expense, net of interest income ... 2,737 2,700 5,467 5,405
-------- -------- -------- --------
Earnings before income taxes ............... 3,437 4,435 6,486 7,957
Income taxes ............................... 1,442 1,710 2,721 3,204
-------- -------- -------- --------
Net earnings ............................... $ 1,995 $ 2,725 $ 3,765 $ 4,753
======== ======== ======== ========
</TABLE>
See accompanying notes.
2
<PAGE>
WELLS ALUMINUM CORPORATION
STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------
Jun. 27, Jun. 28,
1999 1998
------- -------
<S> <C> <C>
Operating activities:
Net earnings ................................................ $ 3,765 $ 4,753
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization ....................... 2,147 2,001
Deferred income taxes ............................... (296) (270)
Changes in operating assets and liabilities:
Accounts receivable, net ........................ (7,063) (1,730)
Inventories ..................................... 485 (884)
Accounts payable and accrued expenses ........... 3,808 (2,645)
Other assets and liabilities .................... 224 1,171
------- -------
Net cash provided by operating activities ................... 3,070 2,396
------- -------
Investing activities:
Purchase of property, plant and equipment ................... (2,506) (1,762)
------- -------
Net cash used in investing activities ....................... (2,506) (1,762)
------- -------
Financing activities:
Proceeds from exercise of stock options ..................... 10 --
Payment of cash dividend .................................... (1,924) --
------- -------
Net cash used in financing activities ....................... (1,914) --
------- -------
Net increase (decrease) in cash and cash equivalents ........ (1,350) 634
Cash and cash equivalents at beginning of year .............. 7,619 5,352
------- -------
Cash and cash equivalents at end of period .................. $ 6,269 $ 5,986
======= =======
</TABLE>
See accompanying notes.
3
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in Thousands)
1. General
Wells Aluminum Corporation (the "Company") is a domestic manufacturer of
aluminum extruded and fabricated products for several diverse industries
including building/construction, transportation, durable goods and
equipment/electrical.
2. Basis of Presentation
The foregoing unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, these financial statements do not include all of the
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these statements include all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of the results for the six months ended June 27, 1999.
Operating results for the interim periods of 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999.
3. Reclassification
Certain amounts previously reported have been reclassified to conform with
the 1999 presentation.
4. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
5. Inventories
The aluminum component of inventories, representing 64% and 67% of total
inventories at June 27, 1999 and December 31, 1998, respectively, is stated at
the lower of cost or market, using the last-in, first-out method (LIFO). The
labor, overhead and supplies components of inventories are carried at the lower
of cost or market using the first-in, first-out method (FIFO). The outside
purchased parts component of inventories are carried at the lower of cost or
market using the weighted average cost method.
The components of inventories are as follows:
Jun. 27, Dec. 31,
1999 1998
------- -------
Raw materials .................................... $ 9,819 $10,233
Finished goods and work in progress .............. 9,488 9,589
Supplies ......................................... 603 572
------- -------
Sub-total .................................... 19,910 20,394
Less LIFO reserve ................................ -- --
------- -------
Inventories .................................. $19,910 $20,394
======= =======
4
<PAGE>
6. Related Party Transactions
During the six months ended June 28, 1998, the Company purchased aluminum
in the amount of $5.4 million from CVG Industria Venezolana de Aluminio, C.A.
("Venalum"), who was, at such time, an owner of 180,362.5 shares of the
Company's Class A common stock. On November 13, 1998, the Company repurchased
the common stock owned by Venalum, and as of that date, Venalum no longer owned
any shares of common stock of the Company. There were no amounts payable to
Venalum at June 27, 1999 and December 31, 1998.
7. Indebtedness
At June 27, 1999 and December 31, 1998, indebtedness consisted of $105.0
million of 10.125% Series B Notes. There were no borrowings outstanding under a
revolving credit facility of $15.0 million.
8. Interest Expense, Net of Interest Income
Interest expense, net of interest income, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
Jun. 27, Jun. 28, Jun. 27, Jun. 28,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest expense ........................... $ 2,672 $ 2,672 $ 5,343 $ 5,343
Amortization of debt issuance costs ........ 155 155 311 311
------- ------- ------- -------
Sub-total .............................. 2,827 2,827 5,654 5,654
Interest income ............................ (90) (127) (187) (249)
------- ------- ------- -------
Interest expense, net of interest income $ 2,737 $ 2,700 $ 5,467 $ 5,405
======= ======= ======= =======
</TABLE>
9. Futures Contracts and Forward Sales Contracts
In the normal course of business, the Company enters into forward sales
contracts with certain customers for the sale of fixed quantities of finished
products at scheduled intervals. The aluminum cost component of the forward
sales contract is fixed for the duration of the contract, based on forward
market prices at the inception of the contract. In order to hedge its exposure
to aluminum price volatility under these forward sales contracts, the Company
enters into aluminum futures contracts (a financial hedge) based on scheduled
deliveries.
At June 27, 1999, the Company was party to $13.0 million of aluminum
futures contracts through nationally recognized brokerage firms and major metal
brokers. These aluminum futures contracts are for periods between July 1999 and
October 2000, covering 22.1 million pounds of aluminum at prices expected to be
settled financially in cash as they reach their respective settlement dates. The
market value of these aluminum futures contracts at June 27, 1999 was $13.0
million. The Company does not engage in any speculative trading of futures
contracts.
10. Commitments
At June 27, 1999, the Company has commitments with 11 North American
suppliers to purchase 51.4 million pounds of primary aluminum and aluminum
billet through December 31, 1999 at current market prices at the delivery dates.
Management expects that such quantity of aluminum will be utilized in the normal
course of operations during the terms of these agreements.
11. Contingencies
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Based upon
information that is currently available, management does not expect
5
<PAGE>
that the resolution of environmental claims will have a material adverse effect
on the Company. However, given the inherent uncertainties in evaluating
environmental exposure, it is not possible to predict the amount of future costs
of environmental claims which may be subsequently determined. The Company has
not anticipated any insurance proceeds or third-party payments in determining
its estimated liability for environmental remediation.
The Company is a party to a number of other lawsuits and claims arising
out of the conduct of its business. Although the ultimate results of lawsuits
and other proceedings against the Company cannot be predicted with certainty,
management does not expect that these matters will have a material adverse
effect on the Company and its operations.
12. Other Matters
In April 1999, the Company retained the investment banking firm of ING
Baring Furman Selz LLC to assist the Company in exploring strategic alternatives
to maximize shareholder value. The alternatives could include taking the Company
public, selling the Company, recapitalizing the Company or pursuing acquisitions
for profitable growth. ING Baring Furman Selz LLC continues to advise the
Company on its strategic alternatives.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Wells Aluminum Corporation (the "Company") is a custom extruder, finisher
and fabricator of soft alloy aluminum products, serving principally the
building/construction, transportation, consumer durables and
equipment/electrical markets. The Company operates a network of seven facilities
with 12 extrusion presses, located in six states in the midwestern and
southeastern United States, and also has its own casting facility for aluminum
billet.
The following discussion contains forward-looking statements which involve
risks and uncertainties. The Company's actual results or future events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including, but not limited to, raw material costs
and availability (primarily aluminum), labor market conditions, the Company's
level of utilization of its extrusion, finishing and fabrication capacities, and
the impact of capacity utilization on costs, whether and to what extent the
Company's capital expenditures can facilitate reductions in variable costs, the
highly competitive nature of the extrusion industry, and developments with
respect to contingencies such as environmental matters and litigation.
Basis of Presentation
The following discussion of financial condition and the results of
operations for the three and six months ended June 27, 1999 and June 28, 1998
are based on the unaudited results achieved by the Company. The following tables
set forth for the periods indicated, net sales, gross profit, operating profit
and net earnings, and for performance and other measurements, pounds of product
shipped, gross sales price per pound, Adjusted EBITDA (as defined below) and
Adjusted EBITDA per pound. The table also includes average market prices of
aluminum per pound and market price of aluminum per pound at period-end.
Adjusted EBITDA is defined as earnings before interest expense, income
taxes and depreciation and amortization, and excludes LIFO charges or income.
Adjusted EBITDA should not be considered in isolation of, nor in substitute for,
net income, cash flows from operations, or other income or cash flow data
prepared in accordance with generally accepted accounting principles.
6
<PAGE>
Statement of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
Jun. 27, Jun. 28, Jun. 27, Jun. 28,
Amounts in Thousands 1999 1998 1999 1998
- -------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales - Products ........................................ $ 60,780 $ 66,855 $ 116,936 $ 127,145
Net Sales - Metal ........................................... -- -- -- 3,529
--------- --------- --------- ---------
Net Sales ............................................... 60,780 66,855 116,936 130,674
Cost of Sales - Products .................................... 49,377 56,155 95,247 106,879
Cost of Sales - Metal ....................................... -- -- -- 3,491
LIFO Income ................................................. -- (575) -- (1,095)
--------- --------- --------- ---------
Cost of Sales ........................................... 49,377 55,580 95,247 109,275
Gross Profit ................................................ 11,403 11,275 21,689 21,399
Operating Profit ............................................ 6,174 7,135 11,953 13,362
Net Earnings ................................................ $ 1,995 $ 2,725 $ 3,765 $ 4,753
Other Measurement Data:
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
Jun. 27, Jun. 28, Jun. 27, Jun. 28,
Amounts in Thousands, Except Per Pound Data 1999 1998 1999 1998
- ------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Pounds of Product Shipped ................................... 42,497 44,133 82,120 83,180
Gross Sales - Products ...................................... $ 64,035 $ 69,826 $ 122,856 $ 132,417
Gross Sales Price per Pound ................................. 1.507 1.582 1.496 1.592
Adjusted EBITDA ............................................. $ 7,092 $ 7,405 $ 13,790 $ 13,957
Adjusted EBITDA per Pound ................................... 0.167 0.168 0.168 0.168
Average Market Price of Aluminum per Pound .................. $ 0.620 $ 0.686 $ 0.606 $ 0.708
Market Price of Aluminum per Pound at Period-End ............ -- -- 0.666 0.628
</TABLE>
Aluminum Prices. For the periods indicated, approximately 55-60% of the
Company's cost of sales products reflect the cost of aluminum, its principal raw
material. The Company seeks to manage aluminum price fluctuations, which can be
volatile, principally either by passing aluminum prices through to customers by
systematic market indexed pricing or by fixing the cost of aluminum by hedging
against committed fixed price sales to customers. As a result, increases and
decreases in aluminum prices have generally caused similar increases and
decreases in selling prices, sales and costs of sales.
Business Activity. The Company's experience indicates that pounds of
product shipped has a direct impact on profitability, since a significant
portion of the Company's operating costs are fixed. The Company defines pounds
of product shipped as the weight of all extrusions shipped, including those
pounds transferred within the Company from which it manufactures fabricated
parts, components and assemblies, but excluding the pounds of aluminum related
to excess metal sales as described herein.
Financial and Other Measures. The Company believes that its abilities to
manage its sales spread (gross sales minus aluminum costs), control variable
spending and minimize its fixed cost structure are significant determinants of
profitability and resultant cash flow. The Company, therefore, monitors its
sales spread per pound, variable costs per pound and fixed costs per pound,
focusing on operating profit as a key performance measure.
7
<PAGE>
In addition, the Company monitors Adjusted EBITDA, as it is relevant for debt
covenant analysis under a revolving credit facility and it can also be used as a
measure of the Company's ability to service its debt.
LIFO Inventory. The Company values its aluminum inventory under the
last-in, first-out (LIFO) method. During periods of rising aluminum prices,
compared to historical LIFO inventory values, the Company may incur LIFO
charges, which will reduce taxable income, and when aluminum prices subsequently
decline, the Company may recognize LIFO income, which will increase taxable
income. As a result of fluctuations in earnings levels resulting from the
application of LIFO, the Company excludes LIFO charges and LIFO income from
certain measures, such as Adjusted EBITDA.
Excess Metal Sales. The Company's policy is to sell excess metal (primary
aluminum ingot and billet) on the open market when necessary to maintain
aluminum inventory levels consistent with near-term business needs. Imbalances
in inventory can arise from the ongoing and efficient operation of the Company's
casting facility and from the Company's obligations to purchase fixed amounts of
primary aluminum ingot and billet under long-term supply agreements. The sale of
excess metal, which also reflects aluminum price fluctuations, has minimal
effect on profit performance since the prices of metal bought and metal sold are
closely matched. Pounds of excess metal sold are not included in the calculation
of pounds of product shipped, the Company's primary indicator of business
activity. In the normal course of business, the Company also sells secondary
aluminum billet and aluminum scrap, which are not accounted for as excess metals
sales.
Reclassification of Sales and Marketing End Use Data
In the six months ended June 27, 1999, the Company completed an evaluation
of the markets of its customers by the end use codes as established by the
Aluminum Association and the Aluminum Extruders Council. These end use codes are
used to compile aluminum industry statistics by specific markets. As a result of
the evaluation, the Company reclassified certain pounds shipped to its customers
during 1999 and 1998 from one market designation to another designation. The
analysis of pounds shipped to a specific market contained herein is based on the
consistent application of end use codes for the periods under comparison.
Three Months Ended June 27, 1999 Compared to Three Months Ended June 28, 1998
The Company's net sales, consisting of net sales - products only,
decreased to $60.8 million in the three months ended June 27, 1999 from $66.9
million in the three months ended June 28, 1998, a decrease of $6.1 million or
9.1%. Gross sales of value added products, which includes painted, anodized and
fabricated products, decreased $1.0 million, or 2.7%, to $36.7 million in the
three months ended June 27, 1999 from $37.7 million in the three months ended
June 28, 1998. Gross sales of mill finished extrusions decreased $4.9 million,
or 15.2%, to $27.4 million in the three months ended June 27, 1999 from $32.3
million in the three months ended June 28, 1998. The gross sales price per pound
decreased by 4.9%, reflecting the effect of a decline of $0.066 in the average
market price per pound of aluminum and a changing customer and product mix in
mill finished sales, offset by a higher percentage of value added sales as
compared to mill finished sales and an improved customer and product mix in
value added sales.
Pounds of product shipped decreased 1.6 million pounds, or 3.6%, to 42.5
million in the three months ended June 27, 1999 from 44.1 million pounds of
product shipped in the three months ended June 28, 1998. In part, the decrease
in shipments reflected a management decision to limit overtime and the use of
temporary workers, thereby reducing effective capacity from the level of the
prior year. Shipments to commercial construction decreased 0.6 million pounds,
primarily due to decreased shipments for several large architectural projects in
the prior year. In residential construction, shipments decreased 1.8 million
pounds, reflecting a management decision to limit capacity allocated to lower
margin residential door and window accounts and lower margin mobile home and
manufactured home accounts. Shipments to transportation increased 1.0 million
pounds, primarily due to increased shipments to manufacturers of trucks and
buses, offset by decreased shipments to a major truck trailer account. In
8
<PAGE>
consumer durables, shipments increased 0.4 million pounds, reflecting increased
shipments to manufacturers of pleasure boats and office furniture. Shipments to
equipment/electrical decreased 0.5 million pounds, primarily due to decreased
shipments to a manufacturer of material handling systems. The decrease of 0.1
million pounds to distributors/other reflected a management decision to limit
capacity allocated to this market.
Cost of sales, consisting of cost of sales - products only, decreased to
$49.4 million for the three months ended June 27, 1999 from $55.6 million in the
three months ended June 28, 1998, a decrease of $6.2 million or 11.2%. This
decrease resulted from a $7.3 million decrease in aluminum costs offset by a
$1.1 million increase in operating costs. Variable costs per pound increased to
$0.469 in the three months ended June 27, 1999 from $0.446 in the three months
ended June 28, 1998, a change of $0.023 per pound. This increase per pound was
primarily due to increased labor costs, a greater use of purchased services and
increased maintenance expenditures.
Gross profit increased to $11.4 million in the three months ended June 27,
1999 from $11.3 million in the three months ended June 28, 1998, an increase of
$0.1 million or 0.9%.
Selling, general and administrative expenses increased to $5.2 million in
the three months ended June 27, 1999 from $4.1 million in the three months ended
June 28, 1998, an increase of $1.1 million or 26.8%. This increase is
attributable to increases in compensation costs of $0.2 million resulting from
the employment of new management personnel, professional fees of $0.4 million
primarily for a non-recurring profit system consulting engagement, sales
expenses of $0.1 million for sales promotional materials, and other selling and
administrative expenses of $0.4 million.
Operating profit decreased to $6.2 million in the three months ended June
27, 1999 from $7.1 million in the three months ended June 28, 1998, a decrease
of $0.9 million or 12.7%.
Interest expense, net of interest income, was $2.7 million in the three
months ended June 27, 1999 and June 28, 1998. Income tax expense decreased to
$1.4 million in the three months ended June 27, 1999 from $1.7 million in the
three months ended June 28, 1998, a decrease of $0.3 million, or 17.6%. The
effective tax rates for the three months ended June 27, 1999 and June 28, 1998
were 42% and 39%, respectively, which differed from the federal statutory rate
of 35% primarily due to the goodwill amortization and state income taxes.
Net earnings decreased to $2.0 million in the three months ended June 27,
1999 from $2.7 million in the three months ended June 28, 1998, a decrease of
$0.7 million or 25.9%.
Adjusted EBITDA (as defined herein) decreased to $7.1 million in the three
months ended June 27, 1999 from $7.4 million in the three months ended June 28,
1998, a decrease of $0.3 million or 4.1%. The decline in Adjusted EBITDA
consisted of a decrease in sales volume of $0.5 million and an increase in
operating costs of $2.5 million, offset by an improved sales spread of $2.7
million. The increase in sales spread was affected by the continuing increase in
aluminum prices in the three months ended June 27, 1999, since market indexed
prices charged to customers increased more rapidly than the costs charged from
aluminum inventory. Adjusted EBITDA per pound decreased $0.001 to $0.167 in the
three months ended June 27, 1999, reflecting both the lower Adjusted EBITDA and
the decreased pounds of product shipped.
Six Months Ended June 27, 1999 Compared to Six Months Ended June 28, 1998
The Company's net sales decreased to $116.9 million in the six months
ended June 27, 1999 from $130.7 million in the six months ended June 28, 1998, a
decrease of $13.8 million or 10.6%. Net sales - products decreased to $116.9
million in the six months ended June 27, 1999 from $127.1 million in the six
months ended June 28, 1998, a decrease of $10.2 million or 8.0%. Gross sales of
value added products increased $0.5 million, or 0.7%, to $71.7 million in the
six months ended June 27, 1999 from $71.2 million in the six months ended June
28, 1998. Gross sales of mill finished extrusions decreased $10.2 million, or
16.6%, to $51.2 million in the six months ended
9
<PAGE>
June 27, 1999 from $61.4 million in the six months ended June 28, 1998. The
gross sales price per pound decreased by 6.1%, reflecting the effect of a
decline of $0.102 in the average market price per pound of aluminum and a
changing customer and product mix in mill finished sales, offset by a higher
percentage of value added sales as compared to mill finished sales and an
improved customer and product mix in value added sales.
Pounds of product shipped decreased 1.1 million pounds, or 1.3%, to 82.1
million in the six months ended June 27, 1999 from 83.2 million pounds of
product shipped in the six months ended June 28, 1998. In part, the decrease in
shipments reflected a management decision to limit overtime and the use of
temporary workers, thereby reducing effective capacity from the level of the
prior year. Shipments to commercial construction increased 0.3 million pounds,
primarily due to increased shipments to a number of specialty building products
manufacturers. In residential construction, shipments decreased 0.9 million
pounds, reflecting a management decision to limit capacity allocated to lower
margin residential door and window accounts and lower margin mobile home and
manufactured home accounts. Shipments to transportation increased 0.2 million
pounds, primarily due to increased business with major truck, bus and specialty
vehicle manufacturers offset by decreased shipments to a major truck trailer
account. In consumer durables, shipments increased 0.3 million pounds,
reflecting increased shipments to manufacturers of pleasure boats and office
furniture. Shipments to equipment/electrical decreased 1.5 million pounds,
primarily due to decreased shipments to a manufacturer of material handling
systems. The increase of 0.5 million pounds to distributors/other resulted from
increases in shipments to distributors of specialty products in the first three
months of 1999.
Cost of sales decreased to $95.2 million for the six months ended June 27,
1999 from $109.3 million in the six months ended June 28, 1998, a decrease of
$14.1 million or 12.9%. Cost of sales - products decreased to $95.2 million in
the six months ended June 27, 1999 from $106.9 million in the six months ended
June 28, 1998, a decrease of $11.7 million or 10.9%. This decrease resulted from
a $12.6 million decrease in aluminum costs offset by a $0.9 million increase in
operating costs. Variable costs per pound increased to $0.456 in the six months
ended June 27, 1999 from $0.441 in the six months ended June 28, 1998, a change
of $0.015 per pound. This increase per pound was primarily due to increased
labor costs and increased expenditures for extrusion dies, shipping supplies,
maintenance items and plant supplies.
Gross profit increased to $21.7 million in the six months ended June 27,
1999 from $21.4 million in the six months ended June 28, 1998, an increase of
$0.3 million or 1.4%.
Selling, general and administrative expenses increased to $9.7 million in
the six months ended June 27, 1999 from $8.0 million in the six months ended
June 28, 1998, an increase of $1.7 million or 21.3%. This increase is primarily
attributable to increases in compensation costs of $0.5 million resulting from
the employment of new management personnel, professional fees of $0.4 million
primarily for a non-recurring profit system consulting engagement, sales
expenses of $0.2 million for sales promotional materials, and other selling and
administrative expenses of $0.6 million.
Operating profit decreased to $12.0 million in the six months ended June
27, 1999 from $13.4 million in the six months ended June 28, 1998, a decrease of
$1.4 million or 10.4%.
Interest expense, net of interest income, increased to $5.5 million in the
six months ended June 27, 1999 from $5.4 million in the six months ended June
28, 1998, an increase of $0.1 million, or 1.9%. Income tax expense decreased to
$2.7 million in the six months ended June 27, 1999 from $3.2 million in the six
months ended June 28, 1998, a decrease of $0.5 million, or 15.6%. The effective
tax rates for the six months ended June 27, 1999 and June 28, 1998 were 42% and
40% respectively, which differed from the federal statutory rate of 35%
primarily due to the goodwill amortization and state income taxes.
Net earnings decreased to $3.8 million in the six months ended June 27,
1999 from $4.8 million in the six months ended June 28, 1998, a decrease of $1.0
million or 20.8%.
10
<PAGE>
Adjusted EBITDA (as defined herein) decreased to $13.8 million in the six
months ended June 27, 1999 from $14.0 million in the six months ended June 28,
1998, a decrease of $0.2 million or 1.4%. The decline in Adjusted EBITDA
consisted of a decrease in sales volume of $0.3 million and an increase in
operating costs of $3.6 million, offset by an improved sales spread of $3.7
million. The increase in sales spread was affected by the continuing increase in
aluminum prices in the three months ended June 27, 1999, since market indexed
prices charged to customers increased more rapidly than the costs charged from
aluminum inventory. Adjusted EBITDA per pound was $0.168 in the six months ended
June 27, 1999 and June 28, 1998.
Liquidity and Capital Resources
The Company has historically obtained funds from its operations, augmented
by borrowings under various credit agreements. Aluminum price changes increase
or decrease working capital requirements since the dollar value of accounts
receivable, inventories and accounts payable reflect these changes. Working
capital requirements are generally higher during periods of higher aluminum
prices.
As of June 27, 1999, the Company had $105.0 million of Series B Notes
outstanding and no borrowings under a revolving credit facility. The ability of
the Company to satisfy its obligations pursuant to such indebtedness, including
the Series B Notes and the Indenture under which these notes were issued, will
be dependent upon the Company's future performance, which, in turn, will be
subject to management, financial and other business factors affecting the
business and operations of the Company, some of which are not in the Company's
control. The Company's liquidity may also be impacted by environmental and other
regulatory matters.
The Company believes that cash flow from operating activities, together
with borrowings available under a revolving credit facility, will be sufficient
to fund currently anticipated working capital needs and capital expenditure
requirements for at least several years. However, there can be no assurance that
this will be the case.
Cash Flows from Operating Activities
Cash provided by operations for the six months ended June 27, 1999 was
$3.1 million as compared to $2.4 million for the six months ended June 28, 1998,
an increase of $0.7 million or 29.2%. Cash flow increased primarily as a result
of the effect of reduced inventories and increases in accounts payable and
accrued expenses, offsetting the effect of increases in accounts payable and
reduced net earnings.
Total working capital at June 27, 1999 was $35.7 million compared to $32.3
million at December 31, 1998, an increase of $3.4 million or 10.5%. Changes in
working capital accounts, including a $1.3 million decrease in cash and cash
equivalents, reflected factors such as the impact of changing business activity,
the timing of incentive compensation payments, the effect of changing aluminum
prices, and the timing of interest payments.
Cash Flows from Investing Activities
Expenditures for property, plant and equipment for the six months ended
June 27, 1999 and June 28, 1998 were $2.5 million and $1.8 million,
respectively. The higher expenditure for the six months ended June 27, 1999
reflected funds spent on equipment and tooling for new fabrication business. The
Company anticipates that expenditures for property, plant and equipment will
approach $4.0 million in 1999 and will average $3.5 million per annum in the
following four years. In 1999, approximately $3.0 million of the annual $4.0
million expenditure is expected to be invested in productivity improvements and
capacity enhancements, with the remainder expected to be used for maintenance
capital. In the following four years, approximately $2.5 million of the annual
$3.5 million expenditure is expected to be invested in productivity improvements
and capacity enhancements, with the remainder expected to be used for
maintenance capital.
11
<PAGE>
Cash Flows from Financing Activities
In January 1999, the Company paid a cash dividend of $2.64 per share, or
$1.9 million, to the holders of its Class A common stock. In March 1999, the
Company received $10,000 resulting from the exercise of 1,250 stock options at
an exercise price of $8.00 per option.
Futures Contracts and Forward Sales Contracts
In the normal course of business, the Company enters into forward sales
contracts with certain customers for the sale of fixed quantities of finished
products at scheduled intervals. The aluminum cost component of the forward
sales contract is fixed for the duration of the contract, based on forward
market prices at the inception of the contract. In order to hedge its exposure
to aluminum price volatility under these forward sales contracts, the Company
enters into aluminum futures contracts (a financial hedge) based on scheduled
deliveries.
At June 27, 1999, the Company was party to $13.0 million of aluminum
futures contracts through nationally recognized brokerage firms and major metal
brokers. These aluminum futures contracts are for periods between July 1999 and
October 2000, covering 22.1 million pounds of aluminum at prices expected to be
settled financially in cash as they reach their respective settlement dates. The
market value of these aluminum futures contracts at June 27, 1999 was $13.0
million. The Company does not engage in any speculative trading of futures
contracts.
LIFO Adjustment and Inflation
The largest component of the Company's cost of sales is aluminum, its
principal raw material. Aluminum costs can be volatile, and reported results may
vary due to LIFO adjustments, as previously discussed. With the exception of
LIFO adjustments, the Company does not believe that inflation has had a
significant impact on its results of operations for the three months and six
months ended June 27, 1999 and June 28, 1998.
Seasonality
The Company generally does not experience significant seasonality in its
business. However, working capital requirements are often higher and operating
results are often lower during the fourth quarter principally due to reduced
shipments of product and increased inventory due to the decrease in sales during
the holiday season and increased accounts receivable due to customers delaying
payment until after the year-end.
Year 2000 Systems Compliance
The Company has undertaken a number of initiatives to ensure that its
computer systems, microprocessors, electronic data interchange (EDI) systems,
and other computer based applications are compliant with the Year 2000
requirements. The Year 2000 issue stems from the fact that many computer
programs were written with two, rather than four, digits to identify the
applicable year. As a result, computer programs with time-sensitive software may
recognize a two-digit code for any year in the next century as related to this
century; for example, "00" entered into a date-field for the year 2000 may be
interpreted as the year 1900, resulting in system failures or miscalculations
and disruptions of operations, including, among other things, a temporary
inability to process transactions or engage in other normal business activities.
The Company has completed an evaluation of its centralized main computer
system and related software and manufacturing equipment and facilities and has
determined that this system and the software and manufacturing equipment and
facilities are compliant with the Year 2000 requirements. The Company has
completed evaluating its other computer systems, microprocessors, EDI systems
and other computer based applications for Year 2000 compliance, and all systems
and applications excepting the EDI systems are compliant. The Company expects to
make the EDI system compliant early in the fourth quarter of 1999.
12
<PAGE>
The Company continues to contact vendors and customers to determine the
extent to which the Company's interface systems are vulnerable to the failure of
such companies to remediate their own Year 2000 issues. There is no guarantee
that the systems of the Company's vendors and customers on which the Company's
systems rely will be modified or converted on a timely basis by such companies
and that such Year 2000 issues would not have a material impact on the
operations of the Company.
The Company continues to inquire of its significant suppliers and
subcontractors that do not share information systems with the Company ("external
agents"). To date, the Company has received 70% of vendor compliance
documentation. The Company is not aware of any external agent with a Year 2000
issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of ensuring
that external agents will be Year 2000 compliant. The inability of external
agents to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external agents
is not determinable.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. The Company
does not believe the remaining phases would significantly impact the Company's
ability to take customer orders, manufacture and ship products, invoice
customers or collect payments. However, disruptions in the economy generally
resulting from Year 2000 issues could materially adversely affect the Company.
The Company could be subject to litigation for computer systems product failure;
for example, computer equipment shutdown or failure to properly date business
records. The amount of potential liability and lost revenue cannot be reasonably
estimated at this time.
Except as described above, the Company has not developed a contingency
plan for the reasonably likely worst case scenario concerning the Year 2000
issue. If a Year 2000 problem were to occur that the Company could not
successfully resolve, it could have a material adverse effect on the results of
operations and financial condition of the Company.
Termination of Retirement Plan for Salaried Employees
The Company has received notification that the Internal Revenue Service
has approved the termination of the Retirement Plan for Salaried Employees. In
the fourth quarter of 1999, the Company expects to record expense of
approximately $1.1 million associated with settling the Retirement Plan for
Salaried Employees.
Commitments
At June 27, 1999, the Company had commitments with 11 North American
suppliers to purchase 51.4 million pounds of primary aluminum and aluminum
billet through December 1999 at current market prices at the delivery dates.
Management expects that such quantities of aluminum will be utilized in the
normal course of operations during the terms of these agreements.
Contingencies
The Company has received notice of claims asserting potential liability
under various federal and state environmental laws. The Company accrues for
losses associated with environmental remediation obligations when such losses
are probable and reasonably estimable. Based upon information that is currently
available, management does not expect that the resolution of environmental
claims will have a material adverse effect on the Company. However, given the
inherent uncertainties in evaluating environmental exposure, it is not possible
to predict the amount of future costs of environmental claims which may be
subsequently determined. The Company has not anticipated any insurance proceeds
or third-party payments in determining its estimated liability for environmental
remediation.
13
<PAGE>
The Company is a party to a number of other lawsuits and claims arising
out of the conduct of its business. Although the ultimate results of lawsuits
and other proceedings against the Company cannot be predicted with certainty,
management does not expect that these matters will have a material adverse
effect on the Company and its operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Futures Contracts and Forward Sales Contracts."
Part II - Other Information
Item 6.Exhibits and Reports on Form 8-K
(a) Exhibits
10.8 Employment Agreement dated as of March 23, 1999 by and between Wells
Aluminum Corporation and William J. Milam.
10.9 Employment Agreement dated as of March 23, 1999 by and between Wells
Aluminum Corporation and Lynn F. Brown
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Corporation during the
quarter covered by this report.
(c) All other items were not applicable.
14
<PAGE>
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.
WELLS ALUMINUM CORPORATION
By: /s/ W. Russell Asher
---------------------------------------------
W. Russell Asher
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)
Date: August 11, 1999
15
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of March 23, 1999, by and between Wells Aluminum
Corporation, a Maryland corporation (the "Corporation"), and William J. Milam
(the "Executive"), residing at 48 English Run Turn, Sparks, Maryland 21152.
W I T N E S S E T H :
WHEREAS, the Corporation desires to employ the Executive and the Executive
is willing to accept such employment with the Corporation, on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the parties hereto do hereby agree as follows:
1. Title and Duties of Executive. (a) During the term of his employment as
provided in Section 3 below, the Executive will be employed as Vice President,
Business Selection and Capacity Management, of the Corporation, and the
Executive agrees to be employed in such capacities. In these capacities, the
Executive will be subject to the overall supervision of the Senior Vice
President, Sales and Marketing, of the Corporation. In no event shall the
Executive be assigned duties inconsistent with his status as an executive
officer of the Corporation.
(b) The Executive agrees to devote his full business time and his
best efforts to the performance of his duties hereunder and to the promotion of
the best interests of the Corporation. The Executive further agrees to normal
and reasonable business travel related to the performance of his duties
hereunder.
2. Place of Employment. The permanent place of the Executive's employment
shall be the Baltimore, Maryland area. If at any time the Board of Directors
shall determine it to be in the best interests of the Corporation for the
Executive to be relocated and the Executive, in the exercise of his sole
discretion, shall so elect, he may be relocated, provided that the Corporation
shall reimburse the Executive's reasonable expenses incurred in moving himself
and his immediate family.
<PAGE>
3. Term of Agreement. The employment of the Executive hereunder shall
commence on March 23, 1999 and shall continue through September 22, 2000, unless
a Change in Ownership (as hereinafter defined) has occurred in which case the
term of this Agreement shall extend eighteen (18) months from the date of
notification of a Change in Ownership to the Executive, unless sooner terminated
by the Executive's death or as hereinafter provided in Section 6 below.
4. Compensation. (a) The Corporation agrees to pay the Executive a salary,
payable semi-monthly, at the rate of $117,500 per annum, which salary shall be
subject to increase pursuant to review at least annually.
(b) The Executive shall also be eligible to participate in any
executive incentive compensation or bonus programs of the Corporation each year
he is employed by the Corporation.
5. Benefits and Expenses. (a) During the term of the Executive's
employment hereunder, the Executive shall, subject to the terms thereof and the
eligibility requirements therefor, be eligible to participate in any insurance,
pension, retirement or other benefit program maintained by the Corporation for
executive employees.
(b) In order to facilitate the Executive's carrying out his duties
hereunder, the Corporation shall promptly reimburse the Executive for all
reasonable expenses paid or incurred by him in promoting the business of the
Corporation, upon presentation by the Executive of an itemized accounting
therefor.
6. Termination. (a) In the event of the Executive's willful misconduct
(not including negligence) in any material respect or his material breach of, or
material failure to perform, his duties or responsibilities hereunder, the
Corporation may terminate the Executive's employment hereunder at any time for
cause by giving written notice to the Executive stating the cause of such
termination. In no event shall the Executive's exercise of his rights under
Section 2 not to relocate be deemed to permit the Corporation to terminate his
employment under this Subsection 6(a).
(b) If the Executive is unable to perform his duties hereunder by
reason of mental or physical illness or other incapacity continuing for a period
of six (6) consecutive
2
<PAGE>
months, the Corporation may, at any time after the expiration of such six month
period and prior to his recovery from such illness or incapacity, elect to
terminate the Executive's employment hereunder by giving written notice of such
election to the Executive. During such period of incapacity, the Executive's
salary hereunder shall be reduced by the amount of any disability payments made
to him under programs maintained by the Corporation.
(c) If the Executive's employment is terminated by the Corporation
for any reason other than as provided in Subsection 6(a) or 6(b), the
Executive's salary shall continue through the term of this Agreement. The
obligation of the Corporation to continue salary pursuant hereto is subject to
offset for the Executive's earnings from other full-time employment.
(d) If the Executive's employment is terminated by the Corporation
for any reason other than as provided in Subsections 6(a) or 6(b), the
Corporation shall also maintain in force the benefits referred to in Subsection
5(a) for six (6) months after termination, to the extent allowed by the then
existing benefit plans of the Corporation.
(f) The Executive may terminate his employment hereunder at any time
by giving the Corporation ninety (90) days written notice.
7. Change in Ownership. In the event that the Corporation shall at any
time be merged or consolidated with or into any corporation or corporations
(other than a subsidiary of the Corporation), or in the event that all or
substantially all of the assets or all or substantially all of the stock of the
Corporation shall be sold or otherwise transferred, or in the event that Wells
Holdings Limited Partnership (or, upon distribution, their partners) shall sell,
transfer or otherwise dispose of an aggregate of 80% or more of the shares of
common stock of the Corporation transferred to Wells Holdings Limited
Partnership as successor to the The Fulcrum III Limited Partnership and The
Second Fulcrum III Limited Partnership (any of the foregoing events, a "Change
in Ownership"), the Corporation shall give the Executive prompt written notice
of such event, and the term of this Agreement shall be automatically extended
for the period eighteen (18) months after the date of such notification.
3
<PAGE>
(b) In the event of a Change in Ownership, the provisions of this
Agreement shall inure to the benefit of the successor of the Corporation
resulting from such merger or consolidation or the purchaser in such sale of
assets.
8. Confidential Information. (a) The Executive agrees that, during his
employment by the Corporation and at all times thereafter, he will not disclose
to others, directly or indirectly, any unpublished confidential information,
which is in the nature of trade secrets, relating to the business, prospects or
plans of the Corporation. Upon termination of his employment with the
Corporation, the Executive shall surrender to the Corporation any and all work
papers, reports, manuals, documents and the like (including all originals and
copies thereof) in his possession which contain any such unpublished
confidential information.
(b) The Executive agrees that, provided he is still employed by the
Corporation or is receiving payments pursuant to Subsection 6(c) above, he will
not directly or indirectly be engaged in the operation or management of, or be
interested as owner, holder of 5% or more of the outstanding equity, creditor,
partner, officer, employee or otherwise in, any business competing with the
business of the Corporation; provided, however, that nothing contained herein
shall prevent the Executive from working for a business or entity which has a
subsidiary, division or separate branch which is competitive with the business
of the Corporation, but only if the Executive does not work for, participate in
or otherwise render services to such competitive subsidiary, division or branch;
and provided, further, that the Executive may elect to terminate his obligations
under this Subsection 8(b) by waiving, irrevocably and in writing, any right to
further compensation, benefits or any other claim under this Agreement against
the Corporation and the directors, officers and employees of the Corporation.
(c) The Executive agrees that he will not, for a three (3) year
period following the date of the termination of his employment under this
Agreement, solicit or encourage any employee of the Corporation to work for the
Executive or any company, partnership or other organization in which the
Executive then works or with which the Executive then has a relationship or from
which the Executive then receives compensation.
4
<PAGE>
(d) In the event of a breach or threatened breach of the terms of
this Section 6 by the Executive, the Corporation shall, in addition to all other
remedies, be entitled to a temporary or permanent injunction and/or a decree for
specific performance, in accordance with the provisions hereof, without showing
any actual damage or that monetary damages would not provide an adequate remedy
and without any bond or other security being required.
9. Notices. Any and all notices or consents required or permitted to be
given under any of the provisions of this Agreement shall be in writing and
shall be deemed to have been duly given and received when delivered personally
or three (3) days after mailing, if mailed by registered or certified mail,
return receipt requested, as to the Executive, at his address appearing above,
and as to the Corporation, at its principal office at that time. The Executive
may change his mailing address for the purposes of this Agreement by notice to
the Corporation as herein provided.
10. Authority. This Agreement has been duly authorized on behalf of the
Corporation by the Compensation Committee of its Board of Directors. The
Executive represents that he is free to enter into this Agreement and that his
entering into this Agreement does not violate any obligation that he has to any
other person, firm or corporation.
11. Separability. In the event that any provision of this Agreement would
be held invalid or unenforceable for any reason unless narrowed by construction,
this Agreement shall be construed as if such invalid or unenforceable provision
had been more narrowly drawn so as not to be invalid or unenforceable. If,
notwithstanding the foregoing, any provision of this Agreement shall be held to
be invalid or unenforceable for any reason, such invalidity or unenforceability
shall attach only to such provision and shall not affect or render invalid or
unenforceable any other provision of this Agreement.
12. Miscellaneous. (a) This Agreement sets forth the entire understanding
of the Corporation and the Executive with respect to the subject matter hereof
and cannot be amended or modified except by a writing signed by both parties.
5
<PAGE>
(b) Except as otherwise expressly provided herein, this Agreement
shall be binding upon and inure to the benefit of the parties hereto, and their
respective successors and assigns, heirs and personal representatives.
(c) The Section headings contained herein are for purposes of
convenience only and are not intended to define or limit the contents of said
Sections.
(d) This Agreement shall be deemed to be a contract under the laws
of the State of Maryland and shall be construed and enforced in accordance with
such laws.
(e) This Agreement may be executed in two counterparts which, taken
together, shall constitute a single original document.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WELLS ALUMINUM CORPORATION:
By /s/ Russell W. Kupiec
--------------------------
Russell W. Kupiec
President & Chief Executive Officer
EXECUTIVE:
/s/ William J. Milam
--------------------------
William J. Milam
6
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of March 23, 1999, by and between Wells Aluminum
Corporation, a Maryland corporation (the "Corporation"), and Lynn F. Brown (the
"Executive"), residing at 257 Long Point Road, Crownsville, Maryland 21032.
W I T N E S S E T H :
WHEREAS, the Corporation desires to employ the Executive and the Executive
is willing to accept such employment with the Corporation, on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the parties hereto do hereby agree as follows:
1. Title and Duties of Executive. (a) During the term of his employment as
provided in Section 3 below, the Executive will be employed as Senior Vice
President, Sales and Marketing, of the Corporation, and the Executive agrees to
be employed in such capacities. In these capacities, the Executive will be
subject to the overall supervision of the President and Chief Executive of the
Corporation. In no event shall the Executive be assigned duties inconsistent
with his status as an executive officer of the Corporation.
(b) The Executive agrees to devote his full business time and his
best efforts to the performance of his duties hereunder and to the promotion of
the best interests of the Corporation. The Executive further agrees to normal
and reasonable business travel related to the performance of his duties
hereunder.
2. Place of Employment. The permanent place of the Executive's employment
shall be the Baltimore, Maryland area. If at any time the Board of Directors
shall determine it to be in the best interests of the Corporation for the
Executive to be relocated and the Executive, in the exercise of his sole
discretion, shall so elect, he may be relocated, provided that the Corporation
shall reimburse the Executive's reasonable expenses incurred in moving himself
and his immediate family.
<PAGE>
3. Term of Agreement. The employment of the Executive hereunder shall
commence on March 23, 1999 and shall continue through March 22, 2001, unless a
Change in Ownership (as hereinafter defined) has occurred in which case the term
of this Agreement shall extend two (2) years from the date of notification of a
Change in Ownership to the Executive, unless sooner terminated by the
Executive's death or as hereinafter provided in Section 6 below.
4. Compensation. (a) The Corporation agrees to pay the Executive a salary,
payable semi-monthly, at the rate of $146,232.48 per annum, which salary shall
be subject to increase pursuant to review at least annually.
(b) The Executive shall also be eligible to participate in any
executive incentive compensation or bonus programs of the Corporation each year
he is employed by the Corporation.
5. Benefits and Expenses. (a) During the term of the Executive's
employment hereunder, the Executive shall, subject to the terms thereof and the
eligibility requirements therefor, be eligible to participate in any insurance,
pension, retirement or other benefit program maintained by the Corporation for
executive employees.
(b) In order to facilitate the Executive's carrying out his duties
hereunder, the Corporation shall promptly reimburse the Executive for all
reasonable expenses paid or incurred by him in promoting the business of the
Corporation, upon presentation by the Executive of an itemized accounting
therefor.
6. Termination. (a) In the event of the Executive's willful misconduct
(not including negligence) in any material respect or his material breach of, or
material failure to perform, his duties or responsibilities hereunder, the
Corporation may terminate the Executive's employment hereunder at any time for
cause by giving written notice to the Executive stating the cause of such
termination. In no event shall the Executive's exercise of his rights under
Section 2 not to relocate be deemed to permit the Corporation to terminate his
employment under this Subsection 6(a).
(b) If the Executive is unable to perform his duties hereunder by
reason of mental or physical illness or other incapacity continuing for a period
of six (6) consecutive
2
<PAGE>
months, the Corporation may, at any time after the expiration of such six month
period and prior to his recovery from such illness or incapacity, elect to
terminate the Executive's employment hereunder by giving written notice of such
election to the Executive. During such period of incapacity, the Executive's
salary hereunder shall be reduced by the amount of any disability payments made
to him under programs maintained by the Corporation.
(c) If the Executive's employment is terminated by the Corporation
for any reason other than as provided in Subsection 6(a) or 6(b), the
Executive's salary shall continue through the term of this Agreement. The
obligation of the Corporation to continue salary pursuant hereto is subject to
offset for the Executive's earnings from other full-time employment.
(d) If the Executive's employment is terminated by the Corporation
for any reason other than as provided in Subsections 6(a) or 6(b), the
Corporation shall also maintain in force the benefits referred to in Subsection
5(a) for six (6) months after termination, to the extent allowed by the then
existing benefit plans of the Corporation.
(f) The Executive may terminate his employment hereunder at any time
by giving the Corporation ninety (90) days written notice.
7. Change in Ownership. In the event that the Corporation shall at any
time be merged or consolidated with or into any corporation or corporations
(other than a subsidiary of the Corporation), or in the event that all or
substantially all of the assets or all or substantially all of the stock of the
Corporation shall be sold or otherwise transferred, or in the event that Wells
Holdings Limited Partnership (or, upon distribution, their partners) shall sell,
transfer or otherwise dispose of an aggregate of 80% or more of the shares of
common stock of the Corporation transferred to Wells Holdings Limited
Partnership as successor to The Fulcrum III Limited Partnership and The Second
Fulcrum III Limited Partnership (any of the foregoing events, a "Change in
Ownership"), the Corporation shall give the Executive prompt written notice of
such event, and the term of this Agreement shall be automatically extended for
the period two (2) years after the date of such notification.
3
<PAGE>
(b) In the event of a Change in Ownership, the provisions of this
Agreement shall inure to the benefit of the successor of the Corporation
resulting from such merger or consolidation or the purchaser in such sale of
assets.
8. Confidential Information. (a) The Executive agrees that, during his
employment by the Corporation and at all times thereafter, he will not disclose
to others, directly or indirectly, any unpublished confidential information,
which is in the nature of trade secrets, relating to the business, prospects or
plans of the Corporation. Upon termination of his employment with the
Corporation, the Executive shall surrender to the Corporation any and all work
papers, reports, manuals, documents and the like (including all originals and
copies thereof) in his possession which contain any such unpublished
confidential information.
(b) The Executive agrees that, provided he is still employed by the
Corporation or is receiving payments pursuant to Subsection 6(c) above, he will
not directly or indirectly be engaged in the operation or management of, or be
interested as owner, holder of 5% or more of the outstanding equity, creditor,
partner, officer, employee or otherwise in, any business competing with the
business of the Corporation; provided, however, that nothing contained herein
shall prevent the Executive from working for a business or entity which has a
subsidiary, division or separate branch which is competitive with the business
of the Corporation, but only if the Executive does not work for, participate in
or otherwise render services to such competitive subsidiary, division or branch;
and provided, further, that the Executive may elect to terminate his obligations
under this Subsection 8(b) by waiving, irrevocably and in writing, any right to
further compensation, benefits or any other claim under this Agreement against
the Corporation and the directors, officers and employees of the Corporation.
(c) The Executive agrees that he will not, for a three (3) year
period following the date of the termination of his employment under this
Agreement, solicit or encourage any employee of the Corporation to work for the
Executive or any company, partnership or other organization in which the
Executive then works or with which the Executive then has a relationship or from
which the Executive then receives compensation.
4
<PAGE>
(d) In the event of a breach or threatened breach of the terms of
this Section 6 by the Executive, the Corporation shall, in addition to all other
remedies, be entitled to a temporary or permanent injunction and/or a decree for
specific performance, in accordance with the provisions hereof, without showing
any actual damage or that monetary damages would not provide an adequate remedy
and without any bond or other security being required.
9. Notices. Any and all notices or consents required or permitted to be
given under any of the provisions of this Agreement shall be in writing and
shall be deemed to have been duly given and received when delivered personally
or three (3) days after mailing, if mailed by registered or certified mail,
return receipt requested, as to the Executive, at his address appearing above,
and as to the Corporation, at its principal office at that time. The Executive
may change his mailing address for the purposes of this Agreement by notice to
the Corporation as herein provided.
10. Authority. This Agreement has been duly authorized on behalf of the
Corporation by the Compensation Committee of its Board of Directors. The
Executive represents that he is free to enter into this Agreement and that his
entering into this Agreement does not violate any obligation that he has to any
other person, firm or corporation.
11. Separability. In the event that any provision of this Agreement would
be held invalid or unenforceable for any reason unless narrowed by construction,
this Agreement shall be construed as if such invalid or unenforceable provision
had been more narrowly drawn so as not to be invalid or unenforceable. If,
notwithstanding the foregoing, any provision of this Agreement shall be held to
be invalid or unenforceable for any reason, such invalidity or unenforceability
shall attach only to such provision and shall not affect or render invalid or
unenforceable any other provision of this Agreement.
12. Miscellaneous. (a) This Agreement sets forth the entire understanding
of the Corporation and the Executive with respect to the subject matter hereof
and cannot be amended or modified except by a writing signed by both parties.
5
<PAGE>
(b) Except as otherwise expressly provided herein, this Agreement
shall be binding upon and inure to the benefit of the parties hereto, and their
respective successors and assigns, heirs and personal representatives.
(c) The Section headings contained herein are for purposes of
convenience only and are not intended to define or limit the contents of said
Sections.
(d) This Agreement shall be deemed to be a contract under the laws
of the State of Maryland and shall be construed and enforced in accordance with
such laws.
(e) This Agreement may be executed in two counterparts which, taken
together, shall constitute a single original document.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WELLS ALUMINUM CORPORATION:
By /s/ Russell W. Kupiec
--------------------------
Russell W. Kupiec
President & Chief Executive Officer
EXECUTIVE:
/s/ Lynn F. Brown
----------------------------
Lynn F. Brown
6
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-27-1999
<CASH> 6,269
<SECURITIES> 0
<RECEIVABLES> 33,718
<ALLOWANCES> 442
<INVENTORY> 19,910
<CURRENT-ASSETS> 61,344
<PP&E> 63,212
<DEPRECIATION> 33,672
<TOTAL-ASSETS> 129,637
<CURRENT-LIABILITIES> 25,620
<BONDS> 105,000
0
0
<COMMON> 7
<OTHER-SE> (9,010)
<TOTAL-LIABILITY-AND-EQUITY> 129,637
<SALES> 116,936
<TOTAL-REVENUES> 116,936
<CGS> 95,247
<TOTAL-COSTS> 104,983
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 5,467
<INCOME-PRETAX> 6,486
<INCOME-TAX> 2,721
<INCOME-CONTINUING> 3,765
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,765
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
